================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 000-21657
SKYMALL, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 86-0651100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1520 EAST PIMA STREET, PHOENIX, ARIZONA 85034
(Address of principal executive offices) (Zip Code)
(602) 254-9777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 8, 1999, there were 10,423,426 shares of the Common Stock,
$.001 par value, of the Company outstanding.
================================================================================
<PAGE>
SKYMALL, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998................................................ 3
Condensed Consolidated Statements of Operations - Three and Nine
months ended September 30, 1999 and 1998......................... 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 1998................................ 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................. 24
Item 2. Changes in Securities and Use of Proceeds......................... 24
Item 3. Defaults Upon Senior Securities................................... 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 26
Signatures................................................................. 28
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SKYMALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
September 30, December 31,
1999 1998
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 945 $ 7,951
Accounts receivable, net 5,849 12,351
Inventory 879 630
Income tax receivable 960 0
Prepaid catalog costs and other 3,244 1,513
Deferred income taxes 0 709
------- -------
Total current assets 11,877 23,154
Property and equipment, net 11,396 6,474
Goodwill, net 2,868 3,022
Other assets, net 1,402 182
Deferred income taxes 6,034 0
------- -------
Total assets $33,577 $32,832
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $15,540 $11,665
Accrued liabilities 3,006 1,217
Unearned revenue 1,908 4,281
Income taxes 0 761
Current portion of notes payable and
capital leases 215 226
------- -------
Total current liabilities 20,669 18,150
Deferred income taxes 158 209
Notes payable and capital leases, net
of current portion 7,609 239
------- -------
Total liabilities 28,436 18,598
------- -------
SHAREHOLDERS' EQUITY:
Common stock 9 9
Additional paid-in capital 10,225 8,364
Retained earnings (deficit) (5,093) 5,861
------- -------
Total shareholders' equity 5,141 14,234
------- -------
Total liabilities and shareholders' equity $33,577 $32,832
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SKYMALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Merchandise sales, net $ 12,353 $ 9,657 $ 35,286 $ 29,022
Placement fees and other 2,812 3,935 8,824 11,504
----------- ----------- ----------- -----------
Total revenues 15,165 13,592 44,110 40,526
COST OF GOODS SOLD 8,022 6,367 23,111 20,307
----------- ----------- ----------- -----------
Gross margin 7,143 7,225 20,999 20,219
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Catalog expenses 3,604 2,723 8,641 8,103
Selling expenses 1,219 816 3,188 2,501
Customer service and fulfillment expenses 1,557 940 5,084 2,951
General and administrative expenses 7,193 2,224 22,146 5,924
----------- ----------- ----------- -----------
Total operating expenses 13,573 6,703 39,059 19,479
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (6,430) 522 (18,060) 740
Interest expense (129) (4) (150) (22)
Other income 72 112 299 394
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (6,487) 630 (17,911) 1,112
Income tax expense (benefit) (3,044) 250 (6,957) 443
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (3,443) $ 380 $ (10,954) $ 669
=========== =========== =========== ===========
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (.38) $ .04 $ (1.22) $ .08
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 9,027,422 8,514,601 8,959,399 8,511,055
=========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (.38) $ .04 $ (1.22) $ .08
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 9,027,422 8,515,211 8,959,399 8,513,513
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
SKYMALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended
September 30,
---------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(10,954) $ 669
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,475 882
Changes in operating assets and liabilities (818) (2,046)
-------- --------
Net cash used in operating activities (10,297) (495)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,243) (1,692)
-------- --------
Net cash used in investing activities (6,243) (1,692)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 7,400 0
Proceeds from issuance of common stock 2,175 139
Payments on notes payable and capital leases, net (41) (49)
Repurchase of common shares 0 (127)
-------- --------
Net cash provided by (used in)
financing activities 9,534 (37)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (7,006) (2,224)
CASH AND CASH EQUIVALENTS,
beginning of period 7,951 9,412
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 945 $ 7,188
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
SKYMALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(In thousands, except per share data)
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
SkyMall, Inc. (the "Company") was incorporated in 1989 as an Arizona
corporation (and reincorporated in Nevada in October 1996). The Company is an
integrated specialty retailer that markets high-quality products and services
through a number of unique channels and partnerships. The Company offers its
products and services via various media, including the SkyMall in-flight print
catalogs, workplace catalogs, multi-media CD-ROM and on the Internet at
WWW.SKYMALL.COM, WWW.SKYMALLTRAVEL.COM and WWW.DURHAM.SKYMALL.COM. The Company
maintains substantially no inventory related to products sold through the
Company's channels. Substantially all products displayed in the Company's
in-flight print catalogs and the SkyMall Web sites are carried and fulfilled by
participating merchants. The Company operates on a calendar year end of December
31.
CONSOLIDATION
The condensed consolidated financial statements include the accounts of
SkyMall, Inc. and its wholly-owned subsidiaries, SKYMALL.COM, INC., Durham &
Company and Disc Publishing, Inc., and include all adjustments and
reclassifications necessary to eliminate the effect of significant intercompany
accounts and transactions.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain information and footnote disclosures normally included in consolidated
financial statements have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998. The condensed consolidated results of operations for the three-month
and nine-month periods ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is based upon the weighted
average shares outstanding. Outstanding stock options and warrants are treated
as common stock equivalents for the purposes of computing diluted net income
(loss) per common share and represent the difference between basic and diluted
weighted average shares outstanding. The following is a summary of the
computation of basic and diluted net income (loss) per common share (amounts in
thousands except per share amounts):
6
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic net income (loss) per common share:
Net income (loss) $ (3,443) $ 380 $(10,954) $ 669
======== ======== ======== ========
Weighted average common shares 9,027 8,515 8,959 8,511
======== ======== ======== ========
Basic per share amount $ (.38) $ .04 $ (1.22) $ .08
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Diluted net income (loss) per common share:
Net income (loss) $ (3,443) $ 380 $(10,954) $ 669
======== ======== ======== ========
Weighted average common shares 9,027 8,515 8,959 8,511
Options and warrants assumed exercised 0 0 0 3
-------- -------- -------- --------
Total common shares plus assumed exercises 9,027 8,515 8,959 8,514
======== ======== ======== ========
Diluted per share amount $ (.38) $ .04 $ (1.22) $ .08
======== ======== ======== ========
</TABLE>
As a result of anti-dilutive effects, approximately 170,000 and
313,000 employee options and other common stock equivalents were not included in
the computation of diluted earnings per share for the three-month and nine-month
periods ended September 30, 1999, respectively.
NOTE 3 - SEGMENT AND RELATED INFORMATION
Summarized financial information concerning the Company's reportable
segments for the three months ended September 30, 1999 and 1998 and the nine
months ended September 30, 1999 and 1998 is shown in the following table
(amounts in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
REVENUES:
In-flight Catalog $10,890 $13,282 $34,587 $39,615
Workplace catalog 1,407 0 3,465 0
Web site 2,762 310 5,939 911
Disc Publishing 106 0 119 0
------- ------- ------- -------
Total revenues $15,165 $13,592 $44,110 $40,526
======= ======= ======= =======
7
<PAGE>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
GROSS MARGIN:
In-flight Catalog $ 5,334 $ 7,071 $16,953 $19,787
Workplace catalog 551 0 1,369 0
Web site 1,152 154 2,558 432
Disc Publishing 106 0 119 0
------- ------- ------- -------
Total gross margin $ 7,143 $ 7,225 $20,999 $20,219
======= ======= ======= =======
IDENTIFIABLE ASSETS:
In-flight Catalog $23,186 $22,582 $23,186 $22,582
Workplace catalog 4,444 0 4,444 0
Web site 5,930 0 5,930 0
Disc Publishing 17 0 17 0
------- ------- ------- -------
Total identifiable assets $33,577 $22,582 $33,577 $22,582
======= ======= ======= =======
NOTE 4 - BUSINESS ACQUISITIONS
DURHAM & COMPANY
On October 12, 1998, the Company acquired all of the outstanding
shares of Durham & Company, an employee logo and incentive merchandise company
that markets its products principally through catalogs in the workplace, for
$2.9 million in cash and a note payable of $200,000, totaling $3.1 million. In
November 1999, the parties intend to convert the note into common stock and
warrants of the Company. This acquisition has been accounted for as a purchase,
and the results of operations of the acquired business have been included in the
consolidated financial statements since the date of acquisition. The excess
purchase price over the fair value of net assets acquired was $3,074,206 and has
been recorded as goodwill and is being amortized on a straight-line basis over
15 years. The purchase price was allocated as follows:
Accounts receivable $ 476,110
Inventory 651,790
Property, equipment and other assets 170,514
Goodwill 3,074,206
Liabilities assumed (1,272,620)
------------
$ 3,100,000
============
The following unaudited consolidated pro forma information is presented as if
the Durham & Company acquisition had occurred on January 1, 1998.
8
<PAGE>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- -------
Net merchandise sales $12,353 $11,001 $ 35,286 $31,838
Net income (loss) $(3,443) $ 485 $(10,954) $ 511
Basic net loss per common share $ (.38) $ .06 $ (1.22) $ .06
Diluted net loss per common share $ (.38) $ .06 $ (1.22) $ .06
The consolidated pro forma information includes adjustments to give effect to
amortization and goodwill. The unaudited consolidated pro forma information is
not necessarily indicative of the combined results that would have occurred had
the acquisition been made on January 1, 1998, nor is it indicative of the
results that may occur in the future.
DISC PUBLISHING, INC.
On September 20, 1999, the Company completed a merger with Disc
Publishing, Inc. SkyMall issued 280,555 shares of its common stock in exchange
for all of the outstanding common stock of Disc Publishing based on a merger
exchange ratio of 2.8 shares of the Company's common stock for each share of
Disc Publishing common stock. The merger qualified as a tax free exchange and
was accounted for as a pooling of interests. Accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the business combination to include the combined financial results of SkyMall
and Disc Publishing. The following table presents a reconciliation of net
merchandise sales and net income (loss) previously reported by the individual
companies to those presented in the accompanying consolidated financial
statements (amounts in thousands).
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
REVENUES:
SkyMall $15,059 $13,592 $ 43,991 $40,526
Disc Publishing 106 0 119 0
------- ------- -------- -------
Total revenues $15,165 $13,592 $ 44,110 $40,526
======= ======= ======== =======
NET INCOME (LOSS):
SkyMall $(3,341) $ 380 $(10,632) $ 669
Disc Publishing (102) 0 (322) 0
------- ------- -------- -------
Total net income (loss) $(3,443) $ 380 $(10,954) $ 669
======= ======= ======== =======
9
<PAGE>
NOTE 5 - RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
The statement, which was to be applied prospectively, is effective for the
Company's quarter ending March 31, 2000. In June 1999, the FASB issued Statement
of Financial Accounting Standards 137 - Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133. This statement deferred the effective date of SFAS 133 to the Company's
quarter ending March 31, 2001. The Company is currently evaluating the impact of
SFAS 133 on its future results of operations and financial position.
In January 1999, the Company adopted Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." This Statement of Position (SOP) provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
statement identifies the characteristics of internal-use software, the
capitalization criteria and the amortization method. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Under SOP 98-1, the Company
capitalized costs of $2.2 million and $3.3 million during the three months and
nine months ended September 30, 1999, respectively.
In January 1999, the Company adopted Statement of Position 98-5,
"REPORTING ON THE COSTS OF START-UP ACTIVITIES." This SOP provides guidance on
the financial reporting of start-up costs and organization costs. The SOP
requires costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Application of SOP 98-5 did not have a material impact on the Company's
financial condition, results of operations or earnings per share data.
In April 1999, the Company adopted APB Opinion No. 29, "ACCOUNTING FOR
NON-MONETARY TRANSACTIONS." This APB opinion provides guidance on accounting for
transactions that involve primarily an exchange of non-monetary assets,
liabilities or services ("barter transactions"). Placement fees and other
revenues include barter revenues which represent an exchange by SkyMall of
advertising space in its print and e-commerce media for reciprocal services,
including print and e-commerce advertising. Revenues and expenses from barter
transactions are recorded at the lower of estimated fair value of the services
received or delivered. Barter revenues and expenses recognized during the three
and nine months ended September 30, 1999, were $292,000 and $600,000,
respectively.
NOTE 6 - CONTINGENCIES
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management, there is no such legal proceeding pending or
asserted against or involving the Company the outcome of which is likely to have
a material adverse effect upon the consolidated financial position or results of
operations of the Company.
In 1999, the Company disputed certain charges from a major supplier for
past services that totaled approximately $1.1 million. In October of 1999, the
Company negotiated a settlement with the supplier regarding these charges. In
connection with this settlement, the Company recognized a loss of approximately
$300,000 in the third quarter of 1999.
10
<PAGE>
NOTE 7 - CONSOLIDATED INCOME TAXES
Income tax benefit was $3 million and $7 million for the three and nine
months ended September 30, 1999, respectively, compared to income tax expense of
$250,000 and $443,000 for the same periods in 1998. The Company has recorded an
income tax receivable of $960,000 that relates to the Company's ability to
recover taxes paid in prior years. Deferred income taxes reflect the tax effects
of temporary differences between the amounts of assets and liabilities for
accounting purposes and the amounts used for income tax purposes. Deferred tax
assets and liabilities of $6 million and $158,000, respectively, have been
recorded at September 30, 1999. The ability of the Company to utilize these
deferred tax assets is dependent on the Company's profitability over the period
of years that the temporary differences are available to be utilized. In
accordance with applicable accounting principles, the Company will continue to
evaluate the recognition of future income tax benefits and deferred tax assets
in periods where the Company is not profitable.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition and should be read in
conjunction with the attached Condensed Consolidated Financial Statements and
Notes thereto and with the Company's audited Consolidated Financial Statements,
the Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations relating thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
Unless the context indicates otherwise, the terms "SkyMall," the
"Company," "we," "us" or "ours" refer to SkyMall, Inc. and its subsidiaries,
SKYMALL.COM, INC., Durham & Company and Disc Publishing, Inc.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, in future filings by the Company with
the Securities and Exchange Commission and in the Company's written and oral
statements made by or with the approval of an authorized executive officer,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. These statements discuss, among other items, the
Company's growth strategy and anticipated trends in our business. Words and
phrases such as "should be," "will be," "believes," "expects," "anticipates,"
"plans," "intends," "may" and similar expressions identify forward-looking
statements. Forward-looking statements are made based upon our belief as of the
date that such statements are made. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties, many of which are beyond our 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.
Examples of uncertainties which could cause such differences include, but are
not limited to, the Company's dependence on its relationships with its airline,
merchant, and other partners, the ability of the Company to attract and retain
key personnel, especially highly skilled technology personnel, the ability of
the Company to secure additional capital to finance its business strategy,
fluctuations in paper prices and airline fuel costs, customer credit risks,
competition from other catalog companies, retailers and e-commerce companies,
and the Company's reliance on technology and information and telecommunications
systems, all of which are discussed more fully below and in the Company's other
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events, or otherwise.
OVERVIEW
GENERAL
Founded in 1989, SkyMall, Inc. is an integrated specialty retailer
that markets high-quality products and services through a number of unique
channels and partnerships. The Company offers its products and services via
various media, including the SkyMall in-flight print catalogs, workplace
catalogs, multi-media CD-ROM and on the Internet at WWW.SKYMALL.COM,
WWW.SKYMALLTRAVEL.COM and WWW.DURHAM.SKYMALL.COM. Our products and services are
provided by more than 300 retailers, including American Country Home, Australian
Outback Collection, Balducci's, Canadian Geographic, Claire Murray,
Frontgate(R), FTD.com, Garden.com, Hammacher Schlemmer(R), Herrington(R),
Improvements(R), Langenbach, Lillian Vernon(R), L.L. Bean(R), Orvis(R), Samsung,
Seiko, Successories(R), The Sharper Image(R), T. Shipley(R), The Wine
Enthusiast(TM), and WorldClass Concierge Services(R). The Company offers a
diverse variety of products from numerous product categories, including
clothing, fashion accessories, health and beauty aids, children's toys,
12
<PAGE>
executive gifts, educational products, gourmet cooking aids, exercise equipment,
jewelry, luggage, travel aids, and home accessories.
SkyMall is a "one-stop" shopping source for customers who may
purchase a variety of merchandise from many different well-known merchants in a
single transaction. Although most of the merchandise offered in the SkyMall
catalogs is available from other catalog and retail companies, each of these
companies typically has its own policies for shipping and handling charges,
merchandise returns, sales taxes and price guarantees, as well as its own Web
site. In addition, each company typically has different customer service hours
and credit and payment policies. By aggregating the merchandise of our various
participating merchants into a single location in our print catalog and on our
Web site, we afford our customers access to thousands of products offered by
more than 300 merchants and the convenience of one-stop shopping.
Our print media provides consumers with a selection of only the
best-selling products from our most well-known merchant partners. This ensures
that consumers quickly see the most popular items, without having to review
hundreds of items that may be of little interest. Through our online database,
we offer online consumers a greater product selection. For the convenience of
our customers, our online database is searchable by a number of parameters that
allow the customer to quickly locate products that are of interest to that
consumer. We plan to further expand the selection and variety of our product
offering and implement additional online technologies that will allow us to use
customer recommendation software to offer SkyMall customers personalized
recommendations based on individual tastes and preferences.
PRINT MEDIA
GENERAL. We market our merchandise through a number of print media,
including our in-flight catalogs, international catalogs and workplace catalogs.
We continue to seek additional ways to expand our print media distribution and
are currently testing a number of new channels, including hotels, consumer
loyalty programs and alliances with credit card companies which have access to
significant customer databases. The merchandise of each participating merchant
in our catalogs is presented in a separate section of each catalog to allow
browsing from "store-to-store," providing the convenience and variety of an
upscale shopping mall environment.
SKYMALL DOMESTIC IN-FLIGHT CATALOGS. Our in-flight catalogs, which
are placed in airline seat pockets, represent our largest distribution channel.
Over the past eight years, we have experienced substantial growth in our
domestic in-flight catalog business. Our in-flight catalog is available to over
70% of all domestic airline passengers annually.
The SkyMall program offers airlines a low-risk means of
incrementally increasing their earnings. In exchange for placement of our
catalogs in seat-back pockets, we pay each airline partner a monthly commission
based on net merchandise sales 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, our airline partners also benefit from enhancing the in-flight
experience of their passengers by providing our catalogs as an additional
amenity.
SKYMALL INTERNATIONAL IN-FLIGHT CATALOGS. We believe that the
demographic and technological trends that are driving the domestic consumer to
shift from traditional retail shopping are also present in many international
markets, which we believe are substantially under-served. In early 1998, we
launched an international initiative under which we began making specialized
catalogs available to passengers on certain international flights traveling to
Japan and serving the Pacific Rim. These catalogs feature merchandise tailored
to this audience and are offered in three languages: English, Japanese and
Chinese.
13
<PAGE>
In March 1999, the Company began offering SkyMall catalogs on
certain transatlantic flights originating from New York and Boston and in June
1999, the Company began offering a European catalog on such flights which is
priced in multiple currencies (US Dollars, British Pound Sterling, French
Francs, German Deutsche Marks, and the Euro), and is printed in English, German
and French.
Although international sales have been immaterial to our total net
merchandise sales, we plan to continue exploring opportunities in these markets.
SkyMall continues to gain experience in international markets, including the
areas of merchandising, customer service and fulfillment. The Company plans to
enter into other controlled and carefully planned expansions into large
international markets through cooperative ventures with its current domestic
airline partners, as well as new international partners. The Company believes
that its experience in the domestic in-flight business, as well as its Web-based
infrastructure that allows it to quickly set-up call center operations in
foreign countries, will enable it to expand into selected international markets,
particularly those with a strong interest in U.S. products or where remote
shopping already has some level of acceptance by consumers.
WORKPLACE MERCHANDISE CATALOGS. Through our subsidiary, Durham &
Company, we offer logo merchandise and recognition products to employees of a
number of blue-chip organizations, primarily through print catalogs and since
September 1999, on the Durham Web site. Competing in the highly fragmented
incentive industry, Durham distinguishes itself by providing high-quality
products and excellent customer service and focuses its marketing efforts on
large organizations. SkyMall provides Durham's clients with unique, high-quality
merchandise offered through other SkyMall channels as well as logo merchandise
and recognition products for corporate gift giving, employee recognition, sales
promotions and incentives, and similar programs.
OTHER PRINT CHANNELS. We provide unique, upscale catalogs to the
membership-oriented airport lounges of one of our major airline partners. The
SkyMall catalogs are also available on certain Northeastern routes of Amtrak. We
continue to test distribution of our print catalogs in a number of other venues,
including hotels and in connection with loyalty and marketing programs. We are
also testing other alliances, including with major credit card companies and
with the cruise line industry. To the extent the test results of these programs
prove successful, we may expand our presence in these channels.
ELECTRONIC MEDIA
GENERAL. We launched our first Internet Web site in January of 1996
and since then have continued to refine and develop our e-commerce strategies.
Our e-commerce channels showcase products offered in our print catalogs and
provide customers an additional means of customer service and support. In
addition, because the Internet does not pose the same size and weight
constraints as our paper catalogs, we offer products and services from a greater
number of merchants and a full complement of products from merchants who offer
only their best-selling items in our catalogs. Through our wholly-owned
subsidiary, SKYMALL.COM, INC., we plan to increase our revenues from this media
by developing SkyMall's Web site as a premier Internet shopping and travel
destination and increasing the number of partners in our affiliate program.
AFFILIATE PROGRAM. In addition to developing our own site, we have
an affiliate program through which we provide a turn-key merchant solution to
businesses that are interested in providing SkyMall's merchandise to visitors to
their own Web sites. Our unique proprietary technology and other systems allow
us to quickly and cost-effectively implement affiliate site programs, in many
cases with lead times of less than three weeks. Visitors to SkyMall's affiliate
sites go directly to a SkyMall site, which is typically co-branded with the
affiliate partner, for shopping services. After shopping, the customers are
directed back exclusively to the site from which they began so that the
affiliate partner does not lose the benefit of the traffic to its site. Although
an online store can be privately labeled for our affiliate partners, most of our
14
<PAGE>
affiliate sites are co-branded to increase SkyMall's brand awareness as well as
generate affinity for our online partners.
Under our agreements with our affiliate partners, we typically pay
them a commission based on net merchandise sales. Our affiliate program offers
advantages to both consumers and our partners. Consumers enjoy the convenience
of SkyMall's online shopping and our partner sites enjoy the benefit of
increased revenue, while ensuring that their customers return to their site.
Early participants in our affiliate program include some of our
airline partners and related entities, such as Delta Air Lines, Delta Crown Room
and Continental Air Lines. In addition, Northwest Airlines and America West
Airlines have joined our affiliate program. New participants are Visa USA, Visa
International, First USA, the largest Visa card issuer and a banking leader in
electronic commerce, and LinkShare(R), a premier provider of partnership-based
marketing on the Web, specializing in brokering revenue-producing links among
complementary e-commerce sites. We also have arrangements with a number of other
high-traffic sites, including the site offered by the best-selling book series,
Chicken Soup for the Soul, Microsoft's online shopping mall called MSN Shopping,
MSNBC, Trip.com, and The Weather Channel site at Weather.com. The Company
continues to evaluate the success of its individual affiliates and, in some
cases, has terminated relationships while it continues to pursue new
affiliations.
THE SKYMALLTRAVEL.COM WEB SITE. As part of SkyMall's previously
announced investment in e-commerce, in July 1999, SkyMall launched its
WWW.SKYMALLTRAVEL.COM Web site targeted to frequent travelers, which provides
one-stop access for all their travel needs. SKYMALLTRAVEL.COM organizes many of
the best travel resources in one place, including linked directories for
airlines, hotels, rental car and online booking services, as well as content and
tools that assist business travelers before, during and after their trips. The
site was designed to help travelers get the most out of online travel planning
while minimizing the effort and time involved. Some of the leading online travel
companies are affiliates at our SKYMALLTRAVEL.COM Web site, including
webflyer.com, Trip.com, ontheroad.com, mapquest.com, weather.com, homefair.com
and MyFamily.com.
THE DURHAM & COMPANY WEB SITE. In September 1999, Durham & Company
launched its Web site at WWW.DURHAM.SKYMALL.COM which offers high quality logo
and corporate identity merchandise to organizations.
DISC PUBLISHING, INC. In September 1999, SkyMall acquired Disc
Publishing, Inc. Disc Publishing's SkyDisc(TM) is a leading interactive CD-ROM
targeted to the business traveler that integrates high-quality print, broadcast
and online media to provide an exciting mix of topics that entertain, inform and
enhance the business travelers' life. SkyDisc offers the business traveler the
option of using the disk on their laptop computer whether onboard the aircraft,
in a hotel, at the office, or at home. While using the disk online, consumers
can link to Web sites promoted on SkyDisc to get more information and services.
With the continued proliferation of new Web sites, SkyDisc will help consumers
sort through the clutter of the Web and drive traffic to the sites of our
program participants. Every other month a new "issue" of SkyDisc is available
free in airline seatback pockets to more than 400,000 SkyWest Airlines
passengers per month. SkyDisc has already attracted many program participants
such as Amazon.com, Earthlink Network, Inc., Interplay Entertainment, Inc. and U
S WEST(R). To the extent sponsorship of this program continues to increase, the
Company will consider expanding distribution of SkyDisc.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
CONSOLIDATED REVENUE AND GROSS MARGIN. Net merchandise sales for the
three and nine months ended September 30, 1999 was $12.4 million and $35.3
million compared to $9.7 million and $29.0 million for the same periods in 1998,
respectively. Placement fees and other revenue for the three and nine months
ended September 30, 1999 were $2.8 million and $8.8 million compared to $3.9
million and $11.5 million for the same periods in 1998, respectively. Revenues
for SKYMALL.COM for the three and nine months ended September 30, 1999 were $2.8
million and $ 5.9 million compared to $310,000 and $911,000 for the same periods
15
<PAGE>
in 1998, respectively. Gross margin for the three and nine months ended
September 30, 1999 was $7.1 million and $21 million compared to $7.2 million and
$20.2 million for the same periods in 1998, respectively.
CONSOLIDATED OPERATING EXPENSE. Total operating expense for the three
and nine months ended September 30, 1999 was $13.6 million and $39.1 million
compared to $6.7 million and $19.5 million for the same periods in 1998,
respectively. Catalog expenses for the three and nine months ended September 30,
1999 were $3.6 million and $8.6 million compared to $2.7 million and $8.1
million for the same periods in 1998, respectively. The increase is primarily
due to an increase in the number and size of catalogs distributed for the three
and nine months ended September 30, 1999 compared to the same period in 1998.
Also included in catalog costs is a $300,000 settlement with a major supplier
for past services. Selling expenses, which represent commissions paid to airline
and marketing partners and are generally variable in nature, for the three and
nine months ended September 30, 1999 were $1.2 million and $3.2 million compared
to $816,000 and $2.5 million for the same periods in 1998, respectively. The
increase is due to an increase in net merchandise sales and the addition of new
airline and marketing partners. Customer service and fulfillment expense, which
include a full-service customer contact and order fulfillment center, for the
three and nine months ended September 30, 1999 was $1.6 million and $5.1 million
compared to $940,000 and $3.0 million for the same periods in 1998,
respectively. This increase resulted from the addition of management and call
center personnel, along with outsourcing solutions and other expenditures
designed to improve the Company's customer service levels. General and
administrative expenses for the three and nine months ended September 30, 1999
were $7.2 million and $22.1 million compared to $2.2 million and $5.9 million
for the same periods in 1998, respectively. The increase is primarily due to the
addition of personnel, expanded marketing efforts, infrastructure investments
relating to the Company's business initiatives, including depreciation of
capital investments, settlement of litigation and expenses incurred by Durham &
Company which was acquired in the fourth quarter of 1998 and the acquisition of
Disc Publishing, Inc. in the third quarter of 1999. The increase in personnel
includes key management, technology, marketing and support personnel totaling
$600,000 and $4.2 million for the three and nine months ended September 30,
1999. Marketing efforts and infrastructure investments increased $3.0 million
and $5.1 million for the three and nine months ended September 30, 1999, and
relate to marketing promotions and technology investments. Depreciation expense
increased $370,000 and $580,000 for the three and nine months ended September
30, 1999, respectively, and relate to capital investments. Legal and settlement
expenses include legal expenses incurred and estimated losses recognized
relating to certain legal matters totaling $2.9 million for the nine months
ended September 30, 1999. Durham & Company incurred expenses totaling $336,000
and $995,000 for the three and nine months ended September 30, 1999. Disc
Publishing, Inc. incurred expenses totaling $208,000 and $441,000 for the three
and nine months ended September 30, 1999. The balance of approximately $455,000
and $2.006 million for the three and nine months ended September 30, 1999,
related to other increases in operational expenses.
CONSOLIDATED INCOME TAXES. Income tax benefit was $3.0 million and $7.0
million for the three and nine months ended September 30, 1999, compared to
income tax expense of $250,000 and $443,000 for the same periods in 1998,
respectively. The Company has recorded an income tax receivable of $960,000 that
relates to the Company's ability to recover taxes paid in prior years. Deferred
income taxes reflect the tax effects of temporary differences between the
amounts of assets and liabilities for accounting purposes and the amounts used
for income tax purposes. Deferred tax assets and liabilities of $6.0 million and
$158,000, respectively, have been recorded at September 30, 1999. The ability of
the Company to utilize these deferred tax assets is dependent on the Company's
profitability over the period of years that the temporary differences are
available to be utilized. In accordance with applicable accounting
principles, the Company will continue to evaluate the recognition of future
income tax benefits and deferred tax assets in periods where the Company is not
profitable.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $10.3 million for the nine
months ended September 30, 1999, compared to $495,000 for the same period in
1998. The increase in cash used in operating activities compared to the same
period in 1998 resulted primarily from the net loss incurred as a result of the
increase in operating expenses described above.
Cash used in investing activities was $6.2 million for the nine
months ended September 30, 1999, compared to $1.7 million for the same period in
1998. Cash used in investing activities for both periods relates to purchases of
telecommunications and computer equipment, software, building improvements, and
furniture and fixtures.
Cash provided by financing activities was $9.5 million for the nine
months ended September 30, 1999, compared to cash used of $37,000 for the same
period in 1998. Cash provided by financing activities for the nine months ended
September 30, 1999 resulted from the exercise of options by others to purchase
the Company's common stock and borrowings on the Company's line of credit. Cash
used in financing activities for the same period in 1998 resulted primarily from
payments on capital lease obligations and repurchases of common stock, offset by
proceeds from the issuance of common stock.
WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS
The Company plans to spend substantial resources in 1999 in
connection with its electronic commerce and other growth initiatives. The
Company anticipates that such expenditures will approximate $27 million and
plans to spend such funds on a number of activities, including improving the
Company's Web user interface, improving the speed, stability and functionality
of the Company's Web site, implementing marketing and public relations
initiatives to raise awareness of the SkyMall brand name, securing additional
content for the Company's Web site, improving the selection and variety of
products offered by the Company, and recruiting and hiring additional personnel,
particularly technology managers and developers.
At September 30, 1999, the Company had a working capital deficit of
$8.8 million, which included cash and cash equivalents of $945,000. On June 30,
1999, the Company secured a $10 million line of credit at a bank, under the
terms of which $5.0 million was immediately available and the remaining $5.0
million was to become available, subject to certain conditions, upon the Company
raising a minimum of $15 million in subordinated debt and/or equity. In
September 1999, the Company entred into a Modification to the Credit and
Security Agreement and related documents whereby Robert M. Worsley, chairman,
president and chief executive officer, and his wife, Christi M. Worsley,
executed a Continuing Guarantee agreement personally guaranteeing up to $2.5
million of such line of credit (the "Worsley Guarantee"). The Worsley Guarantee
allowed the Company to draw additional funds on the line of credit over the $5.0
million initially available. As of September 30, 1999, a total of $7.4 million
had been drawn on the line of credit and $2.6 million was unused.
On November 4, 1999, the Company completed a private placement of
approximately $8,000,000 in shares of the Company's common stock and warrants to
purchase additional shares of common stock (the "Private Offering"). See Part
II, Item 2, "CHANGES IN SECURITIES AND USE OF PROCEEDS" for complete details
regarding the Private Offering. The funds received from the Private Offering
will be used for working capital purposes. The Company currently has a working
capital deficit and its credit line is insufficient to permit the Company to
fully implement its business plan and growth strategy. Management plans to
finance its working capital needs and capital expenditures through a combination
of funds from operations, the new bank line of credit, and by securing
additional capital resources through the issuance of debt and/or equity
securities. There can be no assurance that the Company will be able to secure
additional capital to meet its working capital needs or to secure such capital
17
<PAGE>
on terms favorable to the Company. A failure to secure such capital may be
detrimental to the Company and cause it to reduce or eliminate its growth
initiatives. See also, "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Quarterly Report on Form 10-Q,
the following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact or may have a significant impact on the Company's business, prospects,
financial condition and results of operations.
WE MAY NOT BE PROFITABLE IN THE FUTURE. Although we have been
profitable in recent years, we plan to significantly increase spending on our
growth initiatives from historical levels and we expect to incur losses in the
foreseeable future. In addition, although we plan to spend significant
additional resources in connection with the execution of our growth strategy,
including for marketing, technological development and personnel costs, there
can be no assurance that we can successfully deploy such resources to accomplish
the objectives of our growth strategies and increase the revenues of the
Company.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL. We currently have a
working capital deficit and our existing line of credit is not sufficient to
permit the Company to fully implement its business plan. In order to fully
implement our growth strategy, we will need to raise additional capital from
third parties or otherwise secure additional financing for the Company. There
can be no assurance that the Company will be able to successfully raise
additional capital or secure other financing, or that such funding will be
available on terms that are favorable to the Company. To the extent we are
unable to raise sufficient additional capital or secure other financing, this
could have a material adverse effect on the Company and we may be unable to
fully implement our planned growth strategy.
OUR BUSINESS MAY NOT GROW IN THE FUTURE. Since our inception, we have
rapidly expanded our operations, growing from total revenues of $200,000 in 1990
to total revenues of $66.3 million in 1998. Our continued future growth will
depend to a significant degree on our ability to increase revenues from our
existing businesses, maintain existing channel partner relationships and develop
new channel partner relationships, expand our product and content offering to
consumers, while maintaining adequate gross margins, and implement other
programs that increase the circulation of the SkyMall print catalogs and
generate traffic for our e-commerce programs. Our ability to implement our
growth strategy will also depend on a number of other factors, many of which are
or may be beyond our control, including (i) our ability to select products that
appeal to our customer base and effectively market them to our target audience,
(ii) sustained or increased levels of airline travel, particularly in domestic
airline markets, (iii) increasing adoption by consumers of the Internet for
shopping, (iv) the continued perception by participating merchants that we offer
an effective marketing channel for their products and services, and (v) our
ability to attract, train and retain qualified employees and management. There
can be no assurance that we will be able to successfully implement our growth
strategy.
OUR FUTURE GROWTH IS IN PART DEPENDENT UPON THE CONTINUED GROWTH OF THE
ELECTRONIC COMMERCE MARKET. The market for the sale of products and services
over the Internet is a new and rapidly evolving market. Our future growth
strategy is partially dependent upon the widespread acceptance and use of online
services as an avenue for retail purchases. Consumers have only recently begun
to make purchases over the Internet and there is no assurance that they will
continue to do so in the future. In order for us to grow our online customer
base, we will need to attract purchasers who have historically relied upon
traditional venues for making their retail purchases. If use of online services
does not continue to grow as expected, or if the technological infrastructure
for the Internet is unable to effectively support its growing use, our growth
strategy may be materially adversely affected.
18
<PAGE>
WE MAY BE UNABLE TO MANAGE THE POTENTIAL GROWTH OF OUR BUSINESS. Our
potential growth may place significant demands upon our personnel, management
and financial resources. In order to manage this growth, we may have to hire
additional personnel and develop additional management infrastructure. There is
no assurance that people with the necessary skills and experience will be
available as needed or on terms favorable to us. There is no assurance that our
current and planned personnel, systems, procedures and controls will be adequate
to support our future operations, that we will be able to attract, hire, train,
retain, motivate and manage necessary personnel, or that our management will be
able to identify, manage and exploit existing and potential strategic
relationships and market opportunities. If we are unable to effectively manage
any potential growth, our business and financial condition could be adversely
affected.
OUR PLANS FOR INTERNATIONAL EXPANSION POSE ADDITIONAL RISKS. A
significant aspect of our growth strategy is to expand our business
internationally, through our in-flight catalog program as well as the Internet.
We have limited experience in selling our products and services internationally.
Such expansion will place additional burdens upon our management, personnel and
financial resources and may cause the Company to incur losses. We will also face
different and additional competition in these international markets. In
addition, international expansion has certain unique risks, such as regulatory
requirements, legal uncertainty regarding liability, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, political instability and potentially adverse tax implications.
To the extent we expand our business internationally, we will also become
subject to risks associated with international monetary exchange fluctuations.
Any one of these risks could impair our ability to expand internationally as
well as have a material adverse impact upon our overall business operations,
growth and financial condition.
WE FACE INTENSE COMPETITION. The distribution channels for our
products are highly competitive. From time to time in our airline catalog
business, competitors, typically other catalog retailers, have attempted to
secure contracts with various airlines to offer merchandise to their customers.
American Airlines currently offers merchandise catalogs to its customers through
a competitor. In addition, in July 1999, TWA, a former SkyMall partner, began
carrying a competitor's catalog. We also face 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 we have. In addition, we compete
for customers with other in-flight marketing media, such as airline-sponsored
in-flight magazines and airline video programming. In our electronic commerce
sales, we face intense competition from other content providers and retailers
who seek to offer their products and/or services at their own Web sites or those
of other third parties. The success of online marketing cannot be currently
determined, and further penetration in this market will require substantial
additional financial resources, acquisition of technology, investments in
marketing and contractual relationships with third parties. Results will also be
affected by existing competition, which the Company anticipates will intensify,
and by additional entrants to the market who may already have the necessary
technology and expertise, many of whom may have substantially greater resources
than the Company.
DEPENDENCE ON CHANNEL RELATIONSHIPS. Our business depends significantly
on our relationships with the airlines, affiliate Web sites, hotels and other
channel partners. Our agreements with our channel partners are typically
short-term allowing the partner to terminate the relationship on 60-to-180 days'
advance notice. There is no assurance that our channel partners will continue
their relationships with us and the loss of one or more of our significant
channel partners could have a material adverse effect on our financial condition
and results of operations.
WE MAY BE UNABLE TO MAINTAIN HISTORICAL MARGIN LEVELS. We may be
unable to increase or maintain our gross margins at historical levels,
particularly for our electronic commerce initiatives. As competition in online
shopping intensifies, our merchant participants may be unable or unwilling to
participate in our programs when more favorable economic arrangements may be
available from other third parties. Although many of our merchants have
participated with us for several years, most of our relationships are short-term
19
<PAGE>
and may be re-negotiated by the merchant every 90 days. To the extent our gross
margins decline from historical levels, our financial condition and results of
operations may be adversely affected.
WE FACE CREDIT RISKS. Some participating merchants agree to pay a
placement fee to us for including their merchandise in our programs. We record
an account receivable from the merchant for the placement fee. In some cases, we
collect the placement fee either from the merchant or by withholding it from
amounts due to the merchant for merchandise sold. To 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 us, we may experience
credit losses which could have a material adverse effect on our financial
condition and results of operations.
WE ARE VULNERABLE TO INCREASES IN PAPER COSTS AND AIRLINE FUEL
PRICES. The cost of paper used to print our catalogs and the fees paid to
airlines to reimburse them for the increased fuel costs associated with carrying
our catalogs are significant expenses of our operations. Historically, paper and
airline fuel prices have fluctuated significantly from time to time. Prices in
the paper market can and often do change dramatically over a short period of
time. Any significant increases in paper or airline fuel costs that we must pay
could have a material adverse effect on our financial condition and results of
operations.
OUR INFORMATION AND TELECOMMUNICATIONS SYSTEMS MAY FAIL OR BE
INADEQUATE. We process a large volume of relatively small orders. Consequently,
our success depends to a significant degree on the effective operation of our
information and telecommunications systems. These systems could fail for
unanticipated reasons or they may be inadequate to process any increase in our
sales volume that may occur. Any extended failure of our information and
telecommunications systems could have a material adverse effect on our financial
condition and results of operations.
WE FACE RISKS ASSOCIATED WITH ONLINE SECURITY BREACHES OR FAILURES. In
order to successfully make sales over the Internet, it is necessary that we be
able to ensure the secure transmission of confidential customer information over
public telecommunications networks. We employ certain technology in order to
protect such information, including customer credit card information. However,
there is no assurance that such information will not be intercepted illegally.
Advances in cryptography or other developments that could compromise the
security of confidential customer information could have a direct negative
impact upon our electronic commerce business. In addition, the perception by
consumers that making purchases over the Internet is not secure, even if
unfounded, will mean that fewer consumers are likely to make purchases through
that medium. Finally, any breach in security, whether or not a result of our
acts or omissions, may cause us to be the subject of litigation, which could be
very time-consuming and expensive to defend.
OUR BUSINESS IS SEASONAL. Our business is seasonal in nature, with the
greatest volume of sales typically occurring during the Holiday selling season
of the fourth calendar quarter. During 1998, approximately 41% of our net
merchandise sales were generated in the fourth quarter. Any substantial decrease
in sales for the fourth quarter could have a material adverse effect on our
results of operations.
WE FACE RISKS OF INCREASED GOVERNMENTAL REGULATION AND OTHER LEGAL
UNCERTAINTIES. Our electronic commerce activities are not currently subject to
significant regulation, other than those applicable to businesses generally.
However, electronic commerce is a new market and it is likely that regulations
and laws may be enacted in the future which would apply to our electronic
commerce activities. Any such laws or regulations could result in additional
costs associated with such activities, reduce or inhibit the growth of Internet
use, thereby reducing the growth of our electronic commerce business, or have
other adverse effects. Additionally, certain states or international
jurisdictions could enact laws that would require us to register in such
jurisdictions, pay fees or otherwise increase our costs of doing business.
20
<PAGE>
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS. Our catalogs and our
electronic commerce sites feature products and services from more than 200
participating merchants. Generally, our agreements with these participating
merchants require the merchants to indemnify us and thereby be solely
responsible 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, we maintain product liability insurance in the aggregate amount of
$2.0 million and $1.0 million per occurrence. If a merchant was unable or
unwilling to indemnify us as required, and any such losses exceeded our
insurance coverage or were not covered by our insurer, our financial condition
and results of operations could be materially adversely affected.
WE RELY UPON OUR PRESIDENT AND OTHER KEY PERSONNEL. We depend on the
continued services of Robert M. Worsley, our chairman, president and chief
executive officer, and on the services of certain other executive officers. The
loss of Mr. Worsley's services or of the services of certain other executive
officers could have a material adverse effect on our business.
THE WORSLEYS CAN CONTROL MANY IMPORTANT COMPANY DECISIONS. As of
November 8, 1999, Mr. Worsley and his wife (the "Worsleys") beneficially owned
4,798,530 shares, or approximately 46% of our outstanding common stock. As a
result, the Worsleys have the ability to significantly influence 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.
THE PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE. The market
price of our common stock has been highly volatile. Occurrences that could cause
the trading price of our common stock to fluctuate dramatically in the future
include:
o new merchant agreements
o the acquisition or loss of one or more airline, electronic
commerce or other channel partners
o fluctuations in our operating results
o analyst reports, media stories, Internet chat room
discussions, news broadcasts and interviews
o market conditions for retailers and electronic commerce
companies in general
o changes in airline fuel, paper or our other significant
expenses
o changes in the commissions we are able to negotiate with our
merchants
The stock market has from time to time experienced extreme price and
volume fluctuations that have particularly affected the market price for
companies that do some or all of their business on the Internet. During the
third quarter of 1999, net merchandise sales from the Internet represented
approximately 21% of our net merchandise sales. Accordingly, the price of our
common stock may be impacted by these or other trends.
WE FACE RISKS ASSOCIATED WITH THE YEAR 2000
Many software programs use only two digits to identify the year in the
date field. If such programs are not corrected, data that includes a date in the
Year 2000 or later could cause many computer applications to fail, lock-up or
generate erroneous results. Further, certain computer programs may not properly
process certain dates. This potential problem is generally referred to as the
"Year 2000 Issue." We have initiated a program to evaluate and address our
exposure to the Year 2000 Issue. If not corrected, many computer applications
could fail or create erroneous results.
21
<PAGE>
We have a program in process to identify our exposure to the Year 2000
Issue and we have begun to implement measures to mitigate any problems. We
believe we have identified all significant internal systems and applications
that require attention of some form in order to address Year 2000 Issue risks.
Our information or production systems which consist of order entry,
order conveyance and customer service are primarily based on the Microsoft suite
of products and the hardware is principally late model Compaq and Dell servers,
which are designed and represented to meet Year 2000 Issue functional
requirements. A testing program has been performed by an outside contractor to
certify that such systems are Year 2000 compliant. The certification program
also included the hardware and operating systems that support the applications.
We have other non-production systems such as internal security
systems, telephone systems, and network computer equipment, which we are also
currently reviewing for Year 2000 compliance. In addition, we are surveying
certain third parties, such as our vendor partners, banks and telephone service
providers, to attempt to determine the Year 2000 Issue capability of their
critical systems upon which our essential business operations are dependent.
We believe we have identified all of the major information systems
used in our internal operations and have substantially completed all
modifications, upgrades or replacements to minimize the possibility of a
material disruption of our business. The expenditures that we have incurred to
date and the expenditures we expect to incur in this regard have not been and
are not expected to be material to our business, results of operations and
financial condition. However, failure of third-party equipment, software or
content to operate properly with regard to the Year 2000 issue could require the
Company to incur unanticipated expenses to remedy problems, which could have a
material adverse effect on its business, operating results and financial
condition.
We believe that our most significant worst case Year 2000 Issue
scenarios involve the inability of our vendors to process orders and conduct
business such as arranging deliveries to customers and replenishing inventories
and that the computer systems necessary to maintain the viability of the
Internet or the Web sites that direct consumers to the Company's online catalog
and related sites may not be Year 2000 compliant. In addition, computers used by
customers to access the Company's online catalog and related sites may not be
Year 2000 compliant, delaying customers' product purchases. Furthermore, a
reduction in airline travel due to concerns about Year 2000 issues in the
airline industry, even if based on unfounded fears, could materially impact the
Company's business.
The Company has initiated formal communications with significant
suppliers and service providers to determine the extent to which its systems may
be vulnerable if they fail to address and correct their own Year 2000 issues.
The Company cannot guarantee that the systems of suppliers or other companies on
which it relies will be Year 2000 compliant. Failure by suppliers or other
companies to convert their systems could disrupt the Company's systems.
To the extent we are unable to adequately identify, evaluate and
address all of the Year 2000 Issues relating to our business, or are unable to
develop and implement effective contingency plans, we could experience a
significant disruption of our ability to receive and process customer orders, in
which case our financial condition and results of operations would be likely to
be materially adversely affected.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
22
<PAGE>
The statement, which was to be applied prospectively, is effective for the
Company's quarter ending March 31, 2000. In June 1999, the FASB issued Statement
of Financial Accounting Standards 137 - Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133. This statement deferred the effective date of SFAS 133 to the Company's
quarter ending March 31, 2001. The Company is currently evaluating the impact of
SFAS 133 on its future results of operations and financial position.
In January 1999, the Company adopted Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." This Statement of Position (SOP) provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
statement identifies the characteristics of internal-use software, the
capitalization criteria and the amortization method. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Under SOP 98-1, the Company
capitalized costs of $2.2 million and $3.3 million during the three months and
nine months ended September 30, 1999, respectively.
In January 1999, the Company adopted Statement of Position 98-5,
"REPORTING ON THE COSTS OF START-UP ACTIVITIES." This SOP provides guidance on
the financial reporting of start-up costs and organization costs. The SOP
requires costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. Application of SOP 98-5 did not have a material impact on the Company's
financial condition, results of operations or earnings per share data.
In April 1999, the Company adopted APB Opinion No. 29, "ACCOUNTING
FOR NON-MONETARY TRANSACTIONS." This APB opinion provides guidance on accounting
for transactions that involve primarily an exchange of non-monetary assets,
liabilities or services ("barter transactions"). Placement fees and other
revenues include barter revenues which represent an exchange by SkyMall of
advertising space in its print and e-commerce media for reciprocal services,
including print and e-commerce advertising. Revenues and expenses from barter
transactions are recorded at the lower of estimated fair value of the services
received or delivered. Barter revenues and expenses recognized during the three
and nine months ended September 30, 1999 and 1998, were $292,000 and
$600,000,respectively.
SEGMENT DISCLOSURE
During the fourth quarter of 1998, the Company acquired Durham &
Company, in January 1999, the Company formed SKYMALL.COM, INC. to operate its
Internet e-commerce Web site and in September 1999, the Company acquired Disc
Publishing, Inc. The Durham and Disc Publishing acquisitions and the formation
of SKYMALL.COM created four reportable segments as required under Financial
Accounting Standards Board SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." Operating segment information pertaining to
revenues, gross margins, general and administrative expenses, and identifiable
assets are provided in the Notes to Condensed Consolidated Financial Statements
filed herewith.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
23
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management, there is no such legal proceeding pending or
asserted against or involving the Company the outcome of which is likely to have
a material adverse effect upon the consolidated financial position or results of
operations of the Company.
On May 13, 1998, Kathy Jordan, a purchaser of products through a
SkyMall catalog in March 1998, filed an action in the District Court of Cherokee
County, Oklahoma, styled as Kathy Jordan, Plaintiff v. SkyMall, Inc. a
corporation, and John Doe(s), et al., Defendants, which is designated as Case
No. CJ-98-208. Plaintiff alleged that SkyMall improperly collected from her
certain state and local taxes relating to her purchase. Plaintiff brought the
action on behalf of herself and a class of persons in the United States
similarly situated. She alleged causes of action for unjust enrichment, fraud,
breach of contract, and declaratory judgement, and seeks return of allegedly
unlawful revenue collected with interest, an injunction against collecting taxes
improperly, compensatory and punitive damages, and attorneys' fees and costs.
While the Company believes Ms. Jordan's claims are substantially without merit,
in order to minimize overall litigation risks and ongoing litigation costs, and
to reduce the management time and attention required to be devoted to this
matter, the Company entered into a tentative Settlement Agreement with Plaintiff
and the alleged class. The agreement received final court approval on October
14, 1999. As a part of the agreement, the Company has agreed, among other
things, to offer discounts during 2000 to SkyMall customers who purchased
merchandise from the Company prior to December 31, 1998. The agreement also
calls for SkyMall to issue to Plaintiff's attorneys approximately 65,000 shares
of common stock valued at $600,000 and $100,000 cash. The Company has recorded a
reserve for this settlement amount and the related expenses in the second
quarter of 1999 in the amount of $1.436 million representing approximately
$700,000 payable to Plaintiff's attorneys in stock and cash, $356,000 in
anticipated customer discounts associated with the offer to customers and
$380,000 in professional fees incurred.
On January 29, 1999, a securities class action complaint was filed
against SkyMall and Robert Worsley, the Company's Chief Executive Officer,
Chairman and principal shareholder, in connection with certain disclosures made
by the Company in December 1998 relating to its Internet sales. The complaint
was filed in the United States District Court, District of Arizona, Case No.
CIV-99-0166-PHX-ROS. The complaint alleges unlawful manipulation of the price of
the Company's stock and insider selling during the period from December 28, 1998
through December 30, 1998. The complaint seeks unspecified damages for alleged
violations of federal securities laws. SkyMall believes that the allegations
against it and Mr. Worsley are substantially without merit and intends to
vigorously defend the lawsuit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 10, 1999, the Board of Directors of the Company
adopted a Shareholder Rights Plan (the "Plan") designed to deter coercive or
unfair takeover tactics and to prevent a person or group from gaining control of
the Company without offering a fair price to all stockholders. Under the terms
of the Plan, a dividend distribution of one Preferred Stock Purchase Right
("Right") for each outstanding share of the Company's common stock outstanding
was made to holders of record on October 15, 1999. These Rights entitle the
holder to purchase one one-hundredth of a share of the Company's Series A
Preferred Stock ("Preferred Stock") at an exercise price of $65 per one
one-hundredth of a share. The Rights become exercisable (a) 10 days after a
public announcement that a person or group has acquired shares representing 15%
or more of the outstanding shares of common stock, or (b) 10 business days
following commencement of a tender or exchange offer for 15% or more of such
24
<PAGE>
outstanding shares of common stock. The Company can redeem the Rights for $0.001
per Right at any time prior to their becoming exercisable. The Rights will
expire on October 15, 2009, unless redeemed earlier by the Company or exchanged
for common stock. Under certain circumstances, if a person or group acquires 15%
or more of the Company's common stock, the Rights permit stockholders other than
the acquiror to purchase common stock having a market value of twice the
exercise price of the Rights, in lieu of the Preferred Stock. In addition, in
the event of certain business combinations, the Rights permit stockholders to
purchase the common stock of an acquiror at a 50% discount. Rights held by the
acquiror will become null and void in both cases.
On November 4, 1999, the Company completed a private placement of
approximately $8,000,000 in shares of the Company's common stock and warrants to
purchase additional shares of common stock (the "Private Offering"). A total of
1,142,885 shares of common stock were issued at a purchase price of $7.00 per
share, together with warrants to purchase an additional 571,444 shares of common
stock. The warrants were issued with an exercise price of $8.00 per share and,
subject to certain conditions, are redeemable by the Company at a nominal price
if the Company's stock trades over $12 per share for twenty consecutive trading
days. In addition, an aggregate of approximately 126,280 warrants to purchase
shares of the Company's common stock will be issued to the placement agents in
the Private Offering, with exercise prices ranging from $7.35 to $8.10 per
share. The funds received from the Private Offering will be used primarily to
fund SkyMall's on-going e-commerce initiatives and working capital requirements.
The common stock and warrants issued in the Private Offering were issued in
reliance on the exemption provided under Section 4(2) of the Securities Act of
1933 and Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
The following exhibits are included herein:
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
10.1(a) Rights Agreement between the Company and Continental (1)
Stock (1) Transfer & Trust Company, as Rights Agent,
dated as of September 15, 1999 (including as Exhibit A
the form of Certificate of Designation of Rights,
Preferences and Terms of the Series R Preferred Stock,
as Exhibit B the form of Right Certificate, and as
Exhibit C the Summary of Terms of Rights Agreement).
10.1(b) Form of Letter to SkyMall, Inc. shareholders, dated
October 15, 1999. (1)
10.2(a) Stock Acquisition Agreement, dated as of August 26, 1999, (2)
by and among SkyMall, Inc., Disc Publishing, Inc.,
Lorne Grierson, Warren Osborn, Flamingo Partnership,
Kyle Love, Bart Howell and David E. Hardy
10.2(b) Amendment to Stock Acquisition Agreement, dated as of (2)
September 20, 1999, by and among SkyMall, Inc., Disc
Publishing, Inc., Lorne Grierson, Warren Osborn,
Flamingo Partnership, Kyle Love, Bart Howell and
David E. Hardy
10.2(c) Registration Rights Agreement, dated as of September 20, (2)
1999, by and among SkyMall, Inc., Disc Publishing, Inc.,
Lorne Grierson, Warren Osborn, Flamingo Partnership, KLC
NACT Unitrust, Bart Howell and David E. Hardy
10.3(a) Modification Agreement, dated as of September 1,1999, by (3)
and among SkyMall, Inc., skymall.com, inc., Durham & Company
and Imperial Bank
10.3(b) Continuing Guarantee between Imperial Bank and Robert M. (3)
Worsley and Christi M. Worsley
10.4(a) Stock and Warrant Purchase Agreement between SkyMall, Inc. (3)
and the investors in the private offering closed on
November 4, 1999
10.4(b) Form of Warrant issued to investors in the private offering (3)
27 Financial Data Schedule
--------
(1) Incorporated by reference to Form 8-K filed September 23, 1999
(2) Incorporated by reference to Form 8-K filed October 5, 1999
(3) Filed herewith
26
<PAGE>
(B) REPORTS ON FORM 8-K.
On September 23, 1999, the Company filed a Report on Form 8-K to
announce the adoption of a Shareholder Rights Plan.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SKYMALL, INC.
Date: November 15, 1999 By: /s/ Robert M. Worsley
--------------------------------
Robert M. Worsley
Chairman of the Board, President
(Chief Executive Officer)
Date: November 15, 1999 By: /s/ Stephen R. Peterson
--------------------------------
Stephen R. Peterson
Chief Financial Officer
(Principal Accounting Officer)
28
Exhibit 10.3(a)
MODIFICATION AGREEMENT
BY THIS MODIFICATION AGREEMENT, made and entered into as of the 1st
day of September, 1999, SKYMALL, INC., a Nevada corporation, skymall.com, inc.,
a Nevada corporation, and DURHAM & COMPANY, a Utah corporation (severally and
collectively, the "Borrower"), and IMPERIAL BANK, a California banking
corporation (the "Lender"), confirm and agree as follows:
SECTION 1. RECITALS.
1.1 Borrower and Lender entered into a Credit and Security Agreement
dated June 30, 1999 (as amended from time to time, the "Credit Agreement"),
which provides for a revolving line of credit (the "RLC") by Lender to Borrower
in the amount of $10,000,000.00 upon the terms and conditions contained therein.
All undefined capitalized terms used herein shall have the meaning given them in
the Credit Agreement.
1.2 The RLC is evidenced by a Revolving Promissory Note dated June
30, 1999, executed by Borrower, payable to the order of Lender, in the principal
amount of $10,000,000.00 (the "RLC Note").
1.3 The RLC is secured by the Security Documents.
1.4 Borrower has requested that Lender temporarily modify the Credit
Agreement until the Invested Capital Condition has been satisfied or until the
conditions contained in Section 3.6 herein have been satisfied. Lender is
willing to temporarily modify the Credit Agreement subject to the terms and
conditions contained herein.
SECTION 2. MODIFICATION OF CREDIT DOCUMENTS.
2.1 From and after the date hereof through and until the Invested
Capital Condition or the conditions contained in Section 3.6 herein have been
satisfied (the "Temporary Change Period"), the following definitions in Section
1.1 of the Credit Agreement are hereby amended to read as follows:
"RLC Commitment" means Ten Million Dollars ($10,000,000.00).
2.2 During the Temporary Change Period only, Section 1.1 of the
Credit Agreement is hereby amended by the addition of the following
definition(s):
"Cash Collateral" means an amount equal to one hundred percent
(100%) of the Trust's cash holdings that are subject to that Security Agreement
dated August 23, 1999, executed by the Trust in favor of Lender.
"Guarantor" means Robert M. and Christi M. Worsley, husband and
wife.
<PAGE>
"Maximum Adjusted Cash Flow Loan Amount" means an amount equal to
the lesser of (i) $5,000,000.00 and (ii) an amount not to exceed two and
one-half times (2.50x) Borrower's Adjusted Cash Flow for the preceding four (4)
quarters, measured on a quarterly basis in advance.
"Maximum Guaranteed Loan Amount" means an amount equal to the
lesser of (i) $5,000,000.00 and (ii) an amount not to exceed the sum of (A) the
Stock Collateral, plus (B) the Cash Collateral.
"Stock Collateral" means an amount equal to seventy-five percent
(75%) of the Trust's stock equity in stock that is subject to that Security
Agreement dated August 23, 1999, executed by the Trust in favor of Lender.
"Trust" means The Robert Merrill Worsley and Christi Marie
Worsley Family Revocable Trust dated July 28, 1998.
2.3 During the Temporary Change Period only, Section 2.1 of the
Credit Agreement is hereby amended to read as follows:
Section 2.1 RLC COMMITMENT. Lender agrees to loan to or for the
benefit of Borrower, and Borrower shall be entitled to draw upon and borrow in
the manner and upon the terms and conditions contained in this Agreement, an
amount, (the "Maximum RLC Loan Amount") not to exceed the lesser of the
following:
(a) The RLC Commitment.
(b) An amount equal to the sum of (i) the Maximum Adjusted Cash
Flow Loan Amount, plus (ii) the Maximum Guaranteed Loan Amount.
2.4 During the Temporary Change Period only, Section 7.1 of the
Credit Agreement is hereby amended by the addition of the following sub-section
7.1(m):
(m) as soon as possible, and in any event within twenty (20)
days after the end of each month, a monthly statement of Guarantor's stock and
cash holdings, in form and level of detail reasonably satisfactory to Lender;
and accompanied by a certificate of the chief financial officer of the Borrower,
substantially in the form of Exhibit D-1 hereto.
2.5 During the Temporary Change Period only, Section 9.1 of the
Credit Agreement is hereby amended to read as follows:
Section 9.1 EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or principal of the
RLC Note when it becomes due and payable, which default continues for a period
of ten (10) days; or
-2-
<PAGE>
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement, which default
continues for a period of thirty (30) days after the Lender has given written
notice thereof; or
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in sections 7.12 through and including 7.16
of this Agreement; or
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement (other than sections 7.12
through and including 7.16 which are covered in the prior subsection), which
default continues for a period of twenty (20) days after the Lender has given
written notice thereof; or
(e) The Borrower or any guarantor shall be or become insolvent,
or admit in writing its inability to pay its debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower or such guarantor shall
apply for or consent to the appointment of any receiver, trustee, or similar
officer for it or for all or any substantial part of its property; or such
receiver, trustee or similar officer shall be appointed without the application
or consent of the Borrower or such guarantor, as the case may be; or the
Borrower or such guarantor shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Borrower or such
guarantor; or any judgment, writ, warrant of attachment, garnishment or
execution or similar process shall be issued or levied against a substantial
part of the property of the Borrower or such guarantor; or
(f) A petition shall be filed by or against the Borrower or any
guarantor under the United States Bankruptcy Code naming the Borrower or such
guarantor as debtor; or
(g) Any representation or warranty made by the Borrower in this
Agreement, or by the Borrower (or any of its officers) in any agreement,
certificate, instrument or financial statement or other statement contemplated
by or made or delivered pursuant to or in connection with this Agreement shall
prove to have been incorrect in any material respect when deemed to be
effective; or
(h) The rendering against the Borrower or any guarantor of a
final judgment, decree or order for the payment of money in excess of Five
Hundred Thousand Dollars ($500,000) and the continuance of such judgment, decree
or order unsatisfied and in effect for any period of thirty (30) consecutive
days without a stay of execution; or
(i) A material default under any bond, debenture, note or other
evidence of indebtedness of the Borrower or any guarantor owed to any Person
other than the Lender, or under any indenture or other instrument under which
any such evidence of indebtedness has been issued or by which it is governed, or
-3-
<PAGE>
under any lease of any of the Premises, and the expiration of the applicable
period of grace, if any, specified in such evidence of indebtedness, indenture,
other instrument or lease, which default continues for a period of thirty (30)
days; or
(j) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after written
notice to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed to make
any quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such failures
that the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the assets of the Borrower in favor of the Plan; or
(k) An event of default shall occur under any Security Document
or under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower hereunder
or under any note (other than any obligations to pay principal and interest
under the RLC Note, which are covered in subsection (a) above), which continues
for a period of twenty (20) days after the Lender has given written notice
thereof; or
(l) The Borrower or any guarantor shall liquidate, dissolve,
terminate or suspend its business operations or otherwise fail to operate its
business in the ordinary course, or sell all or substantially all of its assets,
without the prior written consent of the Lender; or
(m) The Borrower or any guarantor shall fail to pay, withhold,
collect or remit any tax or tax deficiency when assessed or due (other than any
tax deficiency which is being contested in good faith and by proper proceedings
and for which it shall have set aside on its books adequate reserves therefor)
except as allowed by Section 7.5 or notice of any state or federal tax liens
shall be filed or issued, which continues for a period of thirty (30) days after
any such event has occurred; or
(n) Default in the payment of any amount owed by the Borrower or
any guarantor to the Lender other than any indebtedness arising hereunder, and
the expiration of the applicable period of grace, if any, specified in the
evidence of indebtedness; or
(o) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the Lender, and
the expiration of the applicable period of grace, if any, specified in such
agreement; or
(p) Any default under that certain Continuing Guarantee dated
August 23, 1999, executed by Guarantor for the benefit of Lender or that certain
Security Agreement dated August 23, 1999, executed by the Trust for the benefit
of Lender.
-4-
<PAGE>
2.6 During the Temporary Change Period only, The Credit Agreement is
amended by the addition of Exhibit D-1 as attached hereto.
SECTION 3. OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS.
3.1 All references to the Credit Agreement in the RLC Note and in the
Security Documents are hereby amended to refer to the Credit Agreement as hereby
amended.
3.2 Borrower acknowledges that the indebtedness evidenced by the RLC
Note is just and owing, that the balance thereof in the amount of $4,925,250.00
on August 23, 1999 is correctly shown in the records of Lender as of the date
hereof, and Borrower agrees to pay the indebtedness evidenced by the RLC Note
and the indebtedness secured by the Security Documents, according to the terms
thereof, as herein modified.
3.3 Borrower hereby reaffirms to Lender each of the representations,
warranties, covenants and agreements of Borrower set forth in the RLC Note, the
Credit Agreement and all Security Documents, with the same force and effect as
if each were separately stated herein and made as of the date hereof.
3.4 Borrower hereby ratifies, reaffirms, acknowledges, and agrees
that the RLC Note, the Credit Agreement and the Security Documents represent
valid, enforceable and collectible obligations of Borrower, and that there are
no existing claims, defenses, personal or otherwise, or rights of setoff
whatsoever with respect to any of these documents or instruments. In addition,
Borrower hereby expressly waives, releases and absolutely and forever discharges
Lender and its present and former shareholders, directors, officers, employees
and agents, and their separate and respective heirs, personal representatives,
successors and assigns, from any and all liabilities, claims, demands, damages,
action and causes of action, whether known or unknown and whether contingent or
matured, that Borrower may now have, or has had prior to the date hereof, or
that may hereafter arise with respect to acts, omissions or events occurring
prior to the date hereof and, without limiting the generality of the foregoing,
from any and all liabilities, claims, demands, damages, actions and causes of
action, known or unknown, contingent or matured, arising out of, or in any way
connected with, the RLC. Borrower further acknowledges and represents that,
except as acknowledged above, no event has occurred and no condition exists
that, after notice or lapse of time, or both, would constitute a default under
this Agreement, the RLC Note, the Credit Agreement or any Security Document.
3.5 All terms, conditions and provisions of the RLC Note, the Credit
Agreement and the Security Documents are continued in full force and effect and
shall remain unaffected and unchanged except as specifically amended hereby. The
RLC Note, the Credit Agreement and the Security Documents, as amended hereby,
are hereby ratified and reaffirmed by Borrower, and Borrower specifically
acknowledges the validity and enforceability thereof.
3.6 The Temporary Change Period shall terminate upon the satisfaction
of the following conditions precedent:
-5-
<PAGE>
(a) Lender shall have received from Borrower written notice of
the requested termination of the Temporary Change Period at least ten (10) days
before such termination.
(b) No Event of Default and no event that with the giving of
notice or the passage of time, or both, would be an Event of Default, shall have
occurred and be continuing on the date of Borrower's notice and on the effective
date of such termination; and
(c) The outstanding principal balance of the Loan shall be an
amount not to exceed the lesser of:
(i) The RLC Commitment ; and
(ii) An amount not to exceed two and one-half times (2.50x)
Borrower's Adjusted Cash Flow for the preceding four (4) quarters, measured
on a quarterly basis in advance.
SECTION 4. GENERAL.
4.1 This Agreement in no way acts as a release or relinquishment of
those liens, security interests and rights securing payment of the RLC,
including, without limitation, the liens created by the Security Documents. Such
liens, security interests and rights are hereby ratified, confirmed, renewed and
extended by Borrower in all respects.
4.2 The modifications contained herein shall not be binding upon
Lender until Lender shall have received all of the following:
(a) An original of this Agreement fully executed by Borrower;
(b) An original Continuing Guarantee executed by Robert M. and
Christi M. Worsley, husband and wife;
(c) An original Security Agreement executed by Robert Merrill
Worsley and Christi Marie Worsley, as Trustees of The Robert Merrill Worsley and
Christi Marie Worsley Family Revocable Trust dated July 28, 1998 ("Trust");
(d) An original Securities Account Control Agreement fully
executed by Borrower, Trust and Intermediary (as defined therein);
(e) The additional non-refundable commitment fee in the amount
of $50,000.00;
(f) A Certification of Trust Agreement executed by all the
trustees and/or settlors of the Trust; and
(g) Such other documents as Lender may reasonably require.
-6-
<PAGE>
4.3 Borrower shall execute and deliver such additional documents and
do such other acts as Lender may reasonably require to fully implement the
intent of this Agreement.
4.4 Borrower shall pay all costs and expenses, including, but not
limited to, reasonable attorneys' fees incurred by Lender in connection
herewith, whether or not all of the conditions described in Paragraph 4.2 above
are satisfied. Lender, at its option, but without any obligation to do so, may
advance funds to pay any such costs and expenses that are the obligation of the
Borrower, and all such funds advanced shall bear interest at the highest rate
provided in the RLC Note, shall be due and payable upon demand and shall be
secured by all of the Security Documents.
4.5 Notwithstanding anything to the contrary contained herein or in
any other instrument executed by Borrower or Lender, or in any other action or
conduct undertaken by Borrower or Lender on or before the date hereof, the
agreements, covenants and provisions contained herein shall constitute the only
evidence of Lender's consent to modify the terms and provisions of the RLC Note,
the Credit Agreement or any Security Documents. Accordingly, no express or
implied consent to any further modifications involving any of the matters set
forth in this Agreement or otherwise shall be inferred or implied by Lender's
execution of this Agreement. Further, Lender's execution of this Agreement shall
not constitute a waiver (either express or implied) of the requirement that any
further modification of the RLC or of the RLC Note, the Credit Agreement or any
Security Document shall require the express written approval of Lender; no such
approval (either express or implied) has been given as of the date hereof.
4.6 Notwithstanding this or any prior forbearance, actual or implied,
of any nature by Lender, time is hereby declared to be of the essence hereof, of
the RLC, of the RLC Note, of the Credit Agreement and of all Security Documents,
and Lender requires, and Borrower agrees to, strict performance of each and
every covenant, condition, provision and agreement hereof, of the RLC Note, of
the Credit Agreement and of all Security Documents.
4.7 This Agreement shall be binding upon, and shall inure to the
benefit of, the parties hereto and their heirs, personal representatives,
successors and assigns.
4.8 This Agreement is made for the sole protection and benefit of the
parties hereto, and no other person or entity shall have any right of action
hereon.
-7-
<PAGE>
4.9 This Agreement shall be governed by and construed according to
the laws of the State of California.
IN WITNESS WHEREOF, these presents are executed as of the date
indicated above.
SKYMALL, INC., a Nevada corporation
By: /s/ Stephen R. Peterson
----------------------------------------
Name: Stephen R. Peterson
--------------------------------------
Title: Chief Financial Officer
--------------------------------------
skymall.com, inc., a Nevada corporation
By: /s/ Stephen R. Peterson
----------------------------------------
Name: Stephen R. Peterson
--------------------------------------
Title: Chief Financial Officer
--------------------------------------
DURHAM & COMPANY, a Utah corporation
By: /s/ Stephen R. Peterson
----------------------------------------
Name: Stephen R. Peterson
--------------------------------------
Title: Chief Financial Officer
--------------------------------------
BORROWER
IMPERIAL BANK, a California banking
corporation
By: /s/ R. Mark Chambers
----------------------------------------
Name: R. Mark Chambers
--------------------------------------
Title: Vice President
--------------------------------------
-8-
Exhibit 10.3(b)
CONTINUING GUARANTEE
TO: IMPERIAL BANK, a California banking corporation
1. For valuable consideration, the undersigned (hereinafter called
"Guarantor"), whose address is set forth after Guarantor's signature below,
jointly and severally, and unconditionally, guarantees and promises to pay to
IMPERIAL BANK, a California banking corporation (hereinafter called "Lender"),
or order, on demand, in lawful money of the United States, any and all
indebtedness of SKYMALL, INC., a Nevada corporation, skymall.com, inc., a Nevada
corporation and DURHAM & COMPANY, a Utah corporation (hereinafter, severally and
collectively, called "Borrower"), to Lender pursuant to that certain Credit and
Security Agreement dated June 30, 1999, as amended by that certain Modification
Agreement of even date herewith, by and between Borrower and Lender
(hereinafter, severally and collectively, called "Credit Agreement")
attributable to the Maximum Guaranteed Loan Amount (as defined in the Credit
Agreement) and not to the Maximum Adjusted Cash Flow Loan Amount (as defined in
the Credit Agreement). If more than one Borrower is named herein, or if this
Guarantee is executed by more than one Guarantor, the word "Borrower" and the
word "Guarantor" respectively shall mean all and any one or more of them,
severally and collectively. The word "indebtedness" is used in its most
comprehensive sense and includes any and all advances, debts, obligations and
liabilities of Borrower heretofore, now or hereafter made, incurred or created,
with or without notice to Guarantor, whether voluntary or involuntary and
however arising, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether Borrower is liable
individually or jointly with others, or whether recovery upon such indebtedness
may be or hereafter become barred by any statute of limitations, or whether such
indebtedness may be or hereafter become otherwise unenforceable, exclusive,
however, of any indebtedness of Borrower to Lender presently covered by existing
guaranties executed by Guarantor, but without derogation to such existing
guaranties, if any, which are hereby ratified and reaffirmed.
2. The liability of Guarantor hereunder shall not exceed at any one
time the sum of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) for principal,
plus all interest thereon and all attorneys' fees and other costs and expenses
incurred by Lender in collecting, compromising or enforcing the indebtedness or
in protecting or preserving any security for the indebtedness. Lender may permit
the indebtedness of Borrower to exceed such maximum liability without impairing
the obligation of Guarantor hereunder. Any payment by Guarantor shall not reduce
Guarantor's maximum obligation hereunder, unless written notice to that effect
is actually received by Lender at or prior to the time of such payment. Any
payment by or recovery from Borrower, any other guarantor or any security shall
be credited first to that portion of the indebtedness which exceeds the maximum
obligation of Guarantor hereunder. Notwithstanding any other provision in this
Guarantee to the contrary, Guarantor shall be totally released from any
liability for the payment of the indebtedness from and after the date that
Borrower satisfies the Invested Capital Condition (as defined in the Credit
Agreement).
<PAGE>
3. This is a continuing guarantee that shall remain in full force and
effect and includes all indebtedness arising under future transactions or under
successive transactions which either continue then existing indebtedness or from
time to time renew it after it has been satisfied, but shall not apply to any
indebtedness created after actual receipt by Lender of written notice of the
revocation of this Guarantee as to future transactions. Any such revocation of
this Guarantee at any time by any Guarantor as to future transactions shall not
affect the liability of any other guarantor for indebtedness of Borrower and
shall not affect the liability of that Guarantor or any other guarantor for
indebtedness incurred or credit committed by Lender to Borrower prior to the
effective time of that revocation; this Guarantee shall remain in full force and
effect as to all such indebtedness. The death of any Guarantor shall not operate
as a revocation of liability hereunder of the estate of that Guarantor for
indebtedness created or incurred or credit committed by Lender to Borrower
subsequent to such death until actual receipt by Lender of written notice of the
death of that Guarantor. Guarantor waives notice of revocation given by any
other guarantor.
4. Guarantor is providing this Guarantee at the instance and request of
Borrower to induce Lender to extend or continue financial accommodations to
Borrower. Guarantor hereby represents and warrants that Guarantor is and will
continue to be fully informed about all aspects of the financial condition and
business affairs of Borrower that Guarantor deems relevant to the obligations of
Guarantor hereunder and hereby waives and fully discharges Lender from any and
all obligations to communicate to Guarantor any information whatsoever regarding
Borrower or Borrower's financial condition or business affairs.
5. Guarantor authorizes Lender, without notice or demand and without
affecting Guarantor's liability hereunder, from time to time, to: (a) renew,
modify, compromise, extend, accelerate or otherwise change the time for payment
of, or otherwise change the terms of the indebtedness or any part thereof,
including increasing or decreasing the rate of interest thereon; (b) release,
substitute or add any one or more endorsers, Guarantor or other guarantors.
6. Upon the occurrence of an Event of Default (as defined in the Credit
Agreement) or at any time thereafter Lender may (a) take and hold security for
the payment of this Guarantee or the indebtedness, and enforce, exchange,
substitute, subordinate, waive or release any such security; (b) proceed against
such security and direct the order or manner of sale of such security as Lender
in its discretion may determine; and (c) apply any and all payments from
Borrower, Guarantor or any other guarantor, or recoveries from such security, in
such order or manner as Lender in its discretion may determine.
7. Guarantor waives and agrees not to assert: (a) any right to require
Lender to proceed against Borrower or any other guarantor, to proceed against or
exhaust any security for the indebtedness, to pursue any other remedy available
to Lender, or to pursue any remedy in any particular order or manner; (b) the
benefit of any statute of limitations affecting Guarantor's liability hereunder
or the enforcement hereof; (c) demand, diligence, presentment for payment,
protest and demand, and notice of extension, dishonor, protest, demand,
nonpayment and acceptance of this Guarantee; (d) notice of the existence,
creation or incurring of new or additional indebtedness of Borrower to Lender;
(e) the benefits of any statutory provision limiting the liability of a surety,
-2-
<PAGE>
including without limitation the provisions of A.R.S. Sections 12-1641, et seq.,
to the extent applicable; (f) any defense arising by reason of any disability or
other defense of Borrower or by reason of the cessation from any cause
whatsoever (other than payment in full) of the liability of Borrower for the
indebtedness; (g) any defense based upon an election of remedies by Lender,
including, without limitation, any election to proceed by judicial or
nonjudicial foreclosure of any security, whether real property or personal
property security, or by deed in lieu thereof, and whether or not every aspect
of any foreclosure sale is commercially reasonable, or any election of remedies,
including but not limited to, remedies relating to real property or personal
property security, which destroys or otherwise impairs the subrogation rights of
Guarantor or the rights of Guarantor to proceed against Borrower or any
guarantor for reimbursement, or both; (h) to the extent permitted by applicable
law, the benefits of any statutory provision limiting the right of Lender to
recover a deficiency judgment, or to otherwise proceed against any person or
entity obligated for payment of the indebtedness, after any foreclosure or
trustee's sale of any security for the indebtedness; and (i) without limiting
the generality of the foregoing or any other provision hereof, any rights and
benefits which might otherwise be available to Guarantor under California Civil
Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899 and 3433, or
any successor sections, to the extent applicable. Guarantor hereby expressly
consents to any impairment of collateral, including, but not limited to, failure
to perfect a security interest and release collateral and any such impairment or
release shall not affect Guarantor's obligations hereunder. Until payment in
full of the indebtedness, Guarantor shall have no right of subrogation and
hereby waives any right to enforce any remedy which Lender now has, or may
hereafter have, against Borrower, and waives any benefit of, and any right to
participate in, any security now or hereafter held by Lender. Guarantor
understands and acknowledges that if Lender forecloses judicially or
nonjudicially against any real property security for the indebtedness, that
foreclosure could impair or destroy any ability that Guarantor may have to seek
reimbursement, contribution or indemnification from Borrower or others based on
any right Guarantor may have of subrogation, reimbursement, contribution or
indemnification for any amounts paid by Guarantor under this Guarantee.
Guarantor further understands and acknowledges that in the absence of this
Paragraph 7, such potential impairment or destruction of Guarantor's rights, if
any, may entitle Guarantor to assert a defense to this Guarantee based on
Section 580d of the California Code of Civil Procedure as interpreted in Union
Bank v. Gradsky, 265 Cal. App. 2d 40 (1968), to the extent applicable. By
executing this Guarantee, Guarantor freely, irrevocably and unconditionally: (i)
waives and relinquishes that defense and agrees that Guarantor will be fully
liable under this Guarantee even though Lender may foreclose judicially or
nonjudicially against any real property security for the indebtedness; (ii)
agrees that Guarantor will not assert that defense in any action or proceeding
which Lender may commence to enforce this Guarantee; and (iii) acknowledges and
agrees that Lender is relying on this waiver in making the loans evidenced by
the Note, and that this waiver is a material part of the consideration which
Lender is receiving for making such Loans. Guarantor waives all rights and
defenses arising out of an election of remedies by Lender, even though that
election of remedies, such as a nonjudicial foreclosure with respect to security
for a guaranteed obligation, has destroyed the guarantor's rights of subrogation
and reimbursement against the principal by the operation of Section 580d of the
Code of Civil Procedure or otherwise.
-3-
<PAGE>
Guarantor waives all rights and defenses that Guarantor may have
because the indebtedness is secured by real property. This means, among other
things:
(a) Lender may collect from Guarantor without first
foreclosing on any real or personal property collateral pledged by
Borrower.
(b) If Lender forecloses on any real property collateral
pledged by Borrower:
(i) The indebtedness may be reduced only by the price
for which that collateral is sold at the foreclosure sale,
even if the collateral is worth more than the sale price.
(ii) Lender may collect from Guarantor even if Lender,
by foreclosing on the real property collateral, has destroyed
any right Guarantor may have to collect from Borrower.
This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because the indebtedness is secured by real
property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code
of Civil Procedure or Section 2848 of the California Civil Code.
8. All existing and future indebtedness of Borrower to Guarantor is
hereby subordinated to the indebtedness of Borrower to Lender and such
indebtedness of Borrower to Guarantor, if Lender so requests, shall be
collected, enforced and received by Guarantor as trustee for Lender and shall be
paid over to Lender on account of the indebtedness of Borrower to Lender, but
without reducing or affecting in any manner the liability of Guarantor under the
other provisions of this Guarantee.
9. In addition to all liens upon, and rights of setoff against, the
monies, securities or other property of Guarantor given to Lender by law, Lender
shall have a lien and a right of setoff against, and Guarantor hereby grants to
Lender a security interest in, all monies, securities and other property of
Guarantor now and hereafter in the possession of or on deposit with Lender,
whether held in a general or special account or deposit, or for safekeeping or
otherwise; every such lien and right of setoff may be exercised without demand
upon or notice to Guarantor. No lien or right of setoff shall be deemed to have
been waived by any act or conduct on the part of Lender, by any neglect to
exercise such right of setoff or to enforce such lien, or by any delay in so
doing.
10. If Borrower is a corporation or partnership, it is not necessary
for Lender to inquire into the powers of Borrower or the officers, directors,
partners or agents acting or purporting to act on its behalf, and any
indebtedness made or created in reliance upon the professed exercise of such
powers shall be guaranteed hereunder.
-4-
<PAGE>
11. Guarantor agrees to deliver to Lender financial statements, income
tax returns and other financial information in form and level of detail, and
containing certifications, as and to the extent required pursuant to the Credit
Agreement.
12. All financial statements, income tax returns and other financial
information previously or hereafter given to Lender by or on behalf of Guarantor
are and shall be true, complete and correct as of the date thereof.
13. Guarantor agrees to pay all attorneys' fees and all other costs and
expenses which may be incurred by Lender in enforcing this Guarantee.
14. The obligations of Guarantor hereunder are joint and several if
Guarantor is more than one person or entity, are separate and independent of the
obligations of Borrower and of any other guarantor, and a separate action or
actions may be brought and prosecuted against Guarantor whether action is
brought against Borrower or any other guarantor or whether Borrower or any other
guarantor is joined in any action or actions. The obligations of Guarantor
hereunder shall survive and continue in full force and effect until payment in
full of the indebtedness is actually received by Lender, notwithstanding any
release or termination of Borrower's liability by express or implied agreement
with Lender or by operation of law and notwithstanding that the indebtedness or
any part thereof is deemed to have been paid or discharged by operation of law
or by some act or agreement of Lender. For purposes of this Guarantee, the
indebtedness shall be deemed to be paid only to the extent that Lender actually
receives immediately available funds and to the extent of any credit bid by
Lender at any foreclosure or trustee's sale of any security for the
indebtedness.
15. This Guarantee sets forth the entire agreement of Guarantor and
Lender with respect to the subject matter hereof and supersedes all prior oral
and written agreements and representations by Lender to Guarantor. No
modification or waiver of any provision of this Guarantee or any right of Lender
hereunder and no release of Guarantor from any obligation hereunder shall be
effective unless in a writing executed by an authorized officer of Lender. There
are no conditions, oral or otherwise, on the effectiveness of this Guarantee.
16. This Guarantee shall inure to the benefit of Lender and its
successors and assigns and shall be binding upon Guarantor and its heirs,
personal representatives, successors and assigns. Lender may assign this
Guarantee in whole or in part without notice.
17. Guarantor agrees that to the extent Borrower or Guarantor makes any
payment to Lender in connection with the indebtedness, and all or any part of
such payment is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid by Lender or paid over to a
trustee, receiver or any other entity, whether under any bankruptcy act or
otherwise (any such payment is hereinafter referred to as a "Preferential
Payment"), then this Guarantee shall continue to be effective or shall be
reinstated, as the case may be, and, to the extent of such payment or repayment
-5-
<PAGE>
by Lender, the indebtedness or part thereof intended to be satisfied by such
Preferential Payment shall be revived and continued in full force and effect as
if said Preferential Payment had not been made.
18. Guarantor represents and warrants to Lender that: (a) (if Guarantor
is not a natural person) it is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization; (b) Guarantor
has full capacity and authority to execute, deliver and perform this Guarantee,
and the execution, delivery and performance of this Guarantee will not (i)
violate any law or regulation, (ii) (if Guarantor is not a natural person)
violate any provision of Guarantor's organizational documents, (iii) violate or
constitute (with due notice or lapse of time or both) a default under any
indenture, agreement, license or other instrument to which Guarantor is a party
or by which Guarantor or any of Guarantor's properties may be bound, (iv)
violate any order of any court, tribunal or governmental agency binding on
Guarantor or any of Guarantor's properties, (v) result in the creation or
imposition of any lien of any nature whatsoever on any of Guarantor's properties
or assets, (vi) render Guarantor insolvent under generally accepted accounting
principles, (vii) leave Guarantor with remaining assets which constitute
unreasonably small capital given the nature of its business, or (viii) result in
the incurrence of debts (whether matured or unmatured, liquidated or
unliquidated, absolute, fixed or contingent) beyond Guarantor's ability to pay
them when and as they become due; (c) no approval or consent of, or filing or
registration with, any federal, state or local regulatory authority is required
in connection with the execution, delivery and performance of this Guarantee;
and (d) this Guarantee constitutes the legal, valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms. These
representations and warranties shall survive the execution of this Guarantee. As
used in this paragraph, "insolvent" means the present fair saleable value of
assets is less than the probable amount required to be paid on existing debts
when and as they mature.
19. Reference Provision.
(a) Each controversy, dispute or claim ("Claim") between the
parties arising out of or relating to this Guarantee and/or any of the
Loan Documents (as defined in the Credit Agreement), which is not
settled in writing within ten days after the "Claim Date" (defined as
the date on which a party gives written notice to all other parties
that a controversy, dispute or claim exists), will be settled by a
reference proceeding in Los Angeles, California, in accordance with the
provisions of Section 638, et seq., of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute
the exclusive remedy for the settlement of any Claim, including whether
such Claim is subject to the reference proceeding and the parties waive
their rights to initiate any legal proceedings against each other in
any court or jurisdiction other than the Superior Court of Los Angeles
(the "Court"). The referee shall be a retired Judge selected by mutual
agreement of the parties, and if they cannot so agree with in thirty
days (30) after the Claim Date, the referee shall be selected by the
Presiding Judge of the Court. The referee shall be appointed to sit as
a temporary judge, as authorized by law. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after
-6-
<PAGE>
the Claim Date and (b) try any and all issues of law or fact and report
a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP
644 in the Court. All discovery permitted by this Guarantee shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the
event of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections
raised to such discovery or unavailability of a witness due to absence
or illness. No party shall be entitled to "priority" in conducing
discovery. Depositions may be taken by either party upon seven (7) days
written notice, and, request for production of inspection of documents
shall be responded to within ten (10) days after service. All disputes
relating to discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding upon
the parties.
(b) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State
of California. The rules of evidence applicable to proceedings at law
in the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well
as legal relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that
are the subject to the reference. The parties hereto expressly reserve
the right to contest or appeal from the final judgment or any
appealable order or appealable judgment entered by the referee. The
parties expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new
trial or a different judgment, which new trial, if granted, is also to
be a reference proceeding under this provision.
(c) No provision of Paragraphs (a) or (b) of this Section 18
however, shall limit the right of Lender to bring action for possession
of any collateral in any jurisdiction, wherever located, in accordance
with the provisions of the Loan Documents.
20. Notwithstanding any waiver of or references to Arizona Revised
Statutes contained in Paragraph 6 hereof, this Guarantee shall be governed by
and construed in accordance with the substantive laws (other than conflict laws)
of the State of California, except to the extent Lender has greater rights or
remedies under Federal law, whether as a national bank or otherwise, in which
case such choice of California law shall not be deemed to deprive Lender of any
such rights and remedies as may be available under Federal law. Subject to the
provisions of Section 18 hereof, each party consents to the personal
jurisdiction and venue of the state courts located in Los Angeles, State of
California in connection with any controversy related to this Guarantee, waives
-7-
<PAGE>
any argument that venue in any such forum is not convenient and agrees that any
litigation initiated by any of them in connection with this Guarantee shall be
venued in the Superior Court of Los Angeles County, California. The parties
waive any right to trial by jury in any action or proceeding based on or
pertaining to this Guarantee.
-8-
<PAGE>
IN WITNESS WHEREOF, these presents are executed as of the 1st day
of September, 1999.
GUARANTOR:
/s/ Robert M. Worsley
-----------------------------------
ROBERT M. WORSLEY
/s/ Christi M. Worsley
-----------------------------------
CHRISTI M. WORSLEY
-9-
Exhibit 10.4(a)
STOCK AND WARRANT PURCHASE AGREEMENT
STOCK AND WARRANT PURCHASE AGREEMENT ("Agreement") dated as of
November 2, 1999 between SkyMall, Inc., a Nevada corporation (the "Company"),
and each person or entity who executes a counterpart signature page to this
Agreement and is listed as an investor on SCHEDULE I attached to this Agreement
(each individually an "Investor" and collectively the "Investors").
W I T N E S S E T H:
WHEREAS, the Company desires to sell and issue to the Investors listed
on SCHEDULE I, and the Investors listed on SCHEDULE I desire to purchase from
the Company, up to an aggregate of 1,142,885 shares of Common Stock, $.001 par
value per share (the "Common Stock"), of the Company on the terms and conditions
set forth herein; and
WHEREAS, each Investor listed on SCHEDULE I will also receive
five-year warrants (the "Warrants"), in the identical form and substance of
EXHIBIT A attached hereto, to purchase that number of additional shares of
Common Stock equal to the product of 50% multiplied by the number of shares of
Common Stock purchased by such Investor at a per share exercise price equal to
$8.00 per share of Common Stock; and
WHEREAS, the Company has granted the Investors registration rights
with respect to the shares of Common Stock purchased hereunder and the shares of
Common Stock issuable upon exercise of the Warrants (the "Warrant Shares")
pursuant to the terms hereof;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"Closing" and "Closing Date" shall have the meanings ascribed to such
terms in Section 1.3 herein.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
<PAGE>
"Holder" and "Holders" shall include an Investor or Investors,
respectively, and any transferee of the shares of Common Stock, the Warrants or
the Warrant Shares or Registrable Securities which have not been sold to the
public to whom the registration rights conferred by this Agreement have been
transferred in compliance with this Agreement.
"Registrable Securities" shall mean: (i) the shares of Common Stock
and the Warrant Shares issued or issuable to each Holder or the respective
permitted transferee or designee; (ii) any securities issued (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued) to each Holder as a result of any stock split, stock dividend,
recapitalization or similar event or upon the exchange of the shares of Common
Stock, Warrants, or Warrant Shares; or (iii) any other security of the Company
issued as a dividend or other distribution with respect to, in exchange of or in
replacement of Registrable Securities.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, including without limitation, Rule 415 under the Securities Act or
any successor rule providing for offering securities on a continuous or delayed
basis, and the declaration or ordering of the effectiveness of such registration
statement by the Commission.
"Registration Expenses" shall mean all expenses to be incurred by the
Company in connection with each Holder's registration rights under this
Agreement, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, reasonable fees and disbursements of Orrick, Herrington &
Sutcliffe LLP or other counsel for Holders (using a single counsel selected by a
majority in the interest of the Holders) for a "due diligence" examination of
the Company and review of the Registration Statement and related documents, and
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company).
"Registration Statement" shall have the meaning set forth in Section
4.1(a) herein.
"Regulation D" shall mean Regulation D as promulgated pursuant to the
Securities Act, and as subsequently amended.
"Securities" shall mean the shares of Common Stock, the Warrants and
the Warrant Shares, collectively.
"Securities Act" or "Act" shall mean the Securities Act of 1933, as
amended.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities, if any, and all
fees and disbursements of counsel for Holders not included within "Registration
Expenses".
2
<PAGE>
ARTICLE I
PURCHASE AND SALE OF THE STOCK AND WARRANTS
Section 1.1 PURCHASE AND SALE. Upon the following terms and
conditions, the Company shall issue and sell to each Investor listed on SCHEDULE
I severally, and each Investor listed on SCHEDULE I severally shall purchase
from the Company, the number of shares of Common Stock and the number of
Warrants indicated next to such Investor's name on SCHEDULE I attached hereto.
Section 1.2 PURCHASE PRICE. The per share purchase price for the
shares of Common Stock shall be equal to $7.00 per share of Common Stock (the
"Common Stock Purchase Price"). Each Investor listed on SCHEDULE I will also
receive Warrants to purchase such number of shares of Common Stock equal to the
product of 50% multiplied by the number of shares of Common Stock purchased at
an exercise price equal to $8.00 per share of Common Stock.
Section 1.3 THE CLOSING. (a) The closing of the purchase and sale of
the Common Stock and Warrants (the "Closing"), shall take place at the offices
of Squire, Sanders & Dempsey L.L.P, at 10:00 a.m., local time following
acceptance by the Company of subscriptions representing not less than an
aggregate of $8,000,200 of shares of Common Stock, which acceptance shall not
occur until the conditions set forth in Article V hereof shall be fulfilled or
waived in accordance herewith. The date on which the Closing occurs is referred
to herein as the "Closing Date."
(b) On the Closing Date, the Company shall deliver to each Investor
certificates (with the number of and denomination of such certificates
reasonably requested by such Investor) representing the Warrants and the Common
Stock purchased hereunder by such Investor registered in the name of such
Investor or its nominee or deposit such Warrants and Common Stock into accounts
designated by such Investor, and such Investor shall deliver to the Company the
purchase price for the Warrants and Common Stock purchased by such Investor
hereunder by wire transfer in immediately available funds to an account
designated in writing by the Company. In addition, each party shall deliver all
documents, instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing Date.
(c) Subject to the terms and conditions of this Agreement, Quintel
Communications, Inc. ("Quintel") has agreed to acquire an aggregate of
$3,000,000 of shares of Common Stock as of the Closing Date at the Common Stock
Purchase Price.
3
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby makes the following representations and warranties to each of the
Investors from and as of the date hereof through the Closing Date:
(a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT. The
Company owns 100% of the outstanding capital stock of each of Durham & Company,
a Utah corporation, Disk Publishing Inc., a Utah corporation, and skymall.com,
Inc. a Nevada corporation (collectively, the "Subsidiaries"). The Company does
not have any other direct or indirect subsidiaries. Each of the Company and its
Subsidiaries is a corporation duly incorporated and validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and the
Company and the Subsidiaries each have the requisite corporate power to own its
properties and to carry on its business as now being conducted. Each of the
Company and each Subsidiary is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any adverse effect on
the business, operations, properties, prospects, or financial condition of the
entity with respect to which such term is used and which is material to such
entity and other entities controlling or controlled by such entity, taken as a
whole, and any material adverse effect on the transactions contemplated under
the Agreement or any other agreement or document contemplated hereby.
(b) AUTHORIZATION; ENFORCEMENT. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and to
issue the Securities in accordance with the terms hereof and the terms of the
Warrants, (ii) the execution and delivery of this Agreement by the Company and
the consummation by it of the transactions contemplated hereby, including the
issuance of the Common Stock and the Warrants in accordance with the terms of
this Agreement and the Warrant Shares in accordance with the terms of the
Warrants have been duly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required, (iii) this Agreement has been duly executed and
delivered by the Company, and (iv) this Agreement constitutes the valid and
binding obligations of the Company enforceable against the Company in accordance
with its terms.
(c) CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock; without giving effect to this offering, there are 9,279,958 shares of
Common Stock and no shares of preferred stock issued and outstanding,
respectively. All of the outstanding shares of the Common Stock have been
validly issued and are fully paid and non-assessable. No shares of Common Stock
or preferred stock are entitled to preemptive rights; without giving effect to
this offering, 370,555 shares of Common Stock (including any shares of Common
Stock issuable upon the exercise of any outstanding options, warrants or rights
4
<PAGE>
or upon the exchange or conversion of any exchangeable or convertible securities
of the Company) are entitled to registration rights (which registration rights
do not adversely impact the registration rights granted to the Investors); and
without giving effect to this offering, there are outstanding options for
1,672,149 shares of Common Stock and outstanding warrants for 104,700 shares of
Common Stock. Except for warrants issuable to Ryan, Beck & Co. Inc. ("Ryan
Beck") and warrants issuable to Shoreline Pacific Institutional Finance
("Shoreline") in connection with this offering and except as disclosed in the
prior sentence and as contemplated by this Agreement or disclosed in the SEC
Documents (as defined below), there are no other scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights exchangeable or convertible into, any shares of capital stock of the
Company, or contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe for, or commitments
to purchase or acquire, any shares, or securities or rights convertible into
shares, of capital stock of the Company. The Company represents and warrants
that it has no current plan or intention to sell or otherwise issue any shares
of Common Stock or securities convertible into or exercisable for shares of
Common Stock other than (i) up to 1,142,885 shares of Common Stock and up to
571,444 Warrants to purchase shares of Common Stock being sold by the Company to
the Investors and (ii) up to an aggregate of 140,002 warrants (the "Placement
Warrants") to purchase Common Stock being issued to Ryan Beck and Shoreline in
connection with this offering (collectively such number of shares of Common
Stock, Warrants and Placement Warrants are referred to as the "Maximum Shares");
(d) ISSUANCE OF WARRANT SHARES. The Warrant Shares are duly authorized
and will be, as of the Closing Date, reserved for issuance and, upon exercise in
accordance with terms of the Warrants, such Warrant Shares will be validly
issued, fully paid and non-assessable, free and clear of any and all liens,
claims and encumbrances, and the holders of such Warrant Shares shall be
entitled to all rights and preferences accorded to a holder of Common Stock. The
outstanding shares of Common Stock are currently listed on the Nasdaq National
Market ("Nasdaq").
(e) NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not (i) result in a violation of the charter
or By-Laws of the Company or any Subsidiary or (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture, patent, patent
license or instrument to which the Company or any Subsidiary is a party, or
result in a violation of any Federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to the Company or any Subsidiary or by which
any property or asset of the Company or any Subsidiary is bound or affected
(except for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the aggregate,
have a Material Adverse Effect); provided that, for purposes of such
5
<PAGE>
representation as to Federal, state, local or foreign law, rule or regulation,
no representation is made herein with respect to any of the same applicable
solely to the Investors and not to the Company or any Subsidiary. Neither the
business of the Company nor of any Subsidiary is being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under Federal, state, local
or foreign law, rule or regulation to obtain any consent, authorization or order
of, or to make any filing or registration with, any court or governmental agency
in order for it to execute, deliver or perform any of its obligations under this
Agreement or the Warrants or issue and sell the Common Stock or the Warrants in
accordance with the terms hereof or issue the Warrant Shares upon exercise of
the Warrants, except for the registration provisions provided for herein,
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investors herein.
(f) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Common Stock of the
Company is registered pursuant to Section 12(g) of the Exchange Act and the
Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Commission pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant to
Section 13(a) or 15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by the Company with the Commission (all of
the foregoing including filings incorporated by reference therein being referred
to herein as the "SEC Documents"). The Company has delivered or made available
to the Investors true and complete copies of all SEC Documents (including,
without limitation, proxy information and solicitation materials and
registration statements) filed with the Commission since September 30, 1998. As
of their respective dates, the SEC Documents (as amended by any amendments filed
prior to the date of this Agreement or any Closing Date and provided to each
Investor) complied or will comply in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other Federal, state and local laws, rules and regulations
applicable to such SEC Documents, and none of the SEC Documents contained or
will contain any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission or other
applicable rules and regulations with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
6
<PAGE>
(g) PRINCIPAL EXCHANGE/MARKET. The principal market on which the
Common Stock is currently traded is Nasdaq.
(h) NO MATERIAL ADVERSE CHANGE. Since June 30, 1999, the date through
which the most recent quarterly report of the Company on Form 10-Q has been
prepared and filed with the Commission, a copy of which is included in the SEC
Documents, no event which had or is likely to have a Material Adverse Effect has
occurred or exists with respect to the Company or any Subsidiary, except as
otherwise disclosed or reflected in press releases or other SEC Documents
prepared through or as of a date subsequent to June 30, 1999 and provided to the
Investors.
(i) NO UNDISCLOSED LIABILITIES. Neither the Company nor any Subsidiary
has any liabilities or obligations not disclosed in the SEC Documents, other
than those liabilities incurred in the ordinary course of its respective
business since June 30, 1999 or liabilities or obligations, individually or in
the aggregate, which do not or would not have a Material Adverse Effect on the
Company or the Subsidiaries, taken as a whole.
(j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or circumstance
has occurred or exists with respect to the Company, any Subsidiary or their
respective business, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(k) NO GENERAL SOLICITATION. None of the Company, the Subsidiaries or,
to the Company's knowledge, any of their respective affiliates or any person
acting on its or their behalf has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D) in connection with the
offer or sale of the Securities.
(l) NO INTEGRATED OFFERING. None of the Company, the Subsidiaries, or,
to the Company's knowledge, any of their respective affiliates, or any person
acting on its or their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under
circumstances that would require registration of any of the Securities.
(m) INTELLECTUAL PROPERTY. Each of the Company and the Subsidiaries
owns or has licenses to use certain copyrights and trademarks ("intellectual
property") associated with its respective business. Each of the Company and the
Subsidiaries has all intellectual property rights which are needed to conduct
its respective business as it is now being conducted or as proposed to be
conducted as disclosed in the SEC Documents. The Company has no reason to
believe that the intellectual property rights owned by the Company or any of its
Subsidiaries are invalid or unenforceable or that the use of such intellectual
property by the Company or the Subsidiaries infringes upon or conflicts with any
right of any third party, and neither the Company nor any Subsidiary has
received notice of any such infringement or conflict. The Company has no
knowledge of any infringement of the Company's or any Subsidiary's intellectual
property by any third party.
7
<PAGE>
(n) NO LITIGATION. Except as set forth in the SEC Documents delivered
to the Investors, no litigation or claim (including those for unpaid taxes)
against the Company or any Subsidiary is pending or, to the Company's knowledge,
threatened, and no other event has occurred, which if determined adversely would
have a Material Adverse Effect on the Company or any Subsidiary, taken as a
whole, or would materially adversely effect the transactions contemplated
hereby. The legal proceedings described in the SEC Documents will not have an
effect on the transactions contemplated hereby, and will not have a Material
Adverse Effect on the Company or the Subsidiaries, taken as a whole.
(o) BROKERS. The Company has taken no action which would give rise to
any claim by any person, other than Ryan, Beck and Shoreline, for brokerage
commissions, finder's fees or similar payments by the Company relating to this
Agreement or the transactions contemplated hereby. The Company has taken no
action which would give rise to any claim by any person for brokerage
commissions, finder's fees or similar payments by any Investor relating to this
Agreement or the transactions contemplated hereby.
(p) FORMS S-3. The Company is eligible to file a Registration
Statement on Form S-3 under the Act and the rules promulgated thereunder, and
Form S-3 is permitted to be used for the transactions contemplated hereby under
the Act and the rules promulgated thereunder.
(q) YEAR 2000 COMPLIANCE. Each system which includes software,
hardware, databases or embedded control systems (microcompressor controlled,
robotic or other device) (collectively, a "System"), that constitutes any part
of, or is used in connection with the use, operation or enjoyment of, any asset,
property or leased premises of the Company or any Subsidiary (i) is designed (or
has been modified) to be used prior to and after January 1, 2000, (ii) to the
Company's knowledge, will operate without error arising from the creation,
recognition, acceptance, calculation, display, storage, retrieval, accessing,
comparison, sorting, manipulation, processing or other use of dates or
date-based, date-dependent or date-related data, including but not limited to
century recognition, day-of-the-week recognition, leap years, date values and
interfaces of date functionalities, and (iii) to the Company's knowledge, will
not be adversely affected by the advent of the year 2000, the advent of the
twenty-first century or the transition from the twentieth century through the
year 2000 and into the twenty-first century (collectively, items (i) through
(iii) are referred to herein as "Year 2000 Compliant"). No System that is
material to the business, finances or operations of the business of the Company
or any Subsidiary receives data from or communicates with any component or
system external to itself (whether or not such external component or system is
the Company's, or any Subsidiary's or any third party's) that is not itself Year
2000 Compliant. All licenses for the use of any system-related software,
hardware, databases or embedded control system permit the Company or the
Subsidiaries to make all modifications, bypasses, debugging, work-arounds,
repairs, replacements, conversions or corrections necessary to permit the System
to operate compatibly, in conformance with their respective specifications, and
to be Year 2000 Compliant. None of the Company nor any of the Subsidiaries has
incurred, and none of the Company nor any of the Subsidiaries has any reason to
8
<PAGE>
believe that it may in the future incur, any expenses arising from or related to
the failure of any of its Systems as a result of not being Year 2000 Compliant.
Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of
the Investors, severally and not jointly, hereby makes the following
representations and warranties to the Company as of the date hereof and on the
Closing Date:
(a) AUTHORIZATION; ENFORCEMENT. (i) Such Investor has the requisite
power and authority, or the legal capacity, as the case may be, to enter into
and perform this Agreement and to purchase the Securities being sold to such
Investor hereunder, (ii) the execution and delivery of this Agreement by such
Investor and the consummation by it of the transactions contemplated hereby have
been duly authorized by all necessary corporate or partnership action, as
required, and (iii) this Agreement the valid and binding obligation of such
Investor enforceable against such Investor in accordance its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
(b) NO CONFLICTS. The execution, delivery and performance of this
Agreement and the consummation by such Investor of the transactions contemplated
hereby do not and will not (i) result in a violation of such Investor's
organizational documents, or (ii) conflict with any agreement, indenture, or
instrument to which such Investor is a party, or (iii) result in a violation of
any law, rule, or regulation or any order, judgment or decree of any court or
governmental agency applicable to such Investor. Such Investor is not required
to obtain any consent or authorization of any governmental agency in order for
it to perform its obligations under this Agreement.
(c) INVESTMENT REPRESENTATION. Such Investor is purchasing the
securities purchased hereunder for its own account and not with a view to
distribution in violation of any securities laws. Such Investor has no present
intention to sell the securities purchased hereunder and such Investor has no
present arrangement (whether or not legally binding) to sell the Securities
purchased hereunder to or through any person or entity; provided, however, that
by the representations herein, such Investor does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of any of the Securities at any time in accordance with Federal and
state securities laws applicable to such disposition.
(d) ACCREDITED INVESTOR. Such Investor is an "accredited investor" as
defined in Rule 501 promulgated under the Act. The Investor has such knowledge
and experience in financial and business matters in general and investments in
particular, so that such Investor is able to evaluate the merits and risks of an
investment in the securities purchased hereunder and to protect its own
interests in connection with such investment. In addition (but without limiting
the effect of the Company's representations and warranties contained herein),
such Investor has received such information as it considers necessary or
appropriate for deciding whether to purchase the Securities purchased hereunder.
9
<PAGE>
(e) RULE 144. Such Investor understands that there is no public
trading market for the Warrants, that none is expected to develop, and that the
Warrants must be held indefinitely unless exercised or unless such securities
are registered under the Act or an exemption from registration is available.
Such Investor understands that the Common Stock and the Warrant Shares must be
held indefinitely unless such securities are registered under the Act or an
exemption from registration is available. Such Investor has been advised or is
aware of the provisions of Rule 144 promulgated under the Act.
(f) BROKERS. Such Investor has taken no action which would give rise
to any claim by any person for brokerage commissions, finder's fees or similar
payments by the Company relating to this Agreement or the transactions
contemplated hereby.
(g) RELIANCE BY THE COMPANY. Such Investor understands that the Common
Stock and Warrants are being offered and sold in reliance on a transactional
exemption from the registration requirements of Federal and state securities
laws and that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
such Investor set forth herein in order to determine the applicability of such
exemptions and the suitability of such Investor to acquire the Securities.
ARTICLE III
COVENANTS
Section 3.1 REGISTRATION AND LISTING. Until the later of (i) such time
as no Warrants are outstanding or (ii) the expiration of the Effectiveness
Period (as hereinafter defined in Section 4.3), the Company will cause the
Common Stock to continue to be registered under Section 12(g) of the Exchange
Act, will comply in all respects, with its reporting and filing obligations
under the Exchange Act, and will not take any action or file any document
(whether or not permitted by the Exchange Act or the rules thereunder) to
terminate or suspend such reporting and filing obligations. Until the later of
(i) such time as no Warrants are outstanding or (ii) the expiration of the
Effectiveness Period, the Company shall use its best efforts to continue the
listing or trading of the Common Stock on Nasdaq or a principal exchange (which
consists exclusively of the NYSE or AMEX) and comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
Nasdaq or such principal exchange, as the case may be.
Section 3.2 CERTIFICATES ON EXERCISE. Upon the exercise of any
Warrants in accordance with the terms of the Warrants, the Company shall issue
and deliver to such Investor (or the then holder) within two (2) business days
of the exercise date, (x) a Certificate or Certificates for the Warrant Shares
issuable upon such exercise and (y) a new certificate or certificates for the
Warrants of such Investor (or holder) which have not yet been exercised but
which are evidenced in part by the certificate(s) submitted to the Company in
connection with such exercise (with the number of and denomination of such new
certificate(s) designated by such Investor or holder).
10
<PAGE>
Section 3.3 REPLACEMENT CERTIFICATES. The certificate(s) representing
the shares of Common Stock, Warrant Shares or the Warrants held by any Investor
(or then holder) may be exchanged by such Investor (or such holder) at any time
and from time to time for certificates with different denominations representing
an equal number of shares of Common Stock, Warrant Shares or Warrants, as the
case may be, as reasonably requested by such Investor (or such holder) upon
surrendering the same. No service charge will be made for such registration,
transfer or exchange.
Section 3.4 SECURITIES COMPLIANCE. The Company shall notify the
Commission and Nasdaq, in accordance with their requirements, of the
transactions contemplated by this Agreement and the Warrants and shall take all
other necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation, for the legal and valid issuance of the
Securities. The Company covenants and agrees that it will not sell or otherwise
issue any shares of Common Stock or securities convertible into or exercisable
for shares of Common Stock which would violate NASD Rule 4460 (i)(1), and, in
particular, but not in limitation to the foregoing, the Company will not, during
the six (6) month period following the Closing of the sale of shares of Common
Stock and Warrants to the Investors, sell or otherwise issue any shares of
Common Stock or securities convertible into or exercisable for shares of Common
Stock in excess of the Maximum Shares without either (i) approval of such sale
or issuance by the stockholders of the Company, or (ii) a written advisory
opinion of the Nasdaq Stock Market that such approval is not necessary under
NASD Rule 4460 (i)(1) or any other applicable Nasdaq Stock Market or NASD rule
or a written waiver of any such requirement by the Nasdaq Stock Market, or (iii)
a written opinion of counsel to the Company that such stockholder approval is
not required.
Section 3.5 NOTICES. The Company agrees to provide all holders of
Warrants with copies of all notices and information, including, without
limitation, notices and proxy statements in connection with any meetings, that
are provided to the holders of shares of Common Stock, contemporaneously with
the delivery of such notices or information to such Common Stock holders.
Section 3.6 RESERVATION OF STOCK ISSUABLE UPON EXERCISE. The Company
shall at all times reserve and keep available out of its authorized but unissued
Common Stock, solely for the purpose of affecting the exercise of the Warrants,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the exercise of all outstanding Warrants.
ARTICLE IV
REGISTRATION
Section 4.1 REGISTRATION REQUIREMENTS. The Company shall use its best
efforts to effect the registration of the Registrable Securities (including,
11
<PAGE>
without limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act) as would permit or facilitate the public sale or
distribution of all the Registrable Securities in the manner (including manner
of sale) and in all states reasonably requested by the Holders. Such best
efforts by the Company shall include the following:
(a) The filing by the Company no later than fifteen (15) days after
the Closing of a registration statement or registration statements (as
necessary) with the Commission pursuant to Rule 415 under the Securities Act on
Form S-3 (or such other appropriate registration form if the Company is
ineligible to use Form S-3) covering the resale of the Registrable Securities
acquired (or underlying the Securities so acquired) at the Closing
("Registration Statement(s)").
(b) Thereafter the Company shall use its best efforts to cause such
Registration Statement(s) to be declared effective by the Commission within
ninety (90) days following the Closing Date. In the event that such Registration
Statement is not declared effective within 90 days following the Closing Date,
then the Company shall until the Registration Statement is declared effective,
(in addition to any other remedies available to a Holder at law or in equity)
pay in cash to each Holder an amount equal to 2% of the respective purchase
price paid by such Holder (the "Damages") for each 30 day period beginning on
the 91st day following the Closing Date at which the Registrable Securities were
acquired (the "Default Period") that the Registration Statement has not been
declared effective; provided, however, that the Default Period shall terminate
and Damages shall cease to accrue on the date upon which such Registrable
Securities may be sold under Rule 144(k) in the reasonable opinion of counsel to
the Company (provided that the Company's transfer agent has accepted an
instruction from the Company to such effect). If any applicable Default Period
is less than 30 days such cash payment shall be on a pro rata basis. The amount
of such cash payment shall be calculated by the Company on the earlier of (i)
the effective date of such Registration Statement or (ii) the last day of each
Default Period, and a certified or bank check in lawful money of the United
States of America shall be sent within three (3) business days of such
calculation to the address of each Holder as listed in the stock transfer ledger
maintained by the Company or its transfer agent. Notwithstanding the foregoing,
if the Default Period commences from the failure of the Company to cause to
become effective the Registration Statement solely by reason of the failure of
any Holder to provide such information as (i) the Company may reasonably request
from such Holder to be included in the Registration Statement or (ii) the
Commission or Nasdaq may request in connection with such Registration Statement
(which request was provided to the Holder in writing) (the "Late Holder"), the
Company shall not be required to pay such Damages to any of the Holders;
provided, that the Company shall file the Registration Statement excluding the
Late Holder or take such other action as necessary to cause the Registration
Statement to be declared effective, within two (2) business days after the
initial day of the original Default Period, provided that a new Default Period
will commence three (3) business days after the initial day of the original
12
<PAGE>
Default Period if the Registration Statement is not effective. The Company
agrees to promptly file an amendment to such Registration Statement including
the Late Holder once the requested information has been provided.
(c) Prepare and file with the Commission such amendments (including
post-effective amendments) and supplements to such Registration Statement and
the prospectus used in connection with such Registration Statement as may be
necessary to keep such Registration Statement effective at all times during the
Effectiveness Period (as defined below) and comply with the provisions of the
Act with respect to the disposition of all securities covered by such
Registration Statement and notify the Holders of the filing and effectiveness of
such Registration Statement and any amendments or supplements. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement by reason of the Company filing a report on
Form 10-K, Form 10-Q or Form 8-K or any analogous report under the Exchange Act,
the Company shall have incorporated such report by reference into the
Registration Statement, if applicable, or shall file such amendments or
supplements with the Commission on the same day on which the Exchange Act report
is filed which created the requirement for the Company to amend or supplement
the Registration Statement.
(d) Furnish to each Holder such numbers of copies of a current
prospectus conforming with the requirements of the Act, copies of the
Registration Statement, any amendment or supplement thereto and any documents
incorporated by reference therein and such other documents as such Holder may
reasonably require in order to facilitate the disposition of Registrable
Securities owned by such Holder.
(e) Use its best efforts to register and qualify the securities
covered by such Registration Statement under such other securities or "Blue Sky"
laws of such jurisdictions as shall be reasonably requested by each Holder;
provided that the Company shall not be required in connection therewith or as a
condition thereto to (i) qualify to do business where it would not otherwise be
required to qualify, (ii) file a general consent to service of process in any
such states or jurisdictions, (iii) make any change in the Company's charter or
By-Laws, or (iv) subject itself to general taxation in any such jurisdiction.
(f) Notify each Holder immediately of the happening of any event as a
result of which the prospectus (including any supplement thereto or thereof)
included in such Registration Statement, as then in effect, includes an untrue
statement of material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing, and use its best efforts to promptly
update and/or correct such prospectus.
(g) Notify each Holder immediately of the issuance by the Commission
or any state securities commission or agency of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose. The Company shall use its reasonable best efforts to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible time.
13
<PAGE>
(h) Permit a single firm of counsel, designated as Holders' counsel by
the Holders of a majority of the Registrable Securities included in the
Registration Statement, to review the Registration Statement and all amendments
and supplements thereto within a reasonable period of time prior to each filing,
and shall not file any document in a form to which such counsel reasonably
objects, provided such counsel shall provide such counsel's comments or
objection within five (5) business days after receipt of any document.
(i) As of the date the Registration Statement is declared effective by
the Commission, the Company shall have caused the Registrable Securities covered
by such Registration Statement to be listed with all securities exchange(s)
and/or markets on which the Common Stock is then listed, and prepared and filed
any required filings with the National Association of Securities Dealers, Inc.
or any exchange or market where the Common Stock is traded.
(j) The Company shall make available for inspection by the Holders,
representative(s) of all the Holders together, any underwriter participating in
any disposition pursuant to a Registration Statement, and any attorney or
accountant retained by any Holder or underwriter, all financial and other
records customary for purposes of the Holders' due diligence examination of the
Company and all SEC Documents filed subsequent to the Closing Date, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by any such representative, underwriter, attorney or accountant in connection
with such Registration Statement, provided that such parties agree to enter into
a Confidentiality Agreement in the form and substance annexed hereto as EXHIBIT
B.
(k) The term "best efforts" as used in this Agreement shall include,
without limitation, that the Company shall submit to the Commission, within five
(5) business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the Commission or that the
staff has no further comments on the Registration Statement, as the case may be,
a request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 72 hours after the submission of such request.
Section 4.2 EXPENSES OF REGISTRATION. All Registration Expenses
incurred in connection with any registration, qualification or compliance with
registration pursuant to this Section 4 shall be borne by the Company, and all
Selling Expenses of a Holder shall be borne by such Holder.
Section 4.3 REGISTRATION PERIOD. In the case of the registration
effected by the Company pursuant to this Section 4, the Company will use its
best efforts to keep such registration effective (the "Effectiveness Period")
until the earlier to occur of (a) two years from the Closing Date, provided,
however, that the period of time which such Registration Statement is required
to be effective shall be increased by the number of days that the Registration
Statement's effectiveness was suspended, if any, during the two year period from
the Closing Date, (b) the date on which all the Holders have completed the sales
14
<PAGE>
or distributions of the Registrable Securities included in the Registration
Statement or, (c) the date on which such Registrable Securities of all Holders
may be sold without restriction under Rule 144(k) promulgated under the
Securities Act (or any successor thereto) in the reasonable opinion of counsel
to the Company (provided that the Company's transfer agent has accepted an
instruction from the Company to such effect and will issue certificates
representing such Registrable Securities without any legend endorsed thereon).
Section 4.4 OBLIGATION OF HOLDER. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to Registrable Securities of the Holder that:
(a) the Holder by such Holder's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless the Holder has notified the Company in writing of
the Holder's election to exclude all of the Holder's Registrable Securities from
such Registration Statement.
(b) the Holder shall furnish to the Company such information regarding
the Holder, the Registrable Securities held by the Holder and the intended
method of disposition of the Registrable Securities held by the Holder as shall
be reasonably required to effect the registration of such Registrable Securities
and the Holder shall execute such documents as are customary in connection with
such registration as the Company may reasonably request.
Section 4.5 INDEMNIFICATION.
(a) COMPANY INDEMNITY. The Company will indemnify each Holder, each of
its officers, directors and partners, and each person controlling each Holder,
within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls, within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder, any underwriter,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or any state
securities law or in either case, any rule or regulation thereunder applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each Holder, each of its officers, directors and partners, and each
person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to a Holder to the extent that any such claim, loss, damage, liability
15
<PAGE>
or expense arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by such Holder or the
underwriter (if any) therefor and stated to be specifically for use therein. The
indemnity agreement contained in this Section 4.5(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent will
not be unreasonably withheld).
(b) HOLDER INDEMNITY. Each Holder will, severally and not jointly, if
Registrable Securities held by it are included in the securities as to which
such registration, qualification or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, and each underwriter, if
any, of the Company's securities covered by such registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their directors, officers and partners, and
each person controlling such other Holder(s) against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, in each case only insofar as such untrue statement or alleged untrue
statement or omission relates to such Holder, and will reimburse the Company and
such other Holder(s) and their directors, officers and partners, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating and defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein, and provided that the maximum amount for which such Holder shall be
liable under this indemnity shall not exceed the net proceeds received by such
Holder from the sale of the Registrable Securities. The indemnity agreement
contained in this Section 4.5(b) shall not apply to amounts paid in settlement
of any such claims, losses, damages or liabilities if such settlement is
effected without the consent of such Holder (which consent will not be
unreasonably withheld).
(c) PROCEDURE. Each party entitled to indemnification under this
Article (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Article
16
<PAGE>
except to the extent that the Indemnifying Party is materially and adversely
affected by such failure to provide notice. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
4.6 CONTRIBUTION. If the indemnification provided for in Section 4
herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of the
exceptions provided therein), then each such Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities as between the Company on the one hand and any Holder on the other,
in such proportion as is appropriate to reflect the relative fault of the
Company and of such Holder in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the Company on the one
hand and of any Holder on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by such Holder.
In no event shall the obligation of any Indemnifying Party to contribute under
this Section 4.6 exceed the amount that such Indemnifying Party would have been
obligated to pay by way of indemnification if the indemnification provided for
under Section 4.5(a) or 4.5(b) hereof had been available under the
circumstances.
The Company and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 4.6 were determined by PRO RATA allocation
(even if the Holders or the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraphs.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraphs shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Holder or underwriter shall
be required to contribute any amount in excess of the an amount which equals (i)
in the case of any Holder, the net proceeds received by such Holder from the
sale of Registrable Securities or (ii) in the case of an underwriter, the
underwriting discount applicable to the securities purchased by the underwriter.
17
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
ARTICLE V
CONDITIONS
Section 5.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
ISSUE AND SELL THE STOCK AND WARRANTS. The obligation hereunder of the Company
to issue and sell the Common Stock and Warrants to the Investors is subject to
the satisfaction, at or before the Closing Date, of each of the conditions set
forth below. These conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
(a) ACCURACY OF THE INVESTORS' REPRESENTATIONS AND WARRANTIES. The
representations and warranties of each Investor shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
particular date).
(b) PERFORMANCE BY THE INVESTORS. Each Investor shall have performed
all agreements and satisfied all conditions required hereby to be performed or
satisfied by such Investor at or prior to the Closing Date.
(c) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 5.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE INVESTORS TO
PURCHASE THE STOCK AND THE WARRANTS. The obligation hereunder of each Investor
to acquire and pay for the Common Stock and Warrants is subject to the
satisfaction, at or before the Closing Date, of each of the conditions set forth
below. These conditions are for each Investor's sole benefit and may be waived
by each Investor at any time in its sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The
representation and warranties of the Company shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
particular date).
(b) PERFORMANCE BY THE COMPANY. The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing Date.
(c) NASDAQ. From the date hereof to the Closing Date, trading in the
Company's Common Stock shall not have been suspended by the Commission or Nasdaq
and trading in securities generally as reported by Nasdaq, shall not have been
18
<PAGE>
suspended or limited, and the Common Stock shall not have been delisted from any
exchange or market where they are currently listed.
(d) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority or competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) OPINION OF COUNSEL. At the Closing Date the Investors shall have
received an opinion of counsel to the Company in substantially the form attached
hereto as EXHIBIT C and such other opinions, certificates and documents as the
Investors or their counsel shall reasonably require incident to the Closing.
(f) MINIMUM SUBSCRIPTION. An aggregate of $8,000,200 of shares of
Common Stock shall have been purchased by the Investors pursuant to this
Agreement.
(g) SECRETARY'S CERTIFICATE. The Company shall have delivered to the
Investors a certificate in form and substance reasonably satisfactory to the
Investors, executed by the Secretary of the Company on behalf of the Company,
certifying as to the satisfaction of all closing conditions, incumbency of
signing officers, charter, By-Laws, good standing and authorizing resolutions of
the Company.
ARTICLE VI
LEGEND AND STOCK
Each certificate representing the Common Stock, the Warrants and the
Warrant Shares shall be stamped or otherwise imprinted with a legend
substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND THEY MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (I) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND
IS CURRENT WITH RESPECT TO THESE SECURITIES OR (II) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, BUT ONLY UPON A HOLDER
HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL OF THE ISSUER, OR
OTHER COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER, THAT THE PROPOSED DISPOSITION
IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS
ANY APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAW.
19
<PAGE>
ARTICLE VII
TERMINATION
Section 7.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Closing Date by the mutual written consent
of the Company and the Investors.
Section 7.2 OTHER TERMINATION. This Agreement may be terminated by
action of the Board of Directors of the Company or by any of the Investors at
any time if the Closing Date shall not have been consummated by the fifth
business day following the date of this Agreement.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 STAMP TAXES; AGENT FEES. The Company shall pay all stamp
and other taxes and duties levied in connection with the issuance of the Common
Stock and the Warrants pursuant hereto and the Warrant Shares issued upon
exercise of the Warrants.
Section 8.2 SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION.
(a) The Company and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity.
(b) The Company and each of the Investors (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court, the
New York State courts and other courts of the United States sitting in New York
County, New York for the purposes of any suit, action or proceeding arising out
of or relating to this Agreement and (ii) hereby waives, and agrees not to
assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. The Company and each of the Investors consents
to process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing in this paragraph shall affect or
limit any right to serve process in any other manner permitted by law.
Section 8.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement together with
the agreements and documents executed in connection herewith, contains the
entire understanding of the parties with respect to the matters covered hereby
20
<PAGE>
and, except as specifically set forth herein, neither the Company nor any
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 8.4 NOTICES. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one business day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
to the Company: SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Telephone: 602-254-8620
Facsimile: 602-254-6544
Attn: Robert M. Worsley
Chief Executive Officer
with copies to: Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004-4498
Telephone: 602-528-4134
Facsimile: 602-253-8129
Attn: Gregory R. Hall, Esq.
to the Investors: To each Investor and its representative at the
addresses set forth on SCHEDULE I of this Agreement.
with copies to: Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, New York 10103
Telephone: 212-506-5000
Facsimile: 212-506-5151
Attn: Rubi Finkelstein, Esq.
Any party hereto may from time to time change its address for notices by giving
at least 5 days written notice of such changed address to the other parties
hereto. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
21
<PAGE>
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above.
Section 8.5 INDEMNITY. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees but
excluding consequential damages) incurred as a result of such parties' breach of
any representation, warranty, covenant or agreement in this Agreement.
Section 8.6 WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 8.7 HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 8.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The parties hereto may amend
this Agreement without notice to or the consent of any third party. The Company
may not assign this Agreement or any rights or obligations hereunder without the
prior written consent of all Investors (which consent may be withheld for any
reason in their sole discretion), except that the Company may assign this
Agreement in connection with a merger, consolidation, business combination or
the sale of all or substantially all of its assets provided that the Company is
not released from any of its obligations hereunder, such successor in interest
or assignee assumes all obligations of the Company hereunder, and appropriate
adjustment of the provisions contained in this Agreement is made, in form and
substance satisfactory to the Investors, to place the Investors in substantially
the same position as they would have been but for such assignment. Any Investor
may assign this Agreement (in whole or in part) or any rights or obligations
hereunder without the consent of the Company in connection with any sale or
transfer of all or any portion of the Securities held by such Investor, provided
that no Investor may assign this Agreement prior to the Closing Date without the
Company's prior consent except to an affiliate or affiliates of such Investor.
Section 8.9 NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 8.10 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to such state's principles of conflict of laws.
22
<PAGE>
Section 8.11 SURVIVAL. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein shall
survive the Closing.
Section 8.12 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
Section 8.13 PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of any Investor
without its consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
Section 8.14 SEVERABILITY. The parties acknowledge and agree that the
Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investors hereunder
are several and not joint, that no Investor shall have any responsibility or
liability for the representations, warrants, agreements, acts or omissions of
any other Investor, and that any rights granted to "Investors" hereunder shall
be enforceable by each Investor hereunder.
Section 8.15 LIKE TREATMENT OF HOLDERS. Neither the Company nor any of
its affiliates shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee, payment for the redemption or
exchange of Securities, or otherwise, to any holder of Securities, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions of the Securities or this Agreement, unless
such consideration is required to be paid to all holders of Securities bound by
such consent, waiver or amendment whether or not such holders so consent, waive
or agree to amend and whether or not such holders tender their Securities for
redemption or exchange. The Company shall not, directly or indirectly, redeem
any Securities unless such offer of redemption is made pro rata to all holders
of Securities on identical terms.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
SKYMALL, INC.
By: /s/ Robert M. Worsley
---------------------------------------
Name: Robert M. Worsley
Title: President
INVESTOR:
By: /s/
---------------------------------------
Name:
Title:
Exact Name in Which Securities Should
be registered: ________________________________
24
Exhibit 10.4(b)
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT.
SKYMALL, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: Number of Shares:
Date of Issuance:
SkyMall, Inc., a Nevada corporation (the "Company"), hereby certifies that, for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Quintel Communications, Inc., the registered holder hereof or its
permitted assigns (a "holder"), is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant, at any time
or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on
the Expiration Date (as defined herein) ____________ fully paid nonassessable
shares of Common Stock (as defined herein) of the Company (the "Warrant Shares")
at the purchase price per share provided in Section 2(a) below.
1. DEFINITIONS.
(a) STOCK AND WARRANT PURCHASE AGREEMENT. This Warrant is one of the
Warrants (the "Warrants") issued pursuant to the Stock and Warrant Purchase
Agreement dated as of November 2, 1999, among the Company and the Investors (as
such term in defined therein) (the "Agreement").
(b) DEFINITIONS. The following words and terms as used in this Warrant
shall have the following meanings:
<PAGE>
(i) "Business Day" means any day other than Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or required
by law to remain closed.
(ii) "Closing Bid Price" means, for any security as of any date, the
last closing bid price for such security on the Principal Market (as defined
below) as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the
Principal Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price for such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holder of this Warrant. All such determinations to be appropriately
adjusted for any stock dividend, stock split or other similar transaction during
such period.
(iii) "Closing Sale Price" means, for any security as of any date, the
last closing trade price for such security on the Principal Market (as defined
below) as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing trade price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the last closing ask price of such
security as reported by Bloomberg, or, if no last closing ask price is reported
for such security by Bloomberg, the average of the lowest ask price and lowest
bid price of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Sale Price cannot
be calculated for such security on such date on any of the foregoing bases, the
Closing Sale Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holder of this Warrant. If the
Company and the holder of this Warrant are unable to agree upon the fair market
value of the Common Stock, then such dispute shall be resolved by the term
"Market Price" being substituted for the term "Closing Sale Price." All such
2
<PAGE>
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period.
(iv) "Common Stock" means (i) the Company's common stock, par value
$.001 per share, and (ii) any capital stock into which such Common Stock shall
have been changed or any capital stock resulting from a reclassification of such
Common Stock.
(v) "Expiration Date" means the date five (5) years from the date of
this Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the City of New York or the
State of New York or on which trading does not take place on the principal
exchange or automated quotation system on which the Common Stock is traded (a
"Holiday"), the next date that is not a Holiday.
(vi) "Issuance Date" means, with respect to each Warrant, the date of
issuance of the applicable Warrant.
(vii) "Market Price" means, with respect to any security for any date
of determination, that price which shall be computed as the arithmetic average
of the Closing Bid Prices for such security on each of the five (5) consecutive
trading days immediately preceding such date of determination (all such
determinations to be appropriately adjusted for any stock dividend, stock split
or similar transaction during the pricing period).
(viii) "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(ix) "Principal Market" means the Nasdaq National Market.
(x) "Securities Act" means the Securities Act of 1933, as amended.
(xi) "Warrant" means this Warrant and all warrants issued in exchange,
transfer or replacement thereof.
(xii) "Warrant Exercise Price" shall be equal to $8.00 per share.
(xiv) OTHER DEFINITIONAL PROVISIONS. Except as otherwise specified
herein, all references herein (A) to the Company shall be deemed to include the
Company's successors and (B) to any applicable law defined or referred to
herein, shall be deemed references to such applicable law as the same may have
3
<PAGE>
been or may be amended or supplemented from time to time. When used in this
Warrant, the words "herein," "hereof," and "hereunder," and words of similar
import, shall refer to this Warrant as a whole and not to any provision of this
Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer to
Sections of, and Schedules and Exhibits to, this Warrant unless otherwise
specified. Whenever the context so requires, the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any Business Day on or after the opening of
business on the date hereof and prior to 11:59 P.M. Eastern Time on the
Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as EXHIBIT A hereto (the "Exercise Notice"), of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased; (ii) (A) payment to the Company of an
amount equal to the Warrant Exercise Price multiplied by the number of Warrant
Shares as to which this Warrant is being exercised (the "Aggregate Exercise
Price") in cash, certified or bank funds or wire transfer of immediately
available funds or (B) notifying the Company that this Warrant is being
exercised pursuant to a Cashless Exercise (as defined in Section 2(e)); and
(iii) the surrender of this Warrant (or a Lost Warrant Affidavit in
substantially the form annexed hereto as Exhibit C with respect to this Warrant
in the case of its loss, theft or destruction) to a common carrier for overnight
delivery to the Company; provided, that if such Warrant Shares are to be issued
in any name other than that of the registered holder of this Warrant, such
issuance shall be deemed a transfer and the provisions of Section 8 shall be
applicable. In the event of any exercise of the rights represented by this
Warrant in compliance with this Section 2(a), the Company shall on the second
Business Day following the date of receipt of the Exercise Notice, the Aggregate
Exercise Price (or notice of a Cashless Exercise) and this Warrant (or a Lost
Warrant Affidavit in substantially the form annexed hereto as EXHIBIT C with
respect to this Warrant in the case of its loss, theft or destruction) (the
"Exercise Delivery Documents"), credit such aggregate number of shares of Common
Stock to which the holder (or its designee) shall be entitled to the holder's
(or its designee's) balance account with The Depository Trust Company; provided,
however, if the holder who submitted the Exercise Notice requested physical
delivery of any or all of the Warrant Shares, then the Company shall, on or
before the second Business Day following receipt of the Exercise Delivery
Documents issue and surrender to a common carrier for overnight delivery to the
address specified in the Exercise Notice, a certificate, registered in the name
of the holder (or its designee), for the number of shares of Common Stock to
which the holder (or its designee) shall be entitled. Upon delivery of the
Exercise Notice and Aggregate Exercise Price referred to above or notification
4
<PAGE>
to the Company of a Cashless Exercise referred to in Section 2(e), the holder of
this Warrant (or its designee) shall be deemed for all corporate purposes to
have become the holder of record of the Warrant Shares with respect to which
this Warrant has been exercised, irrespective of the date of delivery of this
Warrant as required by clause (iii) above or the certificates evidencing such
Warrant Shares. In the case of a dispute as to the determination of the Warrant
Exercise Price or the Market Price of a security or the arithmetic calculation
of the Warrant Shares, the Company shall promptly issue to the holder (or its
designee) the number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to the holder via
facsimile within one Business Day of receipt of the holder's Exercise Notice. If
the holder and the Company are unable to agree upon the determination of the
Warrant Exercise Price or the Market Price or arithmetic calculation of the
Warrant Shares within one day of such disputed determination or arithmetic
calculation being submitted to the holder, then the Company shall immediately
submit via facsimile (i) the disputed determination of the Warrant Exercise
Price or the Market Price to an independent, reputable investment banking firm
of nationally recognized standing, mutually acceptable to both the Company and
the holder or (ii) the disputed arithmetic calculation of the Warrant Shares to
an independent, outside accountant, mutually acceptable to both the Company and
the holder. The Company shall cause the investment banking firm or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment banking firm's or accountant's determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in no event later than two (2) Business Days after delivery of the Exercise
Delivery Documents and at its own expense, issue a new Warrant identical in all
respects to this Warrant exercised except it shall represent rights to purchase
the number of Warrant Shares purchasable immediately prior to such exercise
under this Warrant exercised, less the number of Warrant Shares with respect to
which such Warrant is exercised.
(c) No fractional shares of Common Stock are to be issued upon the exercise
of this Warrant, but rather the number of shares of Common Stock issued upon
exercise of this Warrant shall be rounded up to the nearest whole number.
(d) If the Company shall fail for any reason or for no reason to issue to
the holder within two (2) Business Days of receipt of the Exercise Delivery
Documents, a certificate for the number of shares of Common Stock to which the
holder (or its designee) is entitled or to credit the holder's (or designee's)
balance account with The Depository Trust Company for such number of shares of
Common Stock to which the holder (or its designee) is entitled upon the holder's
5
<PAGE>
exercise of this Warrant or a new Warrant for the number of shares of Common
Stock to which such holder is entitled pursuant to Section 2(b) hereof, the
Company shall, in addition to any other remedies under this Warrant or the
Agreement or otherwise available to such holder, including any indemnification
under the Agreement, pay as additional damages in cash to such holder on each
day the issuance of such Common Stock certificate or new Warrant, as the case
may be, is not timely effected, an amount equal to 0.5% of the product of (A)
the sum of the number of shares of Common Stock not issued to the holder (or its
designee) on a timely basis and to which the holder (or its designee) is
entitled and/or, the number of shares represented by the portion of this Warrant
which is not being converted, as the case may be, and (B) the average of the
Closing Sale Price of the Common Stock for the five (5) consecutive trading days
immediately preceding the last possible date which the Company could have issued
such Common Stock or Warrant, as the case may be, to the holder without
violating this Section 2.
(e) If, despite the Company's obligations under the Agreement, the Warrant
Shares to be issued are not registered and available for resale pursuant to a
registration statement in accordance with the Agreement, then notwithstanding
anything contained herein to the contrary, the holder of this Warrant may, at
its election exercised in its sole discretion, exercise this Warrant in whole or
in part and, in lieu of making the cash payment otherwise contemplated to be
made to the Company upon such exercise in payment of the Aggregate Exercise
Price, elect instead to receive upon such exercise the "Net Number" of shares of
Common Stock determined according to the following formula (a "Cashless
Exercise"):
Net Number = (A X B) - (A X C)
-----------------
B
For purposes of the foregoing formula:
A = the total number of shares with respect to which
this Warrant is then being exercised.
B = the Market Price as of the date of the Exercise
Notice.
C = the Warrant Exercise Price then in effect for the
applicable Warrant Shares at the time of such
exercise.
6
<PAGE>
3. (a) ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK AND PROPERTY; RECLASSIFICATIONS.
In case at any time or from time to time the holders of the Common Stock (or any
shares of stock or other securities at the time receivable upon the exercise of
this Warrant) shall have received, or, on or after the record date fixed for the
determination of eligible shareholders, shall have become entitled to receive,
without payment therefor,
(1) other or additional stock or other securities or property (other
than cash) by way of dividend,
(2) any cash or other property paid or payable out of any source other
than retained earnings (determined in accordance with generally accepted
accounting principles), or
(3) other or additional stock or other securities or property
(including cash) by way of stock-split, spin-off, reclassification,
combination of shares or similar corporate rearrangement,
(other than (x) shares of Common Stock or any other stock or securities into
which such Common Stock shall have been exchanged, or (y) any other stock or
securities convertible into or exchangeable for such Common Stock or such other
stock or securities), then and in each such case a holder, upon the exercise
hereof as provided in Section 2, shall be entitled to receive the amount of
stock and other securities and property (including cash in the cases referred to
in clauses (2) and (3) above) which such holder would hold on the date of such
exercise if on the Issuance Date such holder had been the holder of record of
the number of shares of Common Stock called for on the face of this Warrant, and
had thereafter, during the period from the Issuance Date to and including the
date of such exercise, retained such shares and/or all other or additional stock
and other securities and property (including cash in the cases referred to in
clause (2) and (3) above) receivable by it as aforesaid during such period,
giving effect to all adjustments called for during such period by Sections 3(a)
and 3(b).
(b) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION AND MERGER. In case of
any reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
or reclassification of its securities after the Issuance Date, or the Company
(or any such other corporation) shall consolidate with or merge into another
corporation or entity or convey or exchange all or substantially all its assets
to another corporation or entity, then and in each such case the holder of this
Warrant, upon the exercise hereof as provided in Section 2 at any time after the
consummation of such reorganization, reclassification, consolidation, merger,
conveyance or exchange, shall be entitled to receive, in lieu of the stock or
7
<PAGE>
other securities and property receivable upon the exercise of this Warrant prior
to such consummation, the stock or other securities or property to which such
holder would have been entitled upon such consummation if such holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in Sections 3(a), (b), (c) and (d); in each such case,
the terms of this Warrant shall be applicable to the shares of stock or other
securities or property receivable upon the exercise of this Warrant after such
consummation.
(c) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company at
any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock (or any shares of stock or other
securities at the time receivable upon the exercise of this Warrant) entitled to
receive, a dividend or other distribution payable in additional shares of (x)
Common Stock or any other stock or securities into which such Common Stock shall
have been exchanged, or (y) any other stock or securities convertible into or
exchangeable for such Common Stock or such other stock or securities, then and
in each such event
(1) the Warrant Exercise Price then in effect shall be decreased as of
the time of the issuance of such additional shares or, in the event such record
date is fixed, as of the close of business on such record date, by multiplying
the Warrant Exercise Price then in effect by a fraction (A) the numerator of
which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (B) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date as the case may be,
plus the number of shares of Common Stock issuable in payment of such dividend
or distribution; PROVIDED, HOWEVER, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Warrant Exercise Price shall be recomputed accordingly as of
the close of business on such record date, and thereafter the Warrant Exercise
Price shall be adjusted pursuant to this Section 3(c) as of the time of actual
payment of such dividends or distributions; and
(2) the number of shares of Common Stock theretofore receivable upon
the exercise of this Warrant shall be increased, as of the time of such issuance
or, in the event such record date is fixed, as of the close of business on such
record date, in inverse proportion to the decrease in the Warrant Exercise
Price.
(d) STOCK SPLIT AND REVERSE STOCK SPLIT. If the Company at any time or from
time to time effects a stock split or subdivision of the outstanding Common
Stock, the Warrant Exercise Price then in effect immediately before that stock
split or subdivision shall be proportionately decreased and the number of shares
of Common Stock theretofore receivable upon the exercise of this Warrant shall
8
<PAGE>
be proportionately increased. If the Company at any time or from time to time
effects a reverse stock split or combines the outstanding shares of Common Stock
into a smaller number of shares, the Warrant Exercise Price then in effect
immediately before that reverse stock split or combination shall be
proportionately increased and the number of shares of Common Stock theretofore
receivable upon the exercise of this Warrant shall be proportionately decreased.
Each adjustment under this Section 3(d) shall become effective at the close of
business on the date the stock split, subdivision, reverse stock split or
combination becomes effective.
4. REDEMPTION AT THE COMPANY'S ELECTION. The Company, upon thirty (30) days'
prior written notice to the holder, may elect to redeem all or part of this
Warrant at a price equal to $0.01 per Warrant Share issuable upon the exercise
hereof, if, but only if: (i) the Closing Bid Price shall have exceeded $12.00
per share (as equitably adjusted to reflect any merger, consolidation or
reorganization of the Company or any stock split, subdivision, reverse stock
split or combination effected by the Company) on each of the twenty (20)
consecutive trading days ending not more than one Business Day prior to the date
on which the notice of redemption shall be delivered to the holder, (ii) the
registration statement required to be filed under Section 4.1 of the Agreement,
dated as of the date hereof, by and among the Company and the other parties
signatory thereto, shall be effective and permit the sale of all Warrant Shares,
and (iii) the Common Stock shall be listed and trading on the Nasdaq National
Market, AMEX or the NYSE. Any such redemption shall be effective on the
thirtieth day following the delivery of such notice, PROVIDED, HOWEVER, that the
holder may elect at any time prior to the effective date of redemption to
exercise all or any portion of this Warrant in accordance with the terms hereof;
and PROVIDED FURTHER, that the Company's right to redeem this Warrant shall be
suspended if, after the notice has been delivered, the Warrant Shares may not be
sold pursuant to an effective registration statement for any reason whatsoever
or the Common Stock shall cease to be listed and trading on the Nasdaq National
Market, AMEX or the NYSE. The notice period shall then be extended for a period
of time equal to the number of days during the notice period during which the
registration statement shall not have permitted the sale of such Warrant Shares
or the Common Stock shall not have been so listed and trading, as the case may
be; provided, however, that the notice period shall not begin to run until such
time as the holder receives notice from the Company that the registration
statement permits the sale of the Warrant Shares and/or the Common Stock shall
have been so listed and trading, as the case may be. The redemption price shall
be payable in full, in cash, on the effective date of any redemption pursuant to
this paragraph (4). A redemption notice delivered by the Company pursuant to
this paragraph (4) shall be irrevocable. Notwithstanding the foregoing, the
Company's right to redeem all or part of this Warrant may not be exercised if on
the date on which the Company delivers notice of such exercise the Market Price
shall be less than $12.00 per share (as equitably adjusted to reflect any
merger, consolidation or reorganization of the Company or any stock split,
subdivision, reverse stock split or combination effected by the Company).
9
<PAGE>
5. COVENANTS AS TO COMMON STOCK. The Company hereby covenants and agrees as
follows:
(a) This Warrant is, and any Warrants issued in substitution for or
replacement of this Warrant will upon issuance be, duly authorized and validly
issued.
(b) All Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least 100% of the number of shares of Common Stock needed to provide for the
exercise of the rights then represented by this Warrant and the par value of
said shares will at all times be less than or equal to the applicable Warrant
Exercise Price.
(d) The Company shall secure the listing of the shares of Common Stock
issuable upon exercise of this Warrant upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed within the time required by such exchange or quotation system's rules and
regulations and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all shares of Common Stock from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system within the time
required by such exchange or quotation system's rules and regulations, as the
case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Certificate of Incorporation
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 by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Warrant Exercise Price then in effect,
and (ii) will take all such actions as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
shares of Common Stock upon the exercise of this Warrant.
10
<PAGE>
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets and any such successive mergers, consolidations or
acquisitions.
6. TAXES. The Company shall pay any and all taxes which may be payable with
respect to the issuance and delivery of Warrant Shares upon exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax that may be payable in respect of any transfer involved in the issue or
delivery of Common Stock or other securities or property in a name other than
that of the registered holders of this Warrant to be converted and such holder
shall pay such amount, if any, to cover any applicable transfer or similar tax.
7. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically
provided herein, no holder of this Warrant, solely by virtue of such holding,
shall be entitled to vote or receive dividends or be deemed the holder of shares
of the Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether a reorganization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 6, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
8. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the acceptance
hereof, represents that it is acquiring this Warrant and the Warrant Shares for
its own account for investment only and not with a view towards, or for resale
in connection with, the public sale or distribution of this Warrant or the
Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves the right to dispose of this
Warrant and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act. The holder of
this Warrant further represents, by acceptance hereof, that, as of this date,
such holder is an "accredited investor" as such term is defined in Rule
501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act (an "Accredited Investor").
11
<PAGE>
9. OWNERSHIP AND TRANSFER.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, but in all events recognizing any transfers
made in accordance with the terms of this Warrant.
(b) This Warrant and the rights granted hereunder shall be assignable by
the holder hereof without the consent of the Company.
(c) The Company is obligated to register the Warrant Shares for resale
under the Securities Act pursuant to the Agreement and any holder of this
Warrant (and the assignees thereof) is entitled to the registration rights in
respect of the Warrant Shares as set forth in the Agreement.
10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost,
stolen, mutilated or destroyed, the Company shall, on receipt of an executed
Lost Warrant Affidavit in substantially the form annexed hereto as EXHIBIT C
(or, in the case of a mutilated Warrant, the Warrant), issue a new Warrant of
like denomination and tenor as this Warrant so lost, stolen, mutilated or
destroyed.
11. NOTICE. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Warrant must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Telephone: 602-254-8620
Facsimile: 602-254-6544
Attention: Robert M. Worsley, President and Chief Executive Officer
12
<PAGE>
With copy to:
Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
Facsimile: 602-253-8129
Attention: Gregory R. Hall, Esq.
If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Investors to the Agreement, with copies to such
holder's representatives as set forth on such Schedule of Investors, or at such
other address and facsimile as shall be delivered to the Company by the holder
at any time. Each party shall provide five days' prior written notice to the
other party of any change in address or facsimile number. Written confirmation
of receipt (A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by a nationally
recognized overnight delivery service shall be rebuttable evidence of personal
service, receipt by facsimile or receipt from a nationally recognized overnight
delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.
12. DATE. The date of this Warrant is November 2, 1999. This Warrant, in all
events, shall be wholly void and of no effect after the close of business on the
Expiration Date, except that notwithstanding any other provisions hereof, the
provisions of Section 8 shall continue in full force and effect after such date
as to any Warrant Shares or other securities issued upon the exercise of this
Warrant.
13. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of
the Warrants issued pursuant to the Agreement may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of the
holders of Warrants representing 66.7% of the shares of Common Stock obtainable
upon exercise of the Warrants then outstanding; provided that no such action may
increase the Warrant Exercise Price of the Warrants, decrease the number of
shares or class of stock obtainable upon exercise of any Warrants, or otherwise
materially adversely effect the rights of the holder of this Warrant without the
written consent of such holder.
14. DESCRIPTIVE HEADINGS; GOVERNING LAW; JURISDICTION. The descriptive headings
of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of New York shall govern all issues concerning the relative
13
<PAGE>
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York, or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each of the parties
hereto irrevocably consents and submits to the nonexclusive jurisdiction of the
Supreme Court of the State of New York and the United States District Court for
the Southern District of New York in connection with any proceeding arising out
of or relating to this Warrant, waives any objection to venue in the County of
New York, State of New York, or such District, and agrees that service of any
summons, complaint, notice of other process relating to such proceeding may be
effected in the manner provided by Section 10 hereof.
[Signature Page Follows]
14
<PAGE>
SKYMALL, INC.
By:__________________________________
Name:________________________________
Title: ______________________________
15
<PAGE>
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
SKYMALL, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("Warrant Shares") of SkyMall,
Inc., a Nevada corporation (the "Company"), evidenced by the attached Warrant
(the "Warrant"). Capitalized terms used herein and not otherwise defined shall
have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of
the Warrant Exercise Price shall be made as:
____________ a "CASH EXERCISE" with respect to ________________
Warrant Shares; and/or
____________ a "CASHLESS EXERCISE" with respect to __________
Warrant Shares (to the extent permitted by the
terms of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
________________________________
Name of Registered Holder
By: ___________________________
Name:
Title:
A-1
<PAGE>
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of SkyMall, Inc., a Nevada corporation,
represented by warrant certificate no. _____, standing in the name of the
undersigned on the books of said corporation. The undersigned does hereby
irrevocably constitute and appoint ______________, attorney to transfer the
warrants of said corporation, with full power of substitution in the premises.
Dated: _________________, ____
______________________________________
By: _____________________________
Its: _____________________________
B-1
<PAGE>
EXHIBIT C TO WARRANT
FORM OF AFFIDAVIT OF LOSS
STATE OF )
) ss:
COUNTY OF )
The undersigned (hereinafter "Deponent"), being duly sworn, deposes
and says that:
1. Deponent is an adult whose mailing address is:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. Deponent is the recipient of a Warrant (the "Warrant") from
SkyMall, Inc. (the "Company"), dated ___________________________________ for the
purchase of ___________________________________ shares of Common Stock, par
value $.001 per share, of the Company, at an exercise price of
$_________________________ per share.
3. The Warrant has been lost, stolen, destroyed or misplaced, under
the following circumstances:
4. The Warrant was not endorsed.
5. Deponent has made a diligent search for the Warrant, and has been
unable to find or recover same, and Deponent was the unconditional owner of the
Warrant at the time of loss, and is entitled to the full and exclusive
possession thereof; that neither the Warrant nor the rights of Deponent therein
have, in whole or in part, been assigned, transferred, hypothecated, pledged or
otherwise disposed of, in any manner whatsoever, and that no person, firm or
corporation other than the Deponent has any right, title, claim, equity or
interest in, to, or respecting the Warrant.
C-1
<PAGE>
6. Deponent makes this Affidavit for the purpose of requesting and
inducing the Company and its agents to issue a new warrant in substitution for
the Warrant.
7. If the Warrant should ever come into the hands, custody or power of
the Deponent or the Deponent's representatives, agents or assigns, the Deponent
will immediately and without consideration surrender the Warrant to the Company,
its representatives, agents or assigns, its transfer agents or subscription
agents for cancellation.
8. The Deponent hereby indemnifies and holds harmless the Company from
any claim or demand for payment or reimbursement of any party arising in
connection with the subject matter of this Affidavit.
Signed, sealed and dated: _________________________
________________________________________
Deponent
Sworn to and subscribed before me this
____ day of _____________, _________
______________________________________
Notary Public
C-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS INCLUDED IN THIS FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 945
<SECURITIES> 0
<RECEIVABLES> 7,330
<ALLOWANCES> (1,481)
<INVENTORY> 879
<CURRENT-ASSETS> 11,877
<PP&E> 16,001
<DEPRECIATION> (4,605)
<TOTAL-ASSETS> 33,577
<CURRENT-LIABILITIES> 26,669
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 5,132
<TOTAL-LIABILITY-AND-EQUITY> 33,577
<SALES> 35,286
<TOTAL-REVENUES> 44,110
<CGS> 23,111
<TOTAL-COSTS> 39,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,500
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> (17,911)
<INCOME-TAX> (6,957)
<INCOME-CONTINUING> (10,954)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,954)
<EPS-BASIC> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
