<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1996.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SKYMALL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
NEVADA 5961 86-0651100
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1520 EAST PIMA STREET
PHOENIX, ARIZONA 85034
(602) 254-9777
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
ROBERT M. WORSLEY
PRESIDENT
SKYMALL, INC.
1520 EAST PIMA STREET
PHOENIX, ARIZONA 85034
(602) 254-9777
(Name, address, including zip code, and telephone number, including zip code, of
agent for service)
------------------------
Copies to:
CHRISTOPHER D. JOHNSON, ESQ. RUBI FINKELSTEIN, ESQ.
SQUIRE, SANDERS & DEMPSEY L.L.P. ORRICK, HERRINGTON & SUTCLIFFE LLP
40 NORTH CENTRAL AVENUE 666 FIFTH AVENUE
PHOENIX, ARIZONA 85004 NEW YORK, NEW YORK 10103
(602) 528-4000 (212) 506-5000
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
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Common Stock ($.001 par value).................... 2,300,000(2) $9.00 $20,700,000 $6,273
Representative's Warrants......................... 200,000(3) $.001 $200 $1
Common Stock Underlying Representative's
Warrants........................................ 200,000(4) $10.80 $2,160,000 $655
Common Stock...................................... 540,000(5) $9.00 $4,860,000 $1,473
Common Stock...................................... 180,000(6) $9.00 $1,620,000 $491
- --------------------------------------------------------------------------------------------------------------------
TOTAL..................................................................................... $8,893
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(2) Includes 300,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(3) To be issued to Josephthal Lyon & Ross Incorporated (the "Representative").
(4) Includes up to 200,000 shares of Common Stock issuable upon exercise of
warrants being issued to the Representative of the Underwriters. Pursuant to
Rule 416, there is also being registered hereunder a presently
undeterminable number of shares of Common Stock that may be issued pursuant
to the anti-dilution provisions of the Representative's Warrants.
(5) Represents shares of Common Stock issuable to certain shareholders of the
Registrant upon conversion of certain Preferred Stock upon completion of the
Registrant's underwritten public offering. Pursuant to Rule 416, there is
also being registered hereunder a presently undeterminable number of shares
of Common Stock that may be issued upon conversion of such Preferred Stock
in payment of accrued dividends.
(6) Represents shares of Common Stock issuable upon the exercise of certain
warrants issued by the Company in connection with a private placement.
Pursuant to Rule 416, there is also being registered hereunder a presently
undeterminable number of shares of Common Stock that may be issued pursuant
to the anti-dilution provisions of such warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement (the "Registration Statement") contains two
prospectuses. The first prospectus relates to the underwritten public offering
of 2,000,000 shares of Common Stock by SkyMall, Inc. (the "Company") and 300,000
shares of Common Stock offered by certain selling shareholders (the "Selling
Shareholders") to cover over-allotments, if any (the "Prospectus"). The form of
Prospectus in the exact form in which it is to be used after the effective date
will be filed with the Securities and Exchange Commission pursuant to Rule
424(b) of the General Rules and Regulations under the Securities Act of 1933, as
amended. The second prospectus (the "Selling Securityholder Prospectus") relates
to the offering of 540,000 shares of Common Stock, which upon consummation of
this Offering, will be issued to certain shareholders of the Company (the
"Selling Securityholders") upon conversion of certain shares of Preferred Stock
held by such Selling Securityholders and 180,000 shares of Common Stock, which
may be acquired upon the exercise of certain warrants held by such Selling
Securityholders. This Common Stock may be offered by the Selling Securityholders
from time to time following the Company's underwritten public offering.
Following the Prospectus are certain substitute pages of the Selling
Securityholder Prospectus, including alternate front outside and back outside
cover pages, an alternate "The Offering" section of the "Prospectus Summary" and
sections entitled "Concurrent Offering," "Selling Securityholders" and "Plan of
Distribution." Each of the alternate pages for the Selling Securityholder
Prospectus included herein is labeled "Alternate Page for Selling Securityholder
Prospectus." All other sections of the Prospectus, other than "Underwriting" and
"Concurrent Offering," are to be used in the Selling Securityholder Prospectus.
In addition, cross-references in the Prospectus will be adjusted in the Selling
Securityholder Prospectus to refer to the appropriate sections.
<PAGE> 3
SKYMALL, INC.
CROSS REFERENCE SHEET BETWEEN ITEMS OF FORM S-1 AND
PROSPECTUS PURSUANT TO ITEM 501(b) OF REGULATION S-K
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FORM S-1
ITEM NO. ITEM CAPTION CAPTION OR LOCATION IN PROSPECTUS
- -------- -------------------------------------------------- --------------------------------------
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1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Prospectus Summary; Risk Factors; not
applicable as to Ratio of Earnings to
Fixed Charges
4. Use of Proceeds................................... Prospectus Summary; Use of Proceeds;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations
5. Determination of Offering Price................... Outside Front Cover Page;
Underwriting*
6. Dilution.......................................... Dilution
7. Selling Security Holders.......................... Principal Shareholders*
8. Plan of Distribution.............................. Outside Front Cover Page; Inside Front
Cover Page; Underwriting*
9. Description of Securities to be Registered........ Outside Front Cover Page; Prospectus
Summary; Description of Capital Stock;
Shares Eligible for Future Sale
10. Interests of Named Experts and Counsel............ Not Applicable
11. Information with Respect to the Registrant........ Outside and Inside Front Cover Page;
Prospectus Summary; The Company; Risk
Factors; Dividend Policy; Dilution;
Capitalization; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Shareholders; Shares
Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Management
</TABLE>
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* Will appear under caption "Plan of Distribution" in the Selling Securityholder
Prospectus.
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1996
PROSPECTUS
2,000,000 SHARES
SKYMALL, INC.
EASY SHOPPING FROM YOUR FAVORITE CATALOGS
COMMON STOCK
SkyMall, Inc. ("SkyMall" or the "Company") hereby offers 2,000,000 shares
of common stock, $.001 par value per share (the "Common Stock"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained. It is
anticipated that the initial public offering price will be between $8.00 and
$9.00 per share. For information regarding the factors considered in determining
the initial public offering price, see "Underwriting." Application has been made
for quotation of the Common Stock on the Nasdaq National Market under the symbol
"SKYM." Concurrently, 720,000 shares of Common Stock are being registered at the
Company's expense for sale by certain selling securityholders (the "Selling
Securityholders") pursuant to a separate prospectus (the "Selling Securityholder
Prospectus"). See "Concurrent Offering."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 HEREOF AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------
Per Share........................... $ $ $
- -----------------------------------------------------------------------------------------------------
Total............................... $ $ $
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(1) Excludes the value of warrants to purchase up to 200,000 shares of Common
Stock (the "Representative's Warrants") granted to Josephthal Lyon & Ross
Incorporated, the representative of the several Underwriters (the
"Representative"). The Company has agreed to indemnify the Underwriters
against certain liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), in connection with this Offering. See
"Underwriting."
(2) Before deducting estimated expenses of $810,000 payable by the Company,
including the non-accountable expense allowance payable to the
Representative. See "Underwriting."
(3) Certain shareholders of the Company (the "Selling Shareholders") have
granted to the Underwriters an option (the "Over-Allotment Option"),
exercisable for 45 days after the date of this Prospectus, to purchase up to
300,000 additional shares of Common Stock, upon the same terms and
conditions set forth above, solely to cover over-allotments, if any. The
Company will not receive any of the proceeds from the sale of the Common
Stock by the Selling Shareholders. See "Principal Shareholders" and
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ ,
respectively.
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and,
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this Offering without notice and to reject any order in whole or in part.
It is expected that delivery of the Common Stock offered hereby will be made
against payment therefor at the offices of Josephthal Lyon & Ross Incorporated,
New York, New York, on or about , 1996.
------------------------
JOSEPHTHAL
LYON & ROSS
INCORPORATED
, 1996
<PAGE> 5
[This page includes a photograph of covers of seven SkyMall catalogs.
Depicted on the various covers are Mickey Mouse, Minnie Mouse, a sailboat, a
sweatshirt, a gothic clock and glassware. Below the SkyMall catalog covers are
the names and logos of United Airlines, Delta Air Lines, America West Airlines,
TWA, Continental Airlines and Southwest Airlines.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent public accountants and
quarterly reports for the first three quarters of each year containing unaudited
summary financial information.
2
<PAGE> 6
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and financial statements, including
the notes thereto, contained elsewhere in this Prospectus. Unless otherwise
indicated, all information contained herein (i) assumes no exercise of the
Over-Allotment Option granted to the Underwriters, the Representative's Warrants
or any other stock options or warrants issued by the Company; (ii) reflects the
conversion of shareholder notes in the aggregate principal amount of $5.0
million into 5,000 shares of Convertible Preferred Stock and the conversion of
such shares and 3,000 additional shares of Convertible Preferred Stock issued in
the Private Placement into 1,440,000 shares of Common Stock on the closing date
of this Offering; and (iii) reflects the receipt of $4.0 million in proceeds
from a loan that was used by the Company to repay $4.0 million in debt and
accrued interest of certain shareholders (the conversion of the shareholder
notes, the consummation of the Private Placement, the conversion of the
Convertible Preferred Stock, and the receipt and application of the loan are
hereinafter collectively referred to as the "Recapitalization Transactions").
See "The Company -- Private Placement", "Concurrent Offering," "Management --
Stock Option Plans," "Certain Transactions" and "Underwriting." Investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
SkyMall(R) is the largest in-flight catalog company in the United States
that makes high-quality products and services available to more than 350.0
million airline passengers per year. The Company markets and sells a broad
selection of premium merchandise provided by participating merchants, which
include major catalog companies and specialty retailers, such as Disney,
Hammacher Schlemmer and The Sharper Image(R). The merchandise of each
participating merchant is presented in a separate section of the SkyMall catalog
to allow browsing from "store to store," providing the convenience and variety
of an upscale shopping mall environment. Substantially all of the merchandise
sold by the Company is shipped directly to customers by participating merchants,
thus avoiding significant inventory risk to the Company. The Company has
exclusive agreements to place its catalogs in aircraft seat pockets on 15
airlines, which carried approximately 70% of all domestic passengers in 1995,
including Delta, United, USAir, Continental, TWA, America West and Southwest. As
a result, the SkyMall catalog is available to over 960,000 domestic airline
passengers each day. Since the Company began operations in 1990, SkyMall has
experienced substantial growth and its total revenues have increased from
approximately $5.4 million in fiscal 1991 to approximately $43.1 million in
fiscal 1995, for a compound annual growth rate of 68%. The Company's revenue per
passenger enplanement on flights carrying the SkyMall catalog has increased from
approximately $0.038 in 1991 to approximately $0.082 for the year ended December
31, 1995, for a compound annual growth rate of 21%.
Business Strategy. The Company's foundation is built on its relationships
with its customers, airline partners and participating merchants. The Company's
customers enjoy the convenience of being able to shop for a wide variety of
innovative products while traveling. The Company offers a fair price guarantee
under which the Company will refund the price difference if the customer finds
the same item advertised elsewhere at a lower price. In order to enhance the
ongoing appeal of its product offerings, the Company produces four new catalogs
per year. The Company maintains a toll-free 24-hour telephone ordering service
(from air and ground phones) and an in-house staff of customer service
representatives who are trained to provide exemplary service in order to build
strong customer loyalty and increase revenue from repeat and referral business.
In exchange for placement of its catalogs in aircraft seat pockets, the
Company pays each airline partner a monthly commission based on net merchandise
revenues generated by the Company from sales to that airline's passengers. Some
of the Company's airline agreements also require payment of minimum monthly
fees. The Company's airline partners benefit from this additional revenue and
from being able to enhance the in-flight experience of their passengers by
providing the Company's catalog as an additional amenity.
Participating merchants obtain exposure for their products and services to
a demographically diverse group of potential customers with strong economic
profiles, generate additional revenues and acquire new customers that they can
add to their own proprietary mailing lists. Under its contracts with
participating
3
<PAGE> 7
merchants, the Company earns percentages of revenues generated by the Company's
sales, placement fees for inclusion of the merchants' products in the SkyMall
catalog, or a combination thereof. Among the more than 100 merchants currently
included in the SkyMall catalog are: Brookstone(R), Compaq Computer, The Disney
Catalog, Frontgate(R), Hammacher Schlemmer, The Safety Zone, Hello Direct(R),
Johnston & Murphy, Mattel(R), The Metropolitan Museum of Art, Norm Thompson
Solutions(R), Pepperidge Farms(R), SelfCare(R), The Sharper Image(R),
Successories(R), SyberVision(R), Thomas Cook and The Wine Enthusiast(R).
Growth Strategy. The Company's primary growth strategies are to increase
its revenue per passenger enplanement and to increase circulation of the SkyMall
catalog. The Company plans to increase its revenue per passenger enplanement
through innovative marketing programs, some of which are modeled after
successful "duty-free" in-flight sales programs offered on international
flights, which some airlines have reported to have produced revenues in excess
of $5.00 per passenger enplanement. The Company also plans to expand its
distribution to travelers and other potential customers by securing agreements
from additional airlines to carry the Company's catalogs, including both
domestic and foreign airlines. The Company also plans to implement additional
distribution channels outside of its airline franchise, including direct
marketing "mail-to-home" programs, magazine inserts and catalog placement in
hotels, railways, rental cars and other locations where travelers may be
reached. SkyMall recently entered into an agreement with its first foreign
airline, Japan-based JAL, to test market the SkyMall concept. In addition, in
1994, Amtrak began carrying the Company's catalog on selected routes. The
Company is currently employing advanced database management techniques to
utilize its rapidly growing customer database of over one million names for the
development of direct targeted marketing programs and to generate additional
revenues from database list rentals.
THE OFFERING
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Common Stock offered............................... 2,000,000 shares
Common Stock outstanding prior to this Offering.... 6,590,000 shares of Common Stock(1)
Common Stock to be outstanding after the completion
of this Offering................................. 8,590,000 shares of Common Stock(1)
Use of proceeds.................................... For implementing marketing and promotional
programs, developing additional circulation
media, capital expenditures and working
capital requirements. See "Use of Proceeds."
Risk factors....................................... The Common Stock offered hereby involves a
high degree of risk and immediate and
substantial dilution. See "Risk Factors" and
"Dilution."
Proposed Nasdaq National Market Symbol............. "SKYM"
</TABLE>
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(1) Does not include (i) 438,080 shares of Common Stock issuable upon exercise
of stock options issued pursuant to the Company's stock option plans, which
have a weighted average exercise price of $6.13 per share, and an additional
311,920 shares of Common Stock reserved for issuance thereunder, including
20,000 shares reserved for issuance to non-employee directors upon
completion of this Offering, (ii) 180,000 shares of Common Stock issuable
upon the exercise of Warrants issued by the Company in connection with the
Private Placement, which are exercisable at the initial public offering
price, and (iii) 58,824 shares of Common Stock issuable by the Company upon
the exercise of a warrant issued to a vendor, which is exercisable at the
initial public offering price. See "The Company -- Private Placement" and
"Management -- Stock Option Plans."
4
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OPERATING DATA)
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SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- ------- 1995 -------
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(UNAUDITED)
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STATEMENTS OF OPERATIONS
DATA:
Merchandise sales, net.... $ 5,422 $15,875 $24,507 $ 22,062 $26,883 $12,255 $12,432
Placement fees and other.. 13 178 2,560 8,241 16,198 8,295 5,793
------- ------- ------- -------- ------- ------- -------
Total revenues............ 5,435 16,053 27,067 30,303 43,081 20,550 18,225
------- ------- ------- -------- ------- ------- -------
Costs of goods sold....... 3,370 10,364 13,691 16,266 24,564 11,610 9,553
Total operating expenses.. 6,776 14,589 18,855 25,535 17,009 8,391 7,534
Interest expense and other
income (expense) net.... (364) (740) (287) (688) (750) (384) (368)
------- ------- ------- -------- ------- ------- -------
Net income (loss)......... $(5,075) $(9,640) $(5,766) $(12,186) $ 758 $ 165 $ 770
======= ======= ======= ======== ======= ======= =======
Pro forma net income
(loss) per common share... (1.04) (1.95) (1.59) (3.19) .21 .06 .18
Pro forma weighted average
shares outstanding...... 4,877,399 4,946,867 3,630,559 3,775,274 5,648,824 5,648,824 5,648,824
OPERATING DATA:
Number of domestic
enplanements(1)......... 417,867,000 436,310,000 448,647,000 481,755,000 498,611,000 243,411,000 259,432,000
Domestic enplanement
percentage(2)........... 34% 73% 75% 75% 66% 65% 62%
Revenue per passenger
enplanement(3).......... $ 0.038 $ 0.050 $ 0.073 $ 0.061 $ 0.082 $ 0.078 $ 0.078
Number of airlines at end
of period(4)............ 8 11 15 21 22 22 15
Number of catalogs
produced(5)............. 4,513,000 11,915,000 15,661,000 15,747,000 17,162,000 8,428,000 7,639,000
Average number of pages
per catalog(6).......... 60 80 102 133 137 132 144
Revenue per catalog
produced(7)............. $ 1.20 $ 1.33 $ 1.56 $ 1.40 $ 1.57 $ 1.45 $ 1.63
JUNE 30,
---------------------------------
PRO FORMA
DECEMBER 31, PRO AS
------------------------------------------------------ ACTUAL FORMA(8) ADJUSTED(9)
1991 1992 1993 1994 1995 1996 1996 1996
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BALANCE SHEETS DATA:
Cash and cash equivalents....... $ 560 $ 1,797 $ 171 $ 896 $ 775 $ 455 $ 631 $15,631
Working capital (deficit)....... (264) (1,506) (3,580) (7,540) (4,734) (5,570) (2,794) 12,206
Total assets.................... 5,902 8,757 10,394 5,913 4,726 5,240 5,416 20,416
Long-term debt.................. 6,701 40 2,978 8,082 10,818 10,027 5,203 5,203
Shareholders' equity (deficit).. $(3,946) $ 1,941 $ (3,603) $(15,791) $(15,033) $(14,263) $(6,663) $ 8,337
</TABLE>
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(1) Represents the number of revenue passengers flown on scheduled domestic
airlines in the given period.
(2) Represents the passenger enplanements on domestic airlines that carried the
SkyMall catalog during the period as a percentage of total domestic
passenger enplanements in the period by all scheduled domestic airlines.
(3) Revenue per passenger enplanement is net merchandise sales for the period
divided by the number of domestic enplanements during the period on all
scheduled domestic airlines that carried the SkyMall catalog.
(4) Represents the number of airlines at end of period with which the Company
had an agreement to carry the SkyMall catalog.
(5) Represents the number of catalogs produced by the Company during the period
for distribution to airlines.
(6) Represents the average number of pages in the SkyMall catalog during the
period.
(7) Represents net merchandise sales for the period divided by the number of
catalogs produced by the Company during the period.
(8) Pro forma to give effect to the Recapitalization Transactions. See
"Prospectus Summary," "The Company -- Private Placement," "Concurrent
Offering" and "Certain Transactions."
(9) Pro forma as adjusted to give effect to the Recapitalization Transactions
and to reflect the sale of 2,000,000 shares of Common Stock offered hereby
(assuming an initial public offering price of $8.50 per share) and the
initial application of the net proceeds therefrom. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Use of Proceeds" and "Underwriting."
5
<PAGE> 9
RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk. Prospective investors, prior to making an investment in the securities,
should carefully consider the following risk factors, among others, relating to
the Company and this Offering.
LIMITED HISTORY OF PROFITABLE OPERATIONS; NO ASSURANCE OF CONTINUED
PROFITABILITY
The Company commenced operations in late 1990. Except for fiscal 1995 and
the first six months of fiscal 1996, the Company has incurred substantial
losses, resulting in an accumulated deficit of approximately $32.7 million at
June 30, 1996. There can be no assurance that the Company's operations will
remain profitable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
NO ASSURANCE OF CONTINUED GROWTH
Since its inception, SkyMall has rapidly expanded its operations, growing
from total revenues of $200,000 in fiscal 1990 to total revenues of $43.1
million in fiscal 1995. The Company's continued growth will depend to a
significant degree on its ability to increase revenue per passenger, broaden its
customer base by entering into relationships with new domestic and foreign
airlines and implement other programs that increase the circulation of the
SkyMall catalog. The Company's ability to implement its growth strategy will
also depend on a number of other factors, many of which are or may be beyond the
Company's control, including: (i) the ability of the Company to select products
for its catalog that appeal to its customer base; (ii) sustained or increased
levels of airline travel, particularly in domestic airline markets; (iii) the
continued perception by participating merchants that the Company offers an
effective marketing channel for their products and services; (iv) the Company's
ability to attract, train and retain qualified employees and management; and (v)
the continued profitability of existing operations. There can be no assurance
that the Company will be able to successfully implement its growth strategy or
that its planned expansion will be profitable. See "Business -- Growth
Strategy."
AIRLINE RELATIONSHIPS
The Company's business depends significantly on its relationships with
airlines and its ability to have its catalogs placed on a substantial portion of
domestic airline flights. The Company's agreements with its airline partners
typically have one-year terms, but generally permit the airline to terminate the
relationship on 60 to 180 days' advance notice. In 1993, one major airline
declined to renew its contract with the Company. There can be no assurance that
the Company's airline partners will continue their relationships with the
Company and the loss of one or more of the Company's significant airline
partners could have a material adverse affect on the Company's financial
condition and results of operations. See "Business -- Airline Relationships."
INCREASES IN PAPER COSTS AND AIRLINE FUEL PRICES
The cost of paper used to print the Company's catalogs and the fees paid to
airlines to reimburse them for the increased fuel costs associated with carrying
the Company's catalogs are significant expenses of the Company's operations.
Historically, paper and airline fuel prices have fluctuated significantly from
time to time. In 1995 and the first six months of 1996, the Company experienced
a significant increase in paper costs, and although paper prices have declined
during the third quarter of 1996, prices in the paper market remain volatile.
Any significant increases in paper or airline fuel costs reimbursable by the
Company could have a material adverse effect on the Company's financial
condition and results of operations. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition."
CREDIT RISK
Some participating merchants agree to pay a placement fee to the Company
for inclusion of their merchandise in the SkyMall catalog. The Company records
an account receivable from the merchant for the placement fee ratably for each
month of the catalog issue. In some cases, the Company collects the placement
fee either from the merchant or by withholding it from amounts due to merchants
for merchandise sold. To
6
<PAGE> 10
the extent that the placement fee receivable exceeds the sales of the merchant's
products and the merchant is unable or unwilling to pay the difference to the
Company, the Company may experience credit losses which could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
COMPETITION
The Company faces competition for customers from airport-based retailers,
duty-free retailers, specialty stores, department stores and specialty and
general merchandise catalogs, many of which have greater financial and marketing
resources than the Company. In addition, the Company competes for customers with
other in-flight marketing media, such as airline-sponsored in-flight magazines,
airline video programming, and, to a lesser extent, seatback video shopping
services. All of the products and services offered by the Company can also be
found in other retail stores and catalogs. See "Business -- Competition."
INFORMATION AND TELECOMMUNICATIONS SYSTEMS
The Company processes a large volume of relatively small orders.
Consequently, the Company's success depends to a significant degree on the
effective operation of its information and telecommunications systems. Any
extended failure of the Company's information and telecommunications systems
could have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Business Operations."
SEASONALITY
The Company's business is seasonal in nature, with its sales peak typically
occurring during the holiday selling season of the fourth quarter. During fiscal
1995, approximately 33% of the Company's product sales were generated in the
fourth quarter. Any substantial decrease in sales for the fourth quarter could
have a material adverse effect on the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
PRODUCT LIABILITY
The Company's catalog typically features over 1,000 products and services
from more than 100 participating merchants. Generally, the Company's agreements
with its participating merchants require the merchants to indemnify the Company
for any losses arising from product liability claims made by customers,
including the costs of defending any such claims, and to carry product liability
insurance that names SkyMall as an additional insured. In addition, the Company
maintains product liability insurance in the aggregate amount of $2.0 million
and $1.0 million per occurrence. To the extent that a merchant was unable or
unwilling to indemnify the Company as required, and any such losses exceeded the
Company's insurance coverage or were not covered by the Company's insurer, the
Company's financial condition and results of operations could be materially
adversely affected. See "Business -- Business Operations."
RELIANCE ON KEY PERSONNEL
The Company is dependent on the services of Robert M. Worsley, its
Chairman, President and Chief Executive Officer, and on the services of certain
other executive officers. The Company has entered into an employment agreement
with Mr. Worsley and the Company is the beneficiary of $1.0 million of key-man
life insurance on the life of Mr. Worsley. However, the loss of Mr. Worsley's
services or of the services of certain other executive officers would have a
material adverse effect on the Company. See "Management."
CONTROL BY SHAREHOLDER
Immediately upon completion of this Offering, Mr. Worsley and his wife (the
"Worsleys") will directly own approximately 26.4% of the Company's outstanding
Common Stock. In addition, following this Offering, the Worsleys will have
certain options to purchase an additional 37.2% of the Company's Common Stock
(33.7% if the Over-Allotment Option is exercised in full) from two of the
Company's existing shareholders.
7
<PAGE> 11
The Worsleys will also have an irrevocable proxy to vote the shares of Common
Stock subject to one of these options for the twelve month period following this
Offering. Accordingly, upon the closing of this Offering, the Worsleys will
beneficially own 63.7% of the Company's Common Stock (60.2% if the
Over-Allotment Option is exercised in full) and will have the ability to control
the affairs of the Company and matters requiring a shareholder vote, including
the election of the Company's directors, the amendment of the Company's charter
documents, the merger or dissolution of the Company and the sale of all or
substantially all of the Company's assets. The voting power of the Worsleys may
also discourage or prevent any proposed takeover of the Company pursuant to a
tender offer. See "Principal Shareholders" and "Certain Transactions."
NO PRIOR PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE; VOLATILITY OF
PRICE
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or, if developed, be sustained after this Offering, or that
the market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price of the Common Stock has been
arbitrarily determined by negotiation between the Company and the
Representative, does not necessarily bear any relationship to the Company's
assets, book value, revenues or other established criteria of value, and should
not be considered indicative of the actual value of the Common Stock.
The trading prices of the Common Stock could be subject to wide
fluctuations in response to variations in the Company's operating results,
announcements by the Company or others, developments affecting the Company or
its competitors and other events and factors. In addition, the stock market has
experienced extreme price and volume fluctuations in recent years. These
fluctuations have had a substantial effect on the market prices for many
companies, often unrelated to their performance, and may adversely affect the
market price for the Common Stock. See "Underwriting."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
A significant number of shares of Common Stock offered hereby may be sold
to customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of shares of Common Stock through or with
the Representative. Although it has no obligation to do so, the Representative
intends to make a market in the Common Stock and may otherwise effect
transactions in the Common Stock. If it participates in such market, the
Representative may influence the market, if one develops, for the Common Stock.
Such market-making activity may be discontinued at any time. Moreover, if the
Representative sells the securities issuable upon exercise of the
Representative's Warrants, it may be required under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), to temporarily suspend its market-
making activities. The prices and liquidity of the Common Stock may be
significantly affected by the degree, if any, of the Representative's
participation in such market. See "Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in pro forma net tangible book value of $7.50 (88%) per
share of Common Stock from the initial public offering price. See "Dilution."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
All of the estimated net proceeds from this Offering have been allocated to
the funding of the Company's growth strategy and working capital requirements.
Accordingly, the Company will have broad discretion as to the application of the
proceeds of this Offering. See "Use of Proceeds."
NO DIVIDENDS
The Company has not paid dividends on its Common Stock since its inception
and does not expect to pay cash or stock dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
8
<PAGE> 12
ISSUANCE OF PREFERRED STOCK; BARRIERS TO TAKEOVER
The Board of Directors may issue one or more series of Preferred Stock,
without any action on the part of the shareholders of the Company, the terms of
which may adversely affect the rights of holders of Common Stock. Further, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the shareholders. Issuance of Preferred Stock,
which may be accomplished through a public offering or a private placement to
parties favorable to current management, may dilute the voting power of holders
of Common Stock (such as by issuing Preferred Stock with super-voting rights)
and may render more difficult the removal of current management, even if such
removal may be in the shareholders' best interests. Any such issuance of
Preferred Stock could prevent the holders of Common Stock from realizing a
premium on their shares. See "Description of Securities -- Preferred Stock." The
Company's Articles of Incorporation and Bylaws also contain a certain number of
provisions which could deter takeover attempts. See "Certain Charter and Bylaw
Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's securities in the public
market after this Offering or the perception that such sales may occur could
materially adversely affect the market price of the Common Stock. Of the
8,590,000 shares of Common Stock to be outstanding upon completion of this
Offering, the 2,000,000 shares of Common Stock offered hereby will be
immediately freely transferable without restriction under the Securities Act of
1933, as amended (the "Securities Act") except for any shares of Common Stock
purchased by an "affiliate" of the Company (as that term is defined under the
rules and regulations of the Securities Act), which will be subject to certain
of the resale limitations of Rule 144 under the Securities Act. Eight thousand
shares of Preferred Stock will convert into 1,440,000 shares of Common Stock
upon the closing of this Offering, of which 540,000 shares of Common Stock and
180,000 shares of Common Stock that may be acquired upon the exercise of the
Warrants will be freely tradeable. However, the holders of these shares have
executed agreements pursuant to which they have agreed not to sell, transfer,
assign, pledge or otherwise dispose of their shares for a twelve month period
from the effective date of this Prospectus, without the prior written consent of
the Representative ("Lock-up Agreements").
The remaining 6,050,000 shares of Common Stock outstanding prior to
consummation of this Offering, including 900,000 shares of Common Stock issuable
on conversion of certain shares of Preferred Stock, are "restricted" securities
within the meaning of Rule 144 under the Securities Act. The holders of all
these "restricted" shares, including each officer and director of the Company,
have executed Lock-up Agreements. Taking into consideration the restrictions of
Rule 144 and the Lock-up Agreements, commencing twelve months after the date of
this Prospectus, 5,150,000 shares of Common Stock held by existing shareholders
will become eligible for sale under Rule 144, subject to compliance with the
volume limitations and other requirements of Rule 144. The remaining 900,000
shares of Common Stock held by existing shareholders will become eligible for
sale under Rule 144 in October 1998, subject to compliance with the volume
limitations and other requirements of Rule 144. The sale or availability for
sale of significant quantities of Common Stock could materially adversely affect
the market price of the Common Stock and could impair the ability of the Company
to raise capital in the future through an offering of its equity securities. See
"Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, including
statements regarding, among other items the Company's growth strategy and
anticipated trends in the Company's business. These forward-looking statements
are based largely on the Company's expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from these forward-looking statements as
a result of the factors described herein, including, among others, regulatory or
economic influences. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Prospectus will
in fact transpire or prove to be accurate.
9
<PAGE> 13
THE COMPANY
SkyMall was incorporated in Arizona in 1989. The Company began its
operations in late 1990 and, in 1991, the Company acquired the operations of its
principal competitor, GiftMaster, Inc. ("GiftMaster"). The Company was
reincorporated in Nevada in 1996. Except as otherwise specified, all references
in this Prospectus to the "Company" or "SkyMall" refer to SkyMall, Inc., which
has no subsidiaries. The Company's principal executive offices are located at
and its mailing address is 1520 East Pima Street, Phoenix, Arizona 85034. The
telephone number of the Company is (602) 254-9777.
PRIVATE PLACEMENT
On October 20, 1996, the Company completed a private placement (the
"Private Placement") pursuant to which it sold 3,000 shares of 6% Dividend
Paying Convertible Redeemable Preferred Stock (the "Convertible Preferred
Stock") to certain investors including certain affiliates of the Company. In
connection with the Private Placement, the Company issued warrants (the
"Warrants") to acquire up to 180,000 shares of Common Stock to investors in the
Private Placement. The Warrants are exercisable for three years following this
Offering at an exercise price equal to the initial public offering price at
which shares of Common Stock are offered hereby. The net proceeds from the
Private Placement were approximately $2.6 million (after commissions and
expenses). The Company used the net proceeds of the Private Placement to pay
certain indebtedness and to meet working capital requirements. Simultaneously
with the closing of the Private Placement, certain shareholders of the Company
converted an aggregate of $5.0 million of indebtedness of the Company into 5,000
shares of Convertible Preferred Stock. See "Certain Transactions."
The terms of the Convertible Preferred Stock provide that each share of
Convertible Preferred Stock will automatically be converted into Common Stock
upon the closing of this Offering. The rate at which the Convertible Preferred
Stock converts into Common Stock is the greater of (i) 180 shares of Common
Stock per share of Convertible Preferred Stock, or (ii) 1,000 divided by
(66 2/3% multiplied by the initial public offering price per share of Common
Stock). Assuming an initial public offering price of $8.50 per share, the 8,000
shares of Convertible Preferred Stock issued in the Private Placement and upon
the conversion of certain shareholder debt will convert into 1,440,000 shares of
Common Stock upon the closing of this Offering.
CONCURRENT OFFERING
The Company agreed to register the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock sold in the Private Placement and
the shares of Common Stock underlying the Warrants upon the Company's initial
public offering. Accordingly, the registration statement of which this
Prospectus forms a part also includes a prospectus (the "Selling Securityholder
Prospectus") with respect to an offering of 540,000 shares of Common Stock that
are issuable upon such conversion and 180,000 shares of Common Stock underlying
the Warrants (the "Concurrent Offering"), all of which may be sold in the open
market, in privately negotiated transactions or otherwise, directly by the
holders thereof. These shareholders have agreed with the Representative not to
sell or otherwise transfer any of such securities for 12 months from the date of
this Prospectus without the prior written consent of the Representative. The
Company will not receive any proceeds from the sale of such Common Stock.
Expenses of the Concurrent Offering, other than fees and expenses of counsel to
these shareholders and selling commissions, will be paid by the Company. Sales
of such shares of Common Stock by the holders thereof or the potential for such
sales may have an adverse effect on the market price of the shares offered
hereby. See "Risk Factors -- Shares Eligible for Future Sale."
10
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $8.50
per share, and after deducting underwriting discounts and commissions and the
estimated offering expenses, are estimated to be approximately $15.0 million.
The Company intends to apply such net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT APPROXIMATE
OF PERCENTAGE OF
NET PROCEEDS(1) NET PROCEEDS
------------------ -------------
<S> <C> <C>
Marketing and Promotional Programs(2)................. $ 5.0 33.3%
Development of Additional Circulation Media(3)........ 5.0 33.3%
Capital Expenditures.................................. 1.0 6.7%
Working Capital....................................... 4.0 26.7%
---- -----
Total....................................... $15.0 100.0%
==== =====
</TABLE>
- ---------------
(1) In millions.
(2) To increase its revenue per passenger, the Company plans to implement or
expand a number of marketing and promotional programs, including offering
various incentives to participating airlines and flight attendants,
conducting various gate, jetway, in-flight and frequent flier promotions and
expanding in-flight video shopping services. See "Business -- Growth
Strategy."
(3) To increase circulation of the SkyMall catalog, the Company plans to develop
or expand new marketing channels, including developing new airline
partnerships with both foreign and domestic airlines, implementing a
mail-to-home program, placing the SkyMall catalog in hotels, railways and
rental cars and developing magazine inserts for in-flight magazines
sponsored by various airlines. See "Business -- Growth Strategy."
The allocation of the use of net proceeds represents management's estimates
based upon current business and economic conditions. Although the Company does
not contemplate material changes in the proposed allocation of the use of
proceeds, to the extent the Company finds that adjustment is required by reason
of existing business conditions, the amounts shown may be reallocated among the
uses indicated above or put to new uses. The Company believes that the net
proceeds of this Offering and cash generated from operations will be sufficient
for the Company to implement its growth strategy and otherwise conduct its
operations for at least the twelve month period following this Offering. The net
proceeds of this Offering that are not expended immediately will be deposited in
interest bearing accounts, or invested in government obligations, certificates
of deposit or similar short-term, low risk investments. See "Risk
Factors -- Broad Discretion in Application of Proceeds."
The Company will not receive any of the proceeds from the exercise of the
Over-Allotment Option and the sale of any of the securities being offered by the
certain shareholders in the Concurrent Offering. See "Principal Shareholders"
and "The Company -- Private Placement" and "Concurrent Offering."
DIVIDEND POLICY
The Company has never paid a dividend on its Common Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. It is
the current policy of the Company's Board of Directors to retain any earnings to
finance operations and expansion of the Company's business. The payment of
future dividends is within the discretion of the Board of Directors and will
depend upon the Company's future earnings, if any, its capital requirements,
financial condition and other relevant factors.
11
<PAGE> 15
DILUTION
The pro forma net tangible book value (deficit) of the Company's Common
Stock at June 30, 1996, was approximately $(6.8 million), or $(1.04) per share.
Pro forma net tangible book value per common share represents the book value of
the Company's tangible assets less total liabilities divided by the number of
shares of Common Stock outstanding, after giving effect on a pro forma basis to
the Recapitalization Transactions. Dilution per share to new investors
represents the difference between the amount per share paid by purchasers of
Common Stock of the Company pursuant to this Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
this Offering. After giving effect to the sale of the 2,000,000 shares of Common
Stock offered hereby (at an assumed initial public offering price of $8.50 per
share) and the application of the net proceeds therefrom, the as adjusted pro
forma net tangible book value of the Common Stock at June 30, 1996, would have
been $8.5 million, or $1.00 per share. This represents an immediate increase in
pro forma net tangible book value of $2.04 per share of Common Stock to existing
shareholders and an immediate dilution of $7.50 (88%) per share of Common Stock
to new investors purchasing Common Stock pursuant to this Offering. The
following table illustrates the per share effect of this dilution on an
investor's purchase of shares:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock..... $8.50
Pro forma net tangible book value per share of Common Stock
before this Offering........................................... $(1.04)
Increase in pro forma net tangible book value per share of
Common Stock attributable to new investors..................... $2.04
-----
As adjusted pro forma net tangible book value per share of Common Stock
after this Offering....................................................... $1.00
----
Dilution per share of Common Stock to new investors......................... $7.50
====
</TABLE>
The following table summarizes, as of June 30, 1996, the difference between
the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by existing
shareholders and by new investors purchasing shares of Common Stock pursuant to
this Offering, after giving effect on a pro forma basis to the Recapitalization
Transactions.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED PAID AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).............. 6,590,000 76.7% $26,843,000 61.2% $4.07
New investors......................... 2,000,000 23.3% $17,000,000 38.8% $8.50
--------- ----- ----------- ----- -----
Total....................... 8,590,000 100.0% $43,843,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Does not include (i) 438,080 shares of Common Stock issuable upon exercise
of stock options issued pursuant to the Company's stock option plans, which
have a weighted average exercise price of $6.13 per share, and an additional
311,920 shares of Common Stock reserved for issuance thereunder, including
20,000 shares reserved for issuance to non-employee directors upon
completion of this Offering, (ii) 180,000 shares of Common Stock issuable
upon the exercise of Warrants issued by the Company in connection with the
Private Placement, which are exercisable at the initial public offering
price, and (iii) 58,824 shares of Common Stock issuable by the Company upon
the exercise of a warrant issued to a vendor, which is exercisable at the
initial public offering price. See "The Company -- Private Placement" and
"Management -- Stock Option Plans."
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 (i) on an actual basis, (ii) on a pro forma basis after giving effect
to the Recapitalization Transactions, and (iii) on a pro forma as adjusted basis
to give effect to the Recapitalization Transactions and the sale of 2,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $8.50 per share and the initial application of the estimated net
proceeds therefrom. This table should be read in conjunction with, and is
qualified by, the Financial Statements and notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
Long-term notes payable and capital lease obligations
excluding current portion............................... $ 10,027 $ 5,203 $ 5,203
======== ======== ========
Shareholders' Equity:
Preferred Stock $.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding......... -- -- --
Common Stock $.001 par value, 50,000,000 shares
authorized; 5,150,000 shares issued and outstanding
actual; 6,590,000 shares issued and outstanding pro
forma; and 8,590,000 shares issued and outstanding
pro forma as adjusted(1)............................. 5 7 9
Additional paid-in capital.............................. 18,438 (6,670) 8,328
Retained earnings (deficit)(2).......................... (32,706) -- --
-------- -------- --------
Total shareholders' equity (deficit)................. $(14,263) $ (6,663) $ 8,337
======== ======== ========
Total capitalization (deficiency).................... $ (4,236) $ (1,460) $ 13,540
======== ======== ========
</TABLE>
- ---------------
(1) Does not (i) include 438,080 shares of Common Stock issuable upon exercise
of stock options issued pursuant to the Company's stock option plans, which
have a weighted average exercise price of $6.13 per share, and an additional
311,920 shares of Common Stock reserved for issuance thereunder, including
20,000 shares reserved for issuance to non-employee directors upon
completion of this Offering, (ii) 180,000 shares of Common Stock issuable
upon the exercise of Warrants issued by the Company in connection with the
Private Placement, which are exercisable at the initial public offering
price, and (iii) 58,824 shares of Common Stock issuable by the Company upon
the exercise of a warrant issued to a vendor, which is exercisable at the
initial public offering price. See "The Company -- Private Placement" and
"Management -- Stock Option Plans."
(2) The Company's accumulated deficit, which was $32.7 million at June 30, 1996
was reclassified into additional paid-in capital upon the issuance of the
Preferred Stock in the Private Placement.
13
<PAGE> 17
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OPERATING DATA)
The selected financial data as of and for the years ended December 31,
1991, 1992, 1993, 1994 and 1995 and as of and for the six-month period ended
June 30, 1996 are derived from the Financial Statements of the Company which
have been audited by Arthur Andersen LLP, independent public accountants, and
should be read in conjunction with the Financial Statements included elsewhere
in this prospectus and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
financial data as of and for the six months ended June 30, 1995 have been
derived from unaudited financial statements, which in the opinion of management,
have been prepared on a basis consistent with the audited information and
include all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the information set forth therein. Results of
operations for the six month periods ended June 30, 1995 and 1996 may not
necessarily be indicative of the results to be expected for the full fiscal year
or any other period.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Merchandise sales, net.......... $5,422 $15,875 $24,507 $ 22,062 $26,883 $12,255 $12,432
Placement fees and other........ 13 178 2,560 8,241 16,198 8,295 5,793
------- ------- ------- -------- ------- ------- -------
Total revenues.................. 5,435 16,053 27,067 30,303 43,081 20,550 18,225
Cost of goods sold.............. 3,370 10,364 13,691 16,266 24,564 11,610 9,553
------- ------- ------- -------- ------- ------- -------
Gross margin.................... 2,065 5,689 13,376 14,037 18,517 8,940 8,672
Catalog expenses................ 2,445 4,071 6,890 9,644 9,532 4,733 3,979
Selling expenses................ 773 2,116 2,921 2,754 2,229 1,048 1,134
Customer service and fulfillment
expenses...................... 1,266 3,618 4,514 2,919 2,136 1,021 973
General and administrative
expenses...................... 2,292 4,784 4,530 5,886 3,112 1,589 1,448
Restructure charges............. -- -- -- 4,332 -- -- --
------- ------- ------- -------- ------- ------- -------
Total operating expenses........ 6,776 14,589 18,855 25,535 17,009 8,391 7,534
------- ------- ------- -------- ------- ------- -------
Interest expense and other
income (expense), net......... (364) (740) (287) (688) (750) (384) (368)
------- ------- ------- -------- ------- ------- -------
Net income (loss)............... $(5,075) $(9,640) $(5,766) $(12,186) $758 $165 $770
======= ======= ======= ======== ======= ======= =======
SELECTED OPERATING DATA:
Number of domestic
enplanements(1)............... 417,867,000 436,310,000 448,647,000 481,755,000 498,611,000 243,411,000 259,432,000
Domestic enplanement
percentage(2)................. 34% 73% 75% 75% 66% 65% 62%
Revenue per passenger
enplanement(3)................ $0.038 $0.050 $0.073 $0.061 $0.082 $0.078 $0.078
Number of airlines at end of
period(4)..................... 8 11 15 21 22 22 15
Number of catalogs
produced(5)................... 4,513,000 11,915,000 15,661,000 15,747,000 17,162,000 8,428,000 7,639,000
Average number of pages per
catalog(6).................... 60 80 102 133 137 132 144
Revenue per catalog
produced(7)................... $1.20 $1.33 $1.56 $1.40 $1.57 $1.45 $1.63
JUNE 30,
---------------------------------
PRO
FORMA
DECEMBER 31, PRO AS
----------------------------------------------------- ACTUAL FORMA(8) ADJUSTED(9)
1991 1992 1993 1994 1995 1996 1996 1996
----------- ------- ------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash and cash equivalents............. $ 560 $ 1,797 $ 171 $ 896 $ 775 $ 455 $ 631 $15,631
Working capital (deficit)............. (264) (1,506) (3,580) (7,540) (4,734) (5,570) (2,794 ) 12,206
Total assets.......................... 5,902 8,757 10,394 5,913 4,726 5,240 5,416 20,416
Long-term debt........................ 6,701 40 2,978 8,082 10,818 10,027 5,203 5,203
Shareholders' equity (deficit)........ $(3,946) $ 1,941 $(3,603) $(15,791) $(15,033) $(14,263) $(6,663 ) $ 8,337
</TABLE>
14
<PAGE> 18
- ---------------
(1) Represents the number of revenue passengers flown on scheduled domestic
airlines in the given period.
(2) Represents the passenger enplanements on domestic airlines that carried the
SkyMall catalog during the period as a percentage of total domestic
passenger enplanements in the period by all scheduled domestic airlines.
(3) Revenue per passenger enplanement is net merchandise sales for the period
divided by the number of domestic enplanements during the period on all
scheduled domestic airlines that carried the SkyMall catalog.
(4) Represents the number of airlines at end of period with which the Company
had an agreement to carry the SkyMall catalogs.
(5) Represents the number of catalogs produced by the Company during the period
for distribution to airlines.
(6) Represents the average number of pages in the SkyMall catalog during the
period.
(7) Represents net merchandise sales for the period divided by the number of
catalogs produced by the Company during the period.
(8) Pro forma to give effect to the Recapitalization Transactions. See
"Prospectus Summary," "The Company -- Private Placement," "Concurrent
Offering" and "Certain Transactions."
(9) Pro forma as adjusted to give effect to the Recapitalization Transactions
and to reflect the sale of 2,000,000 shares of Common Stock offered hereby
(assuming an initial offering price of $8.50 per share) and the initial
application of the net proceeds therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Use of
Proceeds" and "Underwriting."
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
Company's financial condition as of December 31, 1994 and 1995 and June 30,
1996, and its results of operations for the years ended December 31, 1993, 1994
and 1995 and the six-month periods ended June 30, 1995 and 1996. This discussion
should be read in conjunction with the preceding "Selected Financial and
Operating Data" and the Company's Financial Statements and related Notes thereto
and other financial data appearing elsewhere in this Prospectus. For information
relating to factors that could affect future operating results, see "Risk
Factors." Any forward-looking statements included in this Prospectus should be
considered in light of such factors, as well as the information set forth below.
GENERAL
The Company commenced operations in late 1990 with an initial business
strategy of establishing exclusive relationships with major airlines, delivering
merchandise ordered by passengers at the airport upon landing and offering
concierge services. In 1991, the Company acquired its only major competitor,
which resulted in the addition of five new airline partners for the Company.
Since its first full year of operations in 1991, the Company has experienced
rapid growth. From 1991 to 1994, the Company devoted its resources to increasing
revenue per passenger enplanement and expanding circulation of the SkyMall
catalog. During this period, the Company gained market share by acquiring
exclusive contracts with airline partners, developing relationships with
participating merchants and gaining knowledge about its consumer market. Total
revenue increased from $5.4 million in 1991 to $30.3 million in 1994 and revenue
per passenger enplanement grew from $0.038 to $0.061 in the same period.
In late 1994, management focused its emphasis on translating the Company's
growth into profitability. Beginning in late 1994, the Company implemented
increases in placement fees charged to participating merchants for inclusion of
their merchandise in the SkyMall catalog. As a result of these increases,
placement fees and other revenues increased from $2.6 million in fiscal 1993 to
$16.2 million in fiscal 1995. During late 1994, the Company also simplified its
business strategy by outsourcing its merchandise fulfillment operations to
participating merchants. Through its market research and experience, the Company
determined that while customers valued the convenience of in-flight shopping,
most passengers preferred delivery at home rather than at the airport. Although
airport delivery and concierge services were essential in attracting new airline
partners to the program, they were no longer necessary to maintain the Company's
airline relationships. Accordingly, the Company discontinued its airport
delivery service and began its current practice of forwarding merchandise orders
to participating merchants for fulfillment. Thus, the Company no longer
maintains any significant inventory and has eliminated from its business
operations the costs and risks associated with managing inventory and a complex
airport delivery system. The Company also began significantly reducing its
operating expenses in late 1994, including outsourcing its concierge operation,
reducing its work force, requiring merchants to provide their own creative
catalog materials and eliminating unprofitable circulation. These actions
substantially reduced the Company's operating costs, from $25.5 million in
fiscal 1994 (including a $4.3 million restructure charge) to $17.0 million in
fiscal 1995. As a result of these changes in placement fees and operating
expenses, the Company's results of operations improved from a net loss of $12.2
million in fiscal 1994 to $0.8 million net income in fiscal 1995.
In the six-month period ended June 30, 1996, the Company's principal
sources of revenues were merchandise sales (68% of total revenues) and placement
fees from participating merchants (30% of total revenues). The Company also
rented its customer database to direct marketing companies (2% of total
revenues), which was included in placement fees and other revenues in the
Company's statement of operations. Merchandise sales represent the Company's
total fulfilled sales at retail sales prices, net of returns and allowances,
from products displayed in the Company's catalog. Placement fees are charged to
participating merchants for inclusion of their merchandise in the SkyMall
catalog. These fees are designed to cover catalog expenses and to stabilize the
Company's revenues by reducing the impact of fluctuations in merchandise sales.
In exchange for placement fees, the Company offers the participating merchants'
products in the Company's catalogs and performs order taking and processing
services. The placement fees are
16
<PAGE> 20
recognized ratably over the life of the catalog (currently quarterly). Order
taking and processing service expenses are recognized in the period incurred.
Customers place their order by telephone, mail or facsimile to the
Company's call center. The Company forwards customers' order information to
participating merchants who then ship products directly to the Company's
customers. Upon notification from a participating merchant of the shipment of
goods, the Company recognizes the merchandise sale and the related cost of goods
sold, and establishes a reserve for anticipated returns. The cost of goods sold
represents the amount paid by the Company to participating merchants in
connection with the sale of merchandise included in the SkyMall catalog. The
percentage of sales which the Company pays to participating merchants varies
from agreement to agreement; generally, the higher the placement fee paid by a
participating merchant, the higher percentage of sales paid by the Company to
the merchant, and vice versa. The Company believes that a combination of
placement fees with a variable percentage of sales component, together with the
payment of sales commissions to its airline partners, creates a situation in
which SkyMall, participating merchants and the airlines all benefit from and
have incentives to promote growth in merchandise sales.
The Company's major costs include costs of goods sold; catalog expenses,
which include paper, printing and catalog production costs; selling expenses,
which are primarily sales commissions to airlines and airline fuel reimbursement
costs; customer service and fulfillment costs, which include a full-service call
center and a drop-ship and order-processing coordination center; and general and
administrative expenses, which include corporate salaries, employee benefits,
facilities, legal and accounting expenses.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships that certain items bear in relation to total revenues of the
Company.
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH
PERIOD
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net merchandise sales.................................... 91% 73% 62% 60% 68%
Placement fees and other................................. 9% 27% 38% 40% 32%
---- ---- ---- ---- ----
Total revenues........................................... 100% 100% 100% 100% 100%
---- ---- ---- ---- ----
Gross margin............................................. 49% 46% 43% 44% 48%
---- ---- ---- ---- ----
Catalog expenses......................................... 25% 32% 22% 23% 22%
Selling expenses......................................... 11% 9% 5% 5% 6%
Customer service and fulfillment expenses................ 17% 10% 5% 5% 5%
General and administrative expenses...................... 17% 19% 7% 8% 8%
</TABLE>
SIX-MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO THE SIX-MONTH PERIOD ENDED JUNE
30, 1995 (UNAUDITED)
Revenue and Gross Margin. Net merchandise sales increased slightly from
$12.3 million for the six-month period ended June 30, 1995 to $12.4 million for
the six-month period ended June 30, 1996, or 1%. Placement fees and other
revenues decreased from $8.3 million for the six-month period ended June 30,
1995 to $5.8 million for the six-month period ended June 30, 1996, or 30%. The
Company has consciously moved the balance of the mix between placement fees and
percentage of sales revenues in order to position the Company to benefit from
anticipated sales increases in the fourth quarter. Beginning in the first
quarter of 1996, SkyMall decreased pages in its catalog from 52 to 16 for a
major participant which had paid placement fees and was paid by the Company 100%
of the sales price as cost of goods sold. SkyMall replaced the merchant on these
pages with new participating merchants, most of which had arrangements with
lower placement fees and a significantly higher percentage of sales retained by
the Company. As a result, due to the
17
<PAGE> 21
decrease in total revenues, gross margin as a percentage of total revenues
increased from 44% for the six-month period ended June 30, 1995, to 48% for the
six-month period ended June 30, 1996.
Operating Expenses. Total operating expenses decreased from $8.4 million
for the six-month period ended June 30, 1995 to $7.5 million for the six-month
period ended June 30, 1996, or 11%, due primarily to a $0.7 million reduction in
catalog expenses. This reduction resulted from elimination of unprofitable
catalog circulation on certain routes with some carriers and lower pricing on
the Company's printing contract. These reductions were partially offset by $0.5
million higher paper costs in the first half of fiscal 1996 compared to the same
period of fiscal 1995 due to the Company's average cost of paper increasing to
$63.71 per hundred weight (cwt) for the six month period ended June 30, 1996
compared to $52.91 for the period ended June 30, 1995. As a result of the
elimination of unprofitable circulation, revenue per catalog increased from
$1.45 for the six-month period ended June 30, 1995 to $1.63 for the six-month
period ended June 30, 1996, or 12%. The decrease in total operating expenses was
also due in part to a 13% decrease in general and administrative expenses from
$1.6 million for the six-month period ended June 30, 1995 to $1.4 million for
the six-month period ended June 30, 1996. These reductions were due primarily to
cost containment measures implemented by the Company during the six-month period
ended June 30, 1996.
Net Income from Operations. Net income from operations increased from $0.5
million at June 30, 1995 to $1.1 million at June 30, 1996, primarily due to the
$0.9 million reduction in the Company's total operating expenses, which was
partially offset by a slight decrease in operating gross margin.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
Revenue and Gross Margin. Net merchandise sales increased from $22.0
million in 1994 to $26.9 million in fiscal 1995, or 22%, due primarily to better
fulfillment of orders in 1995. Due to a lack of working capital in 1994 and
certain order fulfillment problems due to a computer conversion, the Company was
unable to purchase adequate inventory to fulfill many orders. With restructured
operations in place in 1995, order fulfillment percentages returned to normal
levels, which are approximately 90% of all orders received by the Company.
Placement fees and other revenues also increased from $8.2 million in fiscal
1994 to $16.2 million in fiscal 1995, or 98%, due primarily to the Company's
decision in late 1994, effective for the fourth quarter 1994 catalog, to change
its revenue mix to emphasize placement fees, which provide a more stable revenue
base. Gross margin as a percentage of total revenues decreased from 46% to 43%
due to higher total revenues which were the result of the shift to higher
placement fees and a higher cost of sales under its agreements with
participating merchants.
Operating Expenses. Total operating expenses, exclusive of the Company's
one-time restructure charge, decreased from $21.2 million in fiscal 1994 to
$17.0 million in fiscal 1995, or 20%. This decrease was due principally to the
Company's implementation of cost containment initiatives beginning in the fourth
quarter of fiscal 1994. Catalog costs decreased 1% from $9.6 million in fiscal
1994 to $9.5 million in fiscal 1995. Despite a 48% increase in average paper
prices and a 12% increase in pages printed, the Company realized offsetting cost
reductions from requiring participating merchants to provide their own creative
materials, lower printing prices and the elimination of fees that had been paid
by the Company to some merchants to participate in the program. Although net
merchandise sales increased substantially, selling expenses decreased by 21%
from $2.8 million in fiscal 1994 to $2.2 million in fiscal 1995 because SkyMall
began to require merchants to reimburse SkyMall for credit card processing
expenses. Likewise, customer service and fulfillment expenses decreased by 28%
from $2.9 million in fiscal 1994 to $2.1 million in fiscal 1995 due to the
Company's decision in the fourth quarter of 1994 to require participating
merchants to drop ship merchandise to the Company's customers rather than
maintain its own inventory. General and administrative expenses decreased by 47%
from $5.9 million in fiscal 1994 to $3.1 million in fiscal 1995. In connection
with the Company's 1994 restructuring, personnel in merchandise fulfillment
operations, merchandising, purchasing and concierges services were eliminated,
saving the Company nearly $1.0 million in payroll expenses. The Company closed
its fulfillment operations in seven cities which resulted in savings of $0.4
million in facilities expenses. Administrative expenses decreased by $0.8
million from fiscal 1994 to fiscal 1995 due to simplification of the business
and a reduction in professional fees.
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<PAGE> 22
Restructure Charge. In 1994, the Company incurred a one-time charge of
$4.3 million relating to the restructure of the business. The costs associated
with the restructure included:
(i) Losses on a long-term major vendor contract ($3.6 million). In
September 1994, the Company entered into a series of contracts with a
participating merchant. The contractual arrangements provided the working
capital which allowed the Company to continue operations, but is estimated
to cost the Company approximately $3.6 million between September 1994 and
mid 1997 when this contract is expected to expire.
(ii) Abandoned facilities and equipment ($1.0 million). The Company
abandoned leasehold improvements and equipment in its merchandise
fulfillment operations requiring the Company to write-off assets that would
no longer be used in the business. The Company also had long-term lease
commitments for two warehouse facilities which the Company continued to pay
in fiscal 1995 and fiscal 1996 for which the associated loss was recorded
in fiscal 1994.
(iii) Uncollectible accounts receivable ($0.8 million). Many
receivables from pre-restructure placement fees which would have been
offset against inventory purchases became uncollectible after the
restructure.
(iv) Severance and outsourcing expenses ($0.2 million). The Company
incurred severance costs as part of the reductions in its workforce. The
Company also paid a one-time fee to outsource its concierges services.
The foregoing costs were partially offset by a benefit of $1.3 million in
debt forgiveness from participating merchants and vendors.
Net Income (Loss) From Operations. The Company earned income from
operations of $1.5 million in fiscal 1995 compared to a loss from operations of
$11.5 million in fiscal 1994. This improvement was due primarily to the positive
impact in 1995 of the 1994 restructure, the effect of implementation of cost
containment measures in late 1994 and the recognition of the restructure charge
in fiscal 1994.
FISCAL YEAR ENDED DECEMBER 31, 1994 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1993
Revenue and Gross Margin. Net merchandise sales decreased from $24.5
million in fiscal 1993 to $22.0 million in fiscal 1994, or 10%. This decrease
was due to a lack of working capital to finance the Company's inventory
requirements and certain order fulfillment problems due to a computer
conversion, which caused the Company's order fulfillment rate to drop to as low
as 40% in October 1994. In addition, the Company and a major airline carrier
mutually decided not to renew their contract because the Company could no longer
provide this carrier with a custom catalog on a profitable basis. The major
carrier accounted for nearly 20% of the Company's net merchandise sales in 1993.
In 1993, SkyMall began charging participating merchants placements fees for
inclusion of their products in the SkyMall catalog in order to help stabilize
the Company's revenues. As a result, placement fees increased from $2.6 million
in fiscal 1993 to $8.2 million in 1994.
Gross margin as a percentage of total revenues decreased from 49% in fiscal
1993 to 46% in fiscal 1994. As management implemented placement fee arrangements
with participating merchants, the percentage of sales retained by the Company
decreased. Management believes that receiving higher fixed placement fees and
reducing reliance upon revenues from percentages of sales was a less risky
profit strategy during the post-restructure stabilization period.
Operating Expenses. Total operating expenses increased from $18.9 million
in fiscal 1993 to $25.5 million in fiscal 1994, or 35%. Catalog expenses
increased by 39% from $6.9 million in fiscal 1993 to $9.6 million in fiscal
1994, primarily because the Company produced six catalogs in 1994 compared to
three in 1993, added circulation in order to maximize placement fees and printed
31% more pages in 1994 than in 1993. Selling expenses declined slightly in 1994
compared to 1993 due to the termination of an agreement with a major airline in
April 1994 and declines in net merchandise sales and corresponding airline sales
commissions in 1994. Customer service and fulfillment expenses decreased in 1994
due to the restructure plan
19
<PAGE> 23
implemented in the fourth quarter of 1994 when the Company outsourced its
fulfillment operations. General and administrative costs increased by 31% from
$4.5 million in 1993 to $5.9 million in 1994, primarily due to costs associated
with certain unsuccessful financing efforts in 1994.
Net Income (Loss) From Operations. The Company incurred a net loss from
operations in fiscal 1994 of $11.5 million as compared to a net loss from
operations of $5.4 million in fiscal 1993. The increase in the net loss from
fiscal 1993 to fiscal 1994 was due primarily to the restructure charge.
LIQUIDITY AND CAPITAL RESOURCES
While the Company was developing and executing its original inventory-based
business plan from start-up to late 1994, the Company had significant need for
capital to fund investment in facilities and equipment, inventory, working
capital and start-up operating losses. At December 31, 1994, the Company had an
accumulated deficit of $34.2 million and a working capital deficit of $7.5
million. During this period, the Company's primary sources of cash included debt
and equity financing from shareholders, a bank loan guaranteed by a shareholder,
credit from suppliers and cash flow from operations. The Company also financed
its operations through the restructure and deferral of accounts payable in
connection with the Company's 1994
restructure.
In fiscal 1995 and first half of 1996, the Company's principal requirements
for cash were to fund working capital needs and to pay debt obligations to
vendors. The Company no longer needed significant capital to fund inventory and
warehouse facilities. The Company's primary sources of cash during this period
were cash flow from operations, vendor credit supported by shareholder
guarantees and loans from shareholders. Cash flow from operations was sufficient
to fund operating expenses, but was not adequate to also fund debt service to
vendors relating to the 1994 restructure. The Company made its debt payments to
vendors in 1995 but became delinquent in 1996. As of June 30, 1996, the Company
had a current ratio of .37:1 and negative working capital of $5.6 million.
In order to finance its working capital shortfalls, subsequent to June 30,
1996, management and certain shareholders took steps to strengthen the Company's
financial condition and improve the Company's liquidity. These steps included
(1) issuing approximately $2.6 million of Convertible Preferred Stock, net of
offering expenses, the proceeds of which were used to pay past due debts and
notes payable to vendors and (2) converting notes and other obligations to
shareholders of $5.0 million to 5,000 shares of Convertible Preferred Stock
(which will be converted into 900,000 shares of Common Stock upon closing of the
Offering).
The Company believes it will generate sufficient cash flow from operations
to adequately fund its operations over the next twelve months and liquidate its
remaining notes payable to vendors and other liabilities as they come due.
Additionally, management believes that the working capital provided by this
Offering will allow the Company to further reduce its operating costs by taking
advantage of trade discounts.
Cash provided by operating activities was $0.4 million for the six months
ended June 30, 1996 compared to $0.5 million for the same period in 1995. Cash
provided by (used for) operating activities was ($5.3) million, ($2.2) million
and $1.1 million in fiscal 1993, 1994 and 1995, respectively. The improvement in
fiscal 1994 compared to fiscal 1993 was largely due to reductions in inventory
in connection with the 1994 restructure. The improvements in fiscal 1995
compared to fiscal 1994 was due primarily to higher placement fees and lower
operating costs resulting from the 1994 restructure and continuing cost
reduction activities thereafter.
Cash used for investing activities was $0.2 million for the six months
ended June 30, 1996 compared to $0.1 million for the six months ended June 30,
1995. The 1996 increase was primarily due to the Company's investment in
software and computer equipment upgrades for the Company's Call Center. Cash
used for investing activities was $0.2 million, $0.4 million, and $0.2 million
in fiscal 1993, 1994 and 1995, respectively. These investments were primarily
for computer equipment and furniture and fixtures.
20
<PAGE> 24
Cash used for financing activities was $0.5 million for the six months
ended June 30, 1996 compared to $1.0 million for the six months ended June 30,
1995. The decrease in cash used for financing activities for the first half of
1996 was primarily caused by the Company's inability to make its scheduled
payments on notes payable to vendors, while those payments were made on a timely
basis in 1995. Cash provided by (used for) financing activities was $3.9
million, $3.3 million, and ($1.0) million in fiscal years 1993, 1994 and 1995,
respectively. Cash provided of $3.9 million in 1993 was primarily from a $4.0
million bank loan which was guaranteed by a shareholder. Cash provided of $3.3
million in 1994 was primarily from $3 million in loans from shareholders plus
accrued interest on those loans. Cash used for financing activities of $1.0
million for fiscal 1995 resulted from approximately $2.2 million in payments on
notes payable to vendors which was partially offset by loans and accrued
interest of $1.2 million provided by shareholders.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate from period to period as a
result of the seasonal nature of the retail industry. The Company recognizes its
highest sales levels during the fourth quarter holiday season, and the fourth
quarter typically accounts for approximately 33% of the Company's annual
merchandise sales.
The following table sets forth certain unaudited information about the
Company's revenue and results of operations on a quarterly basis for 1994, 1995
and the six months ended June 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
---------------------------------------- ---------------------------------------- ------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Merchandise sales,
net................ $5,635 $5,270 $3,731 $7,426 $6,299 $5,956 $6,123 $8,504 $5,882 $6,550
Placement fees and
other.............. 1,230 1,351 1,184 4,476 4,466 3,829 3,609 4,294 3,073 2,720
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues....... 6,865 6,621 4,915 11,902 10,765 9,785 9,732 12,798 8,955 9,270
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin......... (1) (1) (1) (1) 4,958 3,982 4,242 5,334 4,259 4,414
Catalog expenses..... (1) (1) (1) (1) 2,336 2,397 2,310 2,489 2,151 1,828
Selling expenses..... (1) (1) (1) (1) 514 534 546 635 514 620
Customer service and
fulfillment........ (1) (1) (1) (1) 526 495 513 602 457 515
General and
administrative..... (1) (1) (1) (1) 887 702 718 804 753 695
------ ------ ------ ------ ------ ------
Total operating
expenses........... (1) (1) (1) (1) $4,263 $4,128 $4,087 $4,530 $3,875 $3,658
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Figures for this period are not presented because the Company's
restructuring in fiscal 1994 significantly changed the Company's business
operations and thus are not meaningful for comparison.
NET OPERATING LOSSES IN SUB S CORPORATION -- CONVERSION TO C CORPORATION FOR TAX
PURPOSES
Prior to October 1, 1996, the Company had elected to be taxed under
Subchapter S of the Internal Revenue Code and corresponding provisions of
Arizona tax laws. As a result of the election, federal and state income taxes on
the net income of the Company were payable personally by the shareholders.
Accordingly, the statements of income for all prior years do not include a
provision for federal and state income taxes. Had the Company been a C
corporation for these periods, no federal or state income taxes would have been
due as a result of net operating loss carry-forwards from the earlier years.
21
<PAGE> 25
INFLATION
Management does not believe that inflation has had a material effect on the
Company's operations during the past several years with the exception of
unusually significant increases in paper prices in 1995 and the first six months
of 1996 and a subsequent significant decrease in the third quarter of 1996. The
Company's average paper price increased 48% from fiscal 1994 to fiscal 1995 from
$38.91 cwt to $57.61 cwt, costing the Company an additional $1.7 million in 1995
compared to costs at 1994 prices. The average paper price increased to $63.71
for the six-month period ended June 30, 1996, 64% higher than the 1994 average
price, costing the Company an additional $1.1 million compared to costs at the
1994 level. Subsequent to June 30, 1996, paper prices have decreased
significantly. The Company's cost for paper which has been purchased for the
three-month period ended December 31, 1996 was approximately $42.00 cwt, which
is only 8% higher than the 1994 level. The Company's paper costs will be $40.00
cwt in the first quarter of 1997. Increases in labor, aircraft fuel, paper,
printing, shipping, or merchandise costs could adversely affect the Company's
operations. See "Risk Factors." In the past, except for paper price increases,
the Company has been able to modify its operating procedures or increase its
prices to substantially offset increases in its costs.
22
<PAGE> 26
BUSINESS
GENERAL
SkyMall is the largest in-flight catalog company in the United States that
makes high-quality products and services available to more than 350.0 million
airline passengers per year. The Company markets and sells a broad selection of
premium merchandise provided by participating merchants, which include major
catalog companies and specialty retailers, such as Disney, Hammacher Schlemmer
and The Sharper Image. The merchandise of each participating merchant is
presented in a separate section of the SkyMall catalog to allow browsing from
"store to store," providing the convenience and variety of an upscale shopping
mall environment. Substantially all of the merchandise sold by the Company is
shipped directly to customers by participating merchants, thus avoiding
significant inventory risk to the Company. The Company has exclusive agreements
to place its catalogs in aircraft seat pockets on 15 airlines, which carried
approximately 70% of all domestic passengers in 1995, including Delta, United,
USAir, Continental, TWA, America West and Southwest. As a result, the SkyMall
catalog is available to over 960,000 domestic airline passengers each day. Since
the Company began operations in 1990, SkyMall has experienced substantial growth
and its total revenues have increased from approximately $5.4 million in fiscal
1991 to approximately $43.1 million in fiscal 1995, for a compound annual growth
rate of 68%. The Company's revenue per passenger enplanement on flights carrying
the SkyMall catalog has increased from approximately $0.038 in 1991 to
approximately $0.082 for the year ended December 31, 1995, for a compound annual
growth rate of 21%.
Business Strategy. The Company's foundation is built on its relationships
with its customers, airline partners and participating merchants. The Company's
customers enjoy the convenience of being able to shop for a wide variety of
innovative products while traveling. The Company offers a fair price guarantee
under which the Company will refund the price difference if the customer finds
the same item advertised elsewhere at a lower price. In order to enhance the
ongoing appeal of its product offerings, the Company produces four new catalogs
per year. The Company maintains a toll free 24-hour telephone ordering service
(from air and ground phones) and an in-house staff of customer service
representatives who are trained to provide exemplary service in order to build
strong customer loyalty and increase revenue from repeat and referral business.
In exchange for placement of its catalogs in aircraft seat pockets, the
Company pays each airline partner a monthly commission based on net merchandise
revenues generated by the Company from sales to that airline's passengers. Some
of the Company's airline agreements also require payment of minimum monthly
fees. The Company's airline partners benefit from additional revenue and from
being able to enhance the in-flight experience of their passengers by providing
the Company's catalog as an additional amenity.
Participating merchants obtain exposure for their products and services to
a demographically diverse group of potential customers with strong economic
profiles, generate additional revenues and acquire new customers that they can
add to their own proprietary mailing lists. Under its contracts with
participating merchants, the Company earns percentages of revenues generated by
the Company's sales, placement fees for inclusion of the merchants' products in
the SkyMall catalog, or a combination thereof. Among the more than 100 merchants
currently included in the SkyMall catalog are: Brookstone(R), Compaq Computer,
The Disney Catalog, Frontgate(R), Hammacher Schlemmer, The Safety Zone, Hello
Direct(R), Johnston & Murphy, Mattel(R), The Metropolitan Museum of Art, Norm
Thompson Solutions(R), Pepperidge Farms(R), SelfCare(R), The Sharper Image(R),
Successories(R), SyberVision(R), Thomas Cook and The Wine Enthusiast(R).
Growth Strategy. The Company's primary growth strategies are to increase
its revenue per passenger enplanement and to increase circulation of the SkyMall
catalog. The Company plans to increase its revenue per passenger enplanement
through innovative marketing programs, some of which are modeled after
successful "duty-free" in-flight sales programs offered on international
flights, which some airlines have reported to have produced revenues in excess
of $5.00 per passenger enplanement. The Company also plans to expand its
distribution to travelers and other potential customers by securing agreements
from additional airlines to carry the Company's catalogs, including both
domestic and foreign airlines. The Company also plans to implement additional
distribution channels outside of its airline franchise, including direct
marketing "mail-to-home" programs, magazine inserts and catalog placement in
hotels, railways, rental cars and other
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locations where travelers may be reached. SkyMall recently entered into an
agreement with its first foreign airline, Japan-based JAL, to test market the
SkyMall concept. In addition, in 1994, Amtrak began carrying the Company's
catalog on selected routes. The Company is currently employing advanced database
management techniques to utilize its rapidly growing customer database of over
one million names for the development of direct targeted marketing programs and
to generate additional revenues from database list rentals.
MARKET OVERVIEW
A broad spectrum of companies market their goods and services to airline
passengers. Over 55% of domestic airline passengers had household incomes in
excess of $40,000 per year, while only 23% of people with household incomes of
$40,000 or less travel on airlines. A significant portion of in-flight marketing
consists of "direct-response" marketing, where the merchant seeks to entice the
passenger to take immediate action in response to viewing the advertisement or
marketing materials, such as placing a telephone call to obtain the goods or
services offered. By contrast, "image" marketing, which is also conducted
in-flight, seeks to build brand awareness and foster a favorable image of
products or services and the company offering them. Although the primary goal of
the SkyMall catalog is to elicit a direct-response from passengers, merchants
that offer goods and services in the SkyMall catalog also build their brand
awareness and image.
Although many products and services are offered to passengers while
in-flight through a number of media, the SkyMall catalog is unique in the
airline marketing industry because it is the only publication available to
passengers on major domestic airlines that is exclusively devoted to catalog
shopping. Most airlines provide their passengers with airline-sponsored
"in-flight" magazines, which are placed in airline seatpockets along with the
SkyMall catalog, as well as other magazines and periodicals. Many of the
in-flight magazines contain pages devoted exclusively to marketing products and
services. None of these in-flight magazines, however, is devoted solely to
shopping.
Video marketing is also conducted while passengers are in-flight in the
form of video promotions played on monitors located at the front of or
interspersed throughout passenger cabins and on seatback video displays. Video
marketing on the monitors frequently consists of various in-flight programming
that is prepared by the airline and sponsored by companies that are targeting
the favorable economic profiles of airline passengers. Much of the video
advertising included in this programming consists of image marketing; however,
some airlines, particularly on longer flights, make video shopping services
available to their passengers while in-flight. Seatback video screens that are
available to passengers on certain airlines offer movies, information,
entertainment and in-flight shopping. The Company believes that the current
quality of most seatback video screens does not make them the most effective
method of marketing products and services; however, as the quality of seatback
video screens improves, more shopping services will likely become available.
Pursuant to various nonexclusive agreements with certain of its airline
partners, the Company offers video shopping services on both video monitors and
seatback video displays on selected flights. Although video shopping has not
historically been a significant source of revenue for the Company, the Company
plans to take advantage of new opportunities in this market when appropriate,
including opportunities resulting from enhancements in the quality of video
monitors and systems. See "-- Growth Strategy."
On many international flights, airlines offer passengers duty-free products
while in-flight through their flight attendants who deliver the merchandise to
passengers at the time of purchase. Duty-free shopping revenues in excess of
$5.00 per passenger enplanement on each flight where duty free shopping was
available have been reported by some airlines. Because airlines carry the
merchandise on the plane, the product selections are somewhat limited,
consisting principally of spirits, tobacco, liquor, perfume and gift items.
Of the various media employed by merchants to market goods and services to
airline passengers, the Company believes that the SkyMall catalog is among the
most effective, due in part to the increasing popularity of catalog shopping in
general. Over the past 15 years, consumers have increasingly relied on catalogs
and direct mail to purchase goods and services. According to the Direct
Marketing Association, 52.5% of the adult population in the United States
ordered merchandise by mail or phone in 1994 (compared to 36.2% in 1983)
generating approximately $78.0 billion in sales. If current trends continue, the
Company
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believes in-flight catalog shopping will gain increasing acceptance by airline
passengers, particularly those who appreciate the time-saving convenience of
catalog shopping.
CUSTOMER RELATIONSHIPS
The Company's primary target customers are frequent business travelers with
medium-to-high incomes. The Company's targeted customer typically spends
approximately $1,200 annually for merchandise while traveling. According to the
Company's market research, passengers who shop from the SkyMall catalog while
traveling do so because they have limited time to shop and the SkyMall catalog
offers a convenient alternative to shopping in retail stores. In addition, the
Company's research indicates that many customer purchases are "impulse"
purchases, as well as purchases for gifts. The key elements of the Company's
strategy to cater to the needs of its targeted customers are:
Offer Premium Merchandise. The Company offers high-quality
merchandise from leading catalog and retail suppliers at competitive
prices. The Company maintains close working relationships with
participating merchants and carefully studies the buying patterns of its
customers to ensure that catalog space is devoted to products and services
that have proven appeal to the Company's customers. In order to enhance the
ongoing appeal of its product offerings, the Company produces four new
catalogs per year.
Offer Competitive Pricing and a Fair Price Guarantee. SkyMall offers
its customers the convenience of in-flight shopping at prices that are
competitive with those of merchants offering the same or similar products.
To emphasize its competitive pricing strategy, SkyMall offers its customers
a fair price guarantee under which the Company will refund the price
difference to the customer if the customer finds the same item advertised
elsewhere at a lower price. SkyMall usually obtains reimbursement from
participating merchants for expenses incurred in connection with the fair
price guarantee.
Appeal to a Broad Consumer Base. Airline travelers represent a
diverse cross-section of the public. Accordingly, the Company's catalogs
are designed to have a much broader appeal than most catalogs. The Company
offers a wide variety of products, including health and beauty aids,
children's toys, executive gifts, educational foreign language tapes,
gourmet cooking aids, exercise equipment, luggage, travel aids and stylish
home accessories. Many of the Company's products are luxury items,
therefore, they are particularly well-suited to the diverse demographics of
airline passengers who have higher than average disposable incomes.
Provide Customers with a Convenient One-Stop Shopping
Service. SkyMall is a "one-stop" shopping source for customers who may
purchase a variety of merchandise offered by many participating merchants
with a single phone call. Although most of the merchandise offered in the
SkyMall catalog is available from other catalog and retail companies, each
of these companies typically has its own policies with respect to shipping
and handling charges, merchandise returns, sales taxes and price
guarantees, and each company generally also has different customer service
hours and credit and payment policies. In addition, few of these companies
offer frequent flier credit for purchases. By compiling the merchandise of
its various participating merchants into a single catalog, the Company
affords its customers access to more than 1,000 products offered by more
than 100 participating merchants and the convenience of uniform customer
service policies.
Provide Outstanding Customer Service and Toll-Free Ordering. The
Company maintains an in-house staff of customer service representatives who
are trained to solve customer problems and who are friendly and helpful
with customers and knowledgeable about the products sold by the Company.
The Company's customer service representatives encourage customers to
purchase additional products with each order to increase the Company's
average revenue per order. The Company believes that the customer goodwill
developed by its customer service representatives builds strong customer
loyalty and increases revenue from repeat and referral business. The
Company also offers services designed to maximize convenience to the
traveler, including 24-hour telephone and facsimile ordering, toll-free
ordering from airline seatphones and a 60-day "no questions asked" return
or exchange policy.
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AIRLINE RELATIONSHIPS
SkyMall has exclusive relationships with its airline partners, which are a
vital component of the Company's business strategy. The SkyMall program offers
airlines a low-risk means of incrementally increasing their earnings. Since
commencing operations in 1991, the Company has grown from a single airline
partner to 15 airline partners, including most of the major domestic airlines.
In exchange for placement of its catalogs in aircraft seat pockets, the Company
pays each airline partner a monthly commission based on net merchandise revenues
generated by the Company from sales to that airline's passengers. Some
agreements also require payment of a minimum monthly commission or a boarding
cost that reimburses the airline for the increased fuel costs attributable to
the weight of the catalogs. In addition to increasing airline earnings, the
Company's airline partners also benefit from being able to enhance the in-flight
experience of their passengers by providing the Company's catalog as an
additional amenity. SkyMall's agreements with its airline partners generally
have a term of at least one year and thereafter are automatically renewable on
an annual basis subject to termination on 60 to 180 days' advance notice by
either SkyMall or the airline. SkyMall believes its relations with each of its
airline partners are good.
The SkyMall catalog is currently available on all domestic and selected
international flights of the following air carriers:
<TABLE>
<CAPTION>
1995 DOMESTIC
ENPLANEMENTS INITIAL
CARRIERS(1) (IN MILLIONS)(2) CATALOG(3)
-------------------------------------------------- ---------------- ----------
<S> <C> <C>
Delta............................................. 80.3 Aug 1991
United............................................ 68.1 June 1992
USAir............................................. 57.1 Aug 1991
Southwest......................................... 44.8 July 1996
Continental....................................... 35.8 May 1991
TWA............................................... 21.6 Feb 1991
America West...................................... 16.9 Feb 1994
Alaska............................................ 10.1 Aug 1991
Hawaiian.......................................... 4.8 Feb 1994
Horizon........................................... 3.8 Aug 1991
Atlantic Southeast................................ 3.1 May 1992
Sun Country....................................... 2.6 Jan 1995
SkyWest........................................... 2.2 May 1992
Midway............................................ 1.3 June 1994
Jet Train......................................... .2 Nov 1995
-----
Total................................... 352.7
=====
</TABLE>
- ---------------
(1) The Company's catalog carries the SkyMall name on all participating airlines
except United, where the Company's catalog carries the name "High Street
Emporium."
(2) Source: United States Department of Transportation and Air Transport World
magazine.
(3) The Company's catalog has been available on these airlines continuously from
the date that the initial catalog was placed on the airline, except for
USAir which suspended carrying the SkyMall catalog on July 1, 1996 but will
resume carrying the SkyMall catalog effective November 1, 1996.
MERCHANT RELATIONSHIPS
Merchant Agreements. The Company enters into agreements with merchants who
supply the products and services offered in the Company's catalog. Under its
contracts with participating merchants, the Company earns percentages of
revenues generated by the Company's sales or placement fees for inclusion of the
merchants' products in the SkyMall catalog or a combination thereof. In
addition, most participating merchants are required to reimburse the Company for
certain paper, printing and distribution costs to the
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extent they exceed certain budgeted amounts. Participating merchants agree to
maintain sufficient levels of inventory to satisfy customer demand and to ship
all orders within 72 hours unless the merchandise is out of stock. Merchants who
fail to fill orders on a timely basis are required to pay a penalty fee to the
Company. Generally, the Company's agreements with participating merchants
provide that the prices of products included in the SkyMall catalog will be
honored by the merchant for as long as SkyMall receives orders from that edition
of the catalog. The agreements typically have an initial term consisting of a
single quarterly catalog and thereafter automatically renew for successive
catalog editions unless either the Company or the merchant gives 60 days'
advance notice of termination. The merchants typically agree to indemnify the
Company for any losses associated with injuries caused to customers from the use
of such merchant's product, to carry product liability insurance that names
SkyMall as an additional insured, and to indemnify the Company against claims
that their products infringe on the intellectual property rights of third
parties.
Name Brand Stores in the SkyMall Catalog. SkyMall's catalogs assemble
premium, name brand merchandise and are formatted to allow the traveling
customer to browse from "store-to-store," providing the convenience and variety
of an upscale shopping mall environment. Its largest "stores" are generally
well-known catalog and retail companies that have chosen to participate in the
SkyMall program in order to generate an additional source of revenue, build name
recognition and brand awareness and acquire new customers that they can then add
to their own proprietary mailing lists. The major catalog and retail companies
currently featured in the SkyMall catalog and those who have participated in
recent editions of the catalog include:
Brookstone(R)
Chef's Catalog(R)
Compaq Computer
Competitive Edge Golf(R)
Frontgate(R)
Hammacher Schlemmer
Health Rider(R)
Hello Direct(R)
Huntington Clothiers(R)
Johnston & Murphy
Mattel(R)
Neiman Marcus' Trifles
Nightingale Conant
Norm Thompson Solutions(R)
Orvis(R)
Official Airline Guide
Paul Frederick MenStyle(TM)
Pepperidge Farms(R)
SelfCare(R)
Successories(R)
Syber Vision(R)
The Disney Catalog
The Metropolitan Museum of Art
The Safety Zone
The Sharper Image(R)
The Wine Enthusiast(R)
Thomas Cook
Merchandise Selection. The Company responds to inquiries from
approximately 50 merchants each week who inquire about showcasing their products
or services in the SkyMall catalog. As a result, the Company has been able to
identify and offer to its customers the unique products they desire at
competitive prices. Products are selected for each catalog by the Company's
merchandising staff with the help of each of the major participating merchants.
Approximately one-third of the products in each new edition of the SkyMall
catalog have not been previously featured in the SkyMall catalog.
Products Offered. The Company typically offers more than 1,000 products in
each of its catalogs, which consist of approximately 150 pages. In order to
enhance the ongoing appeal of its product offerings, the Company produces four
new catalogs per year and regularly replaces the products in its catalogs. The
Company seeks out new and unique items that may not be available in ordinary
retail stores, with an emphasis on upscale merchandise selling for $29.95 or
more. During fiscal 1995, the Company's more popular product categories included
household items, electronics, personal care items, clothing, luggage, multimedia
items, and telephones.
GROWTH STRATEGY
Increase Revenue Per Passenger. One of the Company's primary growth
strategies is to increase its revenue per passenger enplanement. The Company's
revenue per passenger enplanement on flights carrying the SkyMall catalog has
increased from $0.038 in 1991 to approximately $0.082 for the year ended
December 31, 1995, for a compound annual growth rate of 21%. To increase revenue
per passenger enplanement, the Company recently has implemented or plans to
implement the following programs:
Marketing and Promotional Programs. The Company has developed several
innovative marketing and promotional programs, some of which will be
facilitated through the unique relationships between the
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<PAGE> 31
Company and its airline partners. Some of these programs are modeled after
successful "duty-free" in-flight sales programs offered on international
flights, which have been reported by some airlines to have generated
revenues of more than $5.00 per passenger enplanement. Among the plans
under consideration or recently implemented by the Company to increase the
use of SkyMall catalogs are: (i) enhancing promotion of the Company's
shopping services through on-board flight attendant announcements supported
by videotape and audio programming; (ii) awarding airline passengers
frequent flier miles for purchases and permitting customers to redeem
frequent flier miles as payment for product purchases; (iii) mailing
inserts in frequent flyer statements in order to promote awareness of the
Company's products and services; (iv) offering airlines and flight
attendants incentives for promoting the use of the Company's catalogs among
airline passengers; (v) establishing an in-flight "video shopping channel"
and advertisements for the Company's products and services on in-flight
videos; (vi) conducting in-flight, gate and jetway promotions, such as gift
certificates, discount certificates and special offers to passengers who
order while in-flight; and (vii) making the Company's catalogs available in
airport gate areas and lounges. The Company believes the foregoing programs
will increase revenue per passenger enplanement and will also increase the
awareness of the SkyMall catalog generally so that airline passengers will
be more likely to make purchases from the SkyMall catalog.
Video Shopping and Other New Technologies. Although video shopping is
available on some airlines, including video shopping offered by the
Company, several companies have recently begun making interactive video
systems available to the airline industry that have greater capabilities
than those currently available. As more sophisticated interactive video
systems become available, the Company plans to explore opportunities to
provide shopping services on these systems and has developed a prototype,
multi-media catalog offering SkyMall products on interactive video. In
order to become proficient in this new medium, in January of 1996, the
Company began offering its products and services on the Internet at
http://www.skymall.com.
Increase Catalog Circulation. To expand its catalog circulation and
thereby increase its customer base, the Company has implemented or plans to
implement a number of programs designed to increase the circulation of the
SkyMall catalog and reach new customers, including the following:
Expanding Domestic Airline Partnerships. The Company will seek to
expand its catalog circulation by securing agreements from additional
domestic airlines to carry the SkyMall catalog. In addition, the Company
plans to pursue opportunities to include a small selection of its products
and services in in-flight magazine inserts to give new airlines the
opportunity to test the Company's services and to make the Company's
products and services available on smaller airlines where a full-length
catalog is not cost effective. The in-flight magazine of Northwest
Airlines, which is not presently an airline partner of the Company, will
contain an eight page SkyMall insert in its November and December 1996
editions to test the SkyMall program.
Developing International Airline Partnerships. According to the Air
Transport Association, in 1995, there were over 780 international million
airline passengers (excluding the U.S.), including 373.9 million in Europe,
306.4 million in Asia and 71.5 million airline passengers in North and
South America. Although some duty-free merchandise is available on
international flights, the Company believes that this market is
substantially underserved. The Company believes that controlled and
carefully planned expansion into the larger international markets through
cooperative ventures with potential foreign partners offers a significant
growth opportunity. The Company is in the process of evaluating potential
foreign markets and developing catalogs in foreign languages with products
and services designed to appeal to targeted international travelers.
Consistent with its growth strategy, SkyMall entered into an agreement in
August 1996 with its first foreign airline, Japan-based JAL, to test
certain merchandise from the SkyMall catalog on a trial basis.
Direct Marketing Program. Through its data management system, the
Company maintains a database of customer information, including customer
names, addresses and product purchases. From this database, the Company
obtains information about customer buying patterns and preferences. The
Company strives to develop customer loyalty, and repeat customer purchases
have been an increasing
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source of revenue for the Company. In 1995, 29% of the Company's customers
had placed at least one additional order with the Company within the
preceding 24 months. To increase the number of repeat customer purchases,
the Company plans to implement a direct marketing "mail-to-home" program to
its customers, particularly those who make several purchases during the
year. Using information from its customer database, the Company initiated
its first direct marketing "mail-to-home" program in August 1996. The
Company plans to expand its direct marketing efforts to selected customer
groups and to tailor the marketing materials to the preferences of those
groups as demonstrated by their prior purchasing history.
Expanding Into Other Travel Related Markets. The Company believes
that its shopping services will appeal to travelers in locations other than
airlines, such as in hotels and rental cars and while traveling by rail.
There are over three million hotel rooms in the United States, providing a
market that the Company believes could be larger than its current airline
market. In addition, rail passengers in both in the United States and
abroad may present a significant market for the Company's services. In
furtherance of this strategy, the Company entered into an agreement with
Amtrak in 1994 under which Amtrak began carrying the Company's catalogs
under the TravelMall name on selected routes, which serve approximately two
million passengers annually. The Company is considering a program to make
its catalogs available to travel agents to distribute to their customers
when delivering travel documents. The Company is evaluating other
opportunities to reach travelers, and plans to implement additional non-
airline based travel programs when appropriate.
BUSINESS OPERATIONS
Customer Service Center; Order Processing and Fulfillment. The Company
maintains a well-trained, in-house staff of customer service representatives and
outsources "overflow" calls to an independent call center. The Company recently
entered into an agreement with a major hotel chain under which the hotel chain's
call processing center will accept the Company's overflow calls during the peak
holiday ordering season, which is typically a slower season for the hotel
industry. The Company believes this arrangement will result in more cost
effective processing of its overflow calls during the holiday peak. The Company
monitors the quality of its customer service operations closely and regularly
implements improvements in its customer service operations.
The Company's customer service representatives are located in its customer
service center in Phoenix, Arizona, where the Company accepts orders 24 hours
per day. The Company's telephone equipment distributes calls to the sales
representatives and provides detailed call reporting and analysis, which assists
the Company with its order processing and marketing efforts. The Company
maintains no significant inventory. Therefore, once the Company receives a
customer order, it is transmitted to the appropriate merchant who ships the
merchandise directly to the Company's customers. Most orders are delivered to
customers within seven to ten days. The Company's average order size was $85,
$90 and $96, respectively, per customer in fiscal 1993, 1994 and 1995. The
Company's customer service representatives are given incentives for outstanding
service. At August 31, 1996, the Company employed more than 96 customer service
representatives.
Over 85% of the Company's daily orders are received on "toll-free" numbers,
including 5% from toll-free seatphones. Airline seatphones offer customers a
convenient way to order goods and services from the Company while in-flight.
Some airline passengers who have access to seatphones may place orders with the
Company while in-flight by using a "speed dial" number programmed into the
seatphone. When SkyMall began operations in 1990, seatphones were available to
less than 5% of all domestic airline passengers. Today, the Company estimates
that seatphones are available to approximately 86% of all domestic airline
passengers. The Company believes that airlines will continue to equip their
planes with seatphones and that passengers will be more accustomed to using them
as they are made more available and the quality of service continues to improve.
Credit Sales. Of the more than 353,000 customer orders received by the
Company during fiscal 1995, approximately 92% of them were billed to customer
credit cards. The remaining customers generally paid for their purchases by
personal check. To minimize credit loses, the Company obtains approval from the
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<PAGE> 33
customer's credit card company prior to processing each order. In addition, when
the customer requests that his or her merchandise be shipped to an address that
is different than the customer's billing address, the Company typically verifies
the charge authorization directly with the credit card holder at his or her
billing address. The Company verifies personal bank checks received from
customers with an independent service bureau prior to processing the customer's
order. Although the Company's credit losses are generally immaterial, under its
agreements with participating merchants, the Company has the right to obtain
reimbursement from the merchants for any reasonable credit losses it incurs.
Information Systems. The Company maintains an information system that is
used primarily to capture and process customer orders. The Company typically
receives approximately 2,000 calls per day in off-peak seasons and approximately
6,000 calls per day during the peak of the holiday season. The Company's
information system is designed to process in excess of 10,000 calls per day,
which the Company believes will provide sufficient capacity for the foreseeable
future.
Once the Company processes an order in its information system, the order is
forwarded to a merchant to be filled. Currently, the Company transmits
approximately half of all orders to merchants electronically through various
electronic data transmission systems maintained by the merchants, and the
remaining orders are sent by facsimile or overnight delivery. The Company is in
the process of establishing a uniform electronic transmission system that will
allow the Company to transmit all customer orders to merchants electronically,
which the Company believes will reduce delivery times to the Company's
customers. Under a contract that begins in January of 1997, once the Company
receives an order through its information system, the order data will be
forwarded to a third party, the LitleNet Direct Commerce Network(SM) (the
"Network"), for further processing. The Network will deliver order information
to the merchants, manage order information relationships and enable shipment
confirmation according to individual merchant capabilities. The Company will
contract for access to the Network on a per transaction basis, permitting the
Company to expand its information systems without additional infrastructure
development, maintenance and upgrade expense. See "Certain Transactions."
Catalog Production and Distribution. Catalog design and layout for each
section of SkyMall's catalog is generally provided directly by the participating
merchant but must be within SkyMall's design guidelines. After the catalog is
designed, the Company submits its catalog to each of its airline partners for
approval. The cover and some of the pages of the airline catalogs are customized
to achieve a look and feel unique to that airline, although the products
featured and the balance of the basic content are common to all of the Company's
catalogs. After the catalogs are printed, the Company ships the catalogs to its
airline partners who distribute the catalogs to the cities in which they operate
and place the catalogs on their aircraft. Each catalog has a source code that
permits the Company to track catalog distribution and sales attributable to
catalogs carried by its airline's partners.
HOUSE FILE
The Company maintains a customer database or "house file" that contains a
variety of information about the more than one million customers who have
purchased merchandise or services from the Company. In addition to the
customer's name and address, the Company's house file also contains a detailed
history of all purchases made by SkyMall's customer with SkyMall. This
information serves as a useful tool for the Company in evaluating the
effectiveness of its marketing efforts and in identifying its best customers.
Like other catalog companies, the Company "rents" its house file to other
catalog, retail and direct marketing companies for a fee. By renting its house
file, the Company is able to generate additional incremental revenues without
incurring significant costs. The Company updates its house file on a daily basis
as orders are received, which increases the value of the house file. In
addition, in connection with its growth strategy, the Company plans to implement
a direct marketing "mail-to-home" program to certain targeted customers and will
use its house files as the primary source of information for implementing the
mail-to-home program.
Direct marketing, credit card and other companies that have large databases
containing customer information have begun sharing database information in order
to obtain more detailed information about customers. Enhancements in computer
technology have made storing large amounts of data more feasible and
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cost effective, and have permitted such companies to accumulate more information
about customer buying patterns and preferences. This information has become
increasingly important to companies that seek to cost effectively target
customers and improve customer response rates. The Company plans to explore
opportunities to combine its house files with the files of other companies when
appropriate to improve its direct marketing efforts and increase the value of
its customer database.
COMPETITION
In-Flight Shopping. SkyMall believes that its long standing relationships
with its airline partners and participating merchants and its customer service
standards create substantial barriers to entry into the in-flight catalog
shopping business. Although several companies have attempted to enter the
in-flight catalog shopping market, none has been successful. Nevertheless,
competitors, some of which may have greater financial, marketing and other
resources than the Company, may seek to enter the in-flight catalog shopping
market in competition with the Company.
In-Flight Marketing. The Company competes with other companies who market
products and services to passengers while in-flight, including those who
advertise in in-flight magazines and other periodicals, sponsor airline video
and audio programming and offer in-flight video shopping services. Several
companies have announced plans to develop seatback interactive video shopping
services, each of which has greater resources than the Company. As seatback
interactive video shopping services become more available to airline passengers,
competition in the in-flight marketing business may increase.
General Catalog and Retail Sales. The catalog sales and retail markets are
both highly fragmented and highly competitive. The Company competes for
customers to some degree with all retailers and catalog companies, including
airport retailers, duty-free retailers, specialty stores, department stores,
specialty catalog companies and general merchandise catalog companies, many of
which have significantly greater financial, marketing and other resources than
the Company. However, because many of the Company's competitors target people
with strong economic profiles, a number of the Company's competitors are also
participants in the SkyMall catalog program.
REGULATION
The Company's operations are subject to various federal, state and local
laws and regulations, including state sales tax laws and various Federal Trade
Commission regulations governing the sale of merchandise by mail. The Company
collects applicable sales taxes from its customers on all merchandise sales and
remits the sales taxes to state taxing authorities. The Federal Trade Commission
regulations applicable to the Company's operations impose various requirements
on the processing of customer orders, including shipping deadlines, delay
notices, order cancellations and refunds. The Company believes that these
regulations do not have a material impact on its business operations.
FACILITIES
The Company's executive offices are located in Phoenix, Arizona, where the
Company leases approximately seven acres of land under long-term leases expiring
in 2012, with an option to extend to 2062. Aggregate annual rental expense on
this land is approximately $37,000 per year. The improvements to this land
include offices, warehouses and storage facilities aggregating approximately
50,000 square feet, which are owned by the Company.
EMPLOYEES
At August 31, 1996, the Company had 132 employees, including 8 employed in
its executive offices, 3 in management positions, 12 in sales and marketing, 9
in accounting and administrative positions, 4 in information management and 96
in customer service capacities. Approximately 90% of the Company's employees are
full-time employees. The Company makes significant use of temporary and
part-time employees to process orders during the holiday season. The Company
believes its has good relations with its employees.
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TRADEMARKS AND TRADE NAMES
SkyMall is a registered trademark of the Company. The loss of the SkyMall
trademark could have a material adverse effect on the Company. In addition, the
Company uses a number of other trademarks and trade names in its business, none
of which the Company believes are material to its overall operations.
LEGAL PROCEEDINGS
The Company is not party to any pending or threatened legal proceedings
that it believes will have a material impact on the Company's business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information concerning the Company's current director and executive
officers, and persons nominated to become directors upon the closing of this
Offering, is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------------------
<S> <C> <C>
Robert M. Worsley............. 40 Chairman of the Board, President and Chief Executive Officer
Jonathan T. Davis............. 42 Vice President of Marketing -- Customers
Andrea Fox.................... 51 Vice President of Marketing -- Airlines
John H. Hurley................ 32 Vice President of Operations
Martin F. Smith............... 39 Vice President of Marketing -- Merchants
David A. Wirthlin............. 35 Vice President of Finance, Chief Financial Officer, Treasurer
and Secretary
Alan C. Ashton................ 52 Director-Nominee
Lyle R. Knight................ 50 Director-Nominee
Thomas J. Litle............... 56 Director-Nominee
Randy Petersen................ 42 Director-Nominee
</TABLE>
ROBERT M. WORSLEY has been the Chairman of the Board, President and Chief
Executive Officer of the Company since it was founded in 1989. Mr. Worsley is a
co-founder of the Company and has been a director and the Chief Executive
Officer of the Company since the Company's incorporation in 1989. From 1985 to
1989, Mr. Worsley was a principal of ExecuShare, Inc., an executive services
firm that provided time-shared financial executives for small companies. From
1980 to 1985, Mr. Worsley was an Audit Manager with Price Waterhouse, a public
accounting firm. Mr. Worsley received a bachelor's degree in accounting from
Brigham Young University in 1980. Mr. Worsley is a Certified Public Accountant.
JONATHAN T. DAVIS has served as SkyMall's Vice President of
Marketing -- Customers since August 1996. Prior to joining the Company in 1996,
Mr. Davis served as the Vice President of Marketing for Merchants Square, Inc.,
a television home shopping network for catalog companies, from 1995 until 1996.
Mr. Davis has also served as Director of Marketing for a children's merchandise
catalog company, The Right Start, Inc., from 1992 until 1995, and as Customer
Marketing Manager for L.L. Bean, an outdoor clothing and equipment catalog
retailer, from 1989 until 1991. Mr. Davis was the Mail Order Manager for
Brookstone, a specialty goods retailer, from 1984 until 1989. Mr. Davis received
a bachelor's degree from Amherst College in 1975 and an M.B.A. from Columbia
University Graduate School of Business in 1980.
ANDREA FOX has served as SkyMall's Vice President of Marketing -- Airlines
since August 1996. Prior to joining the Company, Ms. Fox served as President of
A. Fox Communications, a marketing company, from March 1995 until August 1996.
Ms. Fox was Director of Communications and Public Affairs for the American Heart
Association from 1993 until 1995, and Ms. Fox was the owner and President of Fox
& Associates, a marketing and creative development services provider in Illinois
from 1989 until 1993. Ms. Fox was the Director of Direct Response Marketing for
Callaghan & Company, a publisher of legal and tax materials, from 1987 until
1988. Ms. Fox was an Assistant Vice President of Citicorp Diners Club, a credit
card company, from 1984 until 1987 where she worked with various divisions,
including cardmember services, creative development and cardmember acquisitions.
Ms. Fox received a bachelor's degree from Barat College in 1975.
JOHN H. HURLEY has served as the Vice President of Operations since June
1996. Mr. Hurley joined the Company in December 1991 as a Call Center Sales
Agent and was promoted to various positions, including Call Center Sales Manager
and Call Center Sales Director, before becoming SkyMall's Vice President of
Direct Marketing in December 1995. Before joining the Company, Mr. Hurley held
positions in customer relations and sales at Cellular One from 1984 until 1991.
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<PAGE> 37
MARTIN F. SMITH has served as SkyMall's Vice President of
Marketing -- Merchants since November 1994. Prior to joining the Company, Mr.
Smith served as Director of Sales, Marketing and Advertising for Fulton Homes
from 1992 until 1994 and for Tradewinds Homes, from 1985 until 1990, both of
which are new home construction firms. Mr. Smith also was employed as District
Sales Manager for a chemical company, Huntsman Chemical Corp., from 1990 until
1992.
DAVID A. WIRTHLIN has served as the Chief Financial Officer of the Company
since 1994. Mr. Wirthlin is also the Company's Secretary and Treasurer. From
1989 until 1994, he was employed by Arthur Andersen LLP as a Manager in
operational consulting. From 1987 until 1989, Mr. Wirthlin was a student at the
University of Chicago Graduate School of Business, where he received an MBA.
Prior to attending business school, Mr. Wirthlin was a Senior Accountant with
Arthur Andersen LLP from 1985 to 1987. Mr. Wirthlin received a bachelor of arts
in accounting from the University of Utah in 1985. Mr. Wirthlin is a Certified
Public Accountant.
ALAN C. ASHTON, who was a co-founder of SkyMall, has agreed to become a
director of the Company upon the closing of this Offering. Dr. Ashton was a
co-founder of WordPerfect Corporation and, from its inception in 1978 until
December 31, 1993, served as its President. Dr. Ashton graduated magna cum laude
in mathematics from the University of Utah in 1966 and received a Ph.D. in
computer science from the same university in 1970. Dr. Ashton was professor of
computer science at Brigham Young University for 14 years from 1977 until 1991.
Dr. Ashton serves on the Board of Directors of Novell, Inc. and on the Board of
Directors of Fonix Corporation.
LYLE R. KNIGHT has agreed to become a director of the Company upon the
closing of this Offering. In 1992, Mr. Knight became President and Chief
Executive Officer of Caliber Bank, an affiliate of BankAmerica Corporation. From
1993 until 1995, Mr. Knight served as President of Caliber Bank, a wholly owned
subsidiary of Independent Banks of Arizona, which has subsequently merged with
Norwest Corporation, and Mr. Knight is currently Senior Vice President of
Norwest Banks Arizona. From 1989 and 1992, Mr. Knight was President and Chief
Executive Officer of Security Pacific Bank, Nevada. Mr. Knight graduated from
the University of Utah in 1968 with a bachelor of science degree in Banking and
Finance and, in 1982, graduated with honors from Pacific Coast Banking School.
THOMAS J. LITLE has agreed to become a director of the Company upon the
closing of this Offering. In 1985, Mr. Litle founded Litle & Company, Inc.,
which provides information sharing, payment processing and electronic network
services for the direct marketing industry. Mr. Litle was Chairman of Litle &
Company's Board of Directors and its Chief Executive Officer until 1995, when
the business was sold to First USA. In connection with the sale to First USA,
Mr. Litle retained the networking and non-payment processing part of the
business and formed LitleNet LLC, of which he is the Chairman, which also
provides direct commerce connection and information sharing services to the
direct marketing industry. Mr. Litle received an M.B.A. from Harvard Graduate
School of Business Administration in 1964 after graduating from California
Institute of Technology with a bachelor of science degree in 1962. Mr. Litle
also serves on the Board of Directors of the Direct Marketing Association, the
New York University Center for Direct Marketing, the Direct Marketing
Information Exchange, Foster & Gallagher, Kearsarge Capital Corp., Tessera, the
Catalog Systems Management Network and the National Catalog Operations Forum.
RANDY PETERSEN has agreed to become a director of the Company upon the
closing of this Offering. In 1986, Mr. Petersen founded and is currently the
President and Chairman of the Board of Frequent Flyer Services. Frequent Flyer
Services publishes a monthly frequent flyer magazine and an annual frequent
flyer guidebook, produces frequent traveler oriented merchandise and provides
various travel related services. Mr. Petersen is also a member of the
Association of Corporate Travel Executives and serves on the Advisory Board of
the International Airline Passenger Association. Mr. Petersen serves on the
Board of Directors of FlightPlan, Inc., TeleMiles, Inc. and Travel & Calling
Card, Inc.
34
<PAGE> 38
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding annual and
long-term compensation for services rendered to the Company during the fiscal
year ended December 31, 1995 by Robert M. Worsley, the Chief Executive Officer
of the Company. No other executive officers of the Company had a total salary
and bonus in fiscal 1995 that exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL ------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------------------------------- ------ -------- ------ ------------
<S> <C> <C> <C> <C>
Robert M. Worsley.......................... 1995 $138,295 $7,500 $4,749(1)
Chairman of the Board and President
</TABLE>
- ---------------
(1) Includes a pro rata portion of premiums paid on a life insurance policy on
the life of Mr. Worsley for which a portion of the benefits payable under
the policy are payable to beneficiaries other than the Company.
STOCK OPTION PLANS
1994 Stock Option Plan. The Company has adopted the SkyMall 1994 Stock
Option Plan (the "Option Plan") pursuant to which incentive and nonqualified
stock options may be granted from time to time to directors, officers and other
key employees of the Company at an exercise price of not less than fair market
value on the date of grant, provided that for the one-year period following this
Offering no options may be granted at an exercise price less than the initial
public offering price of the Common Stock offered hereby. The recipients of
options, length of options, exercise price and other terms are determined by the
Board of Directors upon recommendation of the Compensation Committee. The
maximum number of shares of Common Stock subject to options that may be
outstanding at any time under the Option Plan is 650,000, subject to a
proportionate increase or decrease in the event of a stock split, reverse stock
split, stock dividend, or other adjustment to the Company's total number of
outstanding shares of Common Stock. The Company has granted options to employees
of the Company to purchase a total of 438,080 shares.
Non-Employee Plan. The Company has also adopted the SkyMall Non-Employee
Director Stock Option Plan (the "Non-Employee Plan"), which authorizes the Board
of Directors to grant options to non-employee directors of the Company to
purchase shares of Common Stock of the Company. Non-Employee directors of the
Company receive an automatic grant of options to purchase 5,000 shares of Common
Stock on appointment to the Board of Directors and thereafter receive an
automatic grant of options to purchase 3,000 shares annually. In general,
options granted under the Non-Employee Plan are not transferable and expire ten
years after the date of the grant. The per share exercise price of a stock
option granted under the Non-Employee Plan may not be less than the fair market
value of the Common Stock on the date of the grant. The maximum number of shares
of Common Stock that may be outstanding at any time under the Non-Employee Plan
is 100,000, subject to a proportionate increase or decrease in the event of a
stock split, reverse stock split, stock dividend, or other adjustment to the
Company's total number of outstanding shares of Common Stock. As of the date of
this Prospectus, no options to purchase shares of Common Stock have been granted
under the Non-Employee Plan; however, options to acquire an aggregate of 20,000
shares of Common Stock will be issued to the Company's non-employee directors on
the closing of this Offering.
401(K) PLAN
Under the Company's 401(k) plan, adopted in 1992, eligible employees may
direct that a portion of their compensation, up to a legally established
maximum, be withheld by the Company and contributed to their account. All 401(k)
plan contributions are placed in a trust fund to be invested by the 401(k)
plan's trustee, except that the 401(k) plan may permit participants to direct
the investment of their account balances among mutual or investment funds
available under the plan. The 401(k) plan provides a matching contribution of
25% of a participant's contributions up to a maximum of four percent of the
participant's annual salary.
35
<PAGE> 39
Amounts contributed to participant accounts under the 401(k) plan and any
earnings or interest accrued on the participant accounts are generally not
subject to federal income tax until distributed to the participant and may not
be withdrawn until death, retirement, or termination of employment.
EMPLOYMENT AGREEMENT
On September 30, 1996, the Company's Board of Directors approved an
employment agreement with Robert M. Worsley for services as Chairman of the
Board, Chief Executive Officer and President. This agreement requires Mr.
Worsley to devote his full time to the Company during normal business hours in
exchange for a base annual salary of $190,000, subject to annual increases at
the discretion of the Board of Directors. In addition, Mr. Worsley is entitled
to receive bonuses at the discretion of the Board of Directors in accordance
with the Company's bonus plans in effect from time to time, and the Company will
pay certain life and disability insurance premiums on behalf of Mr. Worsley. The
agreement has an initial three-year term and is automatically extended for
successive two-year renewal periods without any action of the Company or Mr.
Worsley unless the Company or Mr. Worsley provides written notice of termination
to the other party no less than 30 days prior to the expiration of the initial
term of the agreement or of any successive renewal period. Pursuant to the
agreement, Mr. Worsley may not compete with the Company anywhere in the United
States on the termination of Mr. Worsley's employment for a period of two years.
COMMITTEES OF THE BOARD OF DIRECTORS
Effective upon closing of this Offering, the Company will establish an
Audit Committee which will be comprised of non-employee directors. The Audit
Committee will be responsible for reviewing and making recommendations regarding
the Company's employment of independent auditors, the annual audit of the
Company's financial statements and the Company's internal accounting controls,
practices and policies. Additionally, the Company will establish a Compensation
Committee which will be comprised of a majority of non-employee directors. It
will be responsible for making recommendations to the Board of Directors
regarding compensation arrangements for executive officers of the Company,
including annual bonus compensation, and will consult with management of the
Company regarding compensation policies and practices. The Compensation
Committee will also make recommendations concerning the adoption of any
compensation plans in which management is eligible to participate, including the
granting of stock options or other benefits under such plans.
DIRECTORS' TERMS AND FEES
Effective upon the closing of this Offering, the Company's Board of
Directors will be comprised of five members. Each director is elected for a
period of one year at the Company's annual meeting of shareholders and serves
until his or her successor is duly elected and qualified. Directors who are not
employees of the Company will receive a quarterly retainer of $2,500, an option
to purchase 5,000 shares of the Company's Common Stock at its fair market value
on the date of grant upon appointment to the Board of Directors, and an annual
option to purchase 3,000 shares of the Company's Common Stock at its fair market
value on the date of grant provided they have attended a required minimum number
of board and committee meetings during the year. All directors will be
reimbursed for expenses incurred in connection with attendance at meetings of
the Board of Directors or committees thereof. Directors who are also officers of
the Company will not be compensated for their services as director.
36
<PAGE> 40
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of September 30,
1996, concerning the beneficial ownership of the Company's Common Stock by (i)
each beneficial owner of more than 5% of the Company's Common Stock, (ii) each
director and director-nominee of the Company, (iii) each Named Executive Officer
of the Company and (iv) all directors, director-nominees and executive officers
of the Company as a group. To the knowledge of the Company, all persons listed
below have sole voting and investment power with respect to their shares, except
to the extent that authority is shared by their respective spouses under
applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED AFTER
OFFERING(1) THE OFFERING(1)
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(2) NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Robert M. and Christi M. Worsley(3)................ 5,470,895 83.0% 5,470,895 63.7%
Alan C. and Karen Ashton(4)(5)(6).................. 2,530,398 38.4 2,530,398 29.4
Bert A. Getz(4)(7)................................. 1,195,996 18.1 1,195,996 13.9
David A. Wirthlin(8)............................... 90,216 1.4 90,216 1.0
Martin F. Smith(9)................................. 48,108 * 48,108 *
Andrea Fox(10)..................................... 22,854 * 22,854 *
Jonathan T. Davis(11).............................. 21,654 * 21,654 *
John H. Hurley(12)................................. 2,000 * 2,000 *
Thomas J. Litle(6)(13)............................. 29,000 * 29,000 *
Lyle R. Knight(6)(13).............................. 29,000 * 29,000 *
Randy Petersen(6).................................. 5,000 * 5,000 *
All directors, director-nominees and executive
officers of the Company as a group (10
persons)......................................... 5,723,727 84.0% 5,723,727 64.9%
</TABLE>
- ---------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants or rights, but are not deemed outstanding
for computing the percentage of any other person. The amounts and
percentages are based upon 6,590,000 shares of Common Stock outstanding as
of September 30, 1996, after giving pro forma effect to the issuance of
1,440,000 shares of Common Stock in connection with the Recapitalization
Transactions, and 8,590,000 shares of Common Stock outstanding as of the
close of this Offering.
(2) The business address for all directors, director-nominees (except Alan
Ashton) and officers of the Company is c/o the Company, 1520 E. Pima
Street, Phoenix, Arizona 85034.
(3) Includes (i) 2,525,398 shares of Common Stock that the Worsleys have the
right to acquire during the two-year period commencing on the closing of
this Offering from Alan C. and Karen Ashton (the "Ashtons"); (ii) 672,999
shares of Common Stock that the Worsleys have the right to acquire during
the eighteen-month period commencing on the closing of this Offering from
Bert A. Getz; (iii) 2,700 shares of Common Stock issuable upon the
conversion of 15 shares of Preferred Stock purchased in the Private
Placement; and (iv) 900 shares of Common Stock issuable upon exercise of
the Warrant acquired in the Private Placement. See "Certain Transactions."
(4) The Ashtons and Bert Getz have granted an Over-Allotment Option to the
underwriters to purchase up to 150,000 of each of their shares of Common
Stock solely to cover over-allotments, if any, which is exercisable up to
45 days following this Offering at the initial public offering price, less
underwriting discounts. This table assumes that the Over-Allotment Option
will not be exercised by the Underwriters. See "Underwriting."
37
<PAGE> 41
(5) The address for the Ashtons is c/o Ralph Rasmussen, Esq., 261 E. 1200
South, Orem, Utah 84058.
(6) Includes 5,000 shares issuable upon exercise of certain stock options to be
granted upon the closing of this Offering pursuant to the Company's
Non-Employee Director Stock Option Plan.
(7) The address for Mr. Getz is c/o Globe Corporation, 3634 Civic Center Blvd.,
Scottsdale, Arizona 85251.
(8) Includes (i) 86,616 shares issuable upon exercise of stock options granted
to Mr. Wirthlin pursuant to the Option Plan; (ii) 2,700 shares of Common
Stock issuable upon the conversion of 15 shares of Preferred Stock
purchased in the Private Placement; and (iii) 900 shares of Common Stock
issuable upon exercise of the Warrant acquired in the Private Placement.
(9) Includes (i) 43,308 shares issuable upon exercise of stock options granted
to Mr. Smith pursuant to the Option Plan; (ii) 3,600 shares of Common Stock
issuable upon the conversion of 20 shares of Preferred Stock purchased in
the Private Placement; and (iii) 1,200 shares of Common Stock issuable upon
exercise of the Warrant acquired in the Private Placement.
(10) Includes (i) 21,654 shares issuable upon exercise of stock options granted
to Ms. Fox pursuant to the Option Plan; (ii) 900 shares of Common Stock
issuable upon the conversion of 5 shares of Preferred Stock purchased in
the Private Placement; and (iii) 300 shares of Common Stock issuable upon
exercise of the Warrant acquired in the Private Placment.
(11) Includes 21,654 shares issuable upon exercise of stock options granted to
Mr. Davis pursuant to the Option Plan.
(12) Includes 2,000 shares issuable upon exercise of stock options granted to
Mr. Hurley pursuant to the Option Plan.
(13) Includes (i) 18,000 shares of Common Stock issuable upon the conversion of
100 shares of Preferred Stock purchased in the Private Placement; and (ii)
6,000 shares of Common Stock issuable upon exercise of the warrant acquired
in the Private Placement.
38
<PAGE> 42
CERTAIN TRANSACTIONS
To fund the Company's working capital requirements, on March 17, 1994 the
Company obtained loans (the "Working Capital Loans") of $2.0 million from the
Ashtons and $1.0 million from Globe Corporation, an affiliate of Bert Getz
(Globe Corporation and Bert Getz are collectively referred to as "Getz"). These
loans paid interest monthly at a rate of 8.5% and originally matured on July 15,
1994, which date was extended to January 1, 1996 pursuant to a loan modification
and pledge agreement by and between the Company, the Ashtons, the Worsleys and
Getz.
On June 30, 1995, the Ashtons loaned an additional $850,000 to the Company
pursuant to a loan and security agreement (the "Ashton Note"). The Note was due
on December 31, 1995 and carried an interest rate of prime plus 2%.
On March 10, 1995, the Company owed $4.0 million to Bank One Arizona, NA
pursuant to the terms of a Loan Agreement dated April 30, 1993 (the "Bank One
Loan"). The Bank One Loan had an interest rate of prime plus 1 1/2% and matured
on April 15, 1995. On March 10, 1995, Getz paid all principal due on the Bank
One Loan, which totalled $4.0 million, and the Company entered into a Loan and
Security Agreement with Getz pursuant to which it agreed to pay Getz $4.0
million (the "Getz Note"). The Getz Note was due on March 11, 1996 and carried
an interest rate of prime plus 1 1/2%.
On October 15, 1996, the Worsleys the Ashtons, Getz and the Company entered
into agreements (collectively, the "Shareholder Agreements") pursuant to which
the Ashtons and Getz agreed to convert shareholder loans of $1.425 million and
$3.575 million, respectively, into 1,425 and 3,575 shares of Preferred Stock,
respectively, effective upon the closing of the Private Placement. In addition,
under the Shareholder Agreements, effective on the closing date of this
Offering, the Worsleys will have an option (the "Ashton Option") to acquire all
of the Common Stock of the Company held by the Ashtons during the two-year
period following this Offering (exclusive of shares acquired by them in the open
market). The Worsleys have agreed to use their best efforts to obtain financing,
including pledging their shares of the Company's Common Stock, if necessary,
from a third party to permit them to exercise the Ashton Option in full as soon
as reasonably practicable following the expiration of their Lock-up Agreement.
In addition, the Worsleys will have an option (the "Getz Option") to acquire
one-half of all of the Common Stock of the Company held by Getz during the
18-month period following this Offering (exclusive of shares acquired by him in
the open market). The exercise prices of the Ashton Option and the Getz Option
are $6.96 per share and $6.69 per share, respectively, subject to adjustment in
certain circumstances. If the Ashton Option is not exercised during its two-year
term, then following such term, the Worsleys will have a right of first refusal
to purchase all of the Common Stock held by the Ashtons during the following
five years. For twelve months following the effective date of this Offering, the
Ashtons have granted an irrevocable proxy to the Worsleys to vote all shares of
Common Stock owned by them. If the Getz Option is not exercised during its
18-month term, then following such term, the Worsleys will have a right of first
refusal to purchase one-half of the shares of Common Stock owned by Getz during
the following 18 months. To the extent the underwriters elect not to exercise
the Over-Allotment Option, the Ashtons and Getz have agreed to grant to the
Worsleys options to acquire any shares of Common Stock the underwriters fail to
acquire at an exercise price equal to the initial public offering price of the
Common Stock offered hereby. The terms of such options run concurrently with the
terms of the Ashton Option and the Getz Option, respectively.
In order to refinance $2.0 million of notes payable (and interest accrued
thereon) to each of the Ashtons and Getz, the Company entered into a loan
agreement for a $4.0 million line of credit with Merrill Lynch Business
Financial Services Inc. ("MLBFS") dated October 11, 1996. The loan, which
matures on December 31, 1998, bears interest at a variable annual rate of 2.6
percent plus the 30-Day Commercial Paper Rate as quoted in The Wall Street
Journal. Ashton and Getz have executed Financial Assets Security Agreements with
MLBFS, granting MLBFS a security interest in Merrill Lynch securities accounts
of at least $2.0 million each owned by Ashton and Getz, respectively.
In April 1993, the Company redeemed 2,268,898 shares of Common Stock held
by the Ashtons in exchange for certain intellectual property, including the
Company's principal trademarks and tradenames. The Company secured an exclusive
license to use the intellectual property acquired by the Ashtons in return for a
39
<PAGE> 43
1% royalty on the Company's sales commencing January 1, 1994. On October 1,
1994, the Ashtons exercised an option granted to them as part of the license,
terminated the Company's obligation to pay the royalty, transferred the
intellectual property back to the Company and were issued 2,268,898 shares of
Common Stock by the Company. At the time such option was exercised, the Company
owed the Ashtons approximately $180,000 pursuant to the license. The Ashtons
forgave approximately $72,000 of such amount and agreed to a payment schedule
for the remainder, of which amount approximately $70,000 is currently
outstanding.
In December 1995, Bert Getz executed a guarantee of certain indebtedness of
the Company in favor of Quad/Graphics, Inc., the Company's catalog printer and
paper supplier. The guarantee originally included obligations of the Company
incurred between December 1, 1995 and June 30, 1996, but was subsequently
extended by Quad/Graphics, Inc. and Mr. Getz until December 31, 1996. As of
September 30, 1996, the balance owed by the Company to Quad/Graphics, Inc. was
approximately $1.2 million.
On April 19, 1996, the Company entered into an agreement with LitleNet LLC,
a company in which Thomas Litle, a director-nominee of the Company, has a
controlling ownership interest, pursuant to which LitleNet LLC provides the
Company with credit card transaction management services. Under this agreement,
the Company pays LitleNet LLC fees of up to $20,700 per month. After the initial
12 month term of the agreement, the agreement is automatically renewed for an
additional 12 months unless terminated by either party.
On October 18, 1996, two of the Company's director-nominees, Lyle Knight
and Thomas Litle, each purchased 100 shares of Convertible Preferred Stock and
Warrants to purchase 6,000 shares of Common Stock in the Private Placement for
$100,000. Upon the closing of this Offering, the shares of Convertible Preferred
Stock of each of Mr. Knight and Mr. Litle will convert into 18,000 shares of
Common Stock. In addition, Robert Worsley, Martin Smith, David Wirthlin and
Andrea Fox purchased 15, 20, 15 and 5 shares of Convertible Preferred Stock,
respectively, and warrants to purchase 900, 1,200, 900, and 300 shares of Common
Stock, respectively, in the Private Placement for $15,000, $20,000, $15,000 and
$5,000, respectively. Upon closing of this Offering, the shares of Preferred
Stock of Mr. Worsley, Mr. Smith, Mr. Wirthlin and Ms. Fox will convert into
2,700, 3,600, 2,700 and 900 shares of Common Stock, respectively.
TAX INDEMNIFICATION
Since its inception, the Company has elected to be treated as an S
Corporation for federal tax purposes. Upon the closing of the Private Placement,
the Company terminated its S Corporation status and became become subject to
federal taxation as a C Corporation. In connection with the termination of its S
Corporation status, the Company and certain of its present shareholders have
entered into a Tax Indemnification Agreement (the "Tax Agreement"). Although the
Company became subject to corporate income taxation after the date on which it
ceased to be an S Corporation (the "Termination Date"), under applicable tax
laws, the existing shareholders will continue to be liable for any tax
deficiencies attributable to the Company's operations prior to the Termination
Date. Accordingly, the Tax Agreement generally provides that the existing
shareholders will be indemnified by the Company with respect to federal and
state taxes (plus interest and penalties, as well as any costs incurred in
contesting any dispute with a taxing authority) resulting from any adjustment to
S Corporation income for any taxable year that was taxed directly to the
existing shareholders. The right to indemnification is absolute and is not
conditioned upon realization by the Company of an offsetting adjustment to the
Company's tax liability in a year in which it is not an S Corporation. Any
payment made by the Company to the existing shareholders pursuant to the Tax
Agreement may be deemed by the Internal Revenue Service or state taxing
authorities to be nondeductible by the Company for income tax purposes.
Additionally, if a payment made under the Tax Agreement is determined to be
taxable to the existing shareholders, then the Company is further obligated to
make additional payments to the existing shareholders in amounts sufficient to
place the shareholders in the same net after-tax position that the shareholders
would have been in if the original indemnification had not been included in
income.
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<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
The Company is a Nevada corporation and its affairs are governed by its
Articles of Incorporation and Bylaws and the Nevada General Corporation Law. The
following description of the Company's capital stock, which is complete in all
material respects, is qualified in its entirety by reference to the provisions
of the Company's Articles of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of preferred
stock, par value $.001 per share (the "Preferred Stock"). As of the date hereof,
there were 6,590,000 shares of Common Stock issued and outstanding, after giving
pro forma effect to the Recapitalization Transaction, which were held of record
by approximately 70 shareholders. No shares of Preferred Stock will be issued
and outstanding upon consummation of this Offering.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and do not have cumulative voting rights.
Subject to the rights of holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to share ratably in dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. In the event of liquidation,
dissolution, or winding up of the Company, subject to the right of outstanding
Preferred Stock, if any, the holders of Common Stock are entitled to share
ratably in all assets available for distribution to the shareholders after
payment of the Company's liabilities. The Common Stock has no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby will
be upon completion of this Offering, fully paid and nonassessable.
PREFERRED STOCK
Shares of Preferred Stock may be issued in one or more series and the Board
of Directors of the Company has the power to fix for each such series such
voting powers, full or limited, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as the Board of Directors shall deem
appropriate, without any further vote or action by the shareholders of the
Company. Preferred Stock could be issued by the Board of Directors with voting
and conversion rights that could adversely affect the voting power of the
holders of the Common Stock. In addition, because the terms of the Preferred
Stock may be fixed by the Board of Directors of the Company without shareholder
action, the Preferred Stock could be issued quickly with terms calculated to
defeat or delay a proposed takeover of the Company, or to make the removal of
the management of the Company more difficult. Under certain circumstances, this
would have the effect of decreasing the market price of the Common Stock.
The Company's Articles of Incorporation designates a series of Convertible
Preferred Stock. The series consists of 8,000 shares, $.001 par value per share,
3,000 of which were issued by the Company in the Private Placement and 5,000 of
which were issued upon the conversion of an aggregate of $5.0 million of
indebtedness of the Company upon the closing of the Private Placement. Each
share of Convertible Preferred Stock will be converted into Common Stock upon
the closing of this Offering. See "The Company -- Private Placement" and
"Concurrent Offering."
OTHER SECURITIES
Upon the closing of this Offering, the Company will issue warrants to the
Representative to purchase up to 200,000 shares of Common Stock at an exercise
price equal to 120% of the initial public offering price. See "Underwriting." In
addition, the Company has granted Warrants to purchase 180,000 shares of Common
Stock to investors in the Private Placement and warrants to a vendor to purchase
58,824 shares of Common Stock, all of which have an exercise price equal to the
initial public offering price of the Common Stock
41
<PAGE> 45
offered hereby. See "The Company -- Private Placement." Options to purchase
438,080 shares of Common Stock have been granted under the Company's Option
Plan. See "Management -- Stock Option Plans."
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company, located at 2 Broadway, New
York, New York 10004, has been appointed as the transfer agent and registrar for
the Common Stock.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Articles of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and the rights of shareholders.
These provisions require the consent of the Board of Directors or the
"disinterested" members thereof and/or the affirmative vote of two-thirds of the
Company's voting stock, excluding stock owned by interested shareholders, to
effect certain business combinations with interested shareholders. An interested
shareholder for purposes of this provision means a person who, together with
affiliates or associates, beneficially owns, or beneficially owned within the
preceding two-year period, 10% or more of the Company's combined voting power.
The provisions included in the Company's Articles of Incorporation and certain
provisions in the Bylaws may not be amended or repealed without the affirmative
vote of two-thirds of the Company's voting stock, excluding, with respect to the
business combination provision, stock owned by interested shareholders. These
provisions could have the effect of deterring unsolicited takeovers or delaying
or preventing changes in control or management of the Company, including
transactions in which shareholders might otherwise receive a premium for their
shares over then-current market prices. In addition, these provisions may limit
the ability of shareholders to approve transactions that they may deem to be in
their best interest.
42
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
8,590,000 shares of Common Stock. Of these shares, the 2,000,000 shares of
Common Stock sold in the Offering (2,300,000 if the Underwriter's Over-Allotment
Option is exercised in full), will be freely tradable without restriction under
the Securities Act. See "Capitalization." Eight thousand shares of Preferred
Stock will convert into 1,440,000 shares of Common Stock upon the closing of
this Offering, of which 540,000 shares of Common Stock and 180,000 shares of
Common Stock underlying the Warrants issued in the Private Placement will be
freely tradeable. However, the holders of these shares have executed agreements
pursuant to which they have agreed not to sell, transfer, assign, pledge or
otherwise dispose of their shares for a 12 month period from the effective date
of this Prospectus without the prior written consent of the Representative
("Lock-up Agreements").
The remaining 6,050,000 shares of Common Stock outstanding prior to
consummation of this Offering, including 900,000 shares of Common Stock issuable
on conversion of certain shares of Preferred Stock, are "restricted" securities
within the meaning of Rule 144 under the Securities Act. The holders of all
these "restricted" shares, including each officer and director of the Company,
have executed Lock-up Agreements. Taking into consideration the restrictions of
Rule 144 and the Lock-up Agreements, commencing 12 months after the date of this
Prospectus, 5,150,000 shares of Common Stock held by existing shareholders will
become eligible for sale under Rule 144, subject to compliance with the volume
limitations and other requirements of Rule 144. The remaining 900,000 shares of
Common Stock held by existing shareholders will become eligible for sale under
Rule 144 in October 1998, subject to compliance with the volume limitations and
other requirements of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares for
at least two years, including persons who may be deemed "affiliates" of the
Company, as the term is defined in Rule 144, would be entitled to sell (in
accordance with the provisions specified in the rule) within any three month
period a number of shares that does not exceed the greater of one percent of the
then outstanding shares of the Company's Common Stock (approximately 85,900
shares immediately following the Offering) or the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission. An
"affiliate" of the Company or of a business it has acquired within two years by
merger or share exchange may sell securities that are not "restricted" without
regard to the period of beneficial ownership but subject to the volume
limitations described above and other conditions of Rule 144. A person (or
persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company (and has not been at any time during the three months immediately
preceding the sale), and who has beneficially owned his or her shares for at
least three years, would be entitled to sell such shares under Rule 144 without
regard to the volume limitations described above, manner of sale provisions,
notice requirements, or availability of public information. As defined in Rule
144, an "affiliate" of an issuer is a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, such issuer.
Prior to the Offering, there has been no public market for the Common Stock
of the Company and no predictions can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market could adversely affect
prevailing market conditions and could impair the Company's future ability to
raise capital through the sale of its equity securities. Application has been
made to list the Common Stock on the Nasdaq National Market under the symbol
"SKYM."
43
<PAGE> 47
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Josephthal Lyon
& Ross Incorporated is acting as the Representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase from the Company and the
Company has agreed to sell to the Underwriters on a firm commitment basis, the
respective number of shares of Common Stock set forth opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
---------------------------------------------------------- ---------
<S> <C>
Josephthal Lyon & Ross Incorporated.......................
---------
Total........................................... 2,000,000
=========
</TABLE>
The Underwriters are committed to purchase all shares of Common Stock
offered hereby, if any of such shares are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company and the Selling Shareholders have been advised by the
Representative that the Underwriters propose initially to offer the Common Stock
to the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less concessions of not
in excess of $ per share of Common Stock. Such dealers may re-allow a
concession not in excess of $ per share of Common Stock to other
dealers. After the commencement of this Offering, the public offering price,
concession and reallowance may be changed by the Representative.
The Representative has advised the Company that it does not anticipate
sales to discretionary accounts by the Underwriters to exceed five percent of
the total number of shares of Common Stock offered hereby.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act. The Company has also agreed to pay to the Representative an
expense allowance on a non-accountable basis in the amount of $75,000 upon the
closing of this Offering.
The Underwriters have been granted an option by the Selling Shareholders,
exercisable within 45 days after the date of this Prospectus, to purchase up to
an additional 300,000 shares of Common Stock at the initial public offering
price per share of Common Stock offered hereby, less underwriting discounts.
Such option may be exercised only for the purpose of covering over-allotments,
if any, incurred in the sale of the shares offered hereby. To the extent such
option is exercised in whole or in part, each Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional shares of Common Stock proportionate to its initial commitment.
Holders of 6,590,000 shares of the Company's Common Stock, including each
officer, director and principal shareholder of the Company, have executed
agreements pursuant to which they have agreed not to sell or otherwise dispose
of their shares for a period of 12 months from the date of this Prospectus
without the prior written consent of the Representative. An appropriate legend
shall be marked on the face of the certificates representing all of such
securities.
The Company has agreed that, for five years after the effective date of
this Prospectus, the Representative shall have the right to designate one person
for election to the Company's Board of Directors. If the Representative does not
designate a person for election to the Company's Board of Directors, the
Representative may designate one person to attend meetings of the Company's
Board of Directors. Such individual may be a director, officer, employee or
affiliate of the Representative.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants to
purchase from the Company 200,000 shares of Common Stock. The Representative's
Warrants are initially exercisable at a price per share equal to 120% of the
initial public offering price for a period of four years commencing one year
after the date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of twelve months from the date hereof,
44
<PAGE> 48
except to officers of the Representative. The Representative's Warrants also
provide for adjustment in the number of shares of Common Stock issuable upon the
exercise thereof as a result of certain subdivisions and combinations of the
Common Stock. The Representative's Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise of the
Representative's Warrants.
In connection with the Private Placement, the Company paid Josephthal Lyon
& Ross Incorporated, as placement agent, $265,500 in cash as commissions and a
non-accountable expense allowance of $15,000. Prior to this Offering, there has
been no public market for the Common Stock. Consequently, the initial public
offering price for the Common Stock has been determined by negotiations between
the Company and the Representative and is not necessarily related to the
Company's asset value, net worth or other established criteria of value. The
factors considered in such negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which the
Company competes, an assessment of the Company's management, the prospects of
the Company, its capital structure and certain other factors as were deemed
relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be compete. Reference is made to a copy
of each such agreement which is filed as an exhibit to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona. Orrick,
Herrington & Sutcliffe LLP, New York, New York has acted as legal counsel for
the Underwriters.
EXPERTS
The financial statements and related schedules of the Company as of
December 31, 1994 and 1995 and June 30, 1996 and for each of the years in the
three-year period ended December 31, 1995 and for the six-month period ended
June 30, 1996 included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus constitutes a part of the Registration Statement and
does not contain all of the information set forth therein and in the exhibits
thereto. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to such Registration Statement
and exhibits. Statements contained in this Prospectus as to the contents of any
document are not necessarily complete and in each instance are qualified in
their entirety by reference to the copy of the appropriate document filed with
the Commission. The Registration Statement, including the exhibits thereto, may
be examined without charge at the Commission's public reference facility at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, copies of any or all part of the Registration Statement, including
such exhibits thereto, may be obtained from the Commission at its principal
office in Washington, D.C., upon payment of the fees prescribed by the
Commission. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy, and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission.
The Registration Statement and the reports and other information to be
filed by the Company following the offering in accordance with the Securities
and Exchange Act of 1934, as amended, can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W.,
45
<PAGE> 49
Washington, D.C. 20549, and at the following regional offices of the Commission:
7 World Trade Center, New York, NY 10048, and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, IL 60601. Copies of such material may
be obtained from the Public Reference Section of the Commission at its principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the
fees prescribed by the Commission.
46
<PAGE> 50
SKYMALL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1994 and 1995 and as of June 30, 1996............... F-3
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and for
the Six Months Ended June 30, 1995 (Unaudited) and 1996............................. F-4
Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1993,
1994 and 1995 and for the Six Months Ended June 30, 1996............................ F-5
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and for
the Six Months Ended June 30, 1995 (Unaudited) and 1996............................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of SkyMall, Inc.:
We have audited the accompanying balance sheets of SkyMall, Inc. (a Nevada
corporation), as of December 31, 1994 and 1995 and June 30, 1996, and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1995 and the six
months ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkyMall, Inc. as of December
31, 1994 and 1995 and June 30, 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995 and
the six months ended June 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
October 21, 1996.
F-2
<PAGE> 52
SKYMALL, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 896 $ 775 $ 455
Accounts receivable, net................................. 1,066 892 963
Merchandise inventory, net............................... 204 22 21
Prepaid catalog costs.................................... 1,672 1,242 1,806
-------- -------- --------
Total current assets.................................. 3,838 2,931 3,245
PROPERTY AND EQUIPMENT, net................................ 1,839 1,581 1,813
OTHER ASSETS, net.......................................... 236 214 182
-------- -------- --------
Total assets..................................... $ 5,913 $ 4,726 $ 5,240
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable......................................... $ 4,354 $ 4,695 $ 5,390
Accrued liabilities...................................... 612 329 340
Current portion of notes payable and capital leases...... 4,072 77 112
Current portion of notes payable to vendors.............. 2,340 2,564 2,973
-------- -------- --------
Total current liabilities........................ 11,378 7,665 8,815
RESERVE FOR RESTRUCTURE CHARGES............................ 2,244 1,276 661
NOTES PAYABLE AND CAPITAL LEASES, net of current portion... 77 -- 129
NOTES PAYABLE TO VENDORS, net of current portion........... 4,713 2,326 1,004
NOTES PAYABLE TO SHAREHOLDERS, including interest.......... 3,292 8,492 8,894
-------- -------- --------
Total liabilities................................ 21,704 19,759 19,503
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value; 50,000,000 shares
authorized; 5,150,000 shares issued and outstanding
each period........................................... 5 5 5
Additional paid-in capital............................... 18,438 18,438 18,438
Accumulated deficit...................................... (34,234) (33,476) (32,706)
-------- -------- --------
Total shareholders' equity (deficit)............. (15,791) (15,033) (14,263)
-------- -------- --------
Total liabilities and shareholders' equity
(deficit)...................................... $ 5,913 $ 4,726 $ 5,240
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 53
SKYMALL, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1996
------- -------- ------- 1995 -------
-------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Merchandise sales, net.................. $24,507 $ 22,062 $26,883 $12,255 $12,432
Placement fees and other................ 2,560 8,241 16,198 8,295 5,793
-------- -------- -------- --------
-- -- -- --
----------
Total revenues.................. 27,067 30,303 43,081 20,550 18,225
COST OF GOODS SOLD........................ 13,691 16,266 24,564 11,610 9,553
-------- ---------- -------- -------- --------
Gross margin.................. 13,376 14,037 18,517 8,940 8,672
-------- ---------- -------- -------- --------
OPERATING EXPENSES:
Catalog expenses........................ 6,890 9,644 9,532 4,733 3,979
Selling expenses........................ 2,921 2,754 2,229 1,048 1,134
Customer service and fulfillment
expenses............................. 4,514 2,919 2,136 1,021 973
General and administrative expenses..... 4,530 5,886 3,112 1,589 1,448
Restructure charge...................... -- 4,332 -- -- --
-------- -------- -------- -------- --------
Total operating expenses........ 18,855 25,535 17,009 8,391 7,534
-------- --------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS............. (5,479) (11,498) 1,508 549 1,138
Interest expense........................ (230) (600) (755) (351) (405)
Other income (expense).................. (57) (88) 5 (33) 37
-------- ---------- -------- -------- --------
NET INCOME (LOSS)......................... $(5,766) $(12,186) $ 758 $ 165 $ 770
========== ========== ========== ========== ==========
PRO FORMA NET INCOME (LOSS) PER COMMON
SHARE................................... $ (1.59) $ (3.19) $ .21 $ .06 $ .18
========== ========== ========== ========== ==========
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING............................. 3,630,559 3,775,274 5,648,824 5,648,824 5,648,824
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 54
SKYMALL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993............ 4,657,211 $ 5 $ 18,340 $ (16,282) $ 2,063
Redemption of shares pursuant to
Stock Redemption and Royalty
Agreement...................... (2,268,898) (2) -- -- (2)
Issuance of shares for guarantee
of debt........................ 265,899 -- 100 -- 100
Net loss.......................... -- -- -- (5,766) (5,766)
---------- --- ------- -------- --------
BALANCE, December 31, 1993.......... 2,654,212 3 18,440 (22,048) (3,605)
Reissuance of shares pursuant to
Stock Redemption and Royalty
Agreement...................... 2,268,898 2 (2) -- --
Issuance of shares for guarantee
of debt........................ 226,890 -- -- -- --
Net loss.......................... -- -- -- (12,186) (12,186)
---------- --- ------- -------- --------
BALANCE, December 31, 1994.......... 5,150,000 5 18,438 (34,234) (15,791)
Net income........................ -- -- -- 758 758
---------- --- ------- -------- --------
BALANCE, December 31, 1995.......... 5,150,000 5 18,438 (33,476) (15,033)
Net income........................ -- -- -- 770 770
---------- --- ------- -------- --------
BALANCE, June 30, 1996.............. 5,150,000 $ 5 $ 18,438 $ (32,706) $(14,263)
========== === ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 55
SKYMALL, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------------- -------------------
1993 1994 1995 1996
------- -------- ------- 1995 -----
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $(5,766) $(12,186) $ 758 $ 165 $ 770
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities-
Depreciation and amortization........................ 822 197 244 120 141
Loss on abandonment of equipment and other assets.... 148 1,011 -- -- --
Provision for restructure charge..................... -- 3,321 -- -- --
Provision for merchandise inventory.................. -- 75 -- -- --
(Increase) decrease in:
Accounts receivable................................ (806) (28) 174 364 (71)
Merchandise inventory.............................. (2,779) 4,659 182 159 1
Prepaid catalog costs.............................. (210) (380) 430 167 (564)
Other assets....................................... -- 204 -- -- --
(Decrease) increase in:
Accounts payable................................... 1,497 2,902 341 146 696
Reserve for restructure............................ -- (1,386) (768) (335) (616)
Accrued liabilities................................ 1,749 (556) (283) (313) 11
------- -------- ------- ------- -----
Net cash provided by (used for) operating
activities.................................... (5,345) (2,167) 1,078 473 368
------- -------- ------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................... (216) (400) (164) (82) (175)
------- -------- ------- ------- -----
Net cash used for investing activities.......... (216) (400) (164) (82) (175)
------- -------- ------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under capital leases............ (52) -- -- -- (2)
Notes payable to vendors............................... -- -- (2,201) (1,059) (913)
Proceeds from notes payable............................ 4,000 3,292 1,166 76 402
Payments of notes payable.............................. (13) -- -- -- --
------- -------- ------- ------- -----
Net cash provided by (used for) financing
activities.................................... 3,935 3,292 (1,035) (983) (513)
------- -------- ------- ------- -----
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......... (1,626) 725 (121) (592) (320)
CASH AND CASH EQUIVALENTS, beginning of period........... 1,797 171 896 896 775
------- -------- ------- ------- -----
CASH AND CASH EQUIVALENTS, end of period................. $ 171 $ 896 $ 775 $ 304 $ 455
======= ======== ======= ======= =====
Income taxes paid...................................... $ -- $ -- $ -- $ -- $ --
======= ======== ======= ======= =====
Total interest paid.................................... $ 206 $ 378 $ 356 $ 177 $ 6
======= ======== ======= ======= =====
Interest paid to shareholders.......................... $ -- $ 25 $ 272 $ -- $ --
======= ======== ======= ======= =====
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
Conversion of accounts payable to notes payable to
vendors.............................................. $ -- $ 5,564 $ -- $ -- $ --
======= ======== ======= ======= =====
Notes payable converted to notes payable to
shareholders......................................... $ -- $ -- $ 4,000 $ 4,000 $ --
======= ======== ======= ======= =====
Capital leases incurred................................ $ -- $ -- $ -- $ -- $ 166
======= ======== ======= ======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 56
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX-MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
(1) THE COMPANY:
Nature of Organization
SkyMall, Inc. ("Company") was incorporated in 1989 as an Arizona
corporation (and reincorporated in Nevada in October 1996). The Company
commenced operations in 1990 after signing an agreement with a major airline to
provide retail merchandise service through inflight catalogs. In 1991, the
Company purchased the assets of GiftMaster, Inc., which included contracts with
three major airlines and two regional airlines. At June 30, 1996, the Company
had agreements with 15 airlines to place its catalogs in the aircraft seat
pockets.
Management's Plans
As reflected in the accompanying financial statements, the Company has
incurred substantial operating losses from inception through 1994 as a result of
its start up and market development. Additionally, the accompanying balance
sheet as of June 30, 1996, reflects a shareholder deficit of approximately $14.3
million and a working capital deficiency of approximately $5.6 million.
Subsequent to June 30, 1996, the Company sold and issued approximately $2.6
million of convertible preferred stock, net of offering expenses, and, in
addition, as discussed further in Note 12, management and certain shareholders
have taken steps to strengthen the Company's financial condition and improve the
Company's liquidity. These steps include: (1) obtaining a $4 million loan,
guaranteed by two principal shareholders, payable in 1998, (2) converting notes
to shareholders of $5 million to 5,000 shares of convertible preferred stock
(convertible into 900,000 additional shares of common stock upon the closing of
an initial public offering), and (3) using the net proceeds of $2.6 million from
the issuance of new preferred stock to pay past due debt and notes payable to
vendors, with which the Company was not in compliance at June 30, 1996.
In addition to the changes discussed above, the Company's projection of
operations and cash flows for the balance of calendar year 1996 and 1997, and
the terms to pay certain significant current payables over 60-90 days, indicate
the Company will generate sufficient profitability and cash flow to liquidate
its remaining liabilities in the ordinary course of its operations.
However, there can be no assurance that the Company will be able to
generate sufficient revenues to achieve or sustain profitability.
Also, as discussed further in Notes 2 and 10, upon the conversion of the
Company from an S corporation to a C corporation, for tax purposes, the
accumulated deficit of $32.7 million will be reclassified to paid-in capital.
F-7
<PAGE> 57
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma application of the net proceeds from the transactions
discussed above as applied to the June 30, 1996, historical balances are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Total current assets........................................... $ 3,245 $ 3,421
======== =======
Accounts payable and accrued liabilities....................... $ 5,730 $ 4,130
Current portion of notes payable to vendors.................... 3,085 2,085
-------- -------
Total current liabilities............................ 8,815 6,215
-------- -------
Long-term portion of notes payable to vendors.................. 1,004 1,004
Notes payable to shareholders, including interest.............. 8,894 70
Bank loan...................................................... -- 4,000
Reserve for restructure charges................................ 661 661
Notes payable and capital leases, net of current portion....... 129 129
Preferred stock................................................ -- --
Common stock................................................... 5 5
Additional paid-in capital..................................... 18,438 (6,668)
Accumulated deficit............................................ (32,706) --
-------- -------
Total liabilities and shareholders' equity........... $ 5,240 $ 5,416
======== =======
</TABLE>
Initial Public Offering
The Company is contemplating an initial public offering (IPO) of 2 million
shares of common stock at an estimated price of $8 to $9 per share (Note 12).
Reincorporation and Restatement of Shares
In October, 1996, the Company reincorporated in the State of Nevada. In
connection with the reincorporation, the Company completed a 1,592 to 1 share
exchange, including treasury shares, resulting in 5,150,000 shares of common
stock outstanding, on a retroactive basis, at June 30, 1996. The accompanying
financial statements and footnotes have been restated for the change in the
number of shares of common stock outstanding for all periods presented.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.
Revenue Recognition
Merchandise sales represent the Company's total fulfilled sales at retail
sales prices, net of returns and allowances, from products displayed in the
Company's catalog. The Company's agreements with participating vendors provide
that the vendor ship the products directly to the Company's customer upon
notification of the order to the vendor. Upon notification from the
participating vendors of the shipment of the goods, the Company recognizes the
merchandise sale and related cost of goods sold, and establishes a reserve for
anticipated returns.
F-8
<PAGE> 58
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Under its contracts with participating vendors, the Company earns
percentages of revenues generated by the Company's sales, placement fees for
inclusion of the merchants' products in the SkyMall catalog, or a combination
thereof. Placement fees are designed to cover catalog expenses and to stabilize
the Company's revenue by reducing the impact of fluctuations in merchandise
sales. Catalogs are issued four times a year. The Company offers the
participating vendor's products in the Company's catalogs and performs order
taking and processing services. The placement fees are recognized ratably over
the life of the catalog. Order taking and processing service expenses are
recognized in the period incurred.
The cost of goods sold represents the amount paid by the Company to vendors
in connection with sales of their merchandise included in the vendor catalog,
which the Company is required to pay under certain of its merchant agreements.
The percentage of sales which the Company pays to the vendor varies from
agreement to agreement; generally, the higher the placement fee paid by a
participating merchant, the higher percentage of sales paid by the Company to
the merchant, and vice versa.
In addition, the Company generates revenue from the rental of its customer
list. List revenue is included in placement fees and other revenue in the
accompanying statements of operations.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets, including
equipment and leasehold improvements and purchased contracts by determining
whether the assets can be recovered from undiscounted future cash flows. The
amount of impairment, if any, is measured based on projected future cash flows
using a discount rate reflecting the Company's average costs of funds.
Recoverability of long-lived assets is dependent upon, among other things,
the Company's ability to continue to achieve profitability, so as to be able to
meet its obligations when they become due. In the opinion of management, based
upon current information and projections, long-lived assets will be recovered
over the period of benefit.
Cash and Cash Equivalents
Cash equivalents include investments purchased with an original maturity of
three months or less. As a result of the Company's restructure in 1994, the
Company is required to pay some vendors through a restricted escrow account.
Total restricted cash balances in such escrow accounts as of December 31, 1994
and 1995 and June 30, 1996, were approximately $539,000, $618,000, and $12,000,
respectively.
Accounts Receivable
Accounts receivable at June 30, 1996, includes amounts due from credit card
companies and receivables from vendors for placement fees. The allowance for
doubtful accounts as of December 31, 1994 and 1995 and June 30, 1996 was
$175,000.
Inventory
Inventory consists of finished goods purchased from vendors which are held
for sale and included in the Company's catalogs to consumers. Subsequent to
December 31, 1994, such inventory consists mainly of logo merchandise which
cannot be delivered via drop ship by vendors. Inventory is stated at the lower
of cost (first-in, first-out) or market. The Company typically has arrangements
whereby inventory items may be returned to vendors if not sold. The Company has
established a reserve of approximately $598,000, $8,000 and $9,000 at December
31, 1994 and 1995 and June 30, 1996, respectively, for damaged, obsolete or
discontinued merchandise that cannot be returned to vendors.
F-9
<PAGE> 59
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Prepaid Catalog Costs
Prepaid catalog costs include primarily catalog production costs, which are
deferred and amortized on a straight-line basis over the period each catalog
issue is in use, currently three months.
Income Taxes
The Company since inception has been an S corporation and thus, is not
directly subject to income taxes. Accordingly, there is no provision or benefit
for income taxes reflected in the accompanying financial statements, as items of
taxable income and losses are reported in the individual returns of
shareholders.
Effective October 1996, the S status of the Company has terminated as a
result of the issuance of convertible preferred stock (Note 1). Subsequent to
the termination, the Company will be taxed as a C corporation. Net operating
losses (NOLS) calculated on a tax basis prior to the termination accrued to the
individual stockholders. Accordingly, such losses are not available to reduce
taxes payable by the Company as a C corporation.
Upon the termination of the S status, the Company is required to implement
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS No. 109), which requires the calculation of existing temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Management does not expect such
implementation to have a significant impact on the Company.
Had the Company been a C corporation prior to October, 1996, no federal or
state income taxes would have been provided as a result of the NOLs discussed
above. Accordingly, no pro forma provision for federal or state income taxes is
presented as if the Company were taxed as a C corporation for the entirety of
all periods presented. Additionally, the accumulated deficit at the time of the
S election termination, will be reclassified to additional paid-in capital.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts receivable and accounts
payable and notes payable to shareholders, which were subsequently converted to
preferred stock.
Concentrations of credit risk with respect to accounts receivable and
accounts payable may be limited due to the large number of participating vendors
comprising the balances and the fact that certain receivable and payable
balances may be offset. The Company performs ongoing credit evaluations of its
merchants, but does not require collateral to support receivables. In addition,
the Company has a right of offset using the proceeds from future merchandise
sales. The Company has established an allowance for doubtful accounts based on
factors surrounding the credit risk of specific customers, historical trends,
and other information.
Pro Forma Net Income (Loss) Per Common Share
Pro forma net income (loss) per share is based on the weighted average
number of common shares outstanding during the periods, as restated for the
share exchange referred to in Note 1 and, as applicable, the dilutive effect of
options outstanding under the Company's stock option plan.
Pursuant to the rules of the Securities and Exchange Commission, certain
changes in common and common equivalent shares during the 12 months immediately
preceding the anticipated date of the Company's initial public offering (IPO)
have been included in the calculation of pro forma common and common equivalent
shares as if they were outstanding for all periods presented, including loss
years where the impact of incremental shares is otherwise antidilutive.
F-10
<PAGE> 60
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The convertible preferred stock, issued subsequent to June 30, 1996, is
automatically convertible into approximately 1,440,000 common shares upon the
closing of an IPO, representing a discount of one-third from the estimated IPO
price. The dilutive impact of these shares for each period presented was 498,824
shares.
Interest related to notes payable to shareholders for the portion that was
converted into preferred stock was added back to the determination of net income
(loss) in the earnings per share computation.
Financial Instruments
The Company's financial instruments include cash, accounts receivable and
accounts payable. Due to the short-term nature of these instruments, the fair
value of these instruments approximates their recorded value. The Company does
not have material financial instruments with off-balance sheet risk.
The Company has notes payable to shareholders at varying terms which, based
upon the subsequent replacement by the new bank loan of $4 million and
conversion of $5 million to convertible preferred stock, the Company believes
are stated at their estimated fair market value.
Unaudited Interim Financial Statements
In the opinion of the Company's management, the June 30, 1995, unaudited
interim financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation.
(3) PROPERTY AND EQUIPMENT:
Depreciation of property and equipment is provided over the estimated
useful lives of the respective assets using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over their estimated useful
lives or the terms of the respective leases, whichever is shorter. The following
is a summary of property and equipment:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, JUNE
USEFUL ------------------- 30,
LIFE (YEARS) 1994 1995 1996
------------ ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Equipment................................ 3-10 $ 1,873 $ 1,717 $ 2,031
Buildings and leasehold improvements..... 15-31 1,294 1,297 1,293
Furniture, fixtures and other............ 3-7 283 269 273
------- ------- -------
3,450 3,283 3,597
Less -- Accumulated depreciation......... (1,611) (1,702) (1,784)
------- ------- -------
$ 1,839 $ 1,581 $ 1,813
======= ======= =======
</TABLE>
F-11
<PAGE> 61
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) OTHER ASSETS:
Other assets include intangibles acquired in 1991 from the purchase of
GiftMaster, Inc., which are amortized using the straight-line method over their
estimated useful lives. The following is a summary of other assets:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL --------------- JUNE 30,
LIFE (YEARS) 1994 1995 1996
------------ ----- ----- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased airline contracts.................. 10 $ 326 $ 326 $ 326
Other, primarily deposits.................... 21 19 21
------ ------ -------
347 345 347
Less -- Accumulated amortization............. (111) (131) (165)
------ ------ -------
$ 236 $ 214 $ 182
======= ======= =======
</TABLE>
(5) NOTES PAYABLE AND CAPITAL LEASES:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ---- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Line of credit of $4 million, interest at prime plus
1.5%, interest due monthly, principal due April 1995,
secured by all assets of the Company and guarantee of a
shareholder............................................ $ 4,000 $ -- $ --
Note payable, interest at 8%, due in monthly installments
(including interest) of approximately $4,700 through
June 1997, secured by equipment and rents.............. 149 77 77
Capital leases, interest at varying rates of 18% to 23%,
due in monthly installments (including interest) of
approximately $4,900 through May 2001, secured by
equipment.............................................. -- -- 164
------- ---- -----
4,149 77 241
Less: current portion.................................... (4,072) (77) (112)
------- ---- -----
$ 77 $ -- $ 129
======= ==== =====
</TABLE>
At June 30, 1996, aggregate annual maturities of notes payable and capital
leases were as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
<S> <C>
1997.......................................... $ 112
1998.......................................... 39
1999.......................................... 39
2000.......................................... 25
2001.......................................... 26
----
$ 241
====
</TABLE>
On April 30, 1993, the Company entered into an agreement with a bank for a
$4 million line of credit. During 1993, 1994 and 1995, the maximum outstanding
on the line of credit was $4 million, the average balance outstanding was $2.7
million, $4 million and $.8 million, respectively, and the average interest rate
was 7.5%, 8.6% and 10.0%, respectively. The line of credit was guaranteed by a
shareholder who received 265,899 shares of the Company's common stock in
exchange for the guarantee. The Company recorded a charge of
F-12
<PAGE> 62
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$100,000 related to the guarantee provided by the shareholder. This amount was
amortized over the term of the line of credit. In 1994, the shareholder received
an additional 226,890 shares related to the continued guarantee of the debt. In
1995, the shareholder paid the line of credit on behalf of the Company and the
Company issued a promissory note payable to the shareholder for $4 million (Note
6).
(6) NOTES PAYABLE TO SHAREHOLDERS:
Notes payable to shareholders consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------ ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Note payable dated March 11, 1995, interest at prime plus 1.5%
(9.75% at June 30, 1996), secured by all assets of the
Company........................................................ $ -- $4,000 $4,000
Note payable dated March 17, 1994, interest at 8.5%, interest due
monthly, principal due upon completion of an initial public
offering of the Company's common stock, secured by all assets
of the Company................................................. 2,000 2,000 2,000
Note payable dated March 17, 1994, interest at 8.5%, interest due
monthly, principal due upon completion of an initial public
offering of the Company's common stock, unsecured.............. 1,000 1,000 1,000
Note payable dated June 30, 1995, interest at prime plus 2%,
interest due monthly, principal due at the earlier of (i) sale
of the Company's building in Phoenix, Arizona, (ii) completion
of an initial public offering of the Company's common stock or
(iii) March 31, 1997........................................... -- 850 850
Note payable for royalties (Note 8).............................. 108 70 70
Accrued interest................................................. 184 572 974
------ ------ ------
$3,292 $8,492 $8,894
====== ====== ======
</TABLE>
As of June 30, 1996, the Company was in default of principal and interest
payments on all notes payable to shareholders. Subsequent to June 30, 1996, the
Company converted $5 million of notes payable to shareholders to preferred stock
(see Note 12) and obtained a bank loan for $4 million to pay accrued interest
due under shareholders' notes and the remaining principal balance due on notes
payable to shareholders. The bank loan is due in 1998, bears interest at the 30
day commercial paper rate plus 2.6 percent and is guaranteed by the shareholders
whose notes and interest were paid from the proceeds. As a result, all notes
payable to shareholders and the related accrued interest are classified as
long-term in the accompanying balance sheets.
Shareholder Guarantees
A shareholder of the Company has guaranteed the payment of certain catalog
costs. In addition the shareholder has made other guarantees to other creditors
of the Company.
(7) RESTRUCTURE AND RECAPITALIZATION:
Financial and Operational Restructure
In the fourth quarter of 1994, the Company completed a major restructuring
of its business operations and relationships with its participating vendors. The
Company discontinued carrying inventory by outsourcing order fulfillment to its
vendors. Vendors currently drop ship directly to customers. The Company also
outsourced or discontinued its noncore, nonessential business activities, such
as concierge services and airport delivery of products. The Company focused on
its business of providing catalogs in airline seat pockets, producing a high
quality catalog, selecting quality merchandise for inclusion in its catalog, and
conducting customer order taking and processing services. Also, the Company
disposed of substantially all of its remaining inventory, closed its warehouses,
received concessions of amounts due to vendors, deferred the payment of its
F-13
<PAGE> 63
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
other vendor payables, and significantly reduced the size of its workforce. In
addition, the Company entered into agreements with one of its major
participating vendors to provide the Company with working capital, $1.0 million
in cash and to provide services for computer processing, catalog production,
database management and other services in exchange for inventory, trade names,
the use of the Company's customer list and placement fees at rates below cost
for a substantial number of pages in its catalogs.
All of these activities resulted in a restructure charge of approximately
$4.3 million in 1994, which included the following (amounts in millions):
<TABLE>
<S> <C>
Loss on long-term major vendor contract discussed above.............. $ 3.6
Losses on fixed asset abandonment and disposal of unneeded equipment
and facilities..................................................... 1.0
Employee termination, severance costs and other...................... .2
Uncollectible accounts receivable.................................... .8
Restructure of and reduction in accounts payable..................... (1.3)
-----
$ 4.3
=====
</TABLE>
Notes Payable to Vendors
In connection with the Company's restructuring, the Company negotiated
extended payment terms with its major vendors. In addition to agreeing to the
extended payment terms, certain vendors agreed to settlements of approximately
60% of the original balance owed at the time of the agreement. These amounts
were converted to notes payable, generally with payment terms of 36 months,
beginning January 1, 1995 and include interest at 8%. At June 30, 1996, the
Company was in default on such notes. Subsequent to June 30, 1996, the Company
negotiated an agreement with one of the vendors whereby the Company agreed to
cure its default and issued to the vendor warrants to purchase 58,824 shares of
the Company's common stock at the IPO price or the fair market value of the
Company's common stock if the IPO is not completed as of March 31, 1997. The
proceeds received from the private placement were used to cure this and other
defaults. Thus, accounts due subsequent to June 30, 1997, are classified as
long-term. Other vendors were paid 50% of the balance owed to them as full
settlement by December 31, 1994. As of June 30, 1996, future payments related to
these notes are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
--------------------------------------------------------------------
<S> <C>
1997................................................................ $2,973
1998................................................................ 1,074
------
$4,047
======
</TABLE>
(8) STOCK REDEMPTION AND ROYALTY AGREEMENT:
In April 1993, the Company redeemed 2,268,898 shares of common stock held
by a shareholder in exchange for certain intellectual property, including the
Company's principal trademarks and tradenames. The Company secured an exclusive
license to use the intellectual property acquired by the shareholder in return
for a 1% royalty on the Company's sales commencing January 1, 1994.
On October 1, 1994, the shareholder exercised an option to terminate the
Company's obligation to pay the royalty, transferred the intellectual property
back to the Company and was issued 2,268,898 shares of common stock by the
Company. At the time such option was exercised, the Company owed the shareholder
approximately $180,000 pursuant to the license. The shareholder forgave
approximately $72,000 of such amount and agreed to a payment schedule for the
remainder, of which amount $70,000 is outstanding as of June 30, 1996, and is
included as notes payable to shareholders (Note 6).
F-14
<PAGE> 64
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is from time-to-time subject to complaints and claims arising
in the ordinary course of business, including claims concerning infringement on
patent and trademark rights of others. In each instance, the Company's suppliers
had warranted that the products were not infringing and indemnified the Company
against any loss in connection with such claim. The Company believes that its
actions with respect to products offered for sale in its catalogs are reasonable
and in compliance with applicable contractual provisions. The Company further
believes that none of the claims and complaints of which it is currently aware
will materially affects its business, financial position or future operating
results, although no assurance can be given with respect to the ultimate outcome
of any such claims or with respect to the occurrence of any future claims.
Leases
The Company has entered into several operating leases for equipment and
facilities. As of June 30, 1996, the future minimum payments under these leases
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
--------------------------------------------------------------------
<S> <C>
1997................................................................ $ 84
1998................................................................ 80
1999................................................................ 64
2000................................................................ 37
2001................................................................ 37
Thereafter.......................................................... 738
------
$1,040
======
</TABLE>
Other equipment and property are leased on a monthly basis. Total lease
expense for the years ended December 31, 1993, 1994 and 1995 and six months
ended June 30, 1995 and 1996, was approximately $174,000, $264,000, $193,000,
$95,000 and $99,000, respectively.
Lease Revenue
The Company leases certain of its facilities to others under noncancelable
leases and month to month agreements. Lease revenue of $79,000, $103,000,
$110,000, $52,000 and $57,000 for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996, respectively, is included
in other income (expense) in the accompanying financial statements. As of June
30, 1996 future minimum lease payments to be received under noncancelable leases
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
----------------------------------------------------------------------
<S> <C>
1997.................................................................. $107
1998.................................................................. 79
1999.................................................................. 69
2000.................................................................. 68
2001.................................................................. 68
Thereafter............................................................ 56
----
$447
====
</TABLE>
F-15
<PAGE> 65
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
401(k) Plan
Under the Company's 401(k) plan (the 401(k) Plan), adopted in 1992,
eligible employees may direct that a portion of their compensation, up to a
legally established maximum, be withheld by the Company and contributed to their
account. All contributions are placed in a trust fund which is invested by the
401(k) Plan's trustee. The 401(k) Plan permits participants to direct the
investment of their account balances among mutual or investment funds and the
Company provides a matching contribution of 25% of a participant's
contributions.
The total contributions made by the Company during the years ended December
31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996, were
not significant.
Stock Options
The Company has an incentive and nonqualified stock option plan, which
allows the Company to grant to officers and key employees, (the Officer and
Employee Plan) options covering up to 650,000 shares of common stock at an
exercise price of not less than fair market value at the date of grant.
The Company accounts for the stock options under APB Opinion No. 25, under
which no compensation cost has been recognized.
Under the Officer and Employee Plan, the option exercise price equals the
stock's fair market value on date of grant. The Plan options vest 40% upon
grant, and an additional 20% upon completion of each year of employment; options
expire ten years after the date of grant or three months after grantee's
employment termination.
A summary of the status of the Company's Plan at December 31, 1994 and 1995
and June 30, 1996, and changes during the years ended December 31, 1994 and 1995
and six months ended June 30, 1996, is presented in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1994 1995 JUNE 30, 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISED SHARES EXERCISED SHARES EXERCISED
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period....... 162 $ 7.39 271 $ 7.39 271 $ 7.39
Granted.................................. 433 7.39 -- -- -- --
Exercised................................ -- -- -- -- -- --
Forfeited................................ (324) 7.39 -- -- -- --
Expired.................................. -- -- -- -- -- --
---- ----- --- ----- --- -----
Outstanding at end of period............. 271 $ 7.39 271 $ 7.39 271 $ 7.39
==== ===== === ===== === =====
</TABLE>
(10) INCOME TAXES:
Concurrently with the change in tax status as discussed in Note 2, the
Company will adopt the provisions of SFAS No. 109. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates applied to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on the deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
F-16
<PAGE> 66
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that the following estimated deferred tax assets and
liabilities would exist at June 30, 1996, if the date of tax status change was
effective on June 30, 1996. The Company would provide a valuation reserve for
the deferred tax asset because the Company has not sustained past taxable net
income at sufficient levels to assure realization:
<TABLE>
<S> <C>
Deferred tax assets --
Nondeductible reserves for bad debts and sales returns............. $ 250
Restructuring reserve.............................................. 265
Valuation reserve.................................................. (515)
-----
$ --
=====
</TABLE>
(11) MAJOR VENDORS:
The following table sets forth net merchandise sales, placement fees and
cost of sales as a percentage of the total of each category for the Company's
largest participating vendor:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
------------- -------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net merchandise sales............................ 21% 49% 48% 25%
Placement fees................................... 34% 44% 47% 13%
Cost of goods sold............................... 25% 54% 50% 33%
== == == ==
</TABLE>
No other vendors accounted for greater than 10% of any category listed
above. The information for 1993 is not presented above due to the change in the
Company's business from 1993 to 1994.
Also, net merchandise sales of the Company's products on the five largest
airlines represent approximately 87%, 80%, 79% and 83% of total net merchandise
sales for the years ended December 31, 1994 and 1995, and the six months ended
June 30, 1995 and 1996, respectively.
(12) EVENTS SUBSEQUENT TO JUNE 30, 1996:
Initial Public Offering
The Company intends to file an S-1 registration statement offering 2
million shares of common stock at an estimated price of $8 to $9 per share in an
IPO. Also, the Company intends to issue to the IPO's underwriter warrants which
enable the underwriter to acquire 200,000 shares of the Company's common stock
for 120% of the IPO price.
Sale of Convertible Preferred Stock
In October 1996, the Company received additional short-term financing
through the sale and issuance of 3,000 shares of convertible preferred stock for
approximately $2.6 million, net of offering costs. The convertible preferred
stock is automatically convertible into common stock upon the completion of an
IPO. Each preferred share included a three-year warrant to purchase 60 shares of
common stock at the IPO price.
The convertible preferred stock converts at the greater of (i) 180 shares
of common stock per share of convertible preferred stock or (ii) $1,000 divided
by two-thirds of the IPO price of the common stock.
Notes Payable to Shareholders Converted to Preferred Stock
In October 1996, two shareholders agreed to convert $5.0 million of their
notes payable to shareholders into preferred stock upon the closing of the
private placement discussed above. The preferred shares will
F-17
<PAGE> 67
SKYMALL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
automatically convert into common stock of the Company upon an IPO. The
conversion rate is equal to that of the convertible preferred stock discussed
above and will result in the issuance of approximately 900,000 shares of common
stock.
Loan
In October 1996, the Company received a $4.0 million loan, guaranteed by
two shareholders, with interest payable monthly and principal due December 1998.
Proceeds of the loan were used to pay interest accrued on notes payable to
shareholders ($1 million) with the balance paying principal on notes payable to
shareholders.
Employment Contract
In September 1996, the Company has entered into an employment agreement
with Robert Worsley, its president and chief executive officer, which expires
September 30, 1999, at an annual compensation level of $190,000 and bonuses as
the Board of Directors may specify. The contract may be renewed for a two-year
period upon its initial expiration. The contract may be terminated earlier under
terms and circumstances described in the agreement. Under certain circumstances,
Mr. Worsley may receive up to two years of base salary upon termination.
Stock Options
Effective October 1996, the Company approved a Non-Employee Director Stock
Option Plan (the Director Plan), which allows the Company to grant nonemployee
directors options covering up to 100,000 shares of common stock at an exercise
price of not less than fair market value of the common stock at the date of
grant.
Under the Director Plan, each nonemployee Board member is granted an option
to purchase 5,000 common shares upon appointment to the Board and an option to
purchase 3,000 shares annually, subject to certain limitations. Options are 100%
vested upon grant and expire ten years after the date of issuance.
In September 1996, under the Officer and Employee Plan, the Company issued
options to purchase 167,405 shares of common stock at a price of $5.56 per share
to certain officers and employees of the Company. Also, options previously
issued to certain employees of the Company were repriced in September 1996 from
$7.39 per share to $5.56 per share.
F-18
<PAGE> 68
THE FOLLOWING PAGES CONTAIN A REPRODUCTION OF SELECTED PAGES OF THE
COMPANY'S HOLIDAY GIFT 1996 CATALOG. THESE PAGES ARE INTENDED TO PROVIDE A
REPRESENTATIVE SAMPLE OF THE COMPANY'S CATALOGS GENERALLY AND THE STATEMENTS
THEREIN SHOULD NOT BE RELIED ON BY POTENTIAL INVESTORS IN MAKING AN INVESTMENT
DECISION.
<PAGE> 69
[THIS IS THE OUTSIDE FRONT COVER PAGE OF THE SKYMALL CATALOG] P. 1
[The outside front cover page of the SkyMall Catalog contains a photograph of
two easels with paintings which are located in the center of the page. There is
a Christmas Tree ornament in the lower right corner of the page. Following is
the text that appears on this page.]
Holiday Gift 1996
Free Take Home Copy
Over 1000 Great Holiday Gifts!
SkyMall(R)
Easy Shopping From Your Favorite Catalogs(TM)
The Best Gifts from . . .
Successories
HealthRider
Magellan's
Frontgate
Brookstone
Hello Direct
The Orvis Company
Hammacher Schlemmer
The Metropolitan Museum of Art
SelfCare(R) Catalog
The Sharper Image
Solutions(R)
. . . and many more!
For Cover Items, see page 2
Unbeatable Prices Guaranteed!
Order by December 20th for Christmas Delivery
See Page 2
This Complimentary SkyMall(R) Catalog Is Yours To Keep
<PAGE> 70
[THIS IS THE SECOND PAGE OF THE SKYMALL CATALOG WHICH IS AN INDEX TO THE
CATALOG.] P. 2
SKYMALL HOLIDAY PROSPECTUS SAMPLER
1996
DIRECTORY
LesConcierges
HealthRider(R)
Hammacher Schlemmer
The Sharper Image(R)
Frontgate(R)
Compaq Computer Corp.
The Disney Catalog
Mattel
Pepperidge Farm
The Wine Enthusiast(R)
The Metropolitan Museum of Art
Red Rose Collections
Successories(R)
SyberVision
Brookstone(R)
DataCal(TM) Direct
Hello Direct(R)
Solutions(TM)
The American Historic Society
Johnston & Murphy
Huntington Clothiers
Travel Tools
The Orvis Company
Cellular Works
The Safety Zone
Improvements
Competitive Edge Golf(R)
British Links
Mach 1
Magellan's
Nightingale Conant
InteliQuest(TM)
SelfCare(R) Catalog
Personal Creations
The Cigar Enthusiast
ORDER FORM
<PAGE> 71
[SECOND PAGE OF SKYMALL CATALOG -- CONTINUED.] P. 2
MERCHANDISING INFORMATION
SkyMall is published by SkyMall, Inc., and is printed four times a year. SkyMall
distributes approximately 1,273,000 copies per month, reaching over 966,000
passengers each day. There are full page and partial page programs available to
merchants. For more information please call (602) 254-9777.
SKYMALL
Copyright 1996 SkyMall, Inc. All rights reserved. SkyMall and the SkyMall
diamond mark are registered trademarks of SkyMall, Inc., registered in the U.S.
Patent and Trademark office. SkyMall is not responsible for typographical
errors.
[In the upper left corner there is a photo of a wine bottle opener, two bottles
of wine, and wine glasses. Under the photo is the caption "THE WINE
ENTHUSIAST(R)." In the middle of the left side of the page there is a photo of
three shoes on a pillow. Under the photo is the caption "JOHNSTON & MURPHY." In
the lower left corner of the page there is a photo of a Winnie the Pooh toy bear
with a scarf and stocking. Under the photo is the caption "THE DISNEY CATALOG."
In the upper right corner of the page there is a photo of a child typing on a
computer keyboard in front of a monitor. Under the photo is the caption "FISHER
PRICE & COMPAQ." In the middle of the right side of the page there is a photo of
a tie and dress shirt. Under the photo is the caption "HUNTINGTON CLOTHIERS." In
the lower right corner of the page there is a photo of candlesticks, boxes of
candy and other food items. Under the photo is the caption "PEPPERIDGE FARMS."]
<PAGE> 72
[THIS IS THE THIRD PAGE OF THE SKYMALL CATALOG, WHICH DEPICTS SEVERAL PRODUCTS
OFFERED BY SKYMALL. FOLLOWING IS THE TEXT THAT APPEARS ON THIS PAGE] P. 3
SKYMALL PRESENTS
HAMMACHER SCHLEMMER
WEATHER-RESISTANT BOOM BOX. When closed this portable stereo's waterproof
exterior resembles a tool box with a handle and Jeep(R) logo. Open the top and
inside there is a compact disc player with an LCD that shows track number and
time elapsed on the song, a cassette deck that tapes from CD player and radio,
and an AM/FM radio designed to resemble a Jeep's speedometer. Its three built-in
pockets carry your CDs. Ear and microphone jacks are included. Runs on eight D
batteries (included) or plugs into household outlet with AC adaptor (included).
Licensed by Jeep(R). 18" L x 7 1/2" W x 11" H. (10 lbs.) 63109 $169.95
GOLF CLUB DRINK DISPENSER. This unique cooler will keep up to 48 ounces of your
favorite beverage cold without the inconvenience of carrying bottles and cans.
With a dispensing head that resembles a three wood, this 33-inch long cooler
slips easily into your golf bag just like any of your clubs. To pour, just move
the pump lever back and forth. Spout folds back into the club head when you are
finished pouring. Comes with cleaning brush. 44" L. 64206 $39.95
ENCYCLOPAEDIA BRITANNICA CD(TM). This is the compact disc version of the
world's oldest (in continuous publication since 1868) and largest
English-language general encyclopedia. It contains all 32 volumes of the current
edition and includes text articles on over 65,000 subjects (more that 44 million
words) along with 2,500 graphics, including photographs, drawings, maps and
flag. In addition it includes the Tenth Edition of the Merriam-Webster
Collegiate(R) Dictionary and it has an index with over 400,000 references. To
use, simply type in a word or a question as it comes to mind, and its powerful
search engine searches and quickly finds all related articles (its "how to" and
"help" buttons also aid in your searches). Comes with a 96-page instructional
owner's manual. Available in PC and Macintosh versions. 63615 $295.95. This
Britannica CD offer is specially priced for Hammacher Schlemmer customers and is
for home use only.
BALL-SHOOTING "BURP" GUN. This classic toy is made using the same patented
design that kept children amused in the 1950s. It uses air-powered pump action
(instead of batteries) to safely fire up to 15 ping-pong balls (one at a time or
in multi-short bursts). Accurate up to 20 feet, each ball makes the famous
"burp" sound when shot. For adults and children over three years of age. Made of
ABS plastic. Includes 15 balls. 22" L. 46883 $19.95
Set of Ten Extra Balls 54577 $4.95
The Perfect Time to GIFT SHOP is NOW!
1-800-SKYMALL
CALL TOLL FREE 1-800-759-6255
[Next to the description of the Weather-Resistant Boom Box, there are two
pictures of the portable radio and compact disc player, one open and one closed.
The word "JEEP" is molded on one side of the unit. Above the description of the
Ball-Shooting "Burp" Gun is a photo of a toy gun with a transparent barrel and
ping-pong balls inside. In the top right corner of the page is a photo of golf
clubs in a golf bag. One of the woods shown in the picture has a nozzle, from
which water is flowing into a glass held by a person's hand. In the lower right
corner of the page is a photo of the carrying case for the Encyclopaedia
Britannica CD, a compact disc labelled "BRITANNICA CD," and a child with an open
encyclopedia and ten bound volumes of Encyclopaedia Britannica.]
<PAGE> 73
[THIS IS THE FOURTH PAGE OF THE SKYMALL CATALOG, WHICH DEPICTS SEVERAL PRODUCTS
OFFERED BY SKYMALL. FOLLOWING IS THE TEXT THAT APPEARS ON THIS PAGE.] P. 4
SKYMALL PRESENTS
FRONTGATE(R)
From light opera and ballet to popular tunes, this Swiss Music Box plays the
music you love best. A collector's masterpiece, this Music Box is a replica of
an antique disc player. The 40 note Swiss movement made by the renowned artisans
at Reuge produces a sweet lyric sound. The domed box is finished with an
exquisitely crafted veneer of burled walnut, rosewood, and ebony inlaid with an
intricate musical motif. Lara's Theme, Edelweiss, and the Magic Flute by Mozart
accompany each Music Box. Included below is a representative sampling of
additional discs that may be special ordered and kept in the six remaining
storage slots. 10 lbs. 12 1/2" L x 8" H x 8 1/2" D. Y2162 Swiss Disc Player
Music Box $995.00 Y2118 All I Ask of You from Phantom of the Opera (Webber)
$14.95 Y2167 Silent Night (Gruber) $14.95 Y2174 Swan Lake (Tchaikovsky)
$14.95
Bask in the warm glow of a crackling campfire right in your own backyard. Build
a blazing bonfire in our Outdoor Fireplace or warm your toes on the foot rail
next to smoldering embers. The ventilated bottom centerpiece ensures sufficient
airflow for easy lighting, and the deep-dish design radiates tremendous heat.
Built from 3/16 inch pressed steel, the Fireplace includes a heavy cooking grate
for open-pit barbecuing, a full dome spark screen, and a stoker. Available in a
generous 24 inch diameter and an impressive 30" diameter (shown) for larger
gatherings. USA. Y2520 Outdoor Fireplace (24", 70 lbs.)
$360.00 Y5970 Large Outdoor Fireplace (30", 120 lbs.) $495.00
Solid brass Stocking Hangers strong enough to hold Santa himself. Rather than
hammering nails in the mantel or draping Christmas stockings over the
firescreen, start a new holiday tradition with these decorative brass Stocking
Hangers. Cast from one pound of solid brass and hand polished to a lustrous
finish, each Hanger can support a stocking filled to the brim with Christmas
surprises. 4" deep with 4 1/2" overhang. Y2055 Angel Stocking Hanger
$21.95, Y2062 Snowman Stocking Hanger $21.95, Y2069 Santa Stocking
Hanger $21.95, Y2076 Tree Stocking Hanger $21.95 Set of any four Hangers
$79.95
[In the upper left corner of the page is a photo of an open music box that rests
on a table in front of a sofa. One music disc is under the music reader and two
discs are held upright in storage spaces. In the lower left corner of the page
is a photo of a man and woman sitting on a bench on a patio watching a fire burn
in a round container. There are trees and a lantern in the background. In the
lower right corner of the page is a photo of a stocking hanger with an
angel-shaped top. Just above the stocking hanger are four more stocking hangers
positioned on the edge of a mantle. From left to right, these stocking hangers
are topped by a snowman figure, a Santa figure, an angel figure and a Christmas
tree figure. Other Christmas decorations are contained in the background.]
<PAGE> 74
[THIS IS THE FIFTH PAGE OF THE SKYMALL CATALOG, WHICH DEPICTS SEVERAL PRODUCTS
OFFERED BY SKYMALL. FOLLOWING IS THE TEXT THAT APPEARS ON THIS PAGE.] P. 5
ORVIS TRAVEL
ORVIS(R)
Grundig Traveler II Shortwave Clock/Radio Tunes in to the World.
Hear the BBC news wherever you are. Small and lightweight, the Grundig provides
amazing reception. Features seven bands (captures all shortwave broadcasts
5.8-12.05 MHz) and AM/FM tuning, an LCD digital alarm clock, and a world-time
select switch. Built-in two-inch speaker and stereo headphones. Includes
Shortwave Frequency Guide. Three AAA batteries included. One-year warranty.
3 1/2" x 5 1/2" x 1 1/4" ( 3/4 lb.) CX761G $99.95
EASY FITTING TRAVELER'S VEST
With squared armholes, concealed buttons, quilted detail with trapunto-like
accents. All cotton, fully lined. In 18-sage, 10-black. Sizes XS (6-8), S (10),
M (12), L(14), XL (16-18). Washable. Imported CX2725 $79
- - Two inner pockets for your passport and tickets
- - Pleated front pockets with flaps and zippers
USE THIS GOKEY(R) LEATHER BRIEFCASE FOR THE REST OF YOUR CAREER . . .THEN PASS
IT ON TO YOUR KIDS
Our best-selling brief. It's made of our exclusive Gokey 1850s Series waxed
cowhide that takes on a wonderful patina with age. Full-envelope pocket inside
with additional built-in pockets for calculator, glasses, pens, business cards.
Outside flap has secure two-buckle closure with new speed-release turnbuckle for
fast access. Even holds legal-size papers comfortably. Leather luggage tag
included. Leather shoulder strap sold separately. 18" x 10" x 5". USA.
CX4032-01 Leather Briefcase $205
CX096K-00 Leather Shoulder Strap $29
- - Features six inner pockets for pen, calculator and address book
- - Large, divided leather compartment to keep important papers separate
PERFECT ALL-LEATHER PACK
Handsome enough to use as a carryall or a business briefcase. Five zippered
compartments hold everything needed for day or even overnight trips. Durable yet
buttery soft tan cowhide. Sturdy carrying handle and removable shoulder strap
included. 1" x 10" x 7". Imported
CX0467 $125
<PAGE> 75
[FIFTH PAGE OF SKYMALL CATALOG -- CONTINUED.] P. 5
[In the upper left corner of the page is a photo of the Grundig radio.
Below the description of the Traveler's Vest is photo of a woman wearing a vest
holding a camera ready to take a photograph. A depiction of the inside of the
Traveler's Vest is in the lower left corner of the page. Above the description
of the Gokey briefcase is a photo of a briefcase on a rug. A carrying strap lies
in front of the briefcase and a small close-up of a fastener. A drawing of the
interior of the briefcase is located in the center of the page. In the lower
middle portion of the page is a photo of a carrying pack with two zippered
containers and a hand strap and shoulder strap. A checkbook and pen lie next to
the pack. A closeup of one pocket of the pack with cards labelled "ORVIS" and
two pens is in the lower right corner.]
<PAGE> 76
[THIS IS THE SIXTH PAGE OF THE SKYMALL CATALOG, WHICH DEPICTS SEVERAL PRODUCTS
OFFERED BY SKYMALL. FOLLOWING IS THE TEXT THAT APPEARS ON THIS PAGE.] P. 6
GUARANTEED UNBEATABLE PRICES! THE DISNEY CATALOG
A GIFT FOR EVERY WISH - - -
DISNEY GOLF POCKET WATCH SET
These three timepieces, will suite both the avid golfer and Disney fan to a tee.
They feature scenes from classic Disney animation shorts devoted to golf:
Donald's Golf Game (1938), Canine Caddie (1941) starring Mickey, and How to Play
Golf (1944) starring Goofy. Each 2" diameter watch is elegantly cased in plated
silver or gold, comes with its own sturdy 14" chain fob, and is embossed with
our Par Excellence golf logo. The set is packaged in a logo collector's
leatherette box with a Certificate of Authenticity. Quartz movement, 2-year
warranty. Limited edition of 2,500. Catalog Exclusive. #14067MJ Set of Three
$250
TIGGER HOODED JACKET
Irrepressible outerwear in waterproof nylon taffeta, fully lined in heathered
polyester/cotton fleece. Heavy-duty zipper front with wind flap for weather
protection. Two zippered slant pockets. Shirred elastic cuffs and waistband.
Oversized cut and deep armholes for easy layering, easy moving. Machine
washable. Imported. Adult's S, M, L, XL, XXL #37297MJ $78
AVIATOR PLUSH
Our aeronautical trio in true aviator attire are the perfect companions to fly
with or to add to your collection. Poseable and free standing 12" high. Aviator
Mickey #13861MJ $20. Flight Attendant Minnie #13862MJ $20. Captain Mickey
#13863MJ $20
EXPRESSION SWEATSHIRT
Gift of thoughtfulness and triple delight! Disney heavyweight cotton, polyester
fleece with embroidered four-pose Mickey art. Crew Neck. Imported. White, red
and ash. Adult's S, M, XL, XXL #72050MJ $48
Receive a Complimentary Disney Catalog with Your Order
1-800-SKYMALL
CALL TOLL FREE 1-800-759-6255
DISNEY EMBROIDERED TEE
Our Magnificent Seven Dwarfs line up on 100% cotton. Embroidered characters.
Short sleeves. Crew Neck. USA. Adult's M, L, XL, XXL #71921MJ $28
<PAGE> 77
[SIXTH PAGE OF SKYMALL CATALOG -- CONTINUED.] P.6
[In the upper left corner of the page is a photo of three pocket watches
with pictures of Mickey Mouse, Goofy and Donald Duck, respectively. In the lower
left corner of the page is a photo of a sweatshirt with four Mickey Mouses
embroidered on its front. To the immediate right of the sweatshirt is a photo of
the cover of the Disney Catalog, depicting Mickey and Minnie Mouse, Goofy and
Donald Duck in front of a snow-covered house. In the lower right corner of the
page is a photo of a shirt with the label "MAGNIFICENT SEVEN," pictures of the
Seven Dwarfs, and each Dwarf's name embroidered on the front. In the middle of
the right side of the page is a photo of three stuffed toys; Mickey Mouse with
aviator goggles, Minnie Mouse with a flight attendant uniform and Mickey Mouse
with a captain's hat, from left to right, respectively. In the upper right
corner of the page is a photo of a woman wearing a hat and a jacket with the
Tigger emblem and name on the front. To the left of that picture is the
posterior of the jacket with the word "TIGGER."]
<PAGE> 78
[THIS IS THE SEVENTH PAGE OF THE SKYMALL CATALOG, WHICH DEPICTS SEVERAL PRODUCTS
OFFERED BY SKYMALL. FOLLOWING IS THE TEXT THAT APPEARS ON THIS PAGE.] P. 7
MATTEL(R)
Barbie COLLECTIBLES(TM)
BARBIE(R) AS SCARLETT IN GONE WITH THE WIND(TM)
It's Barbie as the legendary Scarlett O'Hara(TM), wearing the scandalous
burgundy velvet gown that Scarlett wore in shame to Ashley's birthday party. The
striking gown is trimmed with marabou feathers and adorned with 25 shimmering
faux garnets. Authentically replicated from the movie, every detail is fabulous.
Doll stand included. #12815 $75.00
1996 HAPPY HOLIDAYS(R) BARBIE(R)
Make your holidays sparkle with this Special Edition Barbie. She wears a velvet
gown, trimmed in gold and white. From snowy muff to golden snowflake adorning
her hat, she perfectly captures the holiday spirit. Doll stand included.
<TABLE>
<S> <C> <C>
#15816 white doll $34.99
#15647 black doll $34.99
</TABLE>
GODDESS OF THE SUN(TM) BARBIE(R)
Hollywood designer, Bob Mackie pays tribute to the sun with this dazzling
design. Her shimmering golden gown is covered with over 11,000 hand-sewn sequins
and beads to capture every ray of light. A Limited Edition, she arrives with a
doll stand and a copy of Mackie's original fashion illustration.
<TABLE>
<S> <C> <C>
#14056 $198.00
</TABLE>
(C)1996 Mattell, Inc.
AUTUMN GLORY(TM) BARBIE(R)
A stunning tribute to the colors of fall. Barbie doll shimmers in hues of copper
and burgundy. Adorned with fall leaves and accented with hints of purple and
gold, her gown flows around her like an autumn breeze. Auburn hair and dark wine
hat add the final touch to this autumn portrait. Doll stand included.
<TABLE>
<S> <C> <C>
#15204 $79.00
</TABLE>
SODA FOUNTAIN SWEETHEART(TM) BARBIE(R)
They're two American icons, together for the first time. It's Barbie as the
Coca-Cola lady from years ago. Every detail is lovingly recreated from a 1907
advertisement for Coca-Cola. Even her nostalgic Coca-Cola glass is authentic to
the times. Doll Stand included.
<TABLE>
<S> <C> <C>
#15762 $89.00
</TABLE>
<PAGE> 79
[SEVENTH PAGE OF SKYMALL CATALOG -- CONTINUED.] P. 7
[In the upper left corner of the page is a photo of a Barbie Doll standing at
the end of a staircase. She is wearing a "Scarlett O'Hara" dress. In the lower
left corner of the page is a photo of a Barbie Doll in a velvet gown and white
hat. A picture of Barbie's face appears in a circle immediately below. A photo
of a Barbie Doll in a gold sequined gown occupies the center of this page. This
doll has a hat and sun rays behind it. In the lower right corner of the page is
a photo of a Barbie Doll in a white dress with polka dots holding an umbrella.
In the upper right corner of the page is a photo of a Barbie Doll wearing a
copper and burgundy colored dress and a large, plumed hat. The Coca Cola(R) logo
appears at the bottom of the page.]
<PAGE> 80
[THIS IS THE EIGHTH PAGE OF THE SKYMALL CATALOG, WHICH DEPICTS SEVERAL PRODUCTS
OFFERED BY SKYMALL. FOLLOWING IS THE TEXT THAT APPEARS ON THIS PAGE.] P. 8
THE SHARPER IMAGE
A.
THE IDEAL BINOCULARS FOR THOSE ON A POWER TRIP.
Seeking ultimate power? Now you can buy it. Because with a push of the thumb
lever, these powerful compact 25mm binoculars zoom from a broad 8x to a
telescopic 27x -- and any power in between. You can see anything, peer almost
any distance -- the world is quite literally your oyster. Particulars: Equipped
with precise center-wheel focusing, diopter adjustment to your individual
vision, rubber eyecups that fold down for use with glasses, and durable rubber
armor to protect against jolts and impact. Only 4 1/2()L and an easy-to-carry
12oz. Come with lens caps, lens cleaning cloth, neck strap, carrying pouch, and
limited lifetime warranty.
Don't let these go to your head. They work much better on your eyes.
8-27x25 Compact Zoom Binoculars
$180 #YX701
B.
TALK ABOUT TAILORING YOUR ENVIRONMENT TO SUIT YOU.
It appears that you'll have to attempt sleep to the sound of your neighbor's
stereo. But with the press of a button, you're transported to a tropical cruise.
Press another button to hear rain falling in a lush forest full of exotic birds.
Other buttons allow you to lose yourself in rhythmic ocean waves and surf,
neutral white noise, a soothing heartbeat sound, and more. Quite literally, you
can create almost any sort of ambiance you require. Think of our exclusive Ultra
Heart and Sound Soother(TM) relaxation system as your own personal sound
environment.
Particulars: Ten built-in sounds, including Heartbeat, Rain, Brook, White
Noise, Summer Night, and Ocean. Plus four new nature sounds: North Woods,
California Coast, Rain Forest, and Tropical Cruise. An easy-to-use built-in
timer lets you select a sound (White Noise, for example) to lull you
continuously, or that will switch off automatically after 45 minutes. The
powerful 4() wide-range speaker, with adjustable volume, projects sound in all
directions, enveloping you in a relaxing soundscape. The handsome Burltech(TM)
finish has the look of polished natural burl. Powered by included AC adapter.
For portable use, runs on 6 AA alkaline batteries (not included). Weighs just
14oz., measures 3 3/4()H x 5 1/2() diameter. One-year warranty. Even though you
can't escape from reality, you can escape from its sounds. Ultra Heart and Sound
Soother(TM) with timer -- Burltech(TM) Finish
$139.95 #S1429
GUARANTEED UNBEATABLE PRICES!
<PAGE> 81
[EIGHTH PAGE OF SKYMALL CATALOG CONTINUED.] P. 8
C.
THE CREDIT CARD THAT CAN CLEAN A FISH -- OR OPEN A LETTER.
You may never go fly fishing in Wyoming. But you want to be sure of the exact
measurements of your paperclip sculpture. Handy for home, office, and travel,
Tool Logic Card offers the practical benefits of a multi-tool knife -- and
more -- all integrated compactly into an incredibly slim and lightweight 3 1/4()
x 1/4() card. Carry it in your wallet and you won't even know it's there.
Particulars: razor-sharp 2" blade, toothpick, tweezer, awl, can and bottle
opener, screwdriver, 8 power lens, compass, handy lanyard hole, and measuring
rulers. Each high-quality tool is precision crafted from Zytel(TM) and
mirror-polished stainless steel. Too bad it doesn't pay the bills.
Tool Logic Card $25 #OX300
1-800-SKYMALL
CALL TOLL FREE 1-800-759 6255 6JEX
[At the top center of the page is a photo of a top view of a pair of binoculars.
A photo of a round device labelled "Ultra Heart and Sound Soother" is in the
center of the page. The top of this device has a volume knob and ten labelled
buttons arranged in a semicircle. In the bottom center of the page is a photo of
a rectangular device labelled "The Credit Card Companion: TOOL LOGIC." The
device is pictured with two of its components removed. One, a bottle opener,
rests above the device. The other, a jagged edged knife, is below the device. A
compass is pictured in the upper right corner of the device.]
<PAGE> 82
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 10
Concurrent Offering................... 10
Use of Proceeds....................... 11
Dividend Policy....................... 11
Dilution.............................. 12
Capitalization........................ 13
Selected Financial and Operating
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 33
Principal Shareholders................ 37
Certain Transactions.................. 39
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 43
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 45
Additional Information................ 45
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
SKYMALL, INC.
[Company Logo depicting
aircraft inside of a
diamond shape]
2,000,000 SHARES
COMMON STOCK
-----------------
PROSPECTUS
-----------------
JOSEPHTHAL
LYON & ROSS
INCORPORATED
, 1996
======================================================
<PAGE> 83
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
PROSPECTUS
720,000 SHARES
SKYMALL, INC.
COMMON STOCK
This Prospectus relates to 720,000 shares of common stock, $.001 par value
per share (the "Common Stock"), of SkyMall, Inc. ("SkyMall" or the "Company"),
which are held by certain shareholders of the Company (the "Selling
Securityholders"). The Company issued 540,000 shares of the Common Stock to the
Selling Securityholders upon conversion of a series of 6% Dividend Paying
Convertible Redeemable Preferred Stock (the "Convertible Preferred Stock")
issued by the Company in October, 1996 and converted upon effectiveness of the
Company's initial underwritten public offering. The remaining 180,000 shares of
Common Stock are issuable upon the exercise of certain warrants (the "Warrants")
issued by the Company in October, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "The Company -- Private Placement." The Common Stock
offered by this Prospectus may be sold from time to time by the Selling
Securityholders, provided a current registration statement with respect to such
securities is then in effect and subject, during the twelve month period
commencing on , 1996, to the prior written consent of the
Representative of the Underwriters of a concurrent public offering of the
Company (described below). See "Concurrent Offering," "Plan of Distribution" and
"Selling Securityholders."
The distribution of the shares of Common Stock offered hereby by the
Selling Securityholders may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or more
dealers for resale of such securities as principals, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders.
The Selling Securityholders and intermediaries through whom such securities
are sold may be deemed "underwriters" within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
None of the proceeds of such sales will be received by the Company;
however, the Company will receive proceeds from the exercise, if any, of the
Warrants. Substantially all of the expenses in connection with the registration
of the Common Stock will be borne by the Company, except for any underwriter's,
brokers' and dealers' commissions and/or discounts. See "Plan of Distribution."
The Common Stock is traded on the Nasdaq-National Market under the symbol
"SKYM." [On , 1997 the last reported sale price for the Common Stock
as reported on the Nasdaq-National Market was $ .]
On the date of this Prospectus, a registration statement filed under the
Securities Act with respect to an underwritten public offering by the Company of
2,000,000 shares of Common Stock and up to 300,000 additional shares of Common
Stock offered by certain selling shareholders of the Company (the "Selling
Shareholders") to cover over-allotments, if any, was declared effective by the
Securities and Exchange Commission (the "Commission"). The Company will receive
net proceeds of $ from the sale of the shares included in the
underwritten public offering, and the Selling Shareholders will receive
approximately $ net proceeds if the over-allotment option is exercised
in full after payment of underwriting discounts and commissions and estimated
expenses of the underwritten public offering. Sales of securities by the Selling
Securityholders or even the potential of such sales, would likely have an
adverse effect on the market price of the Common Stock. See "Concurrent
Offering."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 199 .
<PAGE> 84
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
THE OFFERING
Securities Offered Hereby(1)........ 720,000 shares of Common Stock.
Common Stock to be Outstanding after
the Offering(2)(3).................. 8,590,000 shares.
Use of Proceeds..................... None of the proceeds of this offering
will go to the Company. The net
proceeds from the concurrent offering
will be used by the Company for
implementing marketing and
promotional programs, developing
additional circulation media, capital
expenditures and working capital
requirements. See "Use of Proceeds."
Risk Factors........................ The securities offered hereby involve a
high degree of risk. See "Risk
Factors."
Proposed Nasdaq National Market
Symbol.............................. "SKYM"
- ---------------
(1) An additional 2,000,000 shares of Common Stock are being offered by the
Company and up to 300,000 additional shares of Common Stock to cover
over-allotments, if any, are being offered by certain shareholders of the
Company (the "Selling Shareholders") in the concurrent underwritten public
offering. See "Concurrent Offering."
(2) Assumes that the 2,000,000 shares of Common Stock registered under the
concurrent offering have been sold by the Company.
(3) Does not include 438,080 shares of Common Stock issuable upon exercise of
stock options issued pursuant to the Company's stock option plans, which
have a weighted average exercise price of $6.13 per share, an additional
311,920 shares of Common Stock reserved for issuance thereunder, including
20,000 shares reserved for issuance to non-employee directors upon
completion of this Offering, (ii) 180,000 shares of Common Stock issuable
upon the exercise of Warrants issued by the Company in connection with the
Private Placement, which are exercisable at the initial public offering
price, (iii) 58,824 shares of Common Stock issuable by the Company upon the
exercise of a warrant issued to a vendor, which is exercisable at the
initial public offering price; and (iv) 200,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants, which are
exercisable at the initial public offering price. See "The
Company -- Private Placement" and "Management -- Stock Option Plans."
<PAGE> 85
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering of 2,000,000
shares of Common Stock by the Company and up to an additional 300,000 shares of
Common Stock to cover over-allotments, if any, by the Selling Shareholders was
declared effective by the Commission. Sales of securities by the Company and the
Selling Shareholders, or even the potential of such sales, would likely have an
adverse effect on the market price of the Common Stock. See "Risk
Factors -- Shares Eligible for Future Sale."
<PAGE> 86
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
SELLING SECURITYHOLDERS
The following table provides certain information with respect to the Common
Stock beneficially owned by each Selling Securityholder as of the date of this
Prospectus. Except as indicated in the footnotes to this table, none of such
Selling Securityholders has a material relationship with the Company. Except as
indicated in the footnotes to this table, the Company believes that the persons
named in the following table have sole voting and investment power with respect
to the respective shares of Common Stock set forth opposite their names. The
shares of Common Stock offered by this Prospectus may be offered from time to
time by the Selling Securityholders named below or their nominees.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING NUMBER OF OFFERING
------------------- SHARES -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 87
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of any of
the Shares of Common Stock offered hereby (the "Offered Securities") by the
Selling Securityholders; however, the Company will receive proceeds from the
exercise, if any, of the Warrants. The Offered Securities may be sold from time
to time by the Selling Securityholders, or by pledgees, donees, transferees or
other successors in interest. Such sales may be made on one or more exchanges or
in the over-the-counter market or otherwise, at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The Offered Securities may be sold by one or more of
the following: (a) a block trade in which the broker-dealer so engaged will
attempt to sell the Offered Securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; (c) an exchange distribution in accordance with the
rules of such exchange; and (d) ordinary brokerage transactions and transactions
in which the broker solicits purchasers. In effecting sales, broker-dealers
engaged by the Selling Securityholders may arrange for other broker-dealers to
participate in the resales.
In connection with distributions of the Offered Securities or otherwise,
the Selling Securityholders may enter into hedging transactions with
broker-dealers. In connection with such transactions, broker-dealers may engage
in short sales of the Offered Securities in the course of hedging the positions
they assume with Selling Securityholders. The Selling Securityholders may also
sell Offered Securities short and redeliver the Offered Securities to close out
such short positions. The Selling Securityholders may also enter into option or
other transactions with broker-dealers which require the delivery to the
broker-dealer of the Offered Securities, which the broker-dealer may resell or
otherwise transfer pursuant to this Prospectus. The Selling Securityholders may
also loan or pledge Offered Securities to a broker-dealer and the broker-dealer
may sell the Offered Securities so loaned or, upon a default, the broker-dealer
may effect sales of the pledged Offered Securities pursuant to this Prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Securityholders in amounts to
be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any securities covered by
this Prospectus which qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this Prospectus.
All costs, expenses and fees in connection with the registration of the
shares will be borne by the Company. Commissions and discounts, if any,
attributable to the sales of the Offered Securities will be borne by the Selling
Securityholders. The Selling Securityholders may agree to indemnify any
broker-dealer or agent that participates in transactions involving sales of the
Offered Securities against certain liabilities, including liabilities arising
under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Securityholders.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the securities may not simultaneously engage in
market-making activities with respect to the securities for a period of two
business days prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Securityholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rules 10b-6, 10b-6A and 10b-7, which
provisions may limit the timing of the purchases and sales of securities by the
Selling Securityholders.
<PAGE> 88
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................
Risk Factors..........................
The Company...........................
Concurrent Offering...................
Use of Proceeds.......................
Dividend Policy.......................
Dilution..............................
Capitalization........................
Selected Financial and Operating
Data................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Selling Securityholders...............
Description of Securities.............
Shares Eligible for Future Sale.......
Plan of Distribution..................
Legal Matters.........................
Experts...............................
Additional Information................
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
SKYMALL, INC.
[Company logo depicting
aircraft inside of a
diamond shape]
720,000 SHARES
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 1996
======================================================
<PAGE> 89
PART II TO FORM S-1
INFORMATION NOT REQUIRED IN THE PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles 11 and 12 of the Company's Articles of Incorporation provide as
follows:
1. To the fullest extent permitted by the laws of the State of Nevada, as
the same exist or may hereinafter be amended, no director or officer of the
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director or officer;
provided, however, that nothing contained herein shall eliminate or limit the
liability of a director or officer of the Corporation to the extent provided by
applicable laws (i) for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law or (ii) for authorizing the payment of
dividends in violation of Nevada Revised Statutes Section 78.300. The limitation
of liability provided herein shall continue after a director or officer has
ceased to occupy such position as to acts or omissions occurring during such
director's or officer's term or terms of office. No repeal, amendment or
modification of this Article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director or officer
of the Corporation occurring prior to such repeal, amendment or modification.
2. The Corporation shall indemnify, defend and hold harmless any person who
incurs expenses, claims, damages or liability by reason of the fact that he or
she is, or was, an officer, director, employee or agent of the Corporation, to
the fullest extent allowed pursuant to Nevada law.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 8,893
NASD Filing Fee........................................................... 3,434
Nasdaq Listing Fee........................................................ 38,975
Legal Fees and Expenses................................................... 100,000
Accounting Fees and Expenses.............................................. 75,000
Representative's Non-accountable Expense Allowance........................ 75,000
Printing and Engraving Expenses........................................... 150,000
Blue Sky Fees and Expenses................................................ 80,000
Miscellaneous............................................................. 278,698
--------
Total........................................................... $810,000
========
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
On October 1, 1994, the Company issued 2,268,898 shares of Common Stock to
Alan C. and Karen Ashton in consideration for certain intellectual property
rights and a right to receive a 1% royalty on the Company's sales.
On October 1, 1994, the Company issued 226,890 shares of Common Stock to
Bert A. Getz in consideration of Mr. Getz's guarantee of certain Company debt.
On October 20, 1996, the Company issued 3,575 shares of Preferred Stock to
Bert A. Getz in consideration for conversion of $3,575,000 of debt owed by the
Company to Getz.
On October 20, 1996, the Company issued 1,425 shares of Preferred Stock to
Alan C. and Karen Ashton in consideration for conversion of $1,425,000 of debt
owed by the Company to the Ashtons.
On October 20, 1996, the Company issued 3,000 shares of 6% Dividend Paying
Convertible Redeemable Preferred Stock (the "Preferred Stock") in a private
placement offering to certain investors (the "Investors").
II-1
<PAGE> 90
The Company received gross proceeds of $3,000,000 as consideration for the
Preferred Stock. The Preferred Stock is convertible into Common Stock at any
point, and it shall automatically convert into shares of Common Stock upon a
public offering at a conversion rate of the greater of (i) 180 shares of Common
Stock per share of Preferred Stock, or (ii) 1,000 divided by (66 2/3 multiplied
by the initial public offering price per share of Common Stock per share of
Preferred Stock). In connection with the Private Placement, the Company also
issued Warrants to the Investors to purchase an aggregate of 180,000 shares of
Common Stock at the Company's initial public offering price.
On a number of different dates since December 15, 1993, the Company granted
options to purchase a total of 438,080 shares of Common Stock to various
employees of the Company pursuant to the Company's 1994 Stock Option Plan. Such
options have exercise prices ranging from $5.56 to $7.39 per share.
Unless otherwise noted herein, the issuances of securities in the
transactions described above were deemed to be exempt from registration under
the Act either pursuant to the exemption from registration contained in Section
3(a)(9) and Section 4(2) thereof, or under the provisions of Regulation D or
Rule 701 promulgated under the Act. Such sales were made solely to investors who
represented that they were accredited investors and to not more than 35
non-accredited investors, all of whom purchased such securities for investment
and not with a view to the distribution thereof. All sales were made without any
general solicitation or general advertising. Restrictions have been imposed on
the resale of such securities, including the placement of legends thereon noting
such restrictions, and written disclosure of such restrictions were made prior
to issuance of the securities.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION METHOD OF FILING
------- --------------------------------------------------------------- -------------------
<S> <C> <C>
1 Form of Underwriting Agreement................................. *
3.1a Articles of Incorporation of Registrant........................ *
3.1b Certificate of Amendment to Articles of Incorporation.......... *
3.2 Bylaws of Registrant........................................... **
4.1 Amended Certificate of Designation for Preferred Stock......... *
4.2 Form of Representative's Warrant Agreement..................... *
5 Opinion re: legality of the securities being registered........ **
10.1 Employment Agreement between Robert M. Worsley and
SkyMall, Inc................................................... *
10.2 Form of Airline Customer Services Agreement.................... *
10.3 Form of Vendor Space Agreement................................. **
10.4 Loan Agreement between Merrill Lynch Business Financial
Services, Inc. and SkyMall, Inc. dated October 11, 1996........ **
10.5 Tax Indemnification Agreement.................................. **
10.6 SkyMall, Inc. 1994 Stock Option Plan, as amended............... *
10.7 Non-Employee Director Stock Option Plan........................ *
11 Statement re: computation of per share earnings................ *
21 Subsidiaries of Registrant..................................... N/A
23.1 Consent of Accountants......................................... *
23.2 Consent of Counsel............................................. See Exhibit 5
24 Powers of Attorney............................................. See Signature Page
27 Financial Data Schedule........................................ *
99.1 Consent of Alan C. Ashton...................................... *
99.2 Consent of Lyle R. Knight...................................... *
99.3 Consent of Thomas J. Litle..................................... *
99.4 Consent of Randy Petersen...................................... *
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
II-2
<PAGE> 91
(B) FINANCIAL STATEMENT SCHEDULES
UNDERTAKINGS
1. The undersigned Registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. The undersigned Registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
4. The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
5. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
6. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix and State of Arizona on October 21, 1996.
SKYMALL, INC.,
a Nevada corporation
By /s/ Robert M. Worsley
------------------------------------------
Robert M. Worsley
Chairman of the Board and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints ROBERT M. WORSLEY and DAVID A. WIRTHLIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Form S-1 Registration Statement, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------------- -----------------
<S> <C> <C>
/s/ Robert M. Worsley Director and President (Principal October 21, 1996
- ----------------------------------- Executive Officer)
Robert M. Worsley
/s/ David A. Wirthlin Chief Financial Officer (Principal October 21, 1996
- ----------------------------------- Financial Officer)
David A. Wirthlin
</TABLE>
II-4
<PAGE> 1
EXHIBIT 1
[FORM OF UNDERWRITING AGREEMENT]
2,000,000 SHARES OF COMMON STOCK
SKYMALL, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1996
JOSEPHTHAL LYON & ROSS INCORPORATED
As Representative of the Several
Underwriters listed on Schedule A hereto
200 Park Avenue, 24th Floor
New York, New York 10166
Ladies and Gentlemen:
SkyMall, Inc., a Nevada corporation (the "Company") confirms
its agreement with Josephthal Lyon & Ross Incorporated ("Josephthal") and each
of the underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 12), for whom Josephthal is acting as
representative (in such capacity, Josephthal shall hereinafter be referred to as
"you" or the "Representative"), with respect to the sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of the Company's common stock, $.001 par value per
share ("Common Stock"), set forth in Schedule A hereto. Such shares of Common
Stock are hereinafter referred to as the "Firm Shares."
Upon your request, as provided in Section 3(b) of this
Agreement, Alan C. and Karen Ashton (the "Ashtons") and Bert A. Getz ("Getz")
(each of the Ashtons and Getz a "Selling Shareholder" and collectively the
"Selling Shareholders") shall sell to the Underwriters,
<PAGE> 2
acting severally and not jointly, an aggregate of up to 300,000 shares of Common
Stock (collectively, the "Option Shares"). Each of the Selling Shareholders
shall sell one-half of the aggregate number of Option Shares purchased by the
Underwriters, acting severally and not jointly, on each Option Closing Date
(hereinafter defined), if any. The Firm Shares and the Option Shares are
sometimes hereinafter referred to as the "Shares". The Company also proposes to
issue and sell to you warrants (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
for the purchase of up to an additional 200,000 shares of Common Stock. The
shares of Common Stock issuable upon exercise of the Representative's Warrants
are hereinafter referred to as the "Representative's Shares." The Firm Shares,
the Option Shares, the Representative's Warrants and the Representative's Shares
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities
and Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-_______), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Firm Shares and the Option Shares under the Securities Act of 1933, as
amended (the "Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Regulations") of the Commission under
the Act. The Company will promptly file a further amendment to said registration
statement in the form heretofore delivered to the Underwriters and will not,
file any other amendment thereto to which the Underwriters shall have objected
in writing after having been furnished with a copy thereof. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein (including, but
not limited to those documents or information incorporated by reference therein)
and all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430(A) of the Regulations)), is hereinafter called the
"Registration Statement", and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter
called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the
rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or Prospectus or any part of
any thereof and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any of the Company's securities have been
instituted or are pending or to the Company's knowledge, threatened. Each of the
Preliminary Prospectus, the Registration Statement and Prospectus at the time of
filing thereof
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<PAGE> 3
conformed with the requirements of the Act and the Rules and Regulations, and
none of the Preliminary Prospectus, the Registration Statement or Prospectus at
the time of filing thereof contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein and necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters by or on
behalf of the Underwriters expressly for use in such Preliminary Prospectus,
Registration Statement or Prospectus, provided, however, that this
representation and warranty does not apply to statements made or statements
omitted in reliance upon and in conformity with information furnished to the
Company in writing by or on behalf of any Underwriter expressly for use in the
Preliminary Prospectus, Registration Statement or Prospectus or any amendment
thereof or supplement thereto, provided that such written information or
omissions only pertain to disclosures in the Preliminary Prospectus, the
Registration Statement or Prospectus directly relating to the transactions
effected by the Underwriters in connection with this Offering. The Company
acknowledges that the statements with respect to the public offering of the
Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
(c) When the Registration Statement becomes effective and
at all times subsequent thereto up to the Closing Date and each Option Closing
Date, if any, and during such longer period as the Prospectus may be required to
be delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus will contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules and
Regulations; neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, provided, however, that this
representation and warranty does not apply to statements made or statements
omitted in reliance upon and in conformity with information furnished to the
Company in writing with respect to the Underwriters by or on behalf of any
Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto,
provided, however, that this representation and warranty does not apply to
statements made or statements omitted in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of any
Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Underwriters in connection with
this Offering. The Company acknowledges that the statements with respect to the
public offering of the Securities set forth under the heading "Underwriting" and
the stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters for inclusion in the
Prospectus.
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<PAGE> 4
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the state of its
incorporation. The Company does not own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing. The
Company has all requisite corporate power and authority, and the Company has
obtained any and all necessary authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having jurisdiction
over environmental or similar matters), to own or lease its properties and
conduct its business as described in the Prospectus; the Company is and has been
doing business in compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits and all federal, state and local
laws, rules and regulations; and the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company. The disclosures in
the Registration Statement concerning the effects of federal, state and local
laws, rules and regulations on the Company's business as currently conducted and
as contemplated are correct in all material respects and do not omit to state a
material fact necessary to make the statements contained therein not misleading
in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, under
"Capitalization" and "Description of Capital Stock" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Representative's Warrant Agreement
and as described in the Prospectus. The Securities and all other securities
issued or issuable by the Company conform or, when issued and paid for, will
conform, in all respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully paid
and non-assessable and the holders thereof have no rights of rescission with
respect thereto, and the holders thereof are not subject to personal liability
by reason of being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of the Company
or similar contractual rights granted by the Company. The Securities are not and
will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof, will be validly issued, fully paid and
non-assessable and will conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely by
reason of being such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities to be sold by the Company
hereunder has been duly and validly taken; and the certificates representing the
Securities will be in due and proper form. Upon the issuance and delivery
pursuant to the terms hereof of the Securities to be sold by the Company
hereunder, the
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<PAGE> 5
Underwriters or the Representative, as the case may be, will acquire good and
marketable title to such Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity of
any kind whatsoever.
(f) The financial statements, including the related notes
and schedules thereto, included in the Registration Statement, each Preliminary
Prospectus and the Prospectus fairly present the financial position, income,
changes in cash flow, changes in stockholders' equity, and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and the pro forma financial information included in the
Registration Statement and Prospectus presents fairly on a basis consistent with
that of the audited financial statements included therein, what the Company's
pro forma capitalization would have been for the respective periods and as of
the respective dates to which they apply after giving effect to the adjustments
described therein. Such financial statements have been prepared in conformity
with generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved. There has been no adverse
change or development involving a material prospective change in the condition,
financial or otherwise, or in the earnings, position, prospects, value,
operation, properties, business, or results of operations of the Company whether
or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "Summary Financial
and Operating Data," "Selected Financial and Operating Data," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus, the
information set forth therein, have been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus.
(g) The Company (i) has paid all federal, state, local,
and foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986 (the "Code"), and has furnished all information
returns it is required to furnish pursuant to the Code, (ii) has established
adequate reserves for such taxes which are not due and payable, and (iii) does
not have any tax deficiency or claims outstanding, proposed or assessed against
it.
(h) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the Underwriters of the
Securities to be sold by the Company hereunder and the purchase by the
Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement or
the Representative's Warrant Agreement, or (iv) resales of the Shares in
connection with the distribution contemplated hereby.
(i) The Company maintains insurance policies, including,
but not limited to, general liability, product liability and property insurance,
which insures the Company and its employees, against such losses and risks
generally insured against by comparable businesses.
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<PAGE> 6
The Company (A) has not failed to give notice or present any insurance claim
with respect to any matter, including but not limited to the Company's business,
property or employees, under the insurance policy or surety bond in a due and
timely manner, (B) does not have any disputes or claims against any underwriter
of such insurance policies or surety bonds or has not failed to pay any premiums
due and payable thereunder, or (C) has not failed to comply with all conditions
contained in such insurance policies and surety bonds. There are no facts or
circumstances under any such insurance policy or surety bond which would relieve
any insurer of its obligation to satisfy in full any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or business of, the
Company which (i) questions the validity of the capital stock of the Company,
this Agreement or the Representative's Warrant Agreement or of any action taken
or to be taken by the Company pursuant to or in connection with this Agreement
or the Representative's Warrant Agreement, (ii) is required to be disclosed in
the Registration Statement which is not so disclosed (and such proceedings as
are summarized in the Registration Statement are accurately summarized in all
material respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the earnings, position, prospects,
stockholders' equity, value, operation, properties, business or results of
operations of the Company.
(k) The Company has full legal right, power and authority
to authorize, issue, deliver and sell the Firm Shares, the Representative's
Warrants and the Representative's Shares, enter into this Agreement and the
Representative's Warrant Agreement and to consummate the transactions provided
for in such agreements; and this Agreement and the Representative's Warrant
Agreement have each been duly and properly authorized, executed and delivered by
the Company. Each of this Agreement and the Representative's Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except (i) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification or
contribution provisions may be limited under applicable laws or the public
policies underlying such laws and (iii) that the remedies of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceedings may be brought. None of the Company's issue and sale of the
Securities to be sold by the Company, execution or delivery of this Agreement or
the Representative's Warrant Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (i) the articles of
incorporation or by-laws of the Company, (ii) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement,
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<PAGE> 7
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which any of its properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.
(l) Except as described in the Prospectus, no consent,
approval, authorization or order of, and no filing with, any court, regulatory
body, government agency or other body, domestic or foreign, is required for the
issuance of the Firm Shares pursuant to the Prospectus and the Registration
Statement, the issuance of the Representative's Warrants, the performance of
this Agreement and the Representative's Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Firm Shares or the Representative's
Warrants, except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws in connection with the
Underwriters' purchase and distribution of the Shares, and the Representative's
Warrants to be sold by the Company hereunder and under the Representative's
Warrant Agreement.
(m) All executed agreements, contracts or other documents
or copies of executed agreements, contracts or other documents filed as exhibits
to the Registration Statement to which the Company is a party or by which it may
be bound or to which any of its assets, properties or business may be subject
have been duly and validly authorized, executed and delivered by the Company,
and constitute the legal, valid and binding agreements of the Company,
enforceable against the Company, in accordance with their respective terms. The
descriptions in the Registration Statement of agreements, contracts and other
documents are accurate in all material respects and fairly present the
information required to be shown with respect thereto on Form S-1, and there are
no contracts or other documents which are required by the Act to be described in
the Registration Statement or filed as exhibits to the Registration Statement
which are not described or filed as required, and the exhibits which have been
filed are in all material respects complete and correct copies of the documents
of which they purport to be copies.
(n) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company has not (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, (ii) entered into any
transaction other than in the ordinary course of business, or (iii) declared or
paid any dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any change in the capital stock, or
any material change in the debt (long or short term) or liabilities or material
adverse change in or affecting the general affairs, management, financial
operations, stockholders' equity or results of operations of the Company.
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<PAGE> 8
(o) No default exists in the due performance and
observance of any term, covenant or condition of any license, contract,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, partnership agreement, note, loan or
credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the property or assets (tangible or intangible) of the Company is
subject or affected.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with all
federal, state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours. There are no pending investigations involving the Company by the U.S.
Department of Labor, or any other governmental agency responsible for the
enforcement of such federal, state, local, or foreign laws and regulations.
There is no unfair labor practice charge or complaint against the Company
pending before the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened against or
involving the Company or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or, to the knowledge
of the Company, is imminent.
(q) Except as described in the Prospectus, the Company
does not maintain, sponsor or contribute to any program or arrangement that is
an "employee pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. The Company has
never completely or partially withdrawn from a "multiemployer plan."
(r) Neither the Company nor any of its employees,
directors, stockholders, partners, or affiliates (within the meaning of the
Rules and Regulations) of any of the foregoing has taken or will take, directly
or indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
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<PAGE> 9
(s) Except as otherwise disclosed in the Prospectus, none
of the patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company are in dispute so far as known by the Company or are in any conflict
with the right of any other person or entity. The Company (i) owns or has the
right to use, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities of any
kind whatsoever, all patents, trademarks, service marks, trade names and
copyrights, technology and licenses and rights with respect to the foregoing,
used in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing and (ii) is not obligated or under any liability whatsoever to
make any payment by way of royalties, fees or otherwise to any owner or licensee
of, or other claimant to, any patent, trademark, service mark, trade name,
copyright, know-how, technology or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business or otherwise.
(t) The Company owns and has the unrestricted right to use
all trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") that are material
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company, free and clear of and without
violating any right, lien, or claim of others, including without limitation,
former employers of its employees; provided, however, that the possibility
exists that other persons or entities, completely independently of the Company,
or its employees or agents, could have developed trade secrets or items of
technical information similar or identical to those of the Company.
(u) The Company has good and marketable title to, or valid
and enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus, to be owned or leased by it free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects, or
other restrictions or equities of any kind whatsoever, other than those referred
to in the Prospectus and liens for taxes not yet due and payable.
(v) Arthur Andersen LLP ("Arthur Andersen") whose report
is filed with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act and the Rules
and Regulations.
(w) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which all officers and directors
and all of the holders of Common Stock and securities exchangeable for or
convertible into shares of Common Stock including, but not limited to each
holder of shares of 6% Dividend Paying Convertible Preferred Stock (the
"Convertible Preferred Stock") or Warrants (as defined in the Registration
Statement) have executed an agreement (individually, a "Lock-up Agreement,"
collectively, the "Lock-up Agreements") pursuant to which such each person has
agreed not to, directly or indirectly, offer to sell, sell, grant any option for
the sale of, assign, transfer, pledge, hypothecate, distribute or otherwise
encumber or dispose of any shares of Common Stock or securities convertible
into,
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<PAGE> 10
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for a
period of not less than twelve (12) months following the effective date of the
Registration Statement without the prior written consent of the Representative
except as expressly set forth in the respective Lock-up Agreement. The Company
will cause the Transfer Agent, as defined below, to mark an appropriate legend
on the face of stock certificates representing all of such securities and to
place "stop transfer" orders on the Company's stock ledgers.
(x) Except as described in the Prospectus under
"Underwriting," there are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company or any of its officers, directors, stockholders,
partners, employees or affiliates that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").
(y) The Common Stock has been approved for quotation on
the Nasdaq National Market ("Nasdaq").
(z) Neither the Company nor any of its officers,
employees, agents, or any other person acting on behalf of the Company, has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer or
supplier, or official or employee of any governmental agency (domestic or
foreign) or instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other person
who was, is, or may be in a position to help or hinder the business of the
Company (or assist the Company in connection with any actual or proposed
transaction) which (a) might subject the Company, or any other such person to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign), (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company,
or (c) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
(aa) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficial interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain Transactions,"
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or
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<PAGE> 11
transactions, between or among the Company and any officer, director, or
Principal Shareholder (as such term is defined in the Prospectus) of the Company
or any partner, affiliate or associate of any of the foregoing persons or
entities.
(bb) Any certificate signed by any officer of the Company,
and delivered to the Underwriters or to Underwriters' Counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(cc) The minute books of the Company, and its predecessor,
have been made available to the Underwriters and contains a complete summary of
all meetings and actions of the directors, stockholders, audit committee,
compensation committee and any other committee of the Board of Directors of the
Company, respectively, since the time of its incorporation, and reflects all
transactions referred to in such minutes accurately in all material respects.
(dd) Except and to the extent described in the Prospectus,
no holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(ee) The Company has as of the effective date of the
Registration Statement (i) entered into an employment agreement with Robert M.
Worsley, in the form filed as Exhibit ___ to the Registration Statement and (ii)
obtained term key-man insurance on the life of Robert M. Worsley, in the amount
of $1,000,000, which policy names the Company as the sole beneficiary of at
least $1,000,000 thereof.
(ff) The Company confirms as of the date hereof that it is
in compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it or any affiliate commences engaging in
business with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become effective
with the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
(gg) The conversion of all the outstanding shares of
Convertible Preferred Stock of the Company as set forth in the Prospectus has
been duly authorized by the Company and the shareholders of the Company in
accordance with all agreements, documents, understandings and instruments
affecting the rights, duties, responsibilities, obligations and/or privileges of
holders of Convertible Preferred Stock or to which the Company is bound,
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<PAGE> 12
including without limitation, the Certificate of the Designations, Powers,
Preferences and Rights of the Convertible Preferred Stock, the Company's
articles of incorporation and the Company's by-laws; and upon the consummation
of the Offering, without any further action of any shareholders of the Company
or the Company, every share of Convertible Preferred Stock of the Company will
simultaneously convert into 180 validly issued, fully paid and nonassessable
shares of Common Stock.
2. Representations and Warranties of the Selling Shareholders.
Each of the Selling Shareholders represents and warrants to,
and agrees with, the Underwriters as of the date hereof, and as of the Option
Closing Date, if any, with respect to such Selling Shareholders respective
Option Shares as follows:
(a) Such Selling Shareholder has now and will have on each
Option Closing Date, if any, good and valid title to the Option Shares free and
clear of any lien, charge, claim, encumbrance, pledge, security interest,
stockholders' agreement, voting trust, community property right, defect in
title, equitable interest or other equities or restrictions of any kind
whatsoever (including any liability for estate or inheritance taxes and claims
of any creditor, devisee, legatee or beneficiary); other than as described in
this Agreement or disclosed in the Registration Statement or Prospectus, there
are no outstanding options, warrants, rights or other agreements or arrangements
with respect to any of the Option Shares; the Selling Shareholder has and will
have on each Option Closing Date, if any, full right, power and authority to
sell, transfer and deliver the Option Shares hereunder; and upon delivery of the
Option Shares against payment of the purchase price therefor as contemplated in
this Agreement, each of the Underwriters, who has purchased in good faith and
without notice of any adverse claim, will receive good and marketable title to
the Option Shares purchased by it, free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, stockholders' agreement, voting trust,
community property right, defect in title, equitable interests or other equities
or restrictions of any kind whatsoever (including any liability for estate or
inheritance taxes and claims of any creditor, devisee, legatee or beneficiary).
(b) Such Selling Shareholder has duly authorized (if
applicable), executed and delivered, in the forms theretofore furnished to the
Representative, a Lock-up Agreement (the "Seller Lock-Up Agreement"), a Stock
Power (the "Stock Power"), a Power of Attorney (the "Power of Attorney") and a
Letter of Transmittal and Custody Agreement (the "Custody Agreement"); each of
the Custody Agreement, the Stock Power, the Power of Attorney and the Seller
Lock-Up Agreement constitutes a legal, valid and binding agreement of the
Selling Shareholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(c) All authorizations, approvals, consents and orders
necessary for the execution and delivery by such Selling Shareholder of this
Agreement, the Custody Agreement, the Stock Power, the Power of Attorney and the
Seller Lock-Up Agreement and the sale and delivery of the Option Shares
hereunder (other than such authorizations, approvals, orders or consents as may
be necessary under state securities laws) have been obtained and are in full
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<PAGE> 13
force and effect; and such Selling Shareholder has full right, power and
authority to enter into and perform its obligations under this Agreement, the
Custody Agreement, the Stock Power and the Power of Attorney and the Seller
Lock-Up Agreement.
(d) Such Selling Shareholder has not distributed and will
not distribute any prospectus or other offering material in connection with the
distribution of the Securities.
(e) This Agreement has been duly authorized (if
applicable), executed and delivered by such Selling Shareholder and is a legal,
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms, except insofar as indemnity and contribution
provisions may be limited by applicable laws (including, without limitation,
federal laws) or equitable principles and except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. The execution, delivery and performance of this
Agreement, the Custody Agreement, the Stock Power, the Power of Attorney and the
Seller Lock-Up Agreement and the consummation of the transactions contemplated
hereby and thereby by such Selling Shareholder has not conflicted and will not
conflict with and has not resulted and will not result in a breach of or default
under (i) any will, license, contract, indenture, mortgage, lease, deed of
trust, voting trust agreement, bond, debenture, stockholders' agreement, note,
loan or credit agreement or other agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder is or may be bound
or to which any of its properties (including the Option Shares) is or may be
subject, or any indebtedness, or (ii) any statute, judgment, decree, order, rule
or regulation applicable to such Selling Shareholder of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over such Selling Shareholder or any of
such Selling Shareholder's activities or properties (including the Option
Shares), except for conflicts, breaches and defaults which will not adversely
affect the consummation by such Selling Shareholder of the transactions
contemplated hereby.
(f) The sale of the Option Shares hereunder is not
prompted by any information concerning the Company which is material and adverse
to the Company taken as a whole and which is not set forth in the Prospectus;
the information relating to such Selling Shareholder, the transactions between
such Selling Shareholder or its employees, agents or affiliates, if any, and the
Company and all securities of the Company or any of the subsidiaries owned by
such Selling Shareholder (collectively, "Seller Information") set forth in the
Registration Statement and the Prospectus, as so amended or supplemented, does
not and at the Closing Date and each Option Closing Date, if any, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; all information furnished by or on behalf of such Selling
Shareholder in writing for use in each Preliminary Prospectus, the Registration
Statement and the Prospectus, or any amendment or supplement thereto, is and at
the Closing Date and each Option Closing Date, if any, will be true, correct and
complete in all material respects; and there are not now and will not be at the
Closing Date or any Option Closing Date, if any, any agreements, contracts or
other documents or instruments providing for indemnification, contribution or
reimbursement to such Selling Shareholder or its employees, agents, or
affiliates, if any, (as defined in Section 8) by the Company with respect to the
offer or sale of the Option
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<PAGE> 14
Shares or the distribution contemplated hereby (other than those provisions of
the by-laws or the articles of incorporation, as amended, of the Company
relating to the indemnification of directors of the Company in their capacity as
such).
(g) Nothing material has come to the attention of such
Selling Shareholder to cause such Selling Shareholder to believe that the
Company's representations and warranties contained in this Agreement are not
accurate in any material respect.
(h) There is not pending or, to the knowledge of such
Selling Shareholder, threatened against such Selling Shareholder or involving
its properties or activities any material action, inquiry, investigation, suit
or proceeding (and, to the knowledge of such Selling Shareholder, there are no
circumstances that would be expected to give rise to the same) which (i)
questions the validity of this Agreement, the Custody Agreement, the Stock
Power, the Power of Attorney, the Seller Lock-Up Agreement or any action taken
or to be taken by such Selling Shareholder in connection herewith or therewith,
(ii) has or reasonably would be expected to materially adversely affect the
Company which is not disclosed in the Prospectus or (iii) reasonably would be
expected to adversely affect the consummation by such Selling Shareholder of the
transactions contemplated hereby or thereby.
(i) Except as and to the extent disclosed in the
Registration Statement or the Prospectus, such Selling Shareholder does not have
any registration rights, rights of first refusal, co-sale rights, preemptive
rights or other similar rights with respect to any securities of the Company;
such Selling Shareholder has waived all of those rights which it may have with
respect to the Option Shares and the transactions contemplated hereby; and such
Selling Shareholder does not have any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those disclosed in the Registration Statement or the Prospectus.
(j) Such Selling Shareholder has not since the initial
filing of the Registration Statement with the Commission (i) sold, bid for,
purchased, attempted to induce any person to purchase or paid anyone any
compensation for soliciting purchases of any securities of the Company or (ii)
paid or agreed to pay to any person any compensation for soliciting another
person or entity to purchase any securities of the Company (in each case, except
for the sale of the Option Shares to the Underwriters hereunder and except as
permitted by federal and state securities laws).
(k) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the distribution of the Securities.
(l) Any certificate signed by or on behalf of such Selling
Shareholder and delivered to the Underwriters or Underwriters' Counsel shall be
deemed a representation and warranty by such Selling Shareholder to the
Underwriters or Underwriters' Counsel as to the matters covered thereby.
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<PAGE> 15
3. Purchase, Sale and Delivery of the Securities and
Representative's Warrants.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to each Underwriter, and
each Underwriter, severally and not jointly, agrees to purchase from the Company
at a price of $__________ [93% of the initial public offering price] per share
of Common Stock, that number of Firm Shares set forth in Schedule A opposite the
name of such Underwriter, plus any additional number of Firm Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 12 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Selling Shareholders hereby grant an option
to the Underwriters, severally and not jointly, to purchase all or any part of
an additional 300,000 shares of Common Stock at a price of $__________ [93% of
the initial public offering price] per share of Common Stock. Each of the
Selling Shareholders shall sell one-half of the aggregate number of Option
Shares purchased by the Underwriters, acting severally and not jointly, on each
Option Closing Date, if any. The option granted hereby will expire 45 days after
(i) the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the
date of this Agreement if the Company has elected to rely upon Rule 430A under
the Rules and Regulations, and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm Shares upon notice by
the Representative to the Company and the Selling Shareholders setting forth the
number of Option Shares as to which the several Underwriters are then exercising
the option and the time and date of payment and delivery for any such Option
Shares. Any such time and date of delivery (an "Option Closing Date") shall be
determined by the Representative, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to the
Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representative and the Company and the Selling Shareholders. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No Option
Shares shall be delivered unless the Firm Shares shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Shares shall be made at the offices of Josephthal
Lyon & Ross Incorporated at 200 Park Avenue, 24th Floor, New York, New York
10166, or at such other place as shall be agreed upon by the Representative and
the Company. Such delivery and payment shall be made at 10:00 a.m. (New York
City time) on __________, 1996 or at such other time and date as shall be agreed
upon by the Representative and the Company, but not less than three (3) nor more
than seven (7) full business days after the effective date of the Registration
Statement (such time and date of payment and delivery being herein called
"Closing Date"). In addition, in the event that any or all of the Option Shares
are purchased by the Underwriters, payment of the purchase price for, and
delivery of certificates for, such Option Shares shall be made at the above
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<PAGE> 16
mentioned office of the Representative or at such other place as shall be agreed
upon by the Representative, the Company and the Selling Shareholders on each
Option Closing Date as specified in the notice from the Representative to the
Company. Delivery of the certificates for the Firm Shares and the Option Shares,
if any, shall be made to the Underwriters against payment by the Underwriters,
severally and not jointly, of the purchase price for the Firm Shares and the
Option Shares, if any, to the order of the Company for the Firm Shares and the
Option Shares, if any, by New York Clearing House funds. In the event such
option is exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Shares then being
purchased which the number of Firm Shares set forth in Schedule A hereto
opposite the name of such Underwriter bears to the total number of Firm Shares,
subject in each case to such adjustments as the Representative in its discretion
shall make to eliminate any sales or purchases of fractional shares.
Certificates for the Firm Shares and the Option Shares, if any, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Underwriters may
request in writing at least two (2) business days prior to the Closing Date or
the relevant Option Closing Date, as the case may be. The certificates for the
Firm Shares and the Option Shares, if any, shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to Closing Date or the relevant Option Closing Date, as
the case may be.
(d) On the Closing Date, the Company shall issue and sell
to the Representative Representative's Warrants at a purchase price of $.001 per
warrant, which warrants shall entitle the holders thereof to purchase (i) an
aggregate of 200,000 shares of Common Stock. The Representative's Warrants shall
be exercisable for a period of forty-eight (48) months commencing twelve (12)
months from the effective date of the Registration Statement at a price equaling
one hundred twenty percent (120%) of the initial public offering price of the
shares of Common Stock. The Representative's Warrant Agreement and form of
Warrant Certificate shall be substantially in the form filed as Exhibit 4.2 to
the Registration Statement. Payment for the Representative's Warrants shall be
made on the Closing Date.
4. Public Offering of the Shares. As soon after the
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the Shares (other than to
residents of or in any jurisdiction in which qualification of the Shares is
required and has not become effective) at the price and upon the other terms set
forth in the Prospectus. The Representative may from time to time increase or
decrease the public offering price after distribution of the Shares has been
completed to such extent as the Representative, in it discretion deems
advisable. The Underwriters may enter into one of more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or more
broker-dealers who shall act as dealers in connection with such public offering.
5. Covenants and Agreements of the Company.
(a) The Company covenants and agrees with each of the
Underwriters as follows:
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<PAGE> 17
i) The Company shall use its best efforts to
cause the Registration Statement and any amendments thereto to
become effective as promptly as practicable and will not at
any time, whether before or after the effective date of the
Registration Statement, file any amendment to the Registration
Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the
offering of the Shares by the Underwriters of which the
Representative shall not previously have been advised and
furnished with a copy, or to which the Representative shall
have objected or which is not in compliance with the Act, the
Exchange Act or the Rules and Regulations.
ii) As soon as the Company is advised or
obtains knowledge thereof, the Company will advise the
Representative and confirm the notice in writing, (i) when the
Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance
with said Rule 430A and when any post-effective amendment to
the Registration Statement becomes effective, (ii) of the
issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding, suspending
the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus
or the Prospectus, or any amendment or supplement thereto, or
the institution of proceedings for that purpose, (iii) of the
issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of
any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state
securities commission authority shall enter a stop order or
suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
iii) The Company shall file the Prospectus
(in form and substance satisfactory to the Representative) or
transmit the Prospectus by a means reasonably calculated to
result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the
Representative, pursuant to Rule 424(b)(4)) not later than the
Commission's close of business on the earlier of (i) the
second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the
effective date of the Registration Statement.
iv) The Company will give the Representative
notice of its intention to file or prepare any amendment to
the Registration Statement (including any post-effective
amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes
for use by the Underwriters in connection with the offering of
the Securities which differs from the corresponding prospectus
on file at the Commission at the time the
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<PAGE> 18
Registration Statement becomes effective, whether or not such
revised prospectus is required to be filed pursuant to Rule
424(b) of the Rules and Regulations), and will furnish the
Representative with copies of any such amendment or supplement
a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such prospectus
to which the Representative or Orrick, Herrington & Sutcliffe
LLP ("Underwriters' Counsel"), shall object.
v) The Company shall endeavor in good faith,
in cooperation with the Representative, at or prior to the
time the Registration Statement becomes effective, to qualify
the Securities for offering and sale under the securities laws
of such jurisdictions as the Representative may designate to
permit the continuance of sales and dealings therein for as
long as may be necessary to complete the distribution, and
shall make such applications, file such documents and furnish
such information as may be required for such purpose;
provided, however, the Company shall not be required to
qualify as a foreign corporation or file a general or limited
consent to service of process in any such jurisdiction. In
each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such
action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports
at such times as are or may reasonably be required by the laws
of such jurisdiction to continue such qualification.
vi) During the time when a prospectus is
required to be delivered under the Act, the Company shall use
all reasonable efforts to comply with all requirements imposed
upon it by the Act and the Exchange Act, as now and hereafter
amended and by the Rules and Regulations, as from time to time
in force, so far as necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the
provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriters' Counsel,
the Prospectus, as then amended or supplemented, includes an
untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with
the Act, the Company will notify the Representative promptly
and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the
Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as
available and in such quantities as the Underwriters may
request.
vii) As soon as practicable, but in any
event not later than 45 days after the end of the 12-month
period beginning on the day after the end of the fiscal
quarter of the Company during which the effective date of the
Registration
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<PAGE> 19
Statement occurs (90 days in the event that the end of such
fiscal quarter is the end of the Company's fiscal year), the
Company shall make generally available to its security
holders, in the manner specified in Rule 158(b) of the Rules
and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will
otherwise comply with, the provisions of Section 11(a) of the
Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the
effective date of the Registration Statement.
viii) During a period of five years after
the date hereof, the Company will furnish to its stockholders,
as soon as practicable, annual reports (including financial
statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to
the Representative:
(a) concurrently with furnishing
such quarterly reports to its stockholders,
statements of income of the Company for each quarter
in the form furnished to the Company's stockholders
and certified by the Company's principal financial or
accounting officer;
(b) concurrently with furnishing
such annual reports to its stockholders, a balance
sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company
for such fiscal year, accompanied by a copy of the
certificate thereon of independent certified public
accountants;
(c) as soon as they are available,
copies of all reports (financial or other) mailed to
stockholders;
(d) as soon as they are available,
copies of all reports and financial statements
furnished to or filed with the Commission, the NASD
or any securities exchange;
(e) every press release and every
material news item or article of interest to the
financial community in respect of the Company, or its
affairs which was released or prepared by or on
behalf of the Company; and
(f) any additional information of a
public nature concerning the Company (and any future
subsidiary) or its businesses which the
Representative may request.
During such five (5)-year period, if the
Company has an active subsidiary, the foregoing financial
statements will be on a consolidated basis to the extent that
the accounts of the Company and its subsidiary are
consolidated,
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<PAGE> 20
and will be accompanied by similar financial statements for
any significant subsidiary which is not so consolidated.
ix) The Company will maintain a Transfer
Agent and, if necessary under the jurisdiction of
incorporation of the Company, a Registrar (which may be the
same entity as the Transfer Agent) for its Common Stock.
x) The Company will furnish to the
Representative or on the Representative's order, without
charge, at such place as the Representative may designate,
copies of each Preliminary Prospectus, the Registration
Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include
all financial statements and exhibits), the Prospectus, and
all amendments and supplements thereto, including any
prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and
in such quantities as the Representative may request.
xi) On or before the effective date of the
Registration Statement, the Company shall provide the
Representative with true copies of duly executed, legally
binding and enforceable agreements pursuant to which for a
period of twelve (12) months from the effective date of the
Registration Statement, officers and directors and all of the
holders of Common Stock and securities exchangeable or
exercisable for or convertible into shares of Common Stock and
each holder of shares of Convertible Preferred Stock or the
Warrants agree that each will not directly or indirectly,
issue, offer to sell, sell, grant an option for the sale of,
assign, transfer, pledge, hypothecate, distribute or otherwise
encumber or dispose of any shares of Common Stock or
securities convertible into, exercisable or exchangeable for
or evidencing any right to purchase or subscribe for any
shares of Common Stock (either pursuant to Rule 144 of the
Rules and Regulations or otherwise) or dispose of any
beneficial interest therein without the prior written consent
of the Representative (collectively, the "Lock-up
Agreements"). On or before the Closing Date, the Company shall
deliver instructions to the Transfer Agent authorizing it to
place appropriate legends on the certificates representing the
securities subject to the Lock-up Agreements and to place
appropriate stop transfer orders on the Company's ledgers.
During the twelve (12) month period commencing with the
effective date of the Registration Statement (the "Lock-up
Period"), the Company shall not, without the prior written
consent of the Representative, sell, contract or offer to
sell, issue, transfer, assign, pledge, hypothecate,
distribute, or otherwise dispose of, directly or indirectly,
any shares of Common Stock or any options, rights or warrants
with respect to any shares of Common Stock. During the Lock-up
Period, the Company (i) shall not amend the employment
agreement of Robert M. Worsley, which is in effect on the date
hereof and has been filed as an exhibit to the Registration
Statement, (ii) shall not amend any option agreement or other
agreement providing compensation to any officer, director or
principal stockholder and (iii) shall not file any
registration statement with the Securities and Exchange
Commission without the prior written consent of the
Representative.
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<PAGE> 21
xii) Neither the Company, nor any of its
officers, directors, stockholders, nor any of their respective
affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to, or
which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any
securities of the Company.
xiii) The Company shall apply the net
proceeds from the sale of the Securities in the manner, and
subject to the conditions, set forth under "Use of Proceeds"
in the Prospectus. Except as described in the Prospectus, no
portion of the net proceeds will be used, directly or
indirectly, to acquire any securities issued by the Company.
xiv) The Company shall timely file all such
reports, forms or other documents as may be required
(including, but not limited to, a Form SR as may be required
pursuant to Rule 463 under the Act) from time to time, under
the Act, the Exchange Act, and the Rules and Regulations, and
all such reports, forms and documents filed will comply as to
form and substance with the applicable requirements under the
Act, the Exchange Act, and the Rules and Regulations.
xv) The Company shall furnish to the
Representative as early as practicable prior to each of the
date hereof, the Closing Date and each Option Closing Date, if
any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim
financial statements of the Company (which in no event shall
be as of a date more than thirty (30) days prior to the date
of the Registration Statement) which have been read by the
Company's independent public accountants, as stated in its
letter to be furnished pursuant to Section 7(k) hereof.
xvi) The Company shall cause the Common
Stock to be quoted on Nasdaq and for a period of seven (7)
years from the date hereof, and use its best efforts to
maintain the Nasdaq quotation of the Common Stock to the
extent outstanding.
xvii) For a period of five (5) years from
the Closing Date, the Company shall furnish to the
Representative at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets
relating to the Common Stock, (ii) the list of holders of all
of the Company's securities and (iii) a Blue Sky "Trading
Survey" for secondary sales of the Company's securities
prepared by counsel to the Company.
xviii) As soon as practicable, (i) but in no
event more than 5 business days before the effective date of
the Registration Statement, file a Form 8-A with the
Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than 30
days from the effective date of the Registration Statement,
take all necessary and appropriate actions to
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<PAGE> 22
be included in Standard and Poor's Corporation Descriptions
and Moody's OTC Manual and to continue such inclusion for a
period of not less than five (5) years.
xix) The Company hereby agrees that it will
not for a period of twelve (12) months from the effective date
of the Registration Statement, adopt, propose to adopt or
otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement permitting the
grant, issue or sale of any shares of Common Stock or other
securities of the Company (i) in an amount greater than an
aggregate of 750,000 shares of Common stock, (ii) at an
exercise or sale price per share less than the greater of (a)
the initial public offering price of the Shares set forth
herein and (b) the fair market value of the Common Stock on
the date of grant or sale, (iii) to any direct or indirect
beneficial holder on the date hereof of more than 5% of the
issued and outstanding shares of Common Stock, (iv) with the
payment for such securities with any form of consideration
other than cash, (v) upon payment of less than the full
purchase or exercise price for such shares of Common Stock or
other securities of the Company on or before the date of
issuance, or (vi) the existence of stock appreciation rights,
phantom options or similar arrangements.
xx) Until the completion of the distribution
of the Securities, and for 25 days thereafter, the Company
shall not without the prior written consent of the
Representative and Underwriters' Counsel, issue, directly or
indirectly, any press release or other communication or hold
any press conference with respect to the Company or its
activities or the offering contemplated hereby.
xxi) For a period equal to the lesser of (i)
seven (7) years from the date hereof, and (ii) the sale to the
public of the Representative's Shares, the Company will not
take any action or actions which may prevent or disqualify the
Company's use of Form S-1 (or other appropriate form) for the
registration under the Act of the Representative's Shares.
xxii) For a period of five (5) years after
the effective date of the Registration Statement, the
Representative shall have the right to designate one (1)
individual, for election to the Company's Board of Directors
(the "Board"). If the Representative does not designate a
person for election to the Board the Representative may
designate one (1) person to attend any and all meetings of the
Board. The Company shall notify the Representative of every
meeting of the Board and the Company shall send to such
individual all notices and other correspondence and
communications sent by the Company to members of the Board.
Such individual shall be reimbursed for all out-of-pocket
expenses incurred in connection with his attendance of
meetings of the Board.
(b) Each Selling Shareholder severally covenants and agrees as
to himself, herself or itself with the Underwriters that:
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<PAGE> 23
i) Such Selling Shareholder will not, directly or
indirectly, without the prior written consent of the
Representative, offer, sell, grant any option to
purchase or otherwise dispose (or announce any offer,
sale, grant of any option to purchase or other
disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period
of twelve (12) months after the date hereof except
pursuant to this Agreement, the respective option
agreement as in effect on the date hereof by and
among the Selling Shareholder and Robert M. and
Christ M. Worsley and the respective Lock-up
Agreement and will not take, directly or indirectly,
any action designed to, or which might in the
foreseeable future reasonably be expected to cause or
result in, stabilization or manipulation of the price
of any securities of the Company.
ii) Such Selling Shareholder consents to the use of
the Prospectus and any amendment or supplement
thereto by the Underwriters and all dealers to whom
the Option Shares may be sold, both in connection
with the offering or sale of the Option Shares and
for such period of time thereafter as such Prospectus
is required by law to be delivered in connection
therewith.
iii) Such Selling Shareholder has reviewed the
Registration Statement and the Prospectus and will
comply with all agreements and satisfy all conditions
on his, her or its part to be complied with or
satisfied pursuant to this Agreement, the Stock
Power, the Custody Agreement, and the Power of
Attorney at or prior to the Closing Date, and will
advise his, her or its Attorney-in-Fact prior to the
Closing Date or Option Closing Date, if any, as
applicable, if any statement to be made on behalf of
such Selling Shareholder in the certificates
contemplated by Sections 7(g) and 7(j) hereof would
be inaccurate if made as of such Closing Date or
Option Closing Date, if any, as applicable.
6. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the
Closing Date and the Option Closing Date (to the extent not paid at the Closing
Date) all expenses and fees (other than fees of Underwriters' Counsel, except as
provided in (iv) below) incident to the performance of the obligations of the
Company under this Agreement and the Representative's Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any
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<PAGE> 24
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the
Shares, if any, and the purchase by the Representative of the Representative's
Warrants from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement and the Representative's Warrant Agreement, and
(z) resale of the Shares, if any, by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) costs and expenses in connection
with due diligence investigations, including but not limited to the fees of any
independent counsel or consultant retained, (vi) fees and expenses of the
transfer agent and registrar, (vii) applications for assignments of a rating of
the Securities by qualified rating agencies, (viii) the fees payable to the
Commission and the NASD, and (ix) the fees and expenses incurred in connection
with the quotation of the Securities on Nasdaq and any other exchange.
(b) If this Agreement is terminated by the
Underwriters in accordance with the provisions of Section 7 or Section 13, the
Company shall reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to Section 6(c) hereof.
(c) The Company further agrees that, in addition to
the expenses payable pursuant to subsection (a) of this Section 6, it will pay
to the Representative on the Closing Date by certified or bank cashier's check
or, at the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to
$75,000.
7. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company and the Selling
Shareholders herein as of the date hereof and as of the Closing Date and each
Option Closing Date, if any, with respect to the and the Selling Shareholders,
as the case may be, as if it had been made on and as of the Closing Date or each
Option Closing Date, as the case may be; the accuracy on and as of the Closing
Date or Option Closing Date, if any, of the statements of the officers of the
Company and of the Selling Shareholders made pursuant to the provisions hereof;
and the performance by the Company and the Selling Shareholders on and as of the
Closing Date and each Option Closing Date, if any, of their respective covenants
and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become
effective not later than 12:00 Noon, New York time, on the date of this
Agreement or such later date and time as shall be consented to in writing by the
Representative, and, at Closing Date and each Option
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<PAGE> 25
Closing Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Shares and any price-related information
previously omitted from the effective Registration Statement pursuant to such
Rule 430A shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) of the Rules and Regulations within the prescribed time period, and
prior to Closing Date the Company shall have provided evidence satisfactory to
the Representative of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and declared effective
in accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the
Company that the Registration Statement, or any amendment thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the
Representative shall have received from Underwriters' Counsel, such opinion or
opinions with respect to the organization of the Company, the validity of the
Securities, the Representative's Warrants, the Registration Statement, the
Prospectus and other related matters as the Representative may request and
Underwriters' Counsel shall have received such papers and information as they
request to enable them to pass upon such matters.
(d) At Closing Date, the Underwriters shall have
received the favorable opinion of Squire, Sanders & Dempsey L.L.P., counsel to
the Company, dated the Closing Date, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect that:
i) the Company (A) has been duly organized and is
validly existing as a corporation in good standing under the
laws of its jurisdiction, (B) is duly qualified and licensed
and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such
qualification or licensing, and (C) has all requisite
corporate power and authority; and the Company has obtained
any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including,
without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its
properties and conduct its business as described in the
Prospectus; the Company is and has been doing business in
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<PAGE> 26
material compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all
federal, state and local laws, rules and regulations; the
Company has not received any notice of proceedings relating to
the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially
adversely affect the business, operations, condition,
financial or otherwise, or the earnings, business affairs,
position, prospects, value, operation, properties, business or
results of operations of the Company. The disclosures in the
Registration Statement concerning the effects of federal,
state and local laws, rules and regulations on the Company's
business as currently conducted and as contemplated are
correct in all material respects and do not omit to state a
fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were
made.
ii) to the best of such counsel's knowledge, the
Company does not own an interest in any other corporation,
partnership, joint venture, trust or other business entity;
iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and
any amendment or supplement thereto, under "Capitalization"
and "Description of Capital Stock," and the Company is not a
party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock,
rights, warrants, options or other securities, except for this
Agreement and the Representative's Warrant Agreement and as
described in the Prospectus. The Securities, and all other
securities issued or issuable by the Company conform in all
material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of
rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company. The
Shares, the Representative's Warrants and the Representative's
Shares to be sold by the Company hereunder and under the
Representative's Warrant Agreement are not and will not be
subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid
for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and conform to
the description thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities has been
duly and validly taken, and the certificates representing the
Securities are in due and proper form. The Representative's
Warrants constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company
called for thereby. Upon the
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<PAGE> 27
issuance and delivery pursuant to this Agreement and the
Representative's Warrant Agreement of the Securities to be
sold by the Company, the Underwriters and the Representative,
respectively, will acquire good and marketable title to such
Securities free and clear of any pledge, lien, charge, claim,
encumbrance, pledge, security interest, or other restriction
or equity of any kind whatsoever. No transfer tax is payable
by or on behalf of the Underwriters in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by
the Underwriters and the Representative of the Securities and
the Representative's Shares, respectively, from the Company,
(C) the consummation by the Company of any of its obligations
under this Agreement or the Representative's Warrant
Agreement, or (D) resales of the Securities and the
Representative's Shares in connection with the distribution
contemplated hereby.
iv) the Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has
been timely made in the appropriate form under Rule 430A, and
no stop order suspending the use of the Preliminary
Prospectus, the Registration Statement or Prospectus or any
part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or, to the
best of such counsel's knowledge, threatened or contemplated
under the Act;
v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments
or supplements thereto (other than the financial statements
and other financial and statistical data included therein, as
to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the
Rules and Regulations.
vi) to the best of such counsel's knowledge, (A)
there are no agreements, contracts or other documents required
by the Act to be described in the Registration Statement and
the Prospectus and filed as exhibits to the Registration
Statement other than those described in the Registration
Statement (or required to be filed under the Exchange Act if
upon such filing they would be incorporated, in whole or in
part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are
correct copies of the documents of which they purport to be
copies; (B) the descriptions in the Registration Statement and
the Prospectus and any supplement or amendment thereto of
contracts and other documents to which the Company is a party
or by which it is bound, including any document to which the
Company is a party or by which it is bound, incorporated by
reference into the Prospectus and any supplement or amendment
thereto, are accurate in all material respects and fairly
represent the information required to be shown by Form S-1;
(C) to such counsel's knowledge, there is not pending or
threatened against the Company any action, arbitration, suit,
proceeding, inquiry, investigation, litigation, governmental
or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters),
domestic or foreign, pending
- 27 -
<PAGE> 28
or threatened against (or circumstances that may give rise to
the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the
Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement
are accurately summarized in all material respects), (y)
questions the validity of the capital stock of the Company or
this Agreement or the Representative's Warrant Agreement, or
of any action taken or to be taken by the Company pursuant to
or in connection with any of the foregoing; (D) no statute or
regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required; and
(E) there is no action, suit or proceeding pending, or
threatened, against or affecting the Company before any court
or arbitrator or governmental body, agency or official (or any
basis thereof known to such counsel) in which there is a
reasonable possibility of an adverse decision which may result
in a material adverse change in the condition, financial or
otherwise, or the earnings, position, prospects, stockholders'
equity, value, operation, properties, business or results of
operations of the Company, which could adversely affect the
present or prospective ability of the Company to perform its
obligations under this Agreement or the Representative's
Warrant Agreement or which in any manner draws into question
the validity or enforceability of this Agreement or the
Representative's Warrant Agreement;
vii) the Company has full legal right, power and
authority to enter into each of this Agreement and the
Representative's Warrant Agreement and to consummate the
transactions provided for therein; and this Agreement and the
Representative's Warrant Agreement have been duly authorized,
executed and delivered by the Company. Each of this Agreement
and the Representative's Warrant Agreement assuming due
authorization, execution and delivery by each other party
thereto constitutes a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with
its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting
enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited
by applicable law), and none of the Company's execution or
delivery of this Agreement and the Representative's Warrant
Agreement its performance hereunder or thereunder, its
consummation of the transactions contemplated herein or
therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of
the terms or provisions of, or constitutes or will constitute
a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind
whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (A) the
articles of incorporation or by-laws of the Company, (B) any
license, contract, indenture, mortgage, deed of trust, voting
trust agreement, stockholders agreement, note,
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<PAGE> 29
loan or credit agreement or any other agreement or instrument
to which the Company is a party or by which it is or may be
bound or to which any of its respective properties or assets
(tangible or intangible) is or may be subject, or any
indebtedness, or (C) any statute, judgment, decree, order,
rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties;
viii) except as described in the Prospectus, no
consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other
body (other than such as may be required under Blue Sky laws,
as to which no opinion need be rendered) is required in
connection with the issuance of the Shares pursuant to the
Prospectus and the Registration Statement, the issuance of the
Representative's Warrants, the performance of this Agreement
and the Representative's Warrant Agreement and the
transactions contemplated hereby and thereby;
ix) the properties and business of the Company
conform in all material respects to the description thereof
contained in the Registration Statement and the Prospectus;
and the Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or
leased by it, in each case free and clear of all liens,
charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable;
x) to the best knowledge of such counsel, the Company
is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, partnership agreement,
note, loan or credit agreement or any other agreement or
instrument evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which the property
or assets (tangible or intangible) of the Company is subject
or affected; and the Company is not in violation of any term
or provision of its articles of incorporation by-laws, or in
violation of any franchise, license, permit, judgment, decree,
order, statute, rule or regulation;
xi) the statements in the Prospectus under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS," "BUSINESS," "MANAGEMENT,"
"PRINCIPAL SHAREHOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION
OF CAPITAL STOCK," and "SHARES ELIGIBLE FOR FUTURE SALE" have
been reviewed by such counsel, and insofar as they refer
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<PAGE> 30
to statements of law, descriptions of statutes, licenses,
rules or regulations or legal conclusions, are correct in all
material respects;
xii) the Shares have been accepted for quotation on
Nasdaq;
xiii) the persons listed under the caption "PRINCIPAL
SHAREHOLDERS" in the Prospectus are the respective "beneficial
owners" (as such phrase is defined in regulation 13d-3 under
the Exchange Act) of the securities set forth opposite their
respective names thereunder as and to the extent set forth
therein;
xiv) except as described in the Prospectus, no
person, corporation, trust, partnership, association or other
entity has the right to include and/or register any securities
of the Company in the Registration Statement, require the
Company to file any registration statement or, if filed, to
include any security in such registration statement;
xv) except as described in the Prospectus, there are
no claims, payments, issuances, arrangements or understandings
for services in the nature of a finder's or origination fee
with respect to the sale of the Securities hereunder or
financial consulting arrangement or any other arrangements,
agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the
NASD;
xvi) assuming due execution by the parties thereto
other than the Company, the Lock-up Agreements hereof are
legal, valid and binding obligations of parties thereto,
enforceable against the party and any subsequent holder of the
securities subject thereto in accordance with its terms
(except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting
enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited
by applicable law); and
xvii) except as described in the Prospectus, the
Company does not (A) maintain, sponsor or contribute to any
ERISA Plans, (B) maintain or contribute, now or at any time
previously, to a defined benefit plan, as defined in Section
3(35) of ERISA, and (C) has never completely or partially
withdrawn from a "multiemployer plan".
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters were discussed and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy,
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<PAGE> 31
completeness or fairness of the statements contained in the Preliminary
Prospectus, the Registration Statement and Prospectus, on the basis of the
foregoing, no facts have come to the attention of such counsel which lead them
to believe that either the Registration Statement or any amendment thereto, at
the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus).
Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation, the
Legal Opinion Accord of the ABA Section of Business Law (1991), or any
comparable State bar accord.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance satisfactory to Underwriters'
Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company, and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel if requested. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that the
Representative and they are justified in relying thereon. Such opinion shall
also state that Underwriters' Counsel is entitled to rely thereon.
(e) On the Closing Date, the Underwriters shall have
received the favorable opinion of Squire, Sanders & Dempsey L.L.P., in its
capacity as counsel for the Selling Shareholders, dated the Closing Date,
addressed to the Underwriters, in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
i) Each Selling Shareholder has full legal right,
power and authority to enter into this Agreement and to sell,
assign, transfer and deliver in the manner provided herein the
Selling Shareholders' Option Shares sold by such Selling
Shareholder; this Agreement has been duly authorized, executed
and delivered by such Selling Shareholder; and this Agreement,
assuming due authorization, execution and delivery by each
other party hereto and further assuming it is a valid and
binding agreement of the Underwriters, is a valid and legally
binding agreement of such Selling Shareholder, enforceable
against such Selling Shareholder in accordance with its terms
(except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally and by
general principles of equity relating
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<PAGE> 32
to the availability of remedies and except its rights to
indemnity and contribution may be limited by applicable law);
ii) None of the execution, delivery or
performance of this Agreement, the Stock Power, the Power of
Attorney, and the Custody Agreement by such Selling
Shareholder and the consummation by such Selling Shareholder
of the transactions herein and therein contemplated, to the
best of such counsel's knowledge, conflict with or result in a
breach of, or default under, any indenture, mortgage, deed of
trust, voting trust agreement, stockholders agreement, note
agreement or other agreement or other instrument to which such
Selling Shareholder is a party or by which such Selling
Shareholder is bound or to which any of the property of any of
the Selling Shareholders is subject, or the charter or by-laws
of any of the Selling Shareholders that are corporations, and
nothing has come to such counsel's attention which causes such
counsel to believe that such actions will result in any
violation of any law, rule, administrative regulation or court
decree applicable to such Selling Shareholder (other than
state securities or blue sky laws or regulations, as to which
counsel need not express any opinion);
iii) A Stock Power, Power of Attorney, and the
Custody Agreement have been duly authorized, executed and
delivered by each Selling Shareholder and, assuming the due
authorization, execution and delivery of the Custody Agreement
by the other parties thereto, each constitutes the valid and
binding agreement of each Selling Shareholder enforceable in
accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally and by general
principles of equity relating to availability of remedies and
except as rights to indemnity or contribution may be limited
by applicable law); and
iv) Upon the delivery of the Selling Shareholders'
Option Shares sold hereunder by the Selling Shareholders and
payment therefor in accordance with the terms of this
Agreement, the Underwriters will have acquired all rights of
such Selling Shareholder to the Selling Shareholders' Shares
sold by such Selling Shareholder hereunder, and in addition
will have acquired good and marketable title to such Selling
Shareholders' Shares free and clear of any adverse claim.
(f) At each Option Closing Date, if any, the
Underwriters shall have received (i) the favorable opinion of Squire, Sanders &
Dempsey L.L.P. in its role as counsel for the Company, and (ii) the favorable
opinion of Squire, Sanders & Dempsey L.L.P. in its role as counsel for each
Selling Shareholder, dated the Option Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel
confirming as of Option Closing Date the respective statements made by Squire,
Sanders & Dempsey L.L.P. in its respective opinions delivered on the Closing
Date.
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<PAGE> 33
(g) On or prior to each of the Closing Date and the
Option Closing Date, if any, Underwriters' Counsel shall have been furnished
such documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsections (d) and (e) of this Section 7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company, or herein contained.
(h) Prior to each of the Closing Date and each Option
Closing Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects, stockholders' equity or the business activities of the
Company, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is materially adverse to the Company; (iii) the
Company shall not be in default under any provision of any instrument relating
to any outstanding indebtedness; (iv) the Company shall not have issued any
securities (other than the Securities); the Company shall not have declared or
paid any dividend or made any distribution in respect of its capital stock of
any class; and there has not been any change in the capital stock of the
Company, or any material change in the debt (long or short term) or liabilities
or obligations of the Company (contingent or otherwise); (v) no material amount
of the assets of the Company shall have been pledged or mortgaged, except as set
forth in the Registration Statement and Prospectus; (vi) no action, suit or
proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may adversely affect the business, operations,
prospects or financial condition or income of the Company, except as set forth
in the Registration Statement and Prospectus; and (vii) no stop order shall have
been issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(i) At each of the Closing Date and each Option
Closing Date, if any, the Underwriters shall have received a certificate of the
Company signed by the principal executive officer and by the chief financial or
chief accounting officer of the Company, dated the Closing Date or Option
Closing Date, as the case may be, to the effect that each of such persons has
carefully examined the Registration Statement, the Prospectus and this
Agreement, and that:
i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as
of the Closing Date or the Option Closing Date, as the case
may be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior
to such Closing Date or Option Closing Date, as the case may
be;
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<PAGE> 34
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued,
and no proceedings for that purpose have been instituted or
are pending or, to the best of each of such person's
knowledge, after due inquiry are contemplated or threatened
under the Act;
iii) The Registration Statement and the Prospectus
and, if any, each amendment and each supplement thereto,
contain all statements and information required to be included
therein, and none of the Registration Statement, the
Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the
Preliminary Prospectus nor any supplement thereto included 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 therein, in light of the circumstances
under which they were made, not misleading; and
iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and
including the Closing Date or the Option Closing Date, as the
case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or
contingent; (b) the Company has not paid or declared any
dividends or other distributions on its capital stock; (c) the
Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change
in the capital stock of the Company or any material change in
the debt (long or short-term) of the Company; (e) the Company
has not sustained any material loss or damage to its property
or assets, whether or not insured; (g) there is no litigation
which is pending or to the best of each such person's
knowledge threatened (or circumstances giving rise to same)
against the Company, or any affiliated party of any of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (h)
there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this subsection
(i) are to such documents as amended and supplemented at the date of such
certificate.
(j) On the Closing Date, the Underwriters shall have
received a certificate dated the Closing Date, from each Selling Shareholder
(which may be signed by the Attorney-in-Fact) to the effect that each such
Selling Shareholder has carefully examined the Registration Statement and the
Prospectuses and this Agreement, and that:
i) The representations and warranties of such Selling
Shareholder in this Agreement are true and correct, as if made
at and as of the Closing Date, and such Selling Shareholder
has complied with all the agreements and satisfied
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<PAGE> 35
all the conditions to be performed or satisfied by such
Selling Shareholder at or prior to the Closing Date; and
ii) The Registration Statement and Prospectuses and,
if any, each amendment and each supplement thereto, contain
all statements required to such Selling Shareholder's
knowledge to be included therein regarding such Selling
Shareholder, and none of the Registration Statement nor any
amendment thereto includes any untrue statement of a material
fact regarding such Selling Shareholder or omits to state any
material fact regarding such Selling Shareholder required to
such Selling Shareholder's knowledge to be stated therein or
necessary to make the statements therein regarding such
Selling Shareholder not misleading, and no Prospectus (an any
supplements thereto) or any Preliminary Prospectus includes or
included any untrue statement of a material fact regarding
such Selling Shareholder or omits or omitted to state a
material fact regarding such Selling Shareholder required to
such Selling Shareholder's knowledge to be stated therein or
necessary in order to make the statements therein regarding
such Selling Shareholder, in light of the circumstances under
which they are made, not misleading.
(k) By the Closing Date, the Underwriters will have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Underwriters, as described in the Registration Statement.
(l) At the time this Agreement is executed, the
Underwriters shall have received a letter, dated such date, addressed to the
Underwriters in form and substance satisfactory (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
in all respects to the Underwriters and Underwriters' Counsel, from Arthur
Andersen:
i) confirming that they are independent certified
public accountants with respect to the Company within the
meaning of the Act and the applicable Rules and Regulations;
ii) stating that it is their opinion that the
financial statements and supporting schedules of the Company
as of September 30, 1996 and December 31, 1996 and for the
years then ended, and for the period from inception through
________________ included in the Registration Statement comply
as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and
Regulations thereunder and that the Representative may rely
upon the opinion of Arthur Andersen with respect to such
financial statements and supporting schedules included in the
Registration Statement;
iii) stating that, on the basis of a limited review
which included a reading of the latest available unaudited
interim financial statements of the Company, a reading of the
latest available minutes of the stockholders and board of
directors
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<PAGE> 36
and the various committees of the board of directors of the
Company, consultations with officers and other employees of
the Company responsible for financial and accounting matters
and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A)
the pro forma financial information contained in the
Registration Statement and Prospectus does not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or is
not fairly presented in conformity with generally accepted
accounting principles applied on a basis consistent with that
of the audited financial statements of the Company or the
unaudited pro forma financial information included in the
Registration Statement, (B) the unaudited financial statements
and supporting schedules of the Company included in the
Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with
that of the audited financial statements of the Company
included in the Registration Statement, or (C) at a specified
date not more than five (5) days prior to the effective date
of the Registration Statement, there has been any change in
the capital stock of the Company, any change in the long-term
debt of the Company, or any decrease in the stockholders'
equity of the Company or any decrease in the net current
assets or net assets of the Company as compared with amounts
shown in the September 30, 1996 balance sheets included in the
Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was
any change or decrease, setting forth the amount of such
change or decrease, and (D) during the period from September
30, 1996 to a specified date not more than five (5) days prior
to the effective date of the Registration Statement, there was
any decrease in net revenues or net earnings of the Company or
increase in net earnings per common share of the Company, in
each case as compared with the corresponding period beginning
September 30, 1995 other than as set forth in or contemplated
by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5)
days prior to the date of the Registration Statement, the
amount of liabilities of the Company (including a break-down
of commercial paper and notes payable to banks);
v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings, statements and other financial information
pertaining to the Company set forth in the Prospectus in each
case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general
accounting records, including work sheets, of the Company and
excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement; and
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<PAGE> 37
vi) statements as to such other matters incident to
the transaction contemplated hereby as the Representative may
request.
(m) At the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received from Arthur Anderson a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm the statements made in the letter furnished pursuant to
subsection (l) of this Section hereof except that the specified date referred to
shall be a date not more than five days prior to the Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (l) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(n) The Company shall have delivered to the
Representative a letter from Arthur Andersen addressed to the Company stating
that they have not during the immediately preceding two year period brought to
the attention of the Company's management any "weakness" as defined in Statement
of Auditing Standards No. 60 "Communication of Internal Control Structure
Related Matters Noted in an Audit," in any of the Company's internal controls.
(o) On each of the Closing Date and Option Closing
Date, if any, there shall have been duly tendered to the Representative for the
several Underwriters' accounts the appropriate number of Securities.
(p) No order suspending the sale of the Securities in
any jurisdiction designated by the Representative pursuant to Section 5(a)(v)
hereof shall have been issued on either the Closing Date or the Option Closing
Date, if any, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
(q) On or before the Closing Date, the Company shall
have executed and delivered to the Representative, (i) the Representative's
Warrant Agreement substantially in the form filed as Exhibit 4.2 to the
Registration Statement in final form and substance satisfactory to the
Representative, and (ii) the Representative's Warrants in such denominations and
to such designees as shall have been provided to the Company.
(r) On or before the Closing Date, the Securities
shall have been duly approved for quotation on Nasdaq, subject to official
notice of issuance.
(s) On or before the Closing Date, there shall have
been delivered to the Representative all of the Lock-up Agreements and in the
Seller Lock-up Agreements, in form and substance satisfactory to Underwriters'
Counsel.
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<PAGE> 38
If any condition to the Underwriters' obligations hereunder to
be fulfilled prior to or at the Closing Date or the relevant Option Closing
Date, as the case may be, is not so fulfilled, the Representative may terminate
this Agreement or, if the Representative so elects, it may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
8. Indemnification.
(a) The Company and the Selling Shareholders, jointly
and severally, agrees to indemnify and hold harmless each of the Underwriters
(for purposes of this Section 8 "Underwriter" shall include the officers,
directors, partners, employees, agents and counsel of the Underwriter, including
specifically each person who may be substituted for an Underwriter as provided
in Section 12 hereof), and each person, if any, who controls the Underwriter
("controlling person") within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (and actions, proceedings,
investigations, inquiries, and suits in respect thereof), whatsoever (including
but not limited to any and all costs and expenses whatsoever reasonably incurred
in investigating, preparing or defending against such action, proceeding,
investigation, inquiry or suit, commenced or threatened, or any claim
whatsoever), as such are incurred, to which the Underwriter or such controlling
person may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise or under the laws of foreign countries, arising
out of or based upon (A) any untrue statement or alleged untrue statement of a
material fact contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; or (iii) in any application or
other document or written communication (in this Section 8 collectively called
"application") executed by the Company or based upon written information
furnished by the Company or any Selling Shareholder filed, delivered or used in
any jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
Nasdaq or any other securities exchange, (B) the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading (in the case of the Prospectus, in the
light of the circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The liability of each
Selling Shareholder under this paragraph shall be limited to the proportion
thereof which the number of shares of Common Stock sold by such Selling
Shareholder bears to all shares of Common Stock purchased by the Underwriters,
but in no event shall such Selling Shareholder be liable under this paragraph
for an amount exceeding the aggregate purchase price received by such Selling
Shareholder from the Underwriters for the shares of Common Stock sold by such
Selling
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<PAGE> 39
Shareholder hereunder. Neither Selling Shareholder will be liable to the
Underwriters or any person controlling the Underwriters with respect to any
untrue statement or omission or alleged untrue statement or omission made by the
Company or by any other Selling Shareholder.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company or the Selling Shareholders may have
at common law or otherwise.
(b) Each of the Underwriters agrees severally, but
not jointly, to indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the Registration Statement, and each other
person, if any, who controls the Company within the meaning of the Act, and each
Selling Shareholder to the same extent as the foregoing indemnity from the
Company to the Underwriters but only with respect to statements or omissions, if
any, made in any Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment thereof or supplement thereto or in any application
made in reliance upon, and in strict conformity with, written information
furnished to the Company with respect to any Underwriter by such Underwriter
expressly for use in such Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment thereof or supplement thereto or in any such
application, provided that such written information or omissions only pertain to
disclosures in the Preliminary Prospectus, the Registration Statement or
Prospectus directly relating to the transactions effected by the Underwriters in
connection with this Offering. The Company and the Selling Shareholders
acknowledge that the statements with respect to the public offering of the
Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
The indemnity agreement in this subsection (b) shall be in
addition to any liability which the Underwriters may have at common law or
otherwise.
(c) Promptly after receipt by an indemnified party
under this Section 8 of notice of the commencement of any action, suit or
proceeding, such indemnified party shall, if a claim in respect thereof is to be
made against one or more indemnifying parties under this Section 8, notify each
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying party shall
not relieve it from any liability which it may have under this Section 8 except
to the extent that it has been prejudiced in any material respect by such
failure or from any liability which it may have otherwise). In case any such
action, investigation, inquiry, suit or proceeding is brought against any
indemnified party, and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying parties
in connection with the defense of such action at the expense of the
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<PAGE> 40
indemnifying party, (ii) the indemnifying parties shall not have employed
counsel reasonably satisfactory to such indemnified party to have charge of the
defense of such action within a reasonable time after notice of commencement of
the action, or (iii) such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to one or all of the indemnifying parties
(in which case the indemnifying parties shall not have the right to direct the
defense of such action, investigation, inquiry, suit or proceeding on behalf of
the indemnified party or parties), in any of which events such fees and expenses
of one additional counsel shall be borne by the indemnifying parties. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action,
investigation, inquiry, suit or proceeding or separate but similar or related
actions, investigations, inquiries, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 8 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld. An indemnifying party will not, without the prior written
consent of the indemnified parties, settle compromise or consent to the entry of
any judgment with respect to any pending or threatened claim, action,
investigation, inquiry, suit or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party form all liability arising out of such claim, action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes claim for
indemnification pursuant to this Section 8, but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 8 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the Securities or (B) if the
allocation provided by clause (A) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is a contributing party
and the Underwriters are the indemnified party, the relative benefits received
by the Company and/or the Selling Shareholders on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received
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<PAGE> 41
by the Underwriters hereunder, in each case as set forth in the table on the
Cover Page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or the Selling Shareholders or
by the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions, investigations,
inquiries, suits or proceedings in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action, claim, investigation, inquiry, suit or proceeding.
Notwithstanding the provisions of this subdivision (d) the Underwriters shall
not be required to contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by the Underwriters hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each person,
if any, who controls the Company within the meaning of the Act, each officer of
the Company who has signed the Registration Statement, and each director and
each Selling Shareholder of the Company shall have the same rights to
contribution as the Company, subject in each case to this subparagraph (d). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit, inquiry, investigation or proceeding against
such party in respect to which a claim for contribution may be made against
another party or parties under this subparagraph (d), notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have hereunder or otherwise
than under this subparagraph (d), or to the extent that such party or parties
were not adversely affected by such omission. The contribution agreement set
forth above shall be in addition to any liabilities which any indemnifying party
may have at common law or otherwise.
9. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company or of any Selling
Shareholder submitted pursuant hereto, shall be deemed to be representations,
warranties and agreements at the Closing Date and the Option Closing Date, as
the case may be, and such representations, warranties and agreements of the
Company and the Selling Shareholders, as the case may be, and the respective
indemnity agreements contained in Section 8 hereof, shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any Underwriter, the Company, any Selling Shareholder any controlling person of
any Underwriter, the Company or any Selling Shareholder, and shall survive
termination of this Agreement or the issuance, sale and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
10. Effective Date.
(a) This Agreement shall become effective at 10:00
a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Representative, in its discretion, shall release
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<PAGE> 42
the Securities for sale to the public; provided, however, that the provisions of
Sections 6, 8 and 11 of this Agreement shall at all times be effective. For
purposes of this Section 10, the Securities to be purchased hereunder shall be
deemed to have been so released upon the earlier of dispatch by the
Representative of telegrams to securities dealers releasing such shares for
offering or the release by the Representative for publication of the first
newspaper advertisement which is subsequently published relating to the
Securities.
11. Termination.
(a) Subject to subsection (b) of this Section 11, the
Representative shall have the right to terminate this Agreement, after the date
hereof, (i) if any domestic or international event or act or occurrence has
materially disrupted, or in the Representative's opinion will in the immediate
future materially adversely disrupt the financial markets; or (ii) any material
adverse change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Boston Stock Exchange, the
Commission or any other government authority having jurisdiction; or (iv) if
trading of any of the securities of the Company shall have been suspended, or
any of the securities of the Company shall have been delisted, on any exchange
or in any over-the-counter market; or (v) if the United States shall have become
involved in a war or major hostilities, or if there shall have been an
escalation in an existing war or major hostilities or a national emergency shall
have been declared in the United States; or (vi) if a banking moratorium has
been declared by a state or federal authority; or (vii) if a moratorium in
foreign exchange trading has been declared; or (viii) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the delivery of
the Securities; or (viii) if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere as in the Representative's
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities or (ix) if Robert M. Worsley shall no longer serve
the Company in his present capacity.
(b) If this Agreement is terminated by the
Representative in accordance with the provisions of Section 11(a) the Company
shall promptly reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to Section 6(c) above).
Notwithstanding any contrary provision contained in this Agreement, if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof granted to the Representative, by reason of any failure on the
part of the Company to perform any undertaking or satisfy any condition of this
Agreement by it to be performed or satisfied (including, without limitation,
pursuant to Section 7 or Section 13) then, the Company shall promptly reimburse
and indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section
- 42 -
<PAGE> 43
6(c) above). In addition, the Company shall remain liable for all Blue Sky
counsel fees and expenses and filing fees. Notwithstanding any contrary
provision contained in this Agreement, any election hereunder or any termination
of this Agreement (including, without limitation, pursuant to Sections 7, 11, 12
and 13 hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 6 and Section 8 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
12. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 6, Section 7,
Section 11 or Section 13 hereof) to purchase the Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within 24 hours
thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representative shall not have completed
such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not
exceed 10% of the total number of Firm Shares to be purchased
on such date, the non-defaulting Underwriters shall be
obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10%
of the total number of Firm Shares, this Agreement shall
terminate without liability on the part of any non-defaulting
Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
13. Default by the Company or Selling Shareholders. If the
Company or any Selling Shareholder shall fail at the Closing Date or at any
Option Closing Date, as applicable, to sell and deliver the number of Securities
which it is obligated to sell hereunder on such date, then this Agreement shall
terminate (or, if such default shall occur with respect to any Option Shares to
be purchased on an Option Closing Date, the Underwriters may at the
Representative's option, by notice from the Representative to the Company,
terminate the Underwriters' obligation to purchase Option Shares from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to Section 6, Section 8 and Section 11 hereof. No
action taken pursuant to this Section shall relieve the Company or any Selling
Shareholder, as the case may be, from liability, if any, in respect of such
default.
- 43 -
<PAGE> 44
14. Notices. All notices and communications hereunder, except
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at 200 Park Avenue, 24th Floor, New York, New York 10166,
Attention: Michael Kollender, with a copy to Orrick, Herrington & Sutcliffe, 666
Fifth Avenue, New York, New York 10103, Attention: Rubi Finkelstein, Esq.
Notices to the Company shall be directed to the Company at 1520 East Pima
Street, Phoenix, Arizona 85034, Attention: Robert M. Worsley, President and
Chief Executive Officer, with a copy to Squire, Sanders & Dempsey L.L.P., 40
North Central Avenue, Phoenix, Arizona 85004, Attention: Christopher D. Johnson,
Esq. Notices to the Selling Shareholders shall be directed to
[___________________________].
15. Parties. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Underwriters, the Company, the Selling
Shareholders and the controlling persons, directors and officers referred to in
Section 8 hereof, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained. No purchaser of Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
16. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles.
17. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
18. Entire Agreement; Amendments. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative,
the Company and the Selling Shareholders.
- 44 -
<PAGE> 45
If the foregoing correctly sets forth the understanding among
the Underwriters, the Company and the Selling Shareholders, please so indicate
in the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement between us.
Very truly yours,
SKYMALL, INC.
By:
-------------------------------------
Robert M. Worsley
Chairman of the Board, President and
Chief Executive Officer
Confirmed and accepted as of
the date first above written.
JOSEPHTHAL LYON & ROSS INCORPORATED
For itself and as Representative
of the several Underwriters named
in Schedule A hereto.
By:
----------------------------------
Name:
Title:
SELLING SHAREHOLDERS
By:
----------------------------------------
As Attorney-in-Fact for the Selling
Shareholders Named in Schedule B hereto
- 45 -
<PAGE> 46
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares
Name of Underwriters to be Purchased
- -------------------- ---------------
<S> <C>
Josephthal Lyon & Ross Incorporated.............................
Total...................................................... 2,000,000
==========
</TABLE>
<PAGE> 47
SCHEDULE B
Bert A. Getz
Alan C. and Karen Ashton
<PAGE> 1
EXHIBIT 3.1a
ARTICLES OF INCORPORATION
OF
SKYMALL, INC.
1. The name of the Corporation is SKYMALL, INC.
2. Its principal office in the State of Nevada is located at One East
First Street, Reno, Washoe County, Nevada 89501. The name and address of its
resident agent is the Corporation Trust Company of Nevada, One East First
Street, Reno, Nevada 89501.
3. The purpose for which the Corporation is organized is the
transaction of any and all lawful activities for which corporations may be
incorporated under the laws of the State of Nevada, as the same may be amended
from time to time.
4. The total authorized capital stock of the Corporation is Fifty
Million (50,000,000) shares of common stock, $.001 par value per share and Ten
Million (10,000,000) shares of preferred stock, $.001 par value per share. Such
shares may be issued by the Corporation from time to time for such consideration
as may be fixed by the Board of Directors.
As to the preferred stock of the Corporation, the power to issue any
shares of preferred stock of any class or any series of any class and
designations, voting powers, preferences, and relative participating, optional
or other rights, if any, or the qualifications, limitations, or restrictions
thereof, shall be determined by the Board of Directors.
5. The governing board of this Corporation shall be known as directors,
and the number of directors may from time to time be increased up to nine (9) or
decreased in such manner as shall be provided by the Bylaws of this Corporation.
The first Board of Directors shall consist of one (1) director.
The name and mailing address of the initial director, who is to serve
until his successor is elected and qualified is:
NAME POST OFFICE ADDRESS
Robert M. Worsley 1520 E. Pima Street
Phoenix, AZ 85034
6. The capital stock, after the amount of the subscription price or par
value has been paid in, shall not be subject to assessment to pay the debts of
the Corporation.
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<PAGE> 2
7. The name and post office address of each of the incorporators
signing the Articles of Incorporation are as follows:
NAME POST OFFICE ADDRESS
Terrie L. Bates 3225 N. Central Avenue
- ----------------------------- ----------------------------------------
Phoenix, AZ 85012
----------------------------------------
Amelia Castillo 3225 N. Central Avenue
- ----------------------------- ----------------------------------------
Phoenix, AZ 85012
----------------------------------------
Jennifer Hunt 3225 N. Central Avenue
- ----------------------------- ----------------------------------------
Phoenix, AZ 85012
----------------------------------------
8. The Corporation is to have perpetual existence.
9. The fiscal year of the Corporation shall initially end on December
31 and begin on January 1 of each year; provided, however, that such date may be
changed from time to time as determined by the Board of Directors to be in the
best interest of the Corporation.
10. Meetings of stockholders may be held within or without the State of
Nevada, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the Nevada statutes, or the rules and
regulations promulgated thereunder) outside the State of Nevada at such place or
places as may be designated from time to time by the Board of Directors or in
the Bylaws of the Corporation.
11. To the fullest extent permitted by the laws of the State of Nevada,
as the same exist or may hereinafter be amended, no director or officer of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director or officer;
provided, however, that nothing contained herein shall eliminate or limit the
liability of a director or officer of the Corporation to the extent provided by
applicable laws (i) for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law or (ii) for authorizing the payment of
dividends in violation of Nevada Revised Statutes Section 78.300. The limitation
of liability provided herein shall continue after a director or officer has
ceased to occupy such position as to acts or omissions occurring during such
director's or officer's term or terms of office. No repeal, amendment or
modification of this Section, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director or officer
of the Corporation occurring prior to such repeal, amendment or modification.
2
<PAGE> 3
12. The Corporation shall indemnify, defend and hold harmless any
person who incurs expenses, claims, damages or liability by reason of the fact
that he or she is, or was, an officer or director of the Corporation, to the
fullest extent allowed pursuant to Nevada law.
13. Pursuant to Nevada Revised Statutes Section 78.378, the Corporation
elects not to be governed by the provisions of Nevada Revised Statutes Sections
78.378 to 78.3793, inclusive, as the same may be amended from time to time; and
further, pursuant to Nevada Revised Statutes Section 78.434, the Corporation
elects not to be governed by the provisions of Nevada Revised Statutes Sections
78.411 to 78.444, inclusive, as the same may be amended from time to time.
14. Any Business Combination (as hereinafter defined) with an
Interested Stockholder (as hereinafter defined) shall be subject to the
following requirements:
(a) In addition to any affirmative vote required by law or
these Articles of Incorporation or the Bylaws of the Corporation, and except as
otherwise expressly provided in paragraph (b) of this Article 14, a Business
Combination involving an Interested Stockholder or any Affiliate or Associate
(as hereinafter defined) of any Interested Stockholder or any person who
thereafter would be an Affiliate or Associate of such Interested Stockholder
shall require the affirmative vote of not less than sixty-six and two-thirds
percent (66 2/3%) of the votes entitled to be cast by the holders of all the
then outstanding shares of Voting Stock, voting together as a single class,
excluding Voting Stock beneficially owned by such Interested Stockholder. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage or separate class vote may be specified,
by law or in any agreement with any national securities exchange or otherwise.
(b) The provisions of paragraph (a) of this Article 14 shall
not be applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is required by
law or by any other provision of these Articles of Incorporation or the Bylaws
of the Corporation, or any agreement with any national securities exchange, if
all of the conditions specified in either of the following Paragraphs 1 or 2 are
met or, in the case of a Business Combination not involving the payment of
consideration to the holders of the Corporation's outstanding Capital Stock (as
hereinafter defined), if the conditions specified in both Paragraphs 1 and 2 are
met:
1. The Business Combination shall have been approved,
either specifically or as a transaction which is within an approved category of
transactions, by a majority (whether such approval is made prior to or
subsequent to the acquisition of, or announcement of or public disclosure of the
intention to acquire, beneficial ownership of the Voting Stock that caused the
Interested Stockholder to become an Interested Stockholder) of the Continuing
Directors (as hereinafter defined).
3
<PAGE> 4
2. All of the following conditions shall have been
met:
A. The aggregate amount of cash and the Fair
Market Value (as hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash to be received per share
by holders of Common Stock in such Business Combination shall be at least equal
to the highest amount determined under clauses (i) and (ii) below:
(i) (if applicable) the highest per
share price (including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by or on behalf of the Interested Stockholder for any share
of Common Stock in connection with the acquisition by the Interested Stockholder
of beneficial ownership of shares of Common Stock (x) within the two-year period
immediately prior to the first public announcement of the proposed Business
Combination (the "Announcement Date") or (y) in the transaction in which such
person became an Interested Stockholder (the "Determination Date"), whichever is
higher, in either case as adjusted for any subsequent stock split, stock
dividend, subdivision or reclassification with respect to Common Stock; and
(ii) the Fair Market Value per share
of Common Stock on the Announcement Date or on the Determination Date, whichever
is higher, as adjusted for any subsequent stock split, stock dividend,
subdivision or reclassification with respect to Common Stock.
B. The aggregate amount of cash and the Fair
Market Value, as of the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of shares of
any class or series of outstanding Capital Stock, other than Common Stock, shall
be at least equal to the highest amount determined under clauses (i) and (ii)
below:
(i) (if applicable) the highest per
share price (including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by or on behalf of the Interested Stockholder for any share
of such class or series of Capital Stock in connection with the acquisition by
the Interested Stockholder of beneficial ownership of shares of such class or
series of Capital Stock (x) within the two-year period immediately prior to the
Announcement Date or (y) in the transaction in which such person became an
Interested Stockholder, whichever is higher in either case as adjusted for any
subsequent stock split, stock dividend, subdivision or reclassification with
respect to such class or series of Capital Stock; and
(ii) the Fair Market value per share
of such class or series of Capital Stock on the Announcement Date or on the
Determination Date, whichever is higher, as adjusted for any subsequent stock
split, stock dividend, subdivision or reclassification with respect to such
class or series of Capital Stock.
4
<PAGE> 5
The provisions of this Paragraph (b)2.B
shall be required to be met with respect to every class or series of outstanding
Capital Stock, whether or not the Interested Stockholder has previously acquired
beneficial ownership of any shares of a particular class or series of Capital
Stock.
C. The consideration to be received by
holders of a particular class or series of outstanding Capital Stock shall be in
cash or in the same form as previously has been paid by or on behalf of the
Interested Stockholder in connection with the Interested Stockholder's direct or
indirect acquisition of beneficial ownership of shares of such class or series
of Capital Stock. If the consideration so paid for shares of any class or series
of Capital Stock varied as to form, the form of consideration for such class or
series of Capital Stock shall be either cash or the form used to acquire
beneficial ownership of the largest number of shares of such class or series of
Capital Stock previously acquired by the Interested Stockholder.
D. After the Determination Date and prior to
the consummation of such Business Combination: (i) except as approved by a
majority of the Continuing Directors, there shall have been no failure to
declare and pay at the regular date therefor any dividends (whether or not
cumulative) payable in accordance with the terms of any outstanding Capital
Stock; (ii) there shall have been no reduction in the annual rate of dividends
paid on the Common Stock (except as necessary to reflect any stock split, stock
dividend or subdivision of the Common Stock), except as approved by a majority
of the Continuing Directors; (iii) there shall have been an increase in the
annual rate of dividends paid on the Common Stock as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction that has the effect of reducing the
number of outstanding shares of Common Stock, unless the failure so to increase
such annual rate is approved by a majority of the Continuing Directors; and (iv)
such Interested Stockholder shall not have become the beneficial owner of any
additional shares of Capital Stock except as part of the transaction that
results in such Interested Stockholder becoming an Interested Stockholder and
except in a transaction that, after giving effect thereto, would not result in
any increase in the Interested Stockholder's percentage of beneficial ownership
of any class or series of Capital Stock.
E. After the Determination Date, such
Interested Stockholder shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder of the Corporation), of any
loans, advances, guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation, whether in
anticipation of or in connection with such Business Combination or otherwise.
F. A proxy or information statement
describing the proposed Business Combination and complying with the requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Act") (or any subsequent provisions replacing such
Act, rules or regulations) shall be mailed to all stockholders of the
Corporation at least thirty (30) days prior to the consummation of such Business
Combination
5
<PAGE> 6
(whether or not such proxy or information statement is required to be mailed
pursuant to such Act or subsequent provisions). The proxy or information
statement shall contain on the first page thereof, in a prominent place, any
statement as to the advisability (or inadvisability) of the Business Combination
that the Continuing Directors, or any of them, may choose to make and, if deemed
advisable by a majority of the Continuing Directors, the opinion of an
investment banking firm selected by a majority of the Continuing Directors as to
the fairness (or not) of the terms of the Business Combination from a financial
point of view to the holders of the outstanding shares of Capital Stock other
than the Interested Stockholder and its Affiliates or Associates, such
investment banking firm to be paid a reasonable fee for its services by the
Corporation.
G. Such Interested Stockholder shall not
have made any major change in the Corporation's business or equity capital
structure without the approval of a majority of the Continuing Directors.
(c) For the purposes of this Article 14:
1. The term "Business Combination" shall mean:
A. any merger or consolidation of the
Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested
Stockholder or (ii) any other Corporation (whether or not itself an Interested
Stockholder) which is or after such merger or consolidation would be an
Affiliate or Associate of an Interested Stockholder; or
B. any sale, lease, exchange, mortgage,
pledge, transfer or other disposition or security arrangement, investment, loan,
advance, guarantee, agreement to purchase, agreement to pay, extension of
credit, joint venture participation or other arrangement (in one transaction or
a series of transactions) with or for the benefit of any Interested Stockholder
or any Affiliate or Associate of any Interested Stockholder involving any assets
or securities or commitments of the Corporation, any Subsidiary or any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder which, together with all other such arrangements (including all
contemplated future events) has an aggregate Fair Market Value and/or involves
aggregate commitments of $10,000,000 or more or constitutes more than ten
percent (10%) of the book value of the total assets (in the case of transactions
involving assets or commitments other than Capital Stock) or ten percent (10%)
of the stockholders' equity (in the case of transactions in Capital Stock) of
the entity in question (the "Substantial Part"), as reflected in the most recent
fiscal year end consolidated balance sheet of such entity existing at the time
the stockholders of the Corporation would be required to approve or authorize
the Business Combination involving the assets, securities, obligations and/or
commitments constituting any Substantial Part; or
6
<PAGE> 7
C. the adoption of any plan or proposal for
the liquidation or dissolution of the Corporation or for any amendment to these
Articles of Incorporation or the Bylaws proposed by or on behalf of an
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; or
D. any reclassification of securities
(including any reverse stock split), or recapitalization of the Corporation, or
any merger or consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or otherwise involving an Interested
Stockholder) that has the effect, directly or indirectly, of increasing the
proportionate share of any class or series of Capital Stock, or any securities
convertible into Capital Stock or into equity securities of any Subsidiary, that
is beneficially owned by any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder; or
E. any agreement, contract or other
arrangement providing for any one or more of the actions specified in the
foregoing clauses A to D.
2. The term "Capital Stock" shall mean all capital
stock of the Corporation authorized to be issued from time to time under Article
4 of these Articles of Incorporation.
3. The term "person" shall mean any individual, firm,
Corporation or other entity and shall include any group comprised of any person
and any other person with whom such person or any Affiliate or Associate of such
person has any agreement, arrangement or understanding, directly or indirectly,
for the purpose of acquiring, holding, voting or disposing of Capital Stock.
4. The term "Interested Stockholder" shall mean any
person (other than the Corporation or any Subsidiary and other than any
profit-sharing, employee stock ownership or other employee benefit plan of the
Corporation or any Subsidiary or any trustee of, or fiduciary with respect to,
any such plan when acting in such capacity) who (a) is or has announced or
publicly disclosed a plan or intention to become the beneficial owner of Voting
Stock representing ten percent (10%) or more of the votes entitled to be cast by
the holders of all the then outstanding shares of Voting Stock; or (b) is an
Affiliate or Associate of the Corporation and at any time within the two-year
period immediately prior to the date in question, was the beneficial owner of
Voting Stock representing ten percent (10%) or more of the votes entitled to be
cast by the holders of all the then outstanding shares of Voting Stock.
5. A person shall be a "beneficial owner" of any
Capital Stock (a) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; (b) which such person or any of its
Affiliates or Associates has, directly or indirectly, (i) the right to acquire
(whether such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote
7
<PAGE> 8
pursuant to any agreement, arrangement or understanding; or (c) which is
beneficially owned, directly or indirectly, by any other person with which such
person or any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
shares of Capital Stock. For the purposes of determining whether a person is an
Interested Stockholder pursuant to Paragraph 4 of this Section (c), the number
of shares of Capital Stock deemed to be outstanding shall include shares deemed
beneficially owned by such person through application of this Paragraph 5, but
shall not include any other shares of Capital Stock that may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
6. The terms "Affiliate" and "Associate" shall have
the respective meanings ascribed to such terms in Rule 12b-2 under the Act as in
effect on the date that these Articles of Incorporation are accepted for filing
by the Nevada Secretary of State (the term "registrant" in said Rule 12b-2
meaning in this case, the Corporation).
7. The term "Subsidiary" means any company of which a
majority of any class of equity security is beneficially owned by the
Corporation; provided, however, that for the purposes of the definition of
Interested Stockholder set forth in Paragraph 4 of this Section (c), the term
"Subsidiary" shall mean only a company of which a majority of each class of
equity security is beneficially owned by the Corporation.
8. The term "Continuing Director" means (i) any
member of the Board of Directors on the date of the filing of these Articles of
Incorporation with the Nevada Secretary of State, and (ii) any member of the
Board of Directors who thereafter becomes a member of the Board of Directors
while such person is a member of the Board of Directors, who is not an Affiliate
or Associate or representative of the Interested Stockholder and was a member of
the Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder, and (iii) a successor of a Continuing Director while
such successor is a member of the Board of Directors, who is not an Affiliate or
Associate or representative of the Interested Stockholder and is recommended or
elected to succeed the Continuing Director by a majority of Continuing
Directors.
9. The term "Fair Market Value" means (a) in the case
of cash, the amount of such cash; (b) in the case of stock, the highest closing
sale price during the 30-day period immediately preceding the date in question
of a share of such stock on the principal United States securities exchange
registered under the Act on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing bid quotation with respect to a
share of such stock during the 30-day period immediately preceding the date in
question on the Nasdaq National Market or any similar system then in use, or if
no such quotations are available, the fair market value on the date in question
of a share of such stock as determined by a majority of the Continuing Directors
in good faith; and (c) in the case of property other than cash or stock, the
fair market value of such property on the date in question as determined in good
faith by a majority of the Continuing Directors.
8
<PAGE> 9
10. In the event of any Business Combination in which
the Corporation survives, the phrase "consideration other than cash to be
received," as used in Paragraphs 2.A and 2.B of Section (b) of this Article 14,
shall include the shares of Common Stock and/or the shares of any other class or
series of Capital Stock retained by the holders of such shares.
11. The term "Voting Stock" means stock of any class
or series entitled to vote generally in the election of directors.
(d) A majority of the Continuing Directors shall have the
power and duty to determine for the purposes of this Article 14 on the basis of
information known to them after reasonable inquiry, (1) whether a person is an
Interested Stockholder, (2) the number of shares of Capital Stock or other
securities beneficially owned by any person, (3) whether a person is an
Affiliate or Associate, (4) whether the proposed action is with, or proposed by,
or on behalf of, an interested Stockholder or an Affiliate or Associate of an
Interested Stockholder, (5) whether the assets that are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $10,000,000 or more and (6)
whether the assets or securities that are the subject of any Business
Combination constitute a Substantial Part. Any such determination made in good
faith shall be binding and conclusive on all parties.
(e) Nothing contained in this Article 14 shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
(f) The fact that any Business Combination complies with the
provisions of Section (b) of this Article 14 shall not be construed to impose
any fiduciary duty, obligation or responsibility on the Board of Directors, or
any member thereof, to approve such Business Combination or recommend its
adoption or approval to the stockholders of the Corporation, nor shall such
compliance limit, prohibit or otherwise restrict in any manner the Board of
Directors, or any member thereof, with respect to evaluations of or actions and
responses taken with respect to such Business Combination.
(g) For the purposes of this Article 14, a Business
Combination or any proposal to amend, repeal or adopt any provision of these
Articles of Incorporation inconsistent with this Article 14 (collectively, the
"Proposed Action") is presumed to have been proposed by, or on behalf of, an
Interested Stockholder or an Affiliate or Associate of an Interested Stockholder
or a person who thereafter would become such if (1) after the Interested
Stockholder became such, the Proposed Action is proposed following the election
of any director of the Corporation who, with respect to such Interested
Stockholder, would not qualify to serve as a Continuing Director or (2) such
Interested Stockholder, Affiliate, Associate or person votes for or consents to
the adoption of any such Proposed Action, unless as to such Interested
Stockholder, Affiliate, Associate or person, a majority of the Continuing
Directors makes a good faith determination that such Proposed Action is not
proposed by or on behalf of such Interested
9
<PAGE> 10
Stockholder, Affiliate, Associate or person, based on information known to them
after reasonable inquiry.
15. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation or in the
Bylaws of the Corporation, in the manner now or hereafter previously prescribed
by statute, and all rights conferred upon stockholders herein are granted
subject to this reservation, provided, however, that notwithstanding anything to
the contrary in these Articles of Incorporation to the contrary, the affirmative
vote of sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
stock of this Corporation entitled to vote shall be required to amend, alter,
change or repeal, or adopt any provision inconsistent with, these Articles.
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<PAGE> 11
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named, for the purpose of forming a Corporation pursuant to the General
Corporation Law of the State of Nevada, do make and file these Articles of
Incorporation, hereby declaring and certifying that the facts herein stated are
true, and accordingly have hereunto set our hands this 11th day of October,
1996.
/s/ Terrie L. Bates
----------------------------------------
/s/ Amelia Castillo
----------------------------------------
/s/ Jennifer Hunt
----------------------------------------
STATE OF Arizona )
------------------- ) ss.
County of Maricopa )
-------------------
On this 11th day of October, 1996, before me, a Notary Public,
personally appeared Terrie L. Bates, Amelia Castillo and Jennifer Hunt who
who acknowledged that they executed the above instrument.
/s/ Candice Maerz
-----------------------------------
Notary Public
(Notary Seal)
My commission expires:
July 5, 1997
- ------------------------
11
<PAGE> 1
EXIHBIT 3.1b
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION
OF
SKYMALL, INC.
Pursuant to Section 78.390 of the Nevada Revised Statutes:
We, Martin F. Smith, a Vice-President, and David A. Wirthlin, the
Secretary, respectively, of SkyMall, Inc., a corporation organized and existing
under the General Corporation Law of the State of Nevada (the "Corporation"), in
accordance with the provisions of Section 78.390 thereof, DO HEREBY CERTIFY:
1. That the Corporation's Articles of Incorporation are amended
to add Article 16 thereto, which Article reads as follows:
The capital stock of the Corporation shall have no pre-emptive
rights except as set forth in any Certificate of Designation
filed with the Nevada Secretary of State by the Corporation.
2. That the foregoing amendment was approved by the Board of
Directors of the Corporation and by the unanimous consent of
the shareholders of the Corporation.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 14th day
of October, 1996.
/s/ Martin F. Smith
----------------------------------------
MARTIN F. SMITH, Vice-President
ATTEST:
/s/ David A. Wirthlin
- ----------------------------------
DAVID A. WIRTHLIN, Secretary
<PAGE> 2
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 14th day of
October, 1996 by Martin F. Smith, a Vice-President of SkyMall, Inc., a Nevada
corporation, for and on behalf of the Corporation.
/s/ Paul H. Tatz
----------------------------------------
Notary Public
My commission expires:
Aug. 1, 2000
- ----------------------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 14th day of
October, 1996, by David A. Wirthlin, the Secretary of SkyMall, Inc., a Nevada
corporation, for and on behalf of the Corporation.
/s/ Paul H. Tatz
----------------------------------------
Notary Public
My commission expires:
Aug. 1, 2000
- ----------------------------------
2
<PAGE> 1
EXHIBIT 4.1
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
6% DIVIDEND PAYING CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
SKYMALL, INC.
Pursuant to Section 78.1955(4) of the Nevada Revised Statutes:
We, Robert M. Worsley, the President, and David A. Wirthlin, the
Secretary, respectively, of SkyMall, Inc., a corporation organized and existing
under the General Corporation Law of the State of Nevada (the "Corporation"), in
accordance with the provisions of Section 78.1955(4) thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of the Corporation, the said Board of Directors on
October 11, 1996 designated a series of shares of preferred stock as 6% Dividend
Paying Convertible Redeemable Preferred Stock;
That the Certificate of Designation of Rights, Preferences and
Privileges of 6% Dividend Paying Convertible Redeemable Preferred Stock (the
"Original Certificate") was filed with the Nevada Secretary of State on October
11, 1996;
That no shares of 6% Dividend Paying Convertible Redeemable Preferred
Stock have been issued; and
That pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of the Corporation, as amended, the said Board of
Directors on October 15, 1996 adopted the following resolutions, which amend and
restate the Original Certificate in its entirety, without changing the original
designation of the 6% Dividend Paying Convertible Redeemable Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Articles of Incorporation, as amended (the
"Articles"), the Board of Directors does hereby provide for the issuance of a
series of Preferred Stock, $.001 par value, of the Corporation, to be designated
"6% Dividend Paying Convertible Redeemable Preferred Stock", consisting of 8,000
shares and, to the extent that the designations, powers, preferences and
relative and other special rights and the qualifications, limitations and
restrictions of the 6% Dividend Paying Convertible Redeemable Preferred Stock
are not stated and expressed in the Articles, does hereby fix and herein state
and express
<PAGE> 2
such designations, powers, preferences and relative and other special rights and
the qualifications, limitations and restrictions thereof, as follows:
1. Designation and Amount. The shares of such series shall be
designated as "6% Dividend Paying Convertible Redeemable Preferred Stock", par
value $.001 per share (hereinafter referred to as the "6% Preferred"), and the
number of shares constituting such series shall be 8,000.
2. Ranking. The 6% Preferred shall rank senior to all other series of
preferred stock ("Preferred Stock") or common stock ("Common Stock") of the
Corporation.
3. Dividends.
3.1 Dividend Amount. The holders of the 6% Preferred shall be
entitled to receive, out of any assets of the Corporation legally available
therefor, cumulative dividends at a rate of 6% per annum (the "Dividend Rate")
on the total dollar amount of the consideration paid (the "Original Purchase
Price") to the Corporation for each share of 6% Preferred (the "Dividend
Amount"). Such dividends shall be payable annually on the Annual Dividend
Payment Date (as hereinafter defined), commencing on the first Annual Dividend
Payment Date after the first issuance of a share of 6% Preferred. Dividends on
each share of 6% Preferred shall accrue and be cumulative from the date of
issuance thereof to the Redemption Date (as hereinafter defined) or the
Conversion Date (as hereinafter defined) of each such share, as applicable and
whichever first occurs, whether or not there shall be profits, surplus or other
funds of the Corporation legally available for the payment of such dividends at
the time such dividends shall accrue or become due and whether or not such
dividends are declared.
3.2 Annual Dividend Payment Date. Except as set forth in
Section 7.1, dividends shall be payable in cash on each share of 6% Preferred on
the first and second anniversaries, respectively, of the first issuance (the
"Original Issue Date") of a share of 6% Preferred (each such anniversary being
referred to herein as an "Annual Dividend Payment Date") or for such shorter
period as the 6% Preferred shall have been outstanding, to the holder of record
on the date thirty (30) days prior to such Annual Dividend Payment Date.
4. Voting Rights. The holders of 6% Preferred shall have the following
voting rights:
4.1 Separate Class Voting. The Corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of not
less than a majority of the outstanding shares of the 6% Preferred voting as a
separate class:
2
<PAGE> 3
(a) authorize or approve any liquidation or
dissolution of the Corporation;
(b) authorize or approve any merger or consolidation
of the Corporation; or
(c) authorize or approve any sale or transfer of all
or substantially all of the assets of the Corporation.
4.2 Amendments. The Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of not less
than 85 percent of the outstanding shares of 6% Preferred voting as a separate
class, alter or change any rights, privileges or preferences of the 6%
Preferred, including, but not limited to authorization of any class of stock
senior to or pari passau with the 6% Preferred.
4.3 Other Voting Rights. Except as expressly set forth herein
and except where voting rights are required by law, holders of 6% Preferred
shall have no voting rights and their consent shall not be required for taking
any corporate action.
4.4 Number of Votes. Each share of 6% Preferred issued and
outstanding shall have one vote per share on all matters submitted to the vote
of the holders of 6% Preferred.
5. Certain Restrictions. Whenever annual dividends or other dividends
or distributions payable on the 6% Preferred as provided in Section 3 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of 6% Preferred outstanding
shall have been paid in full or set aside for payment, the Corporation shall
not:
5.1 declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the 6% Preferred;
5.2 declare or pay dividends on, make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the 6% Preferred;
5.3 redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the 6% Preferred, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the 6% Preferred.
3
<PAGE> 4
6. Reacquired Shares. Any shares of 6% Preferred purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of the Corporation's
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
7. Conversion
7.1 Right to Convert. The holders of the 6% Preferred shall
have the right, at their option, to convert any number of shares of 6% Preferred
into shares of Common Stock, in accordance with the procedures set forth in this
Section 7 and subject to the terms and conditions of this Section 7 at any time.
The shares of 6% Preferred shall automatically convert, without any further
action by the Corporation or by the holders of the 6% Preferred, into shares of
Common Stock upon the closing of a public offering of the Corporation's Common
Stock (the "Initial Public Offering"). Upon the conversion of the 6% Preferred
into Common Stock upon the closing of an Initial Public Offering, the Company
shall pay all accrued but unpaid dividends on the 6% Preferred. At the option of
the Company, such accrued but unpaid dividends may be paid in cash or in shares
of Common Stock of equivalent value, which have been registered under the
Securities Act of 1933, as amended (the "Securities Act").
7.2 Conversion Ratio. Each share of 6% Preferred to be
converted shall be convertible at the office of the transfer agent of the
Corporation, as designated from time to time by the Corporation (the "Transfer
Agent"), and at such other office or offices, if any, as the Board of Directors
of the Corporation may designate, into the number of fully paid and
nonassessable shares of Common Stock determined by dividing the Original
Purchase Price by $5.56 (the "Conversion Price"); provided, however, that the
Conversion Price of the Preferred Stock into Common Stock upon the closing of an
Initial Public Offering shall be at a price equal to the greater of (i) $5.56
per share of 6% Preferred or (ii) the result of 66 2/3% multiplied by the
Initial Public Offering price per share of the Common Stock.
7.3 Conversion Notice. Except in connection with automatic
conversion of the Preferred Stock upon the closing of an Initial Public
Offering, in order to convert shares of the 6% Preferred, the holder thereof
shall deliver to the Corporation's Transfer Agent a notice of intention to
convert such shares together with the certificate or certificates for the 6%
Preferred to be converted, duly endorsed to the Corporation or in blank, or with
stock power(s) attached. Shares of the 6% Preferred shall be deemed to have been
converted on the day on which notice of intention to convert (including all
required accompanying materials as set forth above) was delivered to the
Transfer Agent or on the closing date of an Initial Public Offering, as
applicable, (the "Conversion Date") and the person or persons entitled to
receive the Common Stock issuable upon
4
<PAGE> 5
such conversion shall be treated for all purposes, including voting such Common
Stock, as the record holder or holders of such Common Stock at such time. As
promptly as practicable on or after the Conversion Date, the Corporation's
Transfer Agent shall issue and deliver to the record holder or holders of such
6% Preferred a certificate or certificates for the number of shares of Common
Stock issuable upon such conversion, together with cash in lieu of any fraction
of a share, as hereinafter provided, to the person or persons entitled to
receive the same.
7.4 Adjustments to Conversion Price. The Conversion Price
shall be subject to adjustment from time to time as follows:
(a) For purposes of this Section 7, the following
definitions shall apply:
(1) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock,
Preferred Stock or Convertible Securities (defined below).
(2) "Convertible Securities" shall mean
securities convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section 7.4(c),
deemed to be issued) by the Corporation after the Original Issue Date other than
shares of Common Stock issued (or, pursuant to Section 7.4(c), deemed to be
issued):
(i) upon conversion of shares of the
6% Preferred;
(ii) to officers, directors and
employees of, and consultants to, the Corporation pursuant to a written stock
option plan whether now existing or hereafter approved by the Corporation's
Board of Directors;
(iii) pursuant to clause (f), (g) or
(h) of this Section 7.4;
(iv) upon the exercise of Options
issued on or prior to the Original Issue Date; or
(v) by way of dividend or other
distributions on securities referred to in clauses (i), (ii), (iii) and (iv)
hereof.
(b) No adjustment in the Conversion Price shall be
made in respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or
5
<PAGE> 6
deemed to be issued by the Corporation is less than the Conversion Price in
effect on the date of, and immediately prior to such issue, for such share of 6%
Preferred.
(c) Additional Shares of Common Stock shall be deemed
to have been issued under the following conditions:
(1) Except as otherwise provided in Sections
7.4(a)(3)(i)-(v) and 7.4(b), in the event the Corporation at any time or from
time to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of any
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provision contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed for any such
exchange, as of the close of business on such record date, provided that in any
such case in which Additional Shares of Common Stock are deemed to be issued:
(i) no further adjustment in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
(iii) upon the expiration of any
such Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion Price computed
upon the original issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of
Convertible Securities or Options for Common Stock, the only Additional Shares
of Common
6
<PAGE> 7
Stock issued were shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if any,
actually received by the Corporation upon such conversion or exchange, and
(B) in the case of Options
for Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the consideration actually
received by the Corporation for the issue of all such Options, whether or not
exercised, plus the consideration received by the Corporation upon the issue of
the Convertible Securities with respect to which such Options were actually
exercised;
(iv) no readjustment pursuant to
clause (ii) or (iii) above shall have the effect of increasing the Conversion
Price to a price that is greater than (a) the Conversion Price on the original
adjustment date, or (b) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date; and
(v) in the case of any Options which
expire by their terms not more than thirty (30) days after the date of issue
thereof, no adjustment of the Conversion Price shall be made until the
expiration or exercise of all such Options.
(d) In the event the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 7.4(c) without consideration or for a
consideration per share less than an amount equal to the Conversion Price for a
share of 6% Preferred in effect on the date of, and immediately prior to such
issue) then and in such event, the Conversion Price shall be decreased,
concurrently with such issue, to a price determined by dividing (1) an amount
equal to the sum of (i) the total number of shares of Common Stock outstanding
(including any Additional Shares of Common Stock deemed to be outstanding)
immediately prior to such issuance multiplied by the Conversion Price in effect
immediately prior to such issuance, plus (ii) the consideration received by the
Corporation upon such issuance, by (2) the total number of shares of Common
Stock outstanding (including any Additional Shares of Common Stock deemed to be
outstanding) immediately after the issuance of such Common Stock.
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<PAGE> 8
(e) For purposes of this Section 7.4, the
consideration received by the Corporation for the issue of any Additional Shares
of Common Stock shall be computed as follows:
(1) Such consideration shall:
(i) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation prior to
amounts paid or payable for accrued interest or accrued dividends and prior to
any commissions or expenses paid by the Corporation;
(ii) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(iii) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (1) and (2)
above, as determined in good faith by the Board of Directors.
(2) The consideration per share received by
the Corporation for Additional Shares of Common Stock deemed to have been issued
pursuant to Section 7.4(c)(1), relating to Options and Convertible Securities,
shall be determined by dividing:
(i) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Option
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(ii) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(f) In the event the outstanding shares of Common
Stock shall be subdivided by stock split, stock dividends or otherwise, into a
greater number of shares of Common Stock, the Conversion Price then in effect
shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be
8
<PAGE> 9
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(g) In the event that the Corporation from time to
time makes or fixes a record date for the determination of holders of Common
Stock entitled to receive any distribution (excluding any repurchases of
securities by the Corporation not made on a pro rata basis from all holders of
any class of the Corporation's securities) payable in property or in securities
of the Corporation other than shares of Common Stock, and other than as
otherwise adjusted in this Section 7, then and in each such event the holders of
6% Preferred shall receive at the time of such distribution, the amount of
property or the number of securities of the Corporation that they would have
received had their 6% Preferred been converted into Common Stock on the date of
such event.
(h) Except as provided in this Section 7, upon any
liquidation, dissolution or winding up of the Corporation, if the Common Stock
issuable upon conversion of the 6% Preferred shall be changed into the same or a
different number of shares of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise (other than a subdivision
or combination of shares provided for above), each share of 6% Preferred and all
accrued but unpaid dividends shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock deliverable upon such conversion shall have been
entitled upon such reorganization or reclassification. In any such event,
effective provision shall be made, in the certificate or articles of
incorporation of the resulting or surviving corporation or otherwise, so that
the provisions set forth herein for the protection of the conversion rights of
the 6% Preferred shall thereafter be applicable to any such other shares of
stock, other securities, cash or property deliverable upon conversion of the
shares of the 6% Preferred remaining outstanding or other convertible stock or
securities received by the holders in place thereof, and any such resulting or
surviving corporation shall expressly assume the obligation to deliver, upon the
exercise of the conversion privilege, such shares, other securities, cash or
property as the holders of the 6% Preferred remaining outstanding, or other
convertible stock or securities received by the holders in place thereof, shall
be entitled to receive pursuant to the provisions hereof, and to make provision
for the protection of the conversion right as above provided.
(i) The Corporation will not, by amendment of this
Certificate of Designation or its Articles or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in the carrying out of
all the provisions of this Section 7 and in the taking of all such action as may
be necessary or appropriate
9
<PAGE> 10
in order to protect the conversion rights of the holders of the 6% Preferred
against impairment.
(j) No adjustment in the number of shares of Common
Stock into which the shares of 6% Preferred are convertible shall be required
unless such adjustment would require an increase or decrease of at least 1/10th
of a share; provided, however, that any adjustment which by reason hereof is not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
7.5 Notice of Adjustment. Whenever any adjustment is required
to be made as provided in Section 7.4, the Corporation shall promptly notify
each record holder of 6% Preferred thereof, describing in reasonable detail the
adjustment and method of calculation used.
7.6 Reservation of Shares. The Corporation shall at all times
reserve and keep available free from preemptive rights, out of its authorized
but unissued Common Stock, for the purpose of effecting the conversion of the 6%
Preferred, the full number of shares of Common Stock then deliverable upon the
conversion of all shares of 6% Preferred then outstanding.
7.7 Fractional Shares. In the sole discretion of the
Corporation, instead of any fraction of a share which would otherwise be
issuable upon conversion of shares of the 6% Preferred, the Corporation may pay
a cash adjustment in respect of such fraction in an amount equal to the same
fraction of the Fair Market Value per share of Common Stock at the close of
business on the date of conversion.
7.8 Accrued But Unpaid Dividends. Upon the receipt of a
Conversion Notice, the Corporation shall pay to the holder of the 6% Preferred
submitting such Conversion Notice all accrued but unpaid dividends on the shares
of 6% Preferred such holder has elected to convert through the date of the
Conversion Notice.
8. Other Notices. If at any time:
8.1 The Corporation shall declare any dividend on the Common
Stock payable in shares of capital stock of the Corporation, cash or other
property; or
8.2 The Corporation shall authorize the issue of any options,
warrants or rights pro rata to all holders of Common Stock entitling them to
subscribe for or purchase any shares of stock of the Corporation or to receive
any other rights; or
8.3 The Corporation shall authorize the distribution pro rata
to all holders of Common Stock of a cash dividend payable otherwise than out of
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<PAGE> 11
earnings of surplus legally available therefor under the laws of the State of
Nevada, shares of its capital stock (other than Common Stock), stock or other
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights
(excluding options to purchase and rights to subscribe for Common Stock or other
securities of the Corporation convertible into or exchangeable for Common
Stock); or
8.4 There shall occur any reclassification of the Common
Stock, or any consolidation or merger of the Corporation with or into another
Corporation or a sale, conveyance or other disposition to another entity of all
or substantially all of the properties of the Corporation; or
8.5 There shall occur the voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation; then,
and in each of such cases, the Corporation shall deliver to each holder of 6%
Preferred at its last address appearing on the books of the Corporation as
promptly as practicable but in any event at least twenty (20) days prior to the
applicable record date (or determination date) mentioned below, a notice
stating, to the extent such information is available, (i) the date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution or rights are to
be determined, or (ii) the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution or winding up is expected to
become effective and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up.
9. Redemption.
9.1 Redemption Right. At any time after the thirtieth full
month following the Original Issue Date of the 6% Preferred, upon notice in
writing (the "Redemption Notice") to the Corporation by the holder of shares of
6% Preferred, the Corporation shall redeem the 6% Preferred. Such redemption
shall be at a price per share of 6% Preferred (the "Redemption Price") equal to
$2,000 per share of 6% Preferred plus all dividends accrued but unpaid on such
6% Preferred.
9.2 Redemption Procedure. Within thirty days of receipt of the
Redemption Notice (the "Redemption Date"), the Corporation shall pay the
Redemption Price to the holder of 6% Preferred executing such Redemption Notice
upon surrender by such holder at the place designated by the Company of the
certificate representing such 6% Preferred duly endorsed in blank or accompanied
by an appropriate form of assignment duly endorsed in blank with signature
guaranteed. In case less than the total number of securities represented
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<PAGE> 12
by any certificate are redeemed, a new certificate representing the number of
unredeemed securities will be issued to the holder thereof without cost to the
holder immediately upon surrender of the certificate representing the redeemed
securities. If the Corporation fails to pay the Redemption Price on the
Redemption Date for any reason other than the failure of a holder to surrender
his 6% Preferred certificate as required, then the Redemption Date shall be the
date on which the Corporation actually pays the Redemption Price. All rights
arising hereunder, other than the right to receive the Redemption Price, shall
terminate on the Redemption Date.
10. Pre-emptive Rights. Prior to the consummation of any proposed
issuance or sale by the Corporation of any shares of its capital stock
(including any treasury shares), other than an issuance or sale of equity
securities in connection with: (i) any public offering effected pursuant to a
registration statement filed with and declared effective by the Securities and
Exchange Commission under the Securities Act of 1933, as amended, (ii) the
private offering of shares of 6% Preferred and Common Stock Purchase Warrants
pursuant to that certain Confidential Private Placement Memorandum dated
September 30, 1996 (and any supplements or amendments thereto), and (iii) the
conversion of stockholder debt into 6% Preferred as more fully described in that
certain Worsley/Ashton Stockholders Agreement dated as of October 15, 1996 and
that certain Worsley/Getz Stockholders Agreement dated as of October 15, 1996,
such shares shall first be offered (on the same terms and conditions as so
proposed to be issued or sold) to the holders of the Corporation's then
outstanding 6% Preferred and Common Stock (collectively the "Stock") pro rata in
proportion to their respective holdings, all as more fully set forth below:
10.1 Said terms and conditions shall be communicated in
writing to each holder of outstanding shares of the Stock, at their address
appearing on the books of this Corporation, together with a statement of their
rights hereunder.
10.2 Each holder of Stock shall have the option to acquire
their proportion (i.e., a fraction, the numerator of which is the number of
shares held by such holder on a fully converted basis, and the denominator of
which is the total number of issued and outstanding shares held by all holders
on a fully converted basis) of the capital stock so proposed to be issued or
sold, on the same terms and conditions, such option shall be exercised by
delivery of written notice of exercise to the principal office or statutory
agent of this Corporation within twenty (20) business days after receipt of the
communication referred to in subparagraph 10.1 above.
10.3 In the event any holder of Stock shall fail or decline to
exercise his preemptive option as aforesaid, such holder's proportion of said
capital stock may be acquired by the shareholders who have exercised their
options (the "Exercising Holders") up to a number of shares in proportion to the
number of shares subject to their options and the Corporation shall so notify
the
12
<PAGE> 13
Exercising Holders of their right to acquire additional shares in the manner
provided in subparagraphs 10.1 and 10.2.
10.4 Any acquisition of capital stock pursuant to the
preemptive rights conferred by this Section 10 shall be closed on the date which
is the later of (i) thirty (30) business days after receipt by the Corporation
of the last written notice of exercise given pursuant to subparagraph 10.2
above, or (ii) the date of the proposed issuance giving rise to such rights, as
set forth in the notice given pursuant to subparagraph 10.1 above.
10.5 The rights set forth in this Section 10 shall
automatically terminate on the effective date of an initial public offering of
Common Stock by the Company pursuant to the Securities Act of 1933, as amended.
11. Covenants.
11.1 Financial Statements. The Corporation shall provide to
each holder of 6% Preferred: (i) consolidated unaudited quarterly balance sheets
and statements of results of operations, including footnotes, within sixty days
of the end of each fiscal quarter, and (ii) audited annual balance sheets,
statements of results of operations and statements of cash flows, including
footnotes, within ninety days of the end of each fiscal year.
11.2 Inspection Rights. In addition to inspection and
visitation rights granted pursuant to Nevada law, holders of 6% Preferred and
their authorized representatives shall be entitled to visit the premises of the
Corporation and inspect the books and records of the Corporation during normal
business hours upon forty-eight hours advance written notice to the Corporation.
12. Liquidation, Dissolution or Winding Up.
12.1 Liquidation Preference. Upon any voluntary liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranking junior (either as to payment of dividends
or with respect to distributions upon liquidation, dissolution or winding up) to
the 6% Preferred unless, prior thereto, the holders of 6% Preferred shall have
received an amount equal to the $1,000 per share of 6% Preferred purchased, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the "6% Preferred
Liquidation Preference"). Following the payment of the full amount of the 6%
Preferred Liquidation Preference, additional distributions shall be made to the
holders of 6% Preferred and to the holders of the Corporation's Common Stock on
a pro rata basis.
12.2 Partial Distribution. In the event, however, that there
are not sufficient assets available to permit payment in full of the 6%
Preferred
13
<PAGE> 14
Liquidation Preference then such remaining assets shall be distributed ratably
to the holders of such 6% Preferred.
13. Consolidation, Merger, etc. In the event of any consolidation or
merger of the Corporation with or into another corporation, or of any sale or
conveyance to another corporation of all or substantially all the property of
the Corporation, in any of which transactions the holders of Common Stock
receive shares of stock, other securities, cash or property receivable upon such
consolidation, merger, sale or conveyance other than Common Stock, each holder
of 6% Preferred then outstanding and thereafter remaining outstanding shall have
the right to convert each share of 6% Preferred held by him into the kind and
amount of shares of stock, other securities, cash or property receivable upon
such consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock into which such share of 6% Preferred could have been
converted immediately prior to the record date applicable to such consolidation,
merger, sale or conveyance, and shall have no other conversion rights. In any
such event, effective provision shall be made, in the certificate of
incorporation of the resulting or surviving corporation or otherwise, so that
the provisions set forth herein for the protection of the conversion rights of
the holders of the 6% Preferred shall thereafter be applicable to any such other
shares of stock, other securities, cash or property deliverable upon conversion
of the shares of the 6% Preferred remaining outstanding or other convertible
stock or securities received by the holders in place thereof, and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares, other
securities, cash or property as the holders of the 6% Preferred remaining
outstanding, or other convertible stock or securities received by the holders in
place thereof, shall be entitled to receive pursuant to the provisions hereof,
and to make provision for the protection of the conversion rights as above
provided.
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<PAGE> 15
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 15th day
of October, 1996.
/s/ Robert M. Worsley
----------------------------------------
ROBERT M. WORSLEY, President
ATTEST:
/s/ David A. Wirthlin
- ----------------------------------
DAVID A. WIRTHLIN, Secretary
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 15th day of
October, 1996 by Robert M. Worsley, President of SkyMall, Inc., a Nevada
corporation, for and on behalf of the Corporation.
/s/ Paul H. Tatz
----------------------------------------
Notary Public
My commission expires:
August 1, 2000
- ----------------------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 15th day of
October, 1996, by David A. Wirthlin, the Secretary of SkyMall, Inc., a Nevada
corporation, for and on behalf of the Corporation.
/s/ Paul H. Tatz
----------------------------------------
Notary Public
My commission expires:
August 1, 2000
- ----------------------------------
15
<PAGE> 1
EXHIBIT 4.2
[FORM OF REPRESENTATIVE'S WARRANT AGREEMENT]
SKYMALL, INC.
AND
JOSEPHTHAL LYON & ROSS INCORPORATED
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ________, 1996
<PAGE> 2
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1996
between SKYMALL, INC., a Nevada corporation (the "Company"), and JOSEPHTHAL LYON
& ROSS INCORPORATED (hereinafter referred to variously as the "Holder" or the
"Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative
or their designees warrants ("Warrants") to purchase up to an aggregate 200,000
shares of common stock of the Company ("Common Stock"); and
WHEREAS, the Representative has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof among the Representative, as the Representative of the Several
Underwriters named in Schedule A thereto, and the Company to act as the
Representative in connection with the Company's proposed public offering of up
to 2,000,000 shares of Common Stock at a public offering price of $____ per
share of Common Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Representative to the Company of an aggregate two hundred dollars
($200.00), the agreements
<PAGE> 3
herein set forth and other good and valuable consideration, hereby acknowledged,
the parties hereto agree as follows:
1. Grant. The Representative is hereby granted the right to
purchase, at any time from _______, 1997 [one year from the effective date of
the registration statement], until 5:30 P.M., New York time, on ____________,
2001 [five years from the effective date of the registration statement], up to
an aggregate of 200,000 shares of Common Stock (the "Shares") at an initial
exercise price (subject to adjustment as provided in Section 8 hereof) of $____
per share of Common Stock [120% of the initial public offering price per share]
subject to the terms and conditions of this Agreement. Except as set forth
herein, the Shares issuable upon exercise of the Warrants are in all respects
identical to the shares of Common Stock being purchased by the Underwriters for
resale to the public pursuant to the terms and provisions of the Underwriting
Agreement.
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. Exercise of Warrant.
Section 3.1 Method of Exercise. The Warrants initially are
exercisable at an aggregate initial exercise price (subject to adjustment as
provided in Section 8 hereof) per share of Common Stock set forth in Section 6
hereof payable by certified or official bank check in New York Clearing House
funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of
a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the shares of Common
2
<PAGE> 4
Stock purchased at the Company's principal offices in Phoenix, Arizona
(presently located at 1520 East Pima Street, Phoenix, Arizona 85034) the
registered holder of a Warrant Certificate ("Holder" or "Holder") shall be
entitled to receive a certificate or certificates for the shares of Common Stock
so purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock underlying the Warrants). Warrants may
be exercised to purchase all or part of the shares of Common Stock represented
thereby. In the case of the purchase of less than all the shares of Common Stock
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the shares of Common Stock
purchasable thereunder.
Section 3.2 Exercise by Surrender of Warrant. In addition to
the method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 in
exchange for the number of Shares equal to the product of (x) the number of
Shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the Market Price (as defined in Section 3.3
below) of the Shares less the Exercise Price and the denominator of which is
such Market Price. Solely for the purposes of this paragraph, Market Price shall
be calculated either (i) on the date which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 13 hereof
("Notice Date") or (ii) as the average of the Market Prices for each of the five
trading days preceding the Notice Date, whichever of (i) or (ii) is greater.
3
<PAGE> 5
Section 3.3 Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be the last reported sale
price, or, in case no such reported sale takes place on such day, the average of
the last reported sale prices for the last three (3) trading days, in either
case as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading or by the Nasdaq National Market
("NNM"), or, if the Common Stock is not listed or admitted to trading on any
national securities exchanged or quoted by NNM, the average closing bid price as
furnished by the NASD through NNM or similar organization if NNM is no longer
reporting such information, or if the Common Stock is not quoted on NNM, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for shares of Common Stock and/or other
securities, properties or rights underlying such Warrants, shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificates shall (subject
to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
4
<PAGE> 6
The Warrant Certificates and the certificates representing the
Shares underlying the Warrants (and/or other securities, property or rights
issuable upon the exercise of the Warrants) shall be executed on behalf of the
Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one
(1) year from the date hereof, except to officers of the Representative.
6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as
otherwise provided in Section 8 hereof, the initial exercise price of each
Warrant shall be $____ [120% of the initial public offering price] per share of
Common Stock. The adjusted exercise price shall be the price which shall result
from time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.
Section 6.2 Exercise Price. The term "Exercise Price" herein
shall mean the initial exercise price or the adjusted exercise price, depending
upon the context.
7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. The
Warrants, the Shares, and any of the other securities issuable upon exercise of
the Warrants have been registered under the Securities Act of 1933, as amended
(the "Act"), pursuant to the Company's Registration
5
<PAGE> 7
Statement on Form S-1 (Registration No. 333-_____) (the "Registration
Statement"). All of the representations and warranties of the Company contained
in the Underwriting Agreement relating to the Registration Statement, the
Preliminary Prospectus and Prospectus (as such terms are defined in the
Underwriting Agreement) and made as of the dates provided therein, are hereby
incorporated by reference. The Company agrees and covenants promptly to file
post-effective amendments to such Registration Statement as may be necessary in
order to maintain its effectiveness and otherwise to take such action as may be
necessary to maintain the effectiveness of the Registration Statement as long as
any Warrants are outstanding. In the event that, for any reason, whatsoever, the
Company shall fail to maintain the effectiveness of the Registration Statement,
upon exercise, in part or in whole, of the Warrants, certificates representing
the Shares underlying the Warrants, and any of the other securities issuable
upon exercise of the Warrants (collectively, the "Warrant Securities") shall
bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), and may not be offered or sold except pursuant to (i)
an effective registration statement under the Act, (ii) to the
extent applicable, Rule 144 under the Act (or any similar rule
under such Act relating to the disposition of securities), or
(iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an
exemption from registration under such Act is available.
Section 7.2 Piggyback Registration. If, at any time commencing
after the date hereof and expiring seven (7) years from the effective date, the
Company proposes to register any of its securities under the Act (other than in
connection with a merger or pursuant to Form S-8) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Representative and to all other Holder(s) of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Representative or other Holder(s)
6
<PAGE> 8
of the Warrants and/or Warrant Securities notify the Company within twenty (20)
business days after receipt of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford the Representative and such Holder(s) of the Warrants and/or Warrant
Securities the opportunity to have any such Warrant Securities registered under
such registration statement (sometimes referred to herein as the "Piggyback
Registration").
Notwithstanding the provisions of this Section 7.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.2 (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
Section 7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring
five (5) years from the effective date, the Holder of the Warrants and/or
Warrant Securities representing a "Majority" (as hereinafter defined) of such
securities (assuming the exercise of all of the Warrants) shall have the right
(which right is in addition to the registration rights under Section 7.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Securities and Exchange Commission (the "Commission"),
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Representative and Holder, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for nine (9) consecutive months by such Holder and
any
7
<PAGE> 9
other Holder of the Warrants and/or Warrant Securities who notify the Company
within ten (10) days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or Holder(s) to
all other registered Holder(s) of the Warrants and the Warrant Securities within
ten (10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2
and subsection (a) of this Section 7.3, at any time commencing after the date
hereof and expiring five (5) years from the effective date, any Holder of
Warrants and/or Warrant Securities shall have the right, exercisable by written
request to the Company, to have the Company prepare and file, on one occasion,
with the Commission a registration statement so as to permit a public offering
and sale for nine (9) consecutive months by any such Holder of its Warrant
Securities, provided, however, that the provisions of Section 7.4(b) hereof
shall not apply to any such registration request and registration and all costs
incident thereto shall be at the expense of the Holder or Holders making such
request.
(d) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant to
the written notice specified in Section 7.3(a) of a Majority of the Holders of
the Warrants and/or Warrant Securities, the Company shall have the option, upon
the written notice of election of a Majority of the Holders of the Warrants
and/or Warrant Securities, to repurchase (i) any and all Warrant Securities at
the higher of the Market Price per share of Common Stock on (x) the date of the
notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a) and
8
<PAGE> 10
(ii) any and all Warrants at such Market Price less the Exercise Price of such
Warrant. Such repurchase shall be in immediately available funds and shall close
within two (2) days after the later of (i) the expiration of the period
specified in Section 7.4(a) or (ii) the delivery of the written notice of
election specified in this Section 7.3(d).
Section 7.4 Covenants of the Company With Respect to
Registration. In connection with any registration under Section 7.2 or 7.3
hereof, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within thirty (30) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Warrant Securities such number of prospectuses as shall
reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements filed pursuant
to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c). If the Company shall
fail to comply with the provisions of Section 7.4(a), the Company shall, in
addition to any other equitable or other relief available to the Holder(s), be
liable for any or all incidental or special damages sustained by the Holder(s)
requesting registration of their Warrant Securities.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included in a
registration statement for offering
9
<PAGE> 11
and sale under the securities or blue sky laws of such states as reasonably are
requested by the Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify each of the Underwriters contained in Section 8
of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold
pursuant to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holder, or their successors
or assigns, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions
10
<PAGE> 12
contained in Section 8 of the Underwriting Agreement pursuant to which the
Underwriters have agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Securities to be included in any registration
statement filed pursuant to Section 7.3 hereof, without the prior written
consent of the Holder(s) of the Warrants and Warrant Securities representing a
Majority of such securities.
(h) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
11
<PAGE> 13
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriters, copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriters to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement
with the managing underwriters selected for such underwriting by Holder(s)
holding a Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representative. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained
12
<PAGE> 14
in agreements of that type used by the managing underwriter. The Holder(s) shall
be parties to any underwriting agreement relating to an underwritten sale of
their Warrant Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriters shall also be made to and for the benefit of such
Holder(s). Such Holder(s) shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except as they
may relate to such Holder(s) and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written
request therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in
reference to the Holder(s) of Warrants or Warrant Securities, shall mean in
excess of fifty percent (50%) of the then outstanding Warrants or Warrant
Securities that (i) are not held by the Company, an affiliate, officer,
creditor, employee or agent thereof or any of their respective affiliates,
members of their family, persons acting as nominees or in conjunction therewith
and (ii) have not been resold to the public pursuant to a registration statement
filed with the Commission under the Act.
8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Common Stock,
the Exercise Price shall
13
<PAGE> 15
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination.
Section 8.2 Stock Dividends and Distributions. In case the
Company shall pay a dividend in, or make a distribution of, shares of Common
Stock or of the Company's capital stock convertible into Common Stock, the
Exercise Price shall forthwith be proportionately decreased. An adjustment made
pursuant to this Section 8.2 shall be made as of the record date for the subject
stock dividend or distribution.
Section 8.3 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section 8,
the number of Warrant Securities issuable upon the exercise at the adjusted
exercise price of each Warrant shall be adjusted to the nearest full amount by
multiplying a number equal to the Exercise Price in effect immediately prior to
such adjustment by the number of Warrant Securities issuable upon exercise of
the Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
Section 8.4 Definition of Common Stock. For the purpose of
this Agreement, the term "Common Stock" shall mean (i) the class of stock
designated as Common Stock in the Articles of Incorporation of the Company as
may be amended as of the date hereof, or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value.
Section 8.5 Merger or Consolidation. In case of any
consolidation of the Company with, or merger of the Company with, or merger of
the Company into, another corporation (other than a consolidation or merger
which does not result in any reclassification or change
14
<PAGE> 16
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the holder of each Warrant then outstanding or to be
outstanding shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of shares of Common Stock of
the Company for which such warrant might have been exercised immediately prior
to such consolidation, merger, sale or transfer. Such supplemental warrant
agreement shall provide for adjustments which shall be identical to the
adjustments provided in Section 8. The above provision of this subsection shall
similarly apply to successive consolidations or mergers.
Section 8.6 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the
shares of Common Stock issuable upon the exercise of the
Warrants;
(b) If the amount of said adjustment shall be less
than two cents (2(cent)) per Warrant Security, provided,
however, that in such case any adjustment that would otherwise
be required then to be made shall be carried forward and shall
be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents (2(cent)) per
Warrant Security.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate of like
15
<PAGE> 17
tenor and date representing in the aggregate the right to purchase the same
number of Warrant Securities in such denominations as shall be designated by the
Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Warrants, nor shall it be required to issue scrip
or pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
11. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the Warrants,
such number of shares of Common Stock or other securities, properties or rights
as shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the
16
<PAGE> 18
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed and/or quoted.
12. Notices to Warrant Holder. Nothing contained in this
Agreement shall be construed as conferring upon the Holder the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than
in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;
17
<PAGE> 19
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may
designate by notice to the Holder.
14. Supplements and Amendments. The Company and the
Representative may from time to time supplement or amend this Agreement without
the approval of any holder of Warrant Certificates (other than the
Representative) in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions
18
<PAGE> 20
arising hereunder which the Company and the Representative may deem necessary or
desirable and which the Company and the Representative deem shall not adversely
affect the interests of the Holder(s) of Warrant Certificates.
15. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holder(s) and their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close
of business on _______, 2003. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on _______, 2009.
17. Governing Law; Submission to Jurisdiction. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws.
The Company, the Representative and the Holder hereby agree
that any action, proceeding or claim against it arising out of, or relating in
any way to, this Agreement shall be brought and enforced in the courts of the
State of New York or of the United States of America for the Southern District
of New York, and irrevocably submits to such jurisdiction, which jurisdiction
shall be exclusive. The Company, the Representative and the Holder hereby
irrevocably waive any objection to such exclusive jurisdiction or inconvenient
forum. Any such process or summons to be served upon any of the Company, the
Representative and the Holder(s) (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 13 hereof. Such mailing
shall be
19
<PAGE> 21
deemed personal service and shall be legal and binding upon the party so served
in any action, proceeding or claim. The Company, the Representative and the
Holder(s) agree that the prevailing party(ies) in any such action or proceeding
shall be entitled to recover from the other party(ies) all of its/their
reasonable legal costs and expenses relating to such action or proceeding and/or
incurred in connection with the preparation therefor.
18. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought.
19. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
21. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Representative and any other registered Holder(s) of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole benefit of the
Company and the Representative and any other registered Holder(s) of Warrant
Certificates or Warrant Securities.
20
<PAGE> 22
22. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
SKYMALL, INC.
By:
---------------------------------
Name:
Title:
Attest:
- ---------------
Secretary
JOSEPHTHAL LYON & ROSS INCORPORATED
By:
---------------------------------
Name:
Title:
21
<PAGE> 23
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2001
No. W- Warrants to Purchase
____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that ___________, or
registered assigns, is the registered holder of Warrants to purchase initially,
at any time from __________, 1997 [one year from the effective date of the
Registration Statement] until 5:30 p.m. New York time on ___________, 2001 [five
years from the effective date of the Registration Statement] ("Expiration
Date"), up to __________ fully-paid and non-assessable shares of common stock,
("Common Stock") of SKYMALL, INC., a Nevada corporation (the "Company"), (one
share of Common Stock referred to individually as a "Security" and collectively
as the "Securities") at the initial exercise price, subject to adjustment in
certain events (the "Exercise Price"), of $______ [120% of the initial public
offering price] per share of Common Stock upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of _______, 1996 between the Company, and JOSEPHTHAL LYON &
ROSS INCORPORATED (the "Warrant Agreement"). Payment of the Exercise Price shall
be made by certified or official bank check in New York Clearing House funds
payable to the order of the Company.
A-1
<PAGE> 24
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holder(s) (the words "holder" or "holder(s)" meaning the
registered holder or registered holder(s)) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in
the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
A-2
<PAGE> 25
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ___________, 1996
SKYMALL, INC.
[SEAL] By:
---------------------------------
Name:
Title:
Attest:
- ---------------
Secretary
A-3
<PAGE> 26
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
/ / shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of SkyMall, Inc. in
the amount of $____, all in accordance with the terms of Section 3.1 of the
Representative's Warrant Agreement dated as of _____, 1996 between SkyMall, Inc.
and Josephthal Lyon & Ross Incorporated. The undersigned requests that a
certificate for such securities be registered in the name of ___whose address is
_____________ and that such Certificate be delivered to __________________ whose
address is _______________.
Dated:
Signature
------------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
-----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
A-4
<PAGE> 27
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: Signature:
------------------------ --------------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
---------------------------------------------
(Insert Social Security or Other Identifying
Number of Assignee)
A-5
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
BY THIS EMPLOYMENT AGREEMENT (the "Agreement") made and entered into as
of this 30th day of September, 1996, SkyMall, Inc., a Nevada corporation
("Employer"; references herein to "Employer" shall include SkyMall, Inc. and any
subsidiary of SkyMall, Inc. existing during the term or extended term of this
Agreement) and Robert M. Worsley ("Employee"), state, confirm and agree as
follows:
I. RECITALS
1.1 Employer is engaged in the business of marketing and selling
consumer merchandise and services through its in-flight catalog and engaging in
other marketing related activities ("Employer's Business"). Employer's Business
is conducted primarily in the United States of America (the "Market Area").
1.2 Employee is a key employee of Employer, having substantial
knowledge and expertise in, and having personal relationships affecting, the
operations, business contacts, trade secrets, customer lists, marketing
strategies and other confidential matters of critical significance to the
conduct of Employer's Business and its future prospects (the "Trade Secrets").
The loss of Employee during the term of this Agreement, or the aid or assistance
to any competitor of Employer by Employee or direct competition of Employee
respecting Employer's Business within the Market Area would materially and
irreparably injure Employer.
1.3 Employer desires to hire Employee, and Employee desires to accept
such employment, on the terms and conditions hereinafter set forth.
II. AGREEMENTS
2.1 Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment from Employer, on the terms and conditions set forth in
this Agreement.
2.2 Term. Subject to the provisions for termination and extension as
hereinafter provided, the term of this Agreement shall commence on the date
first above written, and shall continue until the third anniversary thereof.
2.3 Renewal and Review. The term of this Agreement shall be extended
for successive two (2) year periods ("Renewal Period") without any action of
Employer or Employee unless Employee or Employer provides written notice to the
other party hereto of its intent not to extend this Agreement no less than 30
days prior to the expiration of the initial term of this Agreement or of any
successive Renewal Period.
2.4 Duties and Positions with Employer. During the term of this
Agreement, Employee shall serve as President and Chief Executive Officer of
Employer, and in such other additional positions as the Board of Directors of
Employer (the "Board") may from time to time determine. Employee will faithfully
and diligently perform all duties commensurate with such positions, including
those duties directed by the Board, as well as those set forth in the Bylaws
<PAGE> 2
of Employer that relate to such positions. Employee shall devote all of his
professional time, attention, skill, and energies to Employer's Business and
shall serve it faithfully, diligently, and to the best of his ability.
2.5 Service as Director. If Employee is elected or appointed as a
Director of Employer during all or any portion of the term of this Agreement,
Employee shall serve in such capacity without additional compensation.
2.6 Compensation. Employee will receive the following compensation for
his services during his term of employment:
(a) A base salary of $190,000 per year (reviewable no less
than once per year by, and subject at any time to increase but not
decrease at the discretion of, the Board or the Compensation Committee
thereof), which, after withholding and other required deductions, shall
be paid in equal installments in accordance with such salary payment
policies as may be established by Employer from time to time;
(b) The Company shall pay all premiums, up to a maximum of
$10,000 (exclusive of premiums on key-man life insurance of which the
Company is the beneficiary), on behalf of Employee for life insurance
and disability insurance, which have coverage that is no less than the
coverage in effect on the date hereof;
(c) Participate in any incentive compensation plan, pension or
profit-sharing plan, stock purchase plan, group benefit plan, medical
plan, bonus plan and/or other benefit plans, either currently in effect
or as may be established from time to time by the Board or the
Compensation Committee thereof for which Employee, as an officer of
Employer, may be eligible to participate; and
(d) Receive such other compensation as may from time to time
be granted to Employee by the Board or the Compensation Committee
thereof including any bonuses.
2.7 Expenses. Employer shall pay or reimburse Employee for all
reasonable expenses incurred or paid by Employee in furtherance of the business
of Employer. Employee shall present such receipts, invoices, or other evidence
of the nature and amount of all expenditures paid or reimbursed by Employer as
Employer may from time to time require.
2.8 Termination.
(a) Death. In the event of Employee's death during the term of
this Agreement, this Agreement shall thereupon terminate and Employer
shall pay to Employee's beneficiary or estate, as that term is
hereinafter defined, the portion of Employee's salary, which was earned
but unpaid, on the date of Employee's death. As used herein, the term
"beneficiary or estate" means the person or
2
<PAGE> 3
persons designated by Employee in the last written notice delivered to
Employer during his lifetime, or in the absence of such written notice,
such person or persons designated by Employee in his last will and
testament specifically to receive Employee's benefits under the terms
of this Agreement, or, in the absence of both written notice and such a
designation, Employee's estate. In the event that Employee should
during his lifetime designate a person or persons other than his wife
as beneficiary or beneficiaries in such written notice, such notice to
be valid must contain the signed consent of Employee's spouse.
(b) Permanent Disability. In the event Employee should become
permanently disabled, as that term is hereinafter defined, during the
term of this Agreement, then this Agreement shall terminate and
Employer's only obligation to Employee shall be to pay Employee his
salary and any other benefits to which he is entitled hereunder,
including without limitation disability insurance as provided in
Section 2.6(b), for a twelve-month period following the date Employee
became permanently disabled less any benefits to which Employee is
entitled under any then existing disability insurance or similar plans,
if any, during such period. For the purposes hereof, "permanent
disability" shall mean that disability resulting from injury, disease
or other cause, whether mental or physical, which incapacitates
Employee from performing his normal duties as an employee, which
appears to be permanent in nature and contemplates the continuous,
necessary and substantially complete loss of all professional
activities.
(c) Partial Disability. If Employee should become partially
disabled, as that term is hereinafter defined, Employee shall be
entitled to his salary and any other benefits to which he is entitled,
including without limitation disability insurance as provided in
Section 2.6(b), for six-months following the commencement of such
partial disability. At the end of such six-month period, if Employee
remains partially disabled, his salary shall be reduced according to
the amount of time Employee is able to devote to Employer's business.
For the purposes hereof, "partial disability" shall mean that
disability resulting from injury, disease or other cause, whether
mental or physical, which incapacitates Employee from performing a
significant portion of his normal duties as an employee, which appears
to be permanent in nature and contemplates the continuous and necessary
loss of a significant portion of his professional activities.
(d) Temporary Disability. In the event Employee should become
disabled, and such disability is not partial, as defined above, such
disabled Employee shall be entitled to his salary for a period of
ninety (90) days. If such temporary disability continues longer than
such ninety (90) day period, then Employee shall be deemed to have
become permanently disabled for the purposes of this Agreement at the
end of said ninety (90) day period.
(e) Dismissal. Employer may terminate Employee's employment
under this Agreement at any time with or without Cause by giving at
least thirty
3
<PAGE> 4
(30) days written notice to Employee at his address as listed on
Employer's records specifying the effective date of termination. As
used herein, "Cause" shall mean that (a) in the course of Employee's
duties under this Agreement, Employee engages in willful misconduct,
dishonesty or reckless disregard of Employee's responsibilities or (b)
Employee is convicted of a felony. Upon any termination under this
Paragraph (e), Employee or Employee's estate, as the case may be, will
be entitled to receive only that compensation due Employee through the
date of termination. In the event that Employee is terminated other
than for Cause, Employee will receive his then current salary, net of
withholding and other deductions required by law, through the last day
of the Non-Compete Period (as defined below), payable at Employee's
election either in a lump sum or at the times such salary would have
been payable were Employee to remain employed by Employer.
2.9 Covenant Not to Compete. During the term of this Agreement and for
a period of two (2) years thereafter, Employee shall not use or disclose the
Trade Secrets for any purpose whatsoever or to any person or entity, including
any competitor or potential competitor of Employer. Employee shall not during
the term or extended term of this Agreement, and for a period of two (2) years
thereafter (the "Non-Compete Period"), (a) induce or encourage any other
employee of Employer to become employed by or to provide any Trade Secrets to
any competitor or potential competitor of Employer or its subsidiaries, or (b)
own, directly or indirectly, manage, operate, serve as an officer, director or
partner of, or otherwise (whether actively or by passive investment) become
associated with any person or entity engaged in a business in competition with
Employer's business in the Market Area and in areas in which Employer is
planning to engage in business at the time of the termination or expiration of
this Agreement. The foregoing covenants by Employee shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against Employer whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by Employer of said covenants. If any of the covenants of Employee
set forth in this paragraph shall be deemed too broad to be enforceable by
judicial process, then such covenants shall be reduced to such levels as shall
be so enforceable and shall be enforced as reduced. Employee acknowledges and
agrees that, because of the intended scope of Employer's business operations and
his knowledge gained as a result of this employment relationship, the temporal
and geographic scope of this covenant not to compete are reasonable.
2.10 Representations and Warranties. Employee hereby represents and
warrants that the execution of this Agreement and the discharge of his
obligations hereunder will not breach or conflict with any other contracts,
agreements, covenants or understandings, either oral or written, between
Employee and any other party or parties.
2.11 Attorneys' Fees. In the event either party hereto institutes an
action or other proceeding to enforce any rights arising under this Agreement,
the party prevailing in such action or other proceeding shall be paid all
reasonable costs and attorneys' fees by the other party, such fees to be set by
the court and not by the jury.
4
<PAGE> 5
2.12 Notices. Any notice or communication to be given under the terms
of this Agreement ("Notice") shall be in writing and delivered in person or
deposited, certified or registered, in the United States mail, postage prepaid,
addressed as follows:
If to Employer: SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Attn: Chief Financial Officer
with a copy to: Christopher Johnson, Esq.
Squire, Sanders & Dempsey, L.L.P.
40 North Central Avenue
Suite 2700
Phoenix, AZ 85004
If to Employee: Robert M. Worsley
601 East Houston
Gilbert, Arizona 85234
or at such other address as either party may from time to time designate by
Notice hereunder. Notices shall be effective upon delivery in person, or, if
mailed, at midnight on the third business day after the date of mailing.
2.13 Modifications and Amendments. This Agreement shall not be altered
or amended except by a written agreement signed by the parties hereto.
2.14 Entire Agreement. This Agreement constitutes and embodies the full
and complete understanding and agreement of the parties hereto and supersedes
all prior understandings or agreements whether oral or written.
2.15 Benefit and Binding Effect. Except as herein otherwise expressly
provided, this Agreement shall be binding upon and inure to the benefit of
Employer and its successors and assigns, including any corporation, person or
other entity that acquires all or substantially all of the assets of Employer or
any other corporation with or into which Employer is consolidated or merged, and
Employee and his heirs, executors, administrators and legal representatives;
provided, however, that the obligations of Employee hereunder may not be
delegated or assigned.
2.16 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Arizona.
2.17 Headings; Interpretation. The paragraph headings used herein are
for convenience and reference only and are not intended to define, limit or
describe the scope or intent of any provision of this Agreement. When used in
this Agreement, the term "including" shall mean without limitation by reason of
enumeration.
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2.18 Waiver. The failure of either party to insist, in any one or more
instances, upon strict performance of any of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition, but the obligations of either party with respect thereto shall
continue in full force and effect.
2.19 Severability. In the event that any portion of this Agreement is
held to be invalid or unenforceable for any reason whatsoever, it is agreed that
said invalidity or unenforceability shall not affect the other portions of this
Agreement and that the remaining covenants, terms and conditions, or portions
thereof, shall remain in full force and effect, and any court of competent
jurisdiction may so modify the objectionable provisions as to make them valid,
reasonable and enforceable.
2.20 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed a duplicate original.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the date first written above.
SKYMALL, INC.,
a Nevada corporation
By: /s/ David Wirthlin
------------------------
Name: David Wirthlin
----------------------
Title: Secretary
---------------------
EMPLOYER
/s/ Robert M. Worsley
---------------------------
ROBERT M. WORSLEY
EMPLOYEE
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EXHIBIT 10.2
AIRLINE CUSTOMER SERVICES AGREEMENT
BETWEEN
[AIRLINE NAME]
[ADDRESS]
AND
SKYMALL, INC.
1520 EAST PIMA STREET
PHOENIX, ARIZONA 85034
DATED
____________________, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Recitals.............................................................. 1
1.1 Airline Business............................................. 1
1.2 SkyMall Business............................................. 1
1.3 Offer of SkyMall Program..................................... 1
2. The SkyMall(R) Program and Guarantees................................. 1
2.1 The Catalog.................................................. 1
2.2 Concierge Service............................................ 1
3. SkyMall Program Agreement............................................. 1
3.1 Exclusive Rights............................................. 1
3.2 Reserved Services............................................ 1
4. Term of Agreement..................................................... 2
4.1 Initial and Renewal Terms.................................... 2
4.2 Termination.................................................. 2
5. The Catalog........................................................... 2
5.1 Catalog Production........................................... 2
5.2 Shipment and Distribution of Catalogs........................ 3
6. Customer Orders, Customer Services and Promotion...................... 3
6.1 Order Processing and Delivery................................ 3
6.2 Resolution of Customer Problems.............................. 4
6.3 Promotion of Catalog......................................... 4
6.4 Aircraft Seat Phones......................................... 4
6.5 Complimentary Air Travel..................................... 4
7. SkyMall(R) Program Costs and Expenses.................................. 4
7.1 SkyMall Expenses.............................................. 4
7.2 Airline Expenses.............................................. 5
8. Airline Sales Commissions............................................. 5
8.1 Sales Commission............................................. 5
8.2 Payment Due Date............................................. 5
9. Reports, Records and Audit............................................ 5
9.1 SkyMall Reports and Records.................................. 5
9.2 Airline Reports and Records.................................. 5
9.3 Audit of Records............................................. 5
10. Use and Approval of Names............................................. 5
10.1 Limited License to Use Airline's Names........................ 5
10.2 Mutual Approval of Advertising and Promotional Material....... 6
</TABLE>
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<TABLE>
<S> <C>
11. Rights to the Catalog, Services and Purchase Information........ 6
12. Confidential Information........................................ 6
12.1 Confidential and Proprietary Information............... 6
12.2 Use and Protection of Confidential Information......... 6
12.3 Enforcement............................................ 7
13. No-Competition.................................................. 7
14. Default and Remedies............................................ 7
14.1 Default................................................ 7
14.2 Remedies............................................... 8
14.3 Consequential Damages.................................. 8
14.4 Force Majeure Excusing Performance..................... 8
15. Indemnification................................................. 8
15.1 Claims................................................. 8
15.2 SkyMall's Indemnification of Airline................... 8
15.3 Airline's Indemnification of SkyMall................... 9
15.4 Notification, Defense of Claims and Settlement......... 9
16. Insurance....................................................... 10
16.1 Insurance Amounts and Certificates..................... 10
16.2 Endorsements........................................... 10
17. Miscellaneous................................................... 10
17.1 Entire Agreement....................................... 10
17.2 Amendments and Waivers................................. 10
17.3 Assignments and Successors............................. 10
17.4 No Joint Venture or Partnership........................ 10
17.5 Severability........................................... 10
17.6 Survival............................................... 11
17.7 Further Actions and Assurances......................... 11
17.8 Governing Law.......................................... 11
17.9 Attorneys' Fees........................................ 11
17.10 Notices................................................ 11
17.11 Counterparts........................................... 11
17.12 Exhibits............................................... 11
17.13 Time................................................... 11
17.14 Effective Date......................................... 12
</TABLE>
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<PAGE> 4
AIRLINE CUSTOMER SERVICES AGREEMENT
This Airline Customer Services Agreement (the "Agreement"), is between
[Airline Name], a ________________ corporation ("Airline"), and SkyMall, Inc.,
an Arizona corporation ("SkyMall"). Airline and SkyMall agree as follows:
1. RECITALS.
1.1 Airline Business. Airline operates aircraft to domestic (U.S.) and
international destinations. The "Airline Fleet" includes Airline's
aircraft flying domestic trips.
1.2 SkyMall Business. SkyMall provides in-flight and in-transit sales
and rapid delivery of merchandise and services for travelers.
1.3 Offer of SkyMall Program. This agreement grants SkyMall the
exclusive right to offer the SkyMall(R) Program (as defined below)
to Airline's domestic air passengers.
2. THE SKYMALL(R) PROGRAM AND GUARANTEES. The "SkyMall(R) Program" includes:
2.1 The Catalog. The SkyMall(R) Catalog offers merchandise and
services which may be ordered by Airline's passengers (the
"Catalog"). SkyMall provides a total customer satisfaction
guarantee on merchandise offered in the Catalog, except as
expressly provided in Section 5.1 below.
2.2 Concierge Service. The SkyMall(R) Concierge Service offers
concierge services (the "Concierge Service") for a fee to
customers (the "Concierge Service Fee") plus the price of the
product or service. SkyMall provides a limited customer
satisfaction guarantee on the Concierge Service, depending on the
services requested.
3. SKYMALL PROGRAM AGREEMENT.
3.1 Exclusive Rights. Airline grants SkyMall the exclusive right to
provide the SkyMall(R) Program to Airline for Airline's Fleet.
Airline will not itself provide, nor obtain from any other source,
a similar program. Airline also grants to SkyMall a first right of
refusal to provide the SkyMall(R) Program on inter-active video
for Airline's Fleet.
3.2 Reserved Services. Airline reserves the right to provide to its
passengers: (a) through its in-flight magazine (1) merchandise
marked with Airline's trademarks ("Airline's Trademarked
Merchandise") and Airline's airfare and vacation packages and air
transportation services ("Airline's Services") or any other
proprietary items or services of Airline, and (2) merchandise and
services offered by other advertisers; and (b) a catalog for the
sale of duty free merchandise.
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4. TERM OF AGREEMENT. The Term of this Agreement includes:
4.1 Initial and Renewal Terms. The Initial Term from
_________________, until _________________. After the Initial Term
this Agreement will renew annually (an "Annual Renewal Term"),
unless terminated earlier by either Party pursuant to this
Agreement.
4.2 Termination.
(a) Termination for Convenience. After the Initial Term, either
Party may terminate this Agreement for any reason without
cause by 90 days written notice to the other Party.
(b) Termination For Cause. Either Party may immediately terminate
this Agreement for cause by giving written notice to the
other Party.
(c) Cooperation Upon Termination. Upon notice of termination (1)
the Parties will cooperate until termination to continue
distributing Catalogs and to secure customer orders, (2) each
party will use its best efforts to minimize the costs and
damages of the termination, and (3) Airline is solely
responsible for recycling or disposing of Catalogs in its
possession at the time of termination.
(d) Termination Rights and Obligations. Termination will not
affect rights or obligations of the Parties which are of a
continuing nature or which accrued prior to the effective
date of termination.
5. THE CATALOG.
5.1 Catalog Production. SkyMall will produce, at its expense, three or
more editions of the Catalog each year, each up to _____ pages but
not weighing more than _____________. SkyMall (a) will select and
price all merchandise and services and (b) will consider
reasonable requests of Airline for additional merchants, products,
or services (but is not obligated to secure particular merchants,
products, or services).
NOTE THAT (b) AND (c) SHOULD BE INCLUDED ONLY FOR APPROPRIATE (LARGER)
AIRLINES.
(a) Airline Approval of the Catalog. Airline will approve each
edition of the Catalog prior to production. Airline is deemed
to approve a Catalog edition if Airline's written disapproval
is not delivered to SkyMall within three business days after
Airline receives the prototype Catalog. Airline may
disapprove any merchant, product, or service on any
reasonable grounds except price, but will not unreasonably
disapprove a merchant, product, or service.
(b) Airline Pages. If Airline requests, up to ____ pages in each
Catalog (the "Airline Pages") may be devoted to merchandise
marked with Airline's
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trademarks and Airline's airfare, vacation, and
transportation services ("Airline's Goods and Services").
SkyMall does not guarantee Airline's Goods and Services and
Airline (a) assumes responsibility for the merchandise and
services and (b) indemnifies SkyMall for all product
liability and other costs and expenses arising in connection
with Airline's Goods and Services, including costs of legal
or other proceedings, judgments, fines, and penalties, costs
of defense, and reasonable attorneys' fees.
(c) Cover and Name. The cover of each catalog will be customized
to identify Airline and will not be identical to SkyMall's
general catalog. At Airline's option, the catalog will bear
SkyMall's name or another name selected by Airline. SkyMall
does not own, and acknowledges Airline's ownership of, any
custom name selected by Airline for the Catalog and any
associated goodwill.
(d) Suppliers. SkyMall will contract with each supplier of
merchandise or services (a "Supplier") for the SkyMall(R)
Program. SkyMall is solely responsible for each Supplier's
merchandise and services.
5.2 Shipment and Distribution of Catalogs.
(a) Delivery to Hubs. SkyMall will deliver the Catalogs to
Airline's facilities at up to _______ Airline hub locations
(the "Airline Hubs"). Airline may change the hub locations.
SkyMall will deliver the Catalogs in proportions as directed
by Airline at least five days before the scheduled
distribution of the Catalogs to the Airline Fleet.
(b) Distribution to Airline Fleet. Airline will use reasonable
efforts (at least the same efforts used in connection with
Airline's in-flight magazine) to distribute Catalogs to the
seatbacks of all aircraft in Airline's Fleet, so that each
Airline passenger has access to a reasonably unsoiled and
presentable copy of the Catalog. Airline will carry 20
additional copies of the Catalog on each aircraft to replace
Catalogs taken daily by passengers. Until a Catalog expires
Airline will not remove a Catalog from an aircraft (except
for soiled and unpresentable Catalogs).
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6. CUSTOMER ORDERS, CUSTOMER SERVICES AND PROMOTION
6.1 Order Processing and Delivery. SkyMall, at its sole expense, will
deliver merchandise and services offered through the Catalog.
SkyMall will give prompt attention to any complaint or requested
change with respect to SkyMall's order processing or delivery
services.
(a) Order Processing. SkyMall will offer customer order inquiry
and processing 24 hours per day, 365 days per year (but may
use voice messaging and other equipment during early morning
hours, Sundays, holidays, and at other appropriate times).
SkyMall will maintain an "800" customer order telephone
number, including an in-flight equivalent of an "800"
telephone number for Airline's in-flight telephone equipped
aircraft.
(b) Merchandise Deliveries. SkyMall or its vendors will offer
delivery within the United States, Puerto Rico and the Virgin
Islands. SkyMall may, in its sole discretion, offer delivery
to international destinations.
(c) Payment for Merchandise and Services. SkyMall may require
payment for merchandise by cash (U.S. Dollars), cash
equivalents, and major credit cards. SkyMall is solely
responsible for establishing appropriate contractual
arrangements with companies issuing credit cards honored by
SkyMall.
(d) No Airline Liability. Airline assumes no liability for, and
is not responsible for the credit worthiness of, any Airline
passengers or customers.
(e) SkyMall Employees. SkyMall's order processing and delivery
personnel are SkyMall's employees or independent contractors.
SkyMall's employees and independent contractors will comply
with reasonable security measures imposed by Airline.
(f) Airline Employee Discounts. Subject to proper identification,
SkyMall will allow Airline employees a ____% discount on
merchandise and services to the extent permitted by SkyMall's
vendors.
6.2 Resolution of Customer Problems. SkyMall is solely responsible for
handling, to the reasonable satisfaction of its customer and
Airline, all correspondence, claims, and complaints generated by
the SkyMall(R) Program. Airline may, at its option, respond
directly to any customer request or complaint.
6.3 Promotion of Catalog. Airline will use reasonable efforts to
promote use of the Catalog (at least the same efforts used for
Airline's in-flight magazine), including in flight, boarding area,
and flight club area announcements, information booths, and video
introductions.
6.4 Aircraft Seat Phones. Airline (a) will equip its aircraft with
seat phones or other in-flight telephone equipment as business
conditions warrant and (b) will keep
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SkyMall informed about the installation or change out of in-flight
telephone equipment on its aircraft.
6.5 Complimentary Air Travel. Airline will provide, at its discretion,
complimentary round-trip passes to SkyMall to be used for business
travel related to performance of this Agreement (the
"Complimentary Air Travel"). The Complimentary Air Travel must be
booked at least one week in advance and is available on a positive
space basis.
7. SKYMALL(R) PROGRAM COSTS AND EXPENSES. The costs and expenses associated
with the SkyMall(R) Program will be paid as follows:
7.1 SkyMall Expenses. SkyMall will pay for all costs and expenses
associated with the SkyMall(R) Program except for those assumed by
Airline.
7.2 Airline Expenses. Airline will provide and pay for: (a) the cost
of distribution of the Catalog from the Airline Hubs to Airline's
Fleet and of carrying the Catalog on Airline's Fleet; (b) the
promotional costs incurred by Airline to the extent mutually
agreed upon prior to instituting a promotion; (c) the
Complimentary Air Travel costs; and (d) the costs of any optional
service as mutually agreed by SkyMall and Airline.
8. AIRLINE SALES COMMISSIONS.
8.1 Sales Commission. SkyMall will pay a monthly sales commission (the
"Sales Commission") to Airline equal to the greater of (a)
$__________ per month or (b) _____% of Net Sales (as defined in
EXHIBIT A).
8.2 Payment Due Date. SkyMall will pay the Sales Commission to Airline
on the first day of the second month after the month when the
sales occurred. SkyMall will deliver, with the payment, a
supporting statement showing (a) the number of orders filled for
the month, (b) the net dollar amount of sales related to the
orders, and (c) the calculation of the Sales Commission.
9. REPORTS, RECORDS AND AUDIT.
9.1 SkyMall Reports and Records. SkyMall will provide Airline monthly
reports of SkyMall's performance under this Agreement and of
Airline's Sales Commissions (collectively, the "SkyMall Reports").
The SkyMall Reports will be in a form agreed by the Parties, but
need not include information about activities with anyone other
than Airline. SkyMall will maintain the SkyMall Reports during the
Term and for one year after termination (the "Record Maintenance
Period").
9.2 Airline Reports and Records. Airline will provide SkyMall
information reasonably requested by SkyMall, including data about
actual and projected passenger enplanements and actual and planned
aircraft schedules (collectively, the "Airline Reports"). The
Airline Reports will be in a form agreed by the Parties, but need
not include information about activities with anyone other
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<PAGE> 9
than SkyMall. Airline will maintain the Airline Reports for the
Record Maintenance Period.
9.3 Audit of Records. During the Record Maintenance Period each Party
(or auditors it selects) may, at a mutually convenient time and at
its sole cost and expense, examine and make copies of the other's
Reports at the other's offices.
10. USE AND APPROVAL OF NAMES
10.1 Limited License to Use Airline's Names. Airline grants SkyMall a
non-exclusive license to use Airline's corporate name and
Airline's tradenames, trademarks, and service marks (the "Airline
Names") (a) solely as directed and approved in writing by Airline
and (b) solely in connection with the production and promotion of
the Catalog for Airline. SkyMall will not otherwise use, publish
or reproduce (including, without limitation, in any form of
advertising) any Airline Names. This license creates no third
party rights and will immediately terminate upon termination of
this Agreement.
10.2 Mutual Approval of Advertising and Promotional Material. Airline
must give written approval before any distribution of material
which refers to Airline. SkyMall must give written approval before
any distribution of material which refers to SkyMall.
11. RIGHTS TO THE CATALOG, SERVICES AND PURCHASE INFORMATION. SkyMall owns (a)
the Catalog and the Concierge Service, their contents, their name or
names, the designs and other information created or developed by SkyMall
(or jointly by SkyMall and Airline) in connection with the Catalog and the
SkyMall(R) Program, and the associated goodwill and (b) the names,
addresses and other direct marketing information about persons who order
from the Catalog (the "SkyMall Buyer File"). SkyMall may use the SkyMall
Buyer File, or make it available to third parties, so long as the file
information is not selectable by airline and does not indicate that an
individual is a passenger of Airline or a member of Airline's frequent
flyer program.
12. CONFIDENTIAL INFORMATION.
12.1 Confidential and Proprietary Information. The Parties may furnish
to each other confidential or proprietary information (the
"Confidential Information"). Confidential Information must be
marked in a manner that indicates it is proprietary and includes
information about marketing philosophies and objectives, plans,
designs, orders, forecasts, competitive advantages and
disadvantages, types of services provided, trade secrets, ideas,
creations, materials, intellectual property (including, without
limitation, patents, copyrights, trademarks, service marks,
designs, logos, and slogans), data processing programs or
procedures, source code, object code, business methods and
procedures, employees, suppliers, and customers. Confidential
Information excludes: (a) information approved for release to the
public without qualification as to the recipient; (b) information
which a Party obtained, had, or possessed independently of the
other Party (unless such information is confidential
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<PAGE> 10
pursuant to another agreement or understanding); (c) information
in the public domain; and (d) the SkyMall Buyer File.
12.2 Use and Protection of Confidential Information. Each Party has
exclusive ownership and use of its own Confidential Information.
The Parties and their officers and employees will: (a) preserve
the confidentiality of the other's Confidential Information; (b)
not disclose, directly or indirectly, any of the other's
Confidential Information to any third party for any purpose; (c)
not use the other's Confidential Information except as expressly
permitted by this Agreement; (d) immediately notify the other of
any loss or disclosure of the other's Confidential Information;
(e) comply with reasonable security procedures for protection of
Confidential Information; and (f) employ at least the same degree
of care in protecting the other's Confidential Information as it
employs in protecting its own Confidential Information. A Party
served with a subpoena or other legal process requiring the
production or disclosure of the other's Confidential Information,
will promptly notify the other and will in good faith attempt to
permit the other (at the other's expense) to intervene and contest
such disclosure or production.
12.3 Enforcement. If a Party breaches or threatens to breach its
confidentiality obligations, the other's remedies at law would be
inadequate. Each Party is entitled to a temporary restraining
order or injunction (without any bond or other security) to
prevent disclosure or use of the Confidential Information. This
remedy does not preclude any other action or remedy for any breach
or threatened breach of this Agreement, including the recovery of
damages, reasonable attorneys' fees, costs and other expenses in
connection with the actions.
13. NO-COMPETITION. During the Term, the Parties will not compete with each
other in any way, including use of information or knowledge about the
other in competition with the other, and will not provide any information
or knowledge about the other to any competitor of the other.
14. DEFAULT AND REMEDIES.
14.1 Default. The following are defaults under this Agreement:
(a) Non-Payment. Failure to make a required payment, or to
perform a monetary obligation, within 30 days after written
notice;
(b) Performance or Condition. Failure to perform, or breach of,
any non- monetary obligation under this Agreement which
continues for 45 days after written notice;
(c) Bankruptcy or Insolvency. Either Party: (1) becomes
insolvent; (2) does not pay its bills when due without just
cause; (3) takes any material steps leading to its cessation
as a going concern; (4) ceases or suspends operations; (5)
makes a general assignment for the benefit of creditors or
files a
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voluntary application for appointment of a custodian or
receiver; or (6) has an action commenced against it under any
law relating to bankruptcy, insolvency, reorganization or
relief of debtors (except that if any of the foregoing
actions are filed involuntarily, a Party has 60 days to
secure dismissal before the filing is deemed a default). If
bankruptcy proceedings are commenced and this Agreement is
not otherwise terminated, the non-defaulting Party may
suspend all further performance, other than making payments
when due, until the defaulting Party assumes or rejects this
Agreement pursuant to Section 365 of the United States
Bankruptcy Code or any similar or successor provision. A
suspension of performance pending the defaulting Party's
assumption or rejection is not a breach of this Agreement and
does not affect the non-defaulting Party's right to pursue or
enforce its rights under this Agreement or otherwise.
14.2 Remedies. Upon a default the non-defaulting Party may, consistent
with applicable laws and at its option, do one or more of the
following:
(a) Temporary Restraining Order or Injunction. Proceed
immediately, when Confidential Information or non-competition
requirements are involved, to obtain a temporary restraining
order or injunction;
(b) Damages for Breach. Institute proceedings to recover damages,
including reasonable attorneys' fees, costs and other
expenses;
(c) Other Remedies. Exercise any other right, privilege or remedy
available under this Agreement, or in law or equity; and
(d) Terminate the Agreement. By written notice to the defaulting
Party immediately terminate this Agreement.
14.3 Consequential Damages. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
IN THIS AGREEMENT, NEITHER PARTY WILL BE LIABLE FOR, AND
EACH PARTY WAIVES AND RELEASES ANY CLAIMS AGAINST THE
OTHER PARTY FOR, ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST REVENUES, LOST
PROFIT OR LOSS OF PROSPECTIVE ECONOMIC ADVANTAGE)
RESULTING FROM PERFORMANCE OR FAILURE TO PERFORM, OR ACTS
OR OMISSIONS UNDER, THIS AGREEMENT.
14.4 Force Majeure Excusing Performance. No Party is liable to the
other if a failure or delay in performance arises out of any cause
beyond the reasonable control of the Parties (including loss of
facilities, breach by suppliers of supply agreements, fires,
floods, strikes, labor unrest, embargoes, civil commotion,
rationing or other governmental orders or requirements, acts of
civil or military authorities, war, acts of God, unavoidable
accidents, acts or omissions of sovereign states, or serious
adverse weather conditions). All requirements of notice and other
performance are extended to accommodate the period when
performance is impeded, except that the Party claiming to be
excused must deliver written
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notice to the other Party within 30 days stating the cause, the
reasonable efforts taken to overcome the cause, and the period of
time the cause is expected to continue.
15. INDEMNIFICATION.
15.1 Claims. "Claims" means any and all claims, liabilities, damages,
demands, suits, causes of action, proceedings, recoveries,
judgments, expenses, taxes, fines, penalties or executions
(including but not limited to litigation costs and expenses and
reasonable attorneys' fees).
15.2 SkyMall's Indemnification of Airline. SkyMall indemnifies and
holds harmless Airline, its directors, officers, employees, and
agents against all Claims for: (a) SkyMall's negligent acts or
omissions; (b) SkyMall's offering, providing, or failing to
provide any Catalog merchandise or services; (c) SkyMall's
advertising, promotions, or activities; (d) Airline's use of
patents, copyrights, trademarks, tradenames, logos, slogans,
imprints, or any copy supplied by SkyMall and used as directed by
SkyMall; and (e) any claim that merchandise sold in the Catalog
infringes upon the valid patent or other rights of a third party.
This indemnification does not apply to Claims arising from (a)
merchandise, services, advertising, or promotions offered or
provided by Airline or (b) negligent acts or omissions of Airline,
its directors, officers, employees, contractors, or agents.
15.3 Airline's Indemnification of SkyMall. Airline indemnifies and
holds harmless SkyMall, its directors, officers, employees, and
agents against all Claims for: (a) Airline's negligent acts or
omissions; (b) Airline's offering, providing, or failing to
provide any merchandise or services which are to be provided by
Airline; (c) Airline's advertising, promotions, or activities; (d)
SkyMall's use of patents, copyrights, trademarks, tradenames,
logos, slogans, imprints, or any copy supplied by Airline and used
as directed by Airline; and (e) any claim that merchandise
provided by Airline infringes upon the valid patent or other
rights of a third party. This indemnification does not apply to
Claims arising from (a) merchandise, services, advertising, or
promotions offered or provided by SkyMall or (b) negligent acts or
omissions of SkyMall, its directors, officers, employees,
contractors, or agents.
15.4 Notification, Defense of Claims and Settlement. A Party seeking
indemnification (the "Indemnitee")is subject to the following
procedures:
(a) Notice. Indemnitee must notify the other Party (the
"Indemnitor") promptly after learning of a Claim. Failure to
notify Indemnitor of a Claim relieves Indemnitor from the
obligation to indemnify to the extent the delay materially
prejudices defense of the Claim.
(b) Defense. Indemnitor is entitled to assume the defense of the
Claim, with counsel reasonably acceptable to Indemnitee.
Indemnitor is not liable for legal or other expenses incurred
by Indemnitee after notice of Indemnitor's election to assume
the defense of the Claim, other than the reasonable costs
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of investigating the matter and cooperating with counsel.
Indemnitee may employ its own counsel, but the fees and
expenses are at the Indemnitee's expense unless (1)
Indemnitor authorizes employment of counsel by Indemnitee,
(2) Indemnitee reasonably concludes based on the opinion of
counsel that there is a conflict of interest between
Indemnitor and Indemnitee in the conduct of the defense, or
(3) Indemnitor fails to employ counsel to assume the defense.
(d) Settlements. Indemnitor is not obligated for any settlement
unless it agrees to the settlement in writing. If Indemnitor
agrees to a settlement, but Indemnitee unreasonably fails to
enter into the settlement, then Indemnitor's indemnification
obligation for the Claim will not exceed the amount of the
settlement (plus expenses incurred up to the time the
settlement could have been effected).
16. INSURANCE.
16.1 Insurance Amounts and Certificates. Each Party must keep in force
insurance, and furnish to the other certificates evidencing
insurance, as follows: (a) comprehensive general liability
insurance, $4,000,000 combined single limit coverage; (b) products
liability insurance, $4,000,000 combined single limit coverage;
(c) advertisers liability insurance, $4,000,000; and (d)
automobile liability insurance, $1,000,000. Each party must also
keep in force policies of workers compensation insurance in
amounts required by law.
16.2 Endorsements. Each Party will endorse all required policies to:
(a) provide that the insurance is primary insurance and
acknowledge that insurance procured by the other Party is
secondary or excess insurance; (b) name the other Party, its
directors, officers, agents, and employees as additional insureds;
(c) contain a waiver of subrogation clause in favor of the
additional insureds; and (d) require 30 days written notice to the
other Party of any cancellations or adverse material change in
such insurance.
17. MISCELLANEOUS.
17.1 Entire Agreement. This Agreement is the entire agreement of the
Parties regarding its subject matter and supersedes all prior oral
or written agreements.
17.2 Amendments and Waivers. This Agreement may not be amended except
in a writing signed by each Party. No waiver is effective unless
in writing and signed by the Party granting the waiver. Any single
waiver does not operate as a continuing waiver or waive any other
provision or breach of this Agreement, whether in the past or in
the future.
17.3 Assignments and Successors. Neither Party may assign this
Agreement without the prior written consent of the other Party,
which shall not be unreasonably withheld. This Agreement is
binding on, and inures to the benefit of, the Parties and their
respective successors and assigns. Nothing in this Agreement
confers
10
<PAGE> 14
on any person, other than the Parties or their respective
successors and assigns, any rights, obligations, remedies or
liabilities.
17.4 No Joint Venture or Partnership. Nothing in this Agreement
constitutes, creates, or establishes any agency, joint venture or
partnership relationship between the Parties. No Party has any
power or right to represent, act on behalf of, or contractually
bind the other Party as its agent, partner or otherwise.
17.5 Severability. The unenforceability, illegality, or invalidity of
any provision of this Agreement will not alter the remaining
provisions of this Agreement. Each provision of this Agreement is
severable from all other provisions of this Agreement.
17.6 Survival. All agreements, obligations, covenants, terms,
conditions, representations, and warranties made in this Agreement
will survive the execution and delivery of this Agreement until
all obligations of the parties are fully performed. All rights and
obligations of the Parties with regard to Confidential
Information, Non-Competition, Indemnification, and Insurance shall
survive termination of this Agreement.
17.7 Further Actions and Assurances. Each Party will cooperate in good
faith to take actions, and to execute and deliver documents, as
reasonably requested by the other Party.
17.8 Governing Law. This Agreement is governed by and interpreted in
accordance with the laws of Arizona.
17.9 Attorneys' Fees. In any proceeding arising out of or related to
this Agreement, the prevailing Party is entitled to receive, in
addition to any other remedy or award, reasonable attorneys' fees,
costs and other expenses incurred in connection with such
proceeding.
17.10 Notices. Notices must be in writing and are effective (a) on the
date of delivery or (b) 72 hours after mailing by United States
first class mail, registered or certified, return receipt
requested, postage prepaid and properly addressed. Notices must be
sent to the address stated on the signature page (or to any other
address designated by a Party).
17.11 Counterparts. This Agreement may be executed in counterparts, each
of which is an original. All counterparts constitute one and the
same Agreement.
17.12 Exhibits. The Exhibits to this Agreement are incorporated in and
made a part of this Agreement.
17.13 Time. Time is of the essence of this Agreement.
11
<PAGE> 15
17.14 Effective Date. This Agreement is executed ______________, 19____,
to be effective on ___________________________, 19____.
[AIRLINE NAME]
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
[Airline Name]
[address]
____________ (Voice)
____________ (Fax)
SKYMALL, INC.
By: ______________________________
Name: Robert M. Worsley
Title: President
SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Attention: Robert M. Worsley, President
(602) 254-9777 (Voice)
(602) 254-6075 (Fax)
With a copy to:
Lewis and Roca
40 North Central Avenue
Phoenix, Arizona 85004-4429
Attention: Kevin L. Olson, Esq.
12
<PAGE> 16
EXHIBIT A
NET SALES CALCULATION
PART OF THE AIRLINE CUSTOMER SERVICES AGREEMENT
BETWEEN AIRLINE AND SKYMALL
"Net Sales" are determined as follows:
A. Definitions:
(a) "Gross Merchandise Sales" is defined as all gross merchandise
sales from the Catalog but not sales to Airline's employees.
(b) "Concierge Service Fees" is defined as the charge SkyMall
collects from Airline customers for each concierge service
request and is exclusive of the price of goods or services
required to fulfill such request.
(c) "Returned Merchandise Revenue" is defined as the sale amounts
on all returned merchandise or refunds from Airline customers
and applicable restocking charges.
(d) "Cancelled Concierge Service Fees" is defined as any
Concierge Service Fees charged by SkyMall for services
rendered and thereafter cancelled by Airline customers, and
the cost to cancel or return the applicable service or
product.
(e) "Sales Taxes, Excise Taxes and Duties" is defined as all
applicable sales and excise taxes and duties on Catalog
merchandise and services paid by SkyMall for Airline
customers.
(f) "Shipping and Handling Charges" is defined as all shipping,
handling and insurance costs for all Catalog merchandise and
services sold to Airline customers.
(g) "Giftwrapping and Monogramming Charges" is defined as all
extra and special services requested and paid by Airline
customers.
(h) "Advertising Revenues" is defined as the depiction fees and
advertising charges paid by Suppliers for having their
products or services featured in the Catalog.
(i) "Bad Debts" is defined as all bad debts incurred by SkyMall
in administering the SkyMall(R) Program for Airline.
<PAGE> 17
B. Calculation:
Net Sales =
(a) Gross Merchandise Sales
+ (b) Concierge Service Fees
+ (c) Sales Taxes, Excise Taxes and Duties
+ (d) Shipping and Handling Charges
+ (e) Giftwrapping and Monogramming Charges
(Less):
- (a) Returned Merchandise Revenue
- (b) Cancelled Concierge Service Fees
- (c) Sales Taxes, Excises Taxes and Duties
- (d) Shipping and Handling Charges
- (e) Giftwrapping and Monogramming Charges
- (f) Bad Debts
Net Sales excludes Advertising Revenues
C. Example:
<TABLE>
<S> <C>
Merchandise Sales $3,100,000
Concierge Fees 100,000
Taxes 192,000
Shipping & Handling 320,000
Giftwrapping 30,000
----------
Subtotal $3,742,000
(Less):
Merchandise Returns $ 160,000
Cancelled Fees 5,000
Taxes 192,000
Shipping & Handling 320,000
Giftwrapping 30,000
Bad Debts 32,000
----------
Subtotal $ 739,000
----------
TOTAL NET SALES $3,003,000
</TABLE>
<PAGE> 1
EXHIBIT 10.6
SKYMALL, INC.
1994 STOCK OPTION PLAN
(AS AMENDED SEPTEMBER 30, 1996)
1. Purpose.
The SkyMall, Inc. 1994 Stock Option Plan is intended to assist in
attracting and retaining certain key employees to whom options may be granted
under the Plan.
2. Definitions. The following terms have the following meanings:
2.1. "Act" means the Federal Securities Act of 1933, as amended, and
applicable state securities laws.
2.2. "Board" means the Board of Directors of SkyMall, Inc.
2.3. "Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder.
2.4. "Committee" means the Compensation Committee of the Board of
Directors of Skymall, Inc.
2.5. "Company" means SkyMall, Inc. and any of its subsidiaries.
2.6. "Grant Date" means the date on which an Option is granted.
2.7. "Incentive Option" means an Option eligible for tax treatment as
an incentive option under Section 422 of the Code.
2.8. "Non-Qualified Option" means an Option that is not eligible for
tax treatment under Section 422 of the Code
2.9. "Option" means an option to purchase Stock that is granted under
the Plan.
2.10. "Optionee" means an employee to whom an Option has been granted
under the Plan.
2.11. "Plan" means the SkyMall, Inc. 1994 Stock Option Plan, as
amended, the terms and conditions of which are in this instrument.
2.12. "Stock" means the common stock of SkyMall, Inc.
2.13. "Stock Option Agreement" means the written agreement entered into
between the Company and the Optionee that provides for the price and terms of an
option granted under the Plan.
<PAGE> 2
2.14 "Subsidiary" means any corporation, the majority of the
outstanding capital stock of which is owned, directly or indirectly, by the
Company.
2.15. "Tax Date" means the date an Optionee is required to pay the
Company an amount to cover tax withholding on the exercise of a Non-Qualified
option.
2.16. "Ten Percent Shareholder" means an employee who owns more than
10% of the total combined voting power of all classes of stock of the Company.
3. Administration.
3.1. The Plan shall be administered by the Board. Without limiting the
powers of the Board, the Board shall have the power to determine the times
during which any option shall be exercisable, the events upon which any Option
shall be terminated, the amounts, if any, payable to beneficiaries of an
Optionee upon the death of such Optionee, the exercisability of any Option upon
the sale of all or substantially all of the assets of the Company, or a merger
pursuant to which the Company is not the surviving corporation, (other than a
merger that is only a change in form), and other terms of exercise. No member of
the Board shall be eligible to vote with respect to Options to be granted to him
or her.
3.2. The Committee, subject to the provisions of the Plan, shall make
recommendations to the Board regarding:
(a) the employees who shall receive Options, the times when
such Options shall be granted and the time limits within which Options may be
exercised, the number of shares to be subject to each Option, and the terms and
provisions of Stock Option Agreements (which need not be identical):
(b) Matters of interpretation of plan provisions;
(c) rules and regulations relating to the Plan;
(d) Stock Option Agreements under the Plan; and
(e) other determinations advisable for the proper
administration of the Plan.
All decisions and determinations of the Board in the administration of the Plan
shall be final.
4. Tax Characteristics of Options.
Options granted pursuant to the Plan may be designated, but need not be
designated, as Incentive Options. The Stock Option Agreement shall provide
whether an option is an Incentive Option or a Non-Qualified Option. In the case
of options that are Incentive Options the aggregate fair market value
(determined at the time the incentive stock option is granted) of the Stock with
respect to which options are exercisable for the first time by an employee
during any calendar year (under all stock option plans of the Company) shall not
exceed $100,000.
2
<PAGE> 3
5. Stock Subject to the Plan.
5.1 Subject to adjustments pursuant to Section 11 of this Plan, the
aggregate number of shares that may be issued upon the exercise of Options shall
not exceed 650,000 shares of Stock, which may be authorized but unissued shares
or treasury shares, as the Board may determine.
5.2 If an Option for any reason expires or is terminated, those shares
of Stock allocated for issuance upon the unexercised or terminated portion of
such Option may again be subject to an Option under the Plan.
6. Eligibility.
All directors and officers of the Company who are employees of the
Company and other key employees of the Company and any Subsidiary (whether
existing now or a new subsidiary) as selected by the Board shall be eligible to
receive Options under the Plan.
7. Option Exercise Price and Payment of Withholding Taxes.
The price at which shares of Stock may be purchased upon the exercise
of any Option shall be such price as determined by the Board, which shall not be
less than 110% of the fair market value of the Stock on the date of the granting
of the Option, but if the Company desires to grant an Incentive Option to a Ten
Percent Shareholder, the price at which shares may be purchased shall not be
less than 110% of the fair market value of the Stock at the date of grant. Also,
if an Employee desires to exercise a Non-Incentive Option, the Employee shall
pay to the Company the federal and state income and withholding taxes the
Company determines are payable on the spread between the fair market value of
the stock at the date of exercise and Option Price.
8. Term of Options.
The term of each Option shall be determined by the Board, but unless
otherwise determined the term of each option shall be five years from the date
of grant. In no case shall the term of any option exceed ten years from the date
of grant, or five years in the case of a grant of an Incentive Option to a
person who owns 10% or more of the value of the Employer's outstanding Stock.
9. Payment on Exercise of Options.
The price of an exercised Option and any taxes attributable to the
delivery of the Stock to the employee upon exercise of such Option shall be
paid:
(a) in United States dollars in cash or by check, bank draft or money
order payable to the order of the Company;
(b) at the discretion of the Board, through the delivery of Stock with
a fair market value equal to the exercise price and withholding taxes, if any;
or
3
<PAGE> 4
(c) at the discretion of the Board, through a combination of (a) and
(b).
10. Non-Transferability of Options.
Options shall not be transferable by the Optionee, except that if an
employee dies, his or her personal representative may exercise the option within
90 days of the date of the employee's death.
11. Adjustments.
If the Company:
(a) declares a dividend or makes a distribution on its Stock payable in
Stock or securities convertible into Stock;
(b) recapitalizes through a split-up of the outstanding shares of Stock
into a greater number or a combination of the outstanding Stock into a lesser
number: or
(c) issues, by reclassification of its Stock, any shares of Stock, the
Board shall make appropriate and equitable adjustments in the number and kind of
shares subject to outstanding Options under the Plan. Any other adjustments to
the Options shall be within the sole discretion of the Board. If the adjustment
would produce fractional shares with respect to any unexercised Option, the
Board may adjust appropriately the number of shares covered by the Option to
eliminate the fractional shares. The price of any shares subject to an
outstanding Option shall be adjusted so there will be no change in the aggregate
purchase price payable upon the exercise of such Option.
12. Additional Restrictions.
Notwithstanding any other provisions of the Plan, any Option granted
under the Plan may contain such additional or more restrictive provisions as the
Board deems advisable and consistent with the Plan.
13. Registration.
The Plan, the Stock to be issued pursuant to the exercise of Options or
the Options granted under the Act, may in the discretion of the Board, be
registered under the Act.
14. Effective Date of Plan.
The Plan shall become effective as of January 1, 1994 and shall remain
in effect for ten years from its effective date, unless it is sooner terminated
by the Board. No Incentive Options may be issued under the Plan unless the Plan
is approved by the stockholders of the Company within one year from the date the
Plan is adopted by the Company.
4
<PAGE> 5
15. Amendment Termination.
The Board, in its discretion and at any time, may modify, amend or
terminate the Plan. Neither the termination of the Plan nor any modification or
amendment thereof, shall adversely affect any rights under an Option previously
granted under the Plan without the consent of the Optionee. Notwithstanding the
foregoing, the Board may amend the Plan to the extent necessary to cause Options
granted under the Plan to meet the requirements of the Code and regulations
thereunder and the Act.
16. Miscellaneous.
16.1. The Grant Date of any Option under this Plan shall be the date
specified by the Board in the Stock Option Agreement. The grant of any Option
shall be subject to the execution by an Optionee of a Stock Option Agreement in
the form and containing the terms specified by the Board.
16.2. Nothing in the Plan or any Option granted hereunder shall confer
upon any employee any right to continue in the service of the Company or a
Subsidiary.
16.3 The grant of Options under the Plan, the issuance and delivery of
shares upon the exercise of Options, and any other matters relating thereto
shall be subject to all laws, rules and regulations as may from time to time be
applicable thereto, including but not limited to, any and all rules and
regulations of any stock exchange or exchanges upon which the shares of the
Company may be listed and all applicable federal and state securities laws, and
shall be further subject to the approval of counsel for the Company with
respect to compliance with such laws, rules and regulations.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
In the case of an Incentive Option, any Optionee who disposes of
shares of Stock acquired on the exercise of an Option by sale or exchange (a)
either within two (2) years after the date of the grant of the Option under
which the Stock was acquired or (b) within one (1) year after the acquisition
of such shares of Stock shall notify the Company of such disposition and of the
amount realized upon such disposition.
16.4 No person shall acquire any rights as an Optionee under this Plan
unless and until a Stock Option Agreement shall have been duly executed on
behalf of the Company by such officer or officers as the Board shall designate
for such purpose, delivered to the person named therein, and executed by such
person. No person shall have any rights as a shareholder with respect to any
shares covered by an Option granted pursuant to the Plan until the date of the
issuance of a share certificate to the Optionee for such shares.
5
<PAGE> 6
16.5 The President of the Company has been authorized to execute this
Plan, as amended, and has executed the Plan, as amended, on the date indicated
below.
----------------------------------------
President
Date: September 30, 1996
6
<PAGE> 1
EXHIBIT 10.7
SKYMALL, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purposes Of The Plan. The purposes of this Plan are to enable the
Company to attract and retain the best available individuals to serve as
non-employee members of the Board, to reward such directors for their
contributions to the Company, and to maximize the identity of interest between
such directors and the Company's stockholders generally.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Company" shall mean SkyMall, Inc., a Nevada corporation.
(c) "Exercise Price" shall mean, with respect to each Share
granted, the Fair Market Value on the date of grant.
(d) "Fair Market Value" shall mean, with respect to the date a
given Option is granted or exercised, the value determined by the Board
in good faith using a generally accepted valuation method; provided,
however, that where there is a public market for the Stock, the Fair
Market Value per Share shall be the mean of the final bid and asked
prices of the Stock on the date of grant or exercise, as reported in
The Wall Street Journal (or, if not so reported, as otherwise reported
by the Nasdaq Stock Market's National Market or Nasdaq) or, in the
event the Stock is listed on a stock exchange, the Fair Market Value
per Share shall be the closing price of the Stock on such exchange on
the date of grant or exercise of the Option, as reported in The Wall
Street Journal.
(e) "Option" shall mean a right to purchase Stock, granted
pursuant to the Plan.
(f) "Optioned Stock" shall mean the Stock subject to an
Option.
(g) "Optionee" shall mean a non-employee director of the
Company who has been granted an Option.
(h) "Plan" shall mean this SkyMall, Inc. Non-Employee Director
Stock Option Plan.
(i) "Share" shall mean a share of the Stock.
(j) "Stock" shall mean the common stock of the Company
described in the Company's Articles of Incorporation, as amended or
restated from time to time.
<PAGE> 2
(k) "Trading Day" shall mean a day on which the Fair Market
Value of the Stock can be determined.
3. Stock Subject To The Plan.
(a) Subject to increases and adjustments pursuant to Section 9
hereof, the initial number of Shares reserved and available for
distribution under the Plan shall be 100,000.
(b) If an Option should terminate, or be canceled, rescinded
or surrendered, the Optioned Stock subject to such Option shall not be
available for future grants under the Plan.
4. Option Grants.
(a) An Option to purchase 5,000 Shares shall be granted to
each non-employee director of the Board on appointment to the Board.
(b) In addition, an Option to purchase 3,000 Shares shall be
granted annually to each non-employee director of the Board on the date
determined pursuant to Section 10 hereof; provided, however, that such
Option shall not be granted to any non-employee director of the Company
who during the fiscal year immediately preceding such grant date (or
the period that he served as a director of the Company, if less than
the full fiscal year) attended fewer than 75 percent of the aggregate
of (i) the total number of the regularly scheduled and special meetings
of the Board and (ii) the total number of meetings held by all
committees of the Board on which he served; provided, further, that no
such Options shall be granted to any of the non-employee directors of
the Company in the event that, on such grant date, the number of Shares
remaining available for distribution under the Plan is less than the
product of the number of then current non-employee directors of the
Company multiplied by 3,000.
5. Board Approval And Effective Dates. This Plan shall become effective
as of October 15, 1996, the date as of which the Board and the stockholders of
the Company adopted the Plan. The Plan and all outstanding Options shall remain
in effect until such Options shall have been exercised, shall have expired or
shall otherwise be terminated.
6. Term; Exercise; Rights As A Stockholder.
(a) The term of each Option shall be ten years from the date
of grant thereof. An Option shall be exercisable upon grant and may be
exercised in whole or in part at any time or times during its term;
provided, however, that an Option may not be exercised for a fraction
of a Share.
2
<PAGE> 3
(b) An Option shall be deemed to be exercised upon receipt by
the Company from the Optionee of written notice of such exercise. Such
notice shall be accompanied by full payment for the Shares subject to
such exercise.
(c) No person shall have any right or privilege as a
stockholder of the Company, whether to vote or to receive dividends or
otherwise, by reason of the grant of an Option, but shall obtain such
right only when Shares are actually issued to such person upon exercise
thereof.
7. Payment. The Exercise Price shall be paid:
(a) In United States dollars in cash or by check payable to
the order of the Company; or
(b) At the election of the Optionee by delivery of Shares with
an aggregate Fair Market Value equal to the Exercise Price; or
(c) By any combination of (a) and (b) above.
The Board shall determine acceptable methods for tendering Stock as
payment upon exercise of an Option and may impose such limitations and
prohibitions on the use of Stock to exercise an Option as it deems appropriate.
8. Transferability Of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee or by his guardian or legal
representative.
In the event of the Optionee's death, his Option shall be exercisable,
prior to the expiration of the Option, by the person or entity to whom his
accrued and vested rights pass by will or by the laws of descent and
distribution.
9. Adjustments Upon Changes In Capitalization Or Merger. If the
outstanding Stock of the Company shall at any time be changed or exchanged by
declaration of a stock dividend, split-up, combination of shares,
recapitalization, merger, consolidation, or other corporate reorganization in
which the Company is the surviving corporation, the number and kind of Shares
subject to the Plan or subject to any Options theretofore granted, and the
Options' prices, shall be appropriately and equitably adjusted.
In the event of a liquidation or dissolution of the Company, sale of
all or substantially all of its assets, or a merger, consolidation or other
corporate reorganization in which the Company is not the surviving corporation,
or any merger or other reorganization in which the
3
<PAGE> 4
Company is the surviving corporation but the holders of its Stock receive
securities of another corporation, any outstanding Options hereunder shall be
appropriately and equitably adjusted.
10. Time Of Granting Options. The Option grant date shall be the third
Trading Day after the Company publicly announces its year-end financial results
for the immediately preceding fiscal year.
11. Amendment And Termination Of The Plan. The Board may from time to
time amend the Plan in whole or part in such respects as the Board may deem
advisable or may terminate the Plan, provided, however, that amendments to the
Plan relating to the amount, price, or timing of the option grants shall not be
made more than once in any six month period. Any amendment or termination of the
Plan shall not affect Options already granted and such Options shall remain in
full force and effect as if the Plan had not been amended or terminated. Any
amendment to the Plan shall be submitted as a proposal for approval of the
Company's stockholders if such approval of the amendment is necessary for the
Plan to comply or to continue to comply with the applicable exemption, if any,
under Section 16(b) of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
12. Conditions Upon Issuance Of Shares. The Plan, the grant, the
exercise of Options and the obligations of the Company shall be subject to all
applicable federal and state laws, rules and regulations, and to such approvals
by any regulatory or governmental agency as may be required. The Company shall
not be required to issue or deliver any certificate or certificates for Shares
of Stock prior to (i) the admission of such Shares to listing on any stock
exchange on which the Stock may then be listed, and (ii) the completion of any
registration or other qualification of such Shares under any state or federal
law (including, without limitation, the Securities Act of 1933, as amended), or
rulings or regulations of any government body which the Company shall, in its
sole discretion, determine to be necessary or advisable.
As a condition to the exercise of an Option, the Company may require
the Optionee to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is necessary or advisable.
13. Miscellaneous Provisions.
(a) Plan Expense. Any expenses of administering this Plan
shall be borne by the Company.
(b) Taxes. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Stock under the Plan after giving the person entitled to
receive such Stock notice as far in advance as practical, and the
Company may defer making delivery of such Stock if any such tax may be
pending unless and until indemnified to its satisfaction.
4
<PAGE> 5
(c) Construction Of Plan. The validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined
by the Board in accordance with the laws of the State of Nevada, and
such determinations shall be final and conclusive.
(d) Gender. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the
singular shall include the plural and vice versa, as appropriate.
As approved by the Board of Directors as of October 15, 1996.
----------------------
ROBERT M. WORSLEY
President
ATTEST:
- ------------------------------
DAVID A. WIRTHLIN
Secretary
5
<PAGE> 1
EXHIBIT 11
SkyMall, Inc.
Supplemental Statement Re: Computation of Per Share Loss
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
For Primary Loss Per Share(4)(5) 1991 1992 1993 1994
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding during the period, excluding shares
issued within 12 months prior to the filing of the
registration statement 4,378,575 4,448,043 3,131,736 3,276,450
Common stock equivalents issuable upon
conversion of Preferred Stock from private
placement in October 1996(1)(2) 540,000 540,000 540,000 540,000
Effect of treasury stock method on convertible
shares from private placement(2) (352,941) (352,941) (352,941) (352,941)
Common stock equivalents issuable upon
conversion of Preferred Stock from conversion
of shareholder debt in October 1996(3) 900,000 900,000 900,000 900,000
Effect of treasury stock method on convertible
shares from conversion of shareholder debt(3) (588,235) (588,235) (588,235) (588,235)
---------- ---------- ---------- -----------
Pro forma weighted average number of common and
common equivalent shares outstanding 4,877,399 4,946,867 3,630,559 3,775,274
========== ========== ========== ===========
Net income (loss) $(5,075,000) $(9,640,000) $(5,766,000) $(12,186,000)
Interest on debt converted to preferred stock - - - 129,000
---------- ---------- ---------- -----------
Net income (loss) as adjusted $(5,075,000) $(9,640,000) $(5,766,000) $(12,057,000)
========== ========== ========== ===========
Pro forma net income (loss) per share $ (1.04) $ (1.95) $ (1.59) $ (3.19)
========== ========== ========== ===========
<CAPTION>
Year ended For the
December 31, Six months ended June 30,
------------ -------------------------
For Primary Loss Per Share(4)(5) 1995 1995 1996
------------ --------- ----------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding during the period, excluding shares
issued within 12 months prior to the filing
of the registration statement 5,150,000 5,150,000 5,150,000
Common stock equivalents issuable upon
conversion of Preferred Stock from private
placement in October 1996(1)(2) 540,000 540,000 540,000
Effect of treasury stock method on convertible
shares from private placement(2) (352,941) (352,941) (352,941)
Common stock equivalents issuable upon
conversion of Preferred Stock from conversion
of shareholder debt in October 1996(3) 900,000 900,000 900,000
Effect of treasury stock method on convertible
shares from conversion of shareholder debt(3) (588,235) (588,235) (588,235)
--------- --------- ---------
Pro forma weighted average number of common and
common equivalent shares outstanding 5,648,824 5,648,824 5,648,824
========= ========= =========
Net income (loss) $ 758,000 $ 165,000 $ 770,000
Interest on debt converted to preferred stock 419,000 169,000 252,000
--------- --------- ---------
Net income (loss) as adjusted $1,177,000 $ 334,000 $1,022,000
========= ========= =========
Pro forma net income (loss) per share $ 0.21 $ 0.06 $ 0.18
========= ========= =========
</TABLE>
(1) Pursuant to the rules of the Securities and Exchange Commission, common and
common equivalent shares issued during the 12 months immediately preceding
the anticipated filing date of the Company's initial public offering have
been included in the calculation of common and common equivalent shares as
if they were outstanding for all periods presented, including loss years
where the impact of incremental shares is antidilutive; as calculated using
the treasury stock method assuming an initial public offering price of
$8.50 per share.
(2) Shares of common stock potentially issuable upon conversion of convertible
preferred stock have been included since the convertible preferred stock is
automatically converted upon completion of the initial public offering.
Shares outstanding for all periods presented included in the computation of
pro forma
<PAGE> 2
earnings per share have been restated using the treasury stock method in
accordance with SAB 83. The proceeds from the private placement of
preferred stock were $3 million, before expenses.
(3) Shares of common stock issuable upon conversion of preferred stock issued
in exchange for notes payable to shareholders have been included since the
preferred stock is automatically converted upon completion of the initial
public offering at 66 2/3 percent of the initial public offering price. The
treasury stock method has been used to reduce the shares outstanding in
each period to the extent of outstanding shareholder debt and accrued
interest of up to $5 million using an assumed initial offering price of
$8.50 per share, before expenses.
(4) No calculation of fully diluted loss per share has been provided as fully
diluted loss per share is equal to primary loss per share.
(5) Common and common equivalent shares have been adjusted to reflect a
1,592-for-1 stock exchange upon incorporation in Nevada in October 1996.
<PAGE> 1
EXHIBIT 23.1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made part of this registration
statement.
Arthur Andersen LLP
Phoenix, Arizona
October 21, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM COMPANY
FINACIAL STATEMENTS (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 455
<SECURITIES> 0
<RECEIVABLES> 1,138
<ALLOWANCES> (175)
<INVENTORY> 21
<CURRENT-ASSETS> 3,245
<PP&E> 3,597
<DEPRECIATION> (1,784)
<TOTAL-ASSETS> 5,240
<CURRENT-LIABILITIES> 8,815
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> (14,268)
<TOTAL-LIABILITY-AND-EQUITY> 5,240
<SALES> 12,432
<TOTAL-REVENUES> 18,225
<CGS> 9,553
<TOTAL-COSTS> 17,807
<OTHER-EXPENSES> (37)
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 405
<INCOME-PRETAX> 770
<INCOME-TAX> 0
<INCOME-CONTINUING> 770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 770
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT OF ALAN C. ASHTON
I, Alan C. Ashton, do hereby consent to be named as nominee to the
Board of Directors of SKYMALL, INC., a Nevada corporation (the "Company"), in
the Company's Registration Statement on Form S-1, including any pre-effective
and post-effective amendments thereto, to be filed with the Securities and
Exchange Commission.
/s/ ALAN C. ASHTON
------------------------------
<PAGE> 1
EXHIBIT 99.2
CONSENT OF LYLE R. KNIGHT
I, Lyle R. Knight, do hereby consent to be named as nominee to the
Board of Directors of SKYMALL, INC., a Nevada corporation (the "Company"), in
the Company's Registration Statement on Form S-1, including any pre-effective
and post-effective amendments thereto, to be filed with the Securities and
Exchange Commission.
/s/ LYLE R. KNIGHT
------------------------------
<PAGE> 1
EXHIBIT 99.3
CONSENT OF THOMAS J. LITLE
I, Thomas J. Litle, do hereby consent to be named as nominee to the
Board of Directors of SKYMALL, INC., a Nevada corporation (the "Company"), in
the Company's Registration Statement on Form S-1, including any pre-effective
and post-effective amendments thereto, to be filed with the Securities and
Exchange Commission.
/s/ THOMAS J. LITLE
------------------------------
<PAGE> 1
EXHIBIT 99.4
CONSENT OF RANDY PETERSEN
I, Randy Petersen, do hereby consent to be named as nominee to the
Board of Directors of SKYMALL, INC., a Nevada corporation (the "Company"), in
the Company's Registration Statement on Form S-1, including any pre-effective
and post-effective amendments thereto, to be filed with the Securities and
Exchange Commission.
/s/ RANDY PETERSEN
------------------------------
