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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 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 May 11, 1999, there were 8,983,622 shares of the Common Stock, $.001
par value, of the Company outstanding.
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SKYMALL, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998.......................................... 3
Condensed Consolidated Statements of Operations - Three
months ended March 31, 1999 and 1998........................... 4
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 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........................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................ 21
Item 2. Changes in Securities and Use of Proceeds........................ 21
Item 3. Defaults Upon Senior Securities.................................. 22
Item 4. Submission of Matters to a Vote of Security Holders.............. 22
Item 5. Other Information................................................ 22
Item 6. Exhibits and Reports on Form 8-K................................. 22
Signatures................................................................. 23
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SKYMALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
March 31, December 31,
1999 1998
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,560 $ 7,785
Accounts receivable, net 6,458 12,351
Inventory 679 630
Income tax receivable 1,010 0
Prepaid catalog costs and other 1,429 1,513
Deferred income taxes 709 709
-------- --------
Total current assets 13,845 22,988
Property and Equipment, net 6,810 6,474
Goodwill, net 2,971 3,022
Other Assets, net 1,525 182
-------- --------
Total assets $ 25,151 $32,666
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,266 $ 11,665
Accrued liabilities 964 1,217
Unearned revenue 1,235 4,281
Income taxes 0 761
Current portion of notes payable
and capital leases 233 226
-------- --------
Total current liabilities 11,698 18,150
Deferred Income Taxes 212 209
Notes Payable and Capital Leases, net
of current portion 17 44
-------- --------
Total liabilities 11,927 18,403
-------- --------
SHAREHOLDERS' EQUITY:
Common Stock 9 9
Additional paid-in capital 9,175 8,128
Retained earnings 4,040 6,126
-------- --------
Total shareholders' equity 13,224 14,263
-------- --------
Total liabilities and shareholders' equity $ 25,151 $ 32,666
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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SKYMALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
(Unaudited)
Three months ended
March 31,
-------------------------
1999 1998
--------- ---------
REVENUES:
Merchandise sales, net $ 9,964 $ 9,234
Placement fees and other 3,178 3,930
--------- ---------
Total revenues 13,142 13,164
COST OF GOODS SOLD 6,489 6,809
--------- ---------
Gross margin 6,653 6,355
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OPERATING EXPENSES:
Catalog expenses 2,544 2,663
Selling expenses 833 864
Customer service and fulfillment expenses 1,942 1,099
General and administrative expenses 4,864 1,761
--------- ---------
Total operating expenses 10,183 6,387
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LOSS FROM OPERATIONS (3,530) (32)
Interest expense (11) (8)
Other income 136 163
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (3,405) 123
Income taxes (1,318) 49
--------- ---------
NET INCOME (LOSS) $ (2,087) $ 74
========= =========
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (.24) $ .01
========= =========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,838,351 8,509,701
========= =========
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (.24) $ .01
========= =========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,838,351 8,518,801
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
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SKYMALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three months ended
March 31,
-------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,087) $ 74
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 401 218
Changes in operating assets and liabilities (2,880) (2,044)
--------- ---------
Net cash used in operating activities (4,566) (1,752)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (686) (259)
--------- ---------
Net cash used in investing activities (686) (259)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,047 0
Payments on notes payable and capital leases, net (20) (25)
Repurchase of common shares 0 (127)
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Net cash provided by (used in)
financing activities 1,027 (152)
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DECREASE IN CASH AND CASH EQUIVALENTS (4,225) (2,163)
CASH AND CASH EQUIVALENTS,
beginning of period 7,785 9,412
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CASH AND CASH EQUIVALENTS,
end of period $ 3,560 $ 7,249
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
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SKYMALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 provides
exclusive agreements to create both print and e-commerce solutions for consumers
and merchants. The Company offers high-quality products and services through the
SkyMall in-flight print catalogs, workplace catalogs and the SkyMall Web site.
The Company maintains substantially no inventory related to products sold
through the SkyMall in-flight print catalogs or the SkyMall Web site.
Substantially all products displayed in the Company's in-flight print catalogs
and the SkyMall Web site are carried and fulfilled by participating merchants.
At March 31, 1999, the Company had agreements with 16 airlines to place its
catalogs in aircraft seat pockets. 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. and Durham &
Company, 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
period ended March 31, 1999 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):
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Three months ended
March 31,
-------------------------
1999 1998
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Basic net income (loss) per common share:
Net income (loss) $ (2,087) $ 74
========= =========
Weighted average common shares 8,838 8,510
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Basic per share amount $ (.24) $ .01
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Three months ended
March 31,
-------------------------
1999 1998
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Diluted net income per common share:
Net income (loss) $ (2,087) $ 74
========= =========
Weighted average common shares 8,838 8,510
Options and warrants assumed exercised 0 9
========= =========
Total common shares plus assumed exercises 8,838 8,519
========= =========
Diluted per share amount $ (.24) $ .01
========= =========
NOTE 3 - SEGMENT AND RELATED INFORMATION
The Company is engaged principally in the business of providing exclusive
agreements to create both print and e-commerce solutions for consumers and
merchants. The Company offers high-quality products and services through the
SkyMall in-flight print catalogs, workplace catalogs and the SkyMall Web site.
Summarized financial information concerning the Company's reportable
segments for the three months ended March 31, 1999 and 1998 is shown in the
following table (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended In-flight Workplace
March 31, 1999 Print Catalog Catalog E-commerce Corporate(1) Total
- --------------------------------- ------------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues $11,340 $ 972 $ 830 $ 0 $13,142
Gross Margin $ 5,968 $ 379 $ 306 $ 0 $ 6,653
Operating revenue over expenses,
before general and administrative
expenses $ 704 $ 379 $ 251 $ 0 $ 1,334
General and administrative
expenses $ 0 $ 0 $ 0 $ 4,864 $ 4,864
Identifiable Assets $18,258 $ 4,229 $ 2,664 $ 0 $25,151
Depreciation $ 246 $ 6 $ 97 $ 0 $ 349
</TABLE>
7
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<TABLE>
<CAPTION>
Three Months Ended In-flight Workplace
March 31, 1998 Print Catalog Catalog E-commerce Corporate(1) Total
- --------------------------------- ------------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues $12,898 $ 0 $ 266 $ 0 $13,164
Gross Margin $ 6,232 $ 0 $ 123 $ 0 $ 6,355
Operating revenue over expenses,
before general and administrative
expenses $ 1,606 $ 0 $ 123 $ 0 $ 1,729
General and administrative
expenses $ 0 $ 0 $ 0 $ 1,761 $ 1,761
Identifiable Assets $19,229 $ 0 $ 0 $ 0 $19,229
Depreciation $ 218 $ 0 $ 0 $ 0 $ 218
</TABLE>
- --------------
(1) The "Corporate" column includes corporate related general and
administrative expenses which are not allocated to reportable segments.
NOTE 4 - BUSINESS ACQUISITION
In October 1998, the Company acquired all of the outstanding shares of
Durham & Company, an employee logo and incentive merchandise company, for $2.9
million in cash and a note payable of $200,000, totaling $3.1 million. 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.
Three months ended
March 31,
-------------------------
1999 1998
--------- ---------
Net merchandise sales $ 9,964 $ 9,931
Net loss $ (2,087) $ (43)
Basic net loss per common share $ (.24) $ (.01)
Diluted net loss per common share $ (.24) $ (.01)
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.
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NOTE 5 - RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). Application of the Statement's requirements is not expected to have a
material impact on the Company's financial position, results of operations, or
earnings per share data as currently reported.
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 $190,000 during the three months ended March 31, 1999.
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.
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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. and Durham & Company.
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. capitalizes on exclusive agreements to
create both print and e-commerce solutions for consumers and merchants. We offer
products and services to consumers through print and on-line media. Our products
and services are provided by more than 100 of the country's leading retailers,
including Balducci's, Brookstone(R), Frontgate(R), Hammacher Schlemmer(R),
Improvements(R), Lillian Vernon(R), Orvis(R), Successories(R), The Sharper
Image(R) and The Wine Enthusiast(TM). The Company offers a diverse variety of
products from numerous product categories, including clothing, fashion
accessories, health and beauty aids, children's toys, 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
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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 100 well-known merchants and the convenience of one-stop shopping.
Our print media, which typically includes approximately 2,000 items per
catalog, 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 on-line database, we offer on-line consumers
a greater product selection and currently offer more than 3,500 products for
sale. For the convenience of our customers, our on-line 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 on-line
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, are our largest distribution channel. Over the
past eight years, we have experienced substantial growth in our domestic
in-flight catalog business, which currently accounts for approximately 82% of
our net merchandise sales and substantially all of our placement fees and other
revenue. We currently have exclusive agreements to place our catalogs on 16
airlines, including Northwest Airlines, which will begin carrying the SkyMall
catalogs effective July 1, 1999. These 16 airlines, which carry approximately
71% of all domestic passengers or more than 428 million airline passengers
annually, also include America West, Continental, Delta, Southwest, United and
US Airways. In order to enhance the appeal of our product offerings, we produce
four new domestic in-flight catalogs per year. To gain efficiency in production
and printing, the catalog content is substantially the same for all of our
airline partners. During the first three quarters of the year, our catalogs
typically average 170 pages. During our peak selling season in the fourth
quarter of the year, we generally expand our catalog offering to over 225 pages.
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's agreements with its airline partners generally have a term of
at least one year and thereafter are automatically renewable on an annual basis,
subject to termination with 60-to-180 days' advance notice by either SkyMall or
the airline.
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 a
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new international initiative with United Airlines under which we began making
specialized catalogs available to the more than five million international
passengers who travel each year on United Airlines' flights originating from
Tokyo and Osaka, Japan and serving the Pacific Rim. These catalogs feature
merchandise tailored to this audience and are offered in three languages:
English, Japanese and Chinese. Although revenue from this program has been
immaterial to date, we attribute this result primarily to the poor economic
conditions in Asia and we plan to continue this program for the foreseeable
future.
In March 1999, the Company began a five-month test program with British
Airways, which began offering SkyMall catalogs on most of its transatlantic
flights originating from New York and Boston. On June 1, 1999, the Company will
begin offering a European catalog on such flights which will be priced in
multiple currencies (US Dollars, British Pound Sterling, French Francs, German
Deutsche Marks, and the Euro), and will be printed in English, German and
French. The European catalog will also be offered on certain flights of United
Airlines beginning June 1, 1999. Pending the results of these tests, the Company
may consider expanding the program to additional flights. In addition, in
January 1999, the Company began testing a Spanish language order form on several
Continental flights to Latin America. Beginning in April 1999, the order form
was expanded to include worldwide shipping rates, toll-free phone numbers for
multi-lingual customer care centers, and other ordering information.
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 in
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 more than one million
employees of a number of blue-chip organizations, primarily through print
catalogs. Competing in the highly fragmented $23 billion incentive industry,
Durham distinguishes itself by providing high-quality products and excellent
customer service and focuses its marketing efforts on large organizations.
SkyMall plans to provide Durham's clients 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.
SkyMall has begun to further leverage its existing airline relationships by
offering them Durham's expanded logo merchandise and recognition product lines.
In February 1999, SkyMall and Durham entered into an agreement with a third
party pursuant to which Durham's logo merchandise and SkyMall's products are
offered at United Airline's corporate store at the airline's headquarters
outside Chicago, which serves United's employees and visitors. In addition,
commencing in February 1999, Durham began providing a logo merchandise catalog
to United's 85,000 domestic employees.
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. To the
extent the test results of these programs prove successful, we may expand our
presence in these channels.
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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
we can private label an on-line store for our affiliate partners, most of our
affiliate sites are co-branded to increase SkyMall's brand awareness as well as
generate affinity for our on-line 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 on-line 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. 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 on-line shopping mall called MSN
Shopping, MSNBC, The 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. Gaining additional knowledge from
these experiences, the Company plans to continue to expand its affiliate
program.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AND 1998.
CONSOLIDATED REVENUE AND GROSS MARGIN. Net merchandise sales increased to
$10.0 million for the three months ended March 31, 1999 from $9.2 million for
the same period in 1998, or 7.9%. Placement fees and other revenues decreased to
$3.2 million for the three months ended March 31, 1999 from $3.9 million for the
same period in 1998, or 19.1%. Gross margin increased to $6.7 million for the
three months ended March 31, 1999 from $6.4 million for the same period in 1998,
or 4.7%. Gross margin percentage increased to 50.6% of total revenues for the
three months ended March 31, 1999 from 48.3% for the same period in 1998. The
decrease in placement fees and other revenues and the increase in gross margin
percentage was primarily due to a change in the mix of agreements with
merchants, emphasizing more variable compensation associated with merchandise
sales versus fixed placement fees.
CONSOLIDATED OPERATING EXPENSES. Total operating expenses increased to
$10.2 million or 77.5% of total revenues for the three months ended March 31,
1999 from $6.4 million or 48.5% of total revenues for the same period in 1998.
Catalog expenses decreased to $2.5 million for the three months ended March 31,
1999 from $2.7 million for the same period in 1998, or 4.5%. The decrease is due
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primarily to a decrease in the number of catalogs distributed for the three
months ended March 31,1999 compared to the same period in 1998, as a result of
new distribution monitoring procedures implemented by the Company. Selling
expenses, which represent commissions paid to airline and marketing partners and
are generally variable in nature, decreased to 6.3% of total revenues for the
three months ended March 31, 1999 compared to 6.6% for the same period in 1998.
Customer service and fulfillment expenses, which include a full-service customer
contact and order fulfillment center, increased to 14.8% of total revenues for
the three months ended March 31, 1999 compared to 8.3% for the same period in
1998. 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 increased to $4.9 million for the three months ended March 31, 1999
from $1.8 million for the same period in 1998. The increase is primarily due to
the addition of personnel, expanded marketing efforts, infrastructure
investments relating to the Company's business initiatives and expenses incurred
by Durham & Company which was acquired in the fourth quarter of 1998. The
increase in personnel includes key management, technology, marketing and support
personnel totaling $1.5 million. Marketing efforts and infrastructure
investments increased $662,000 and relate to marketing promotions and technology
investments. Durham & Company incurred expenses totaling $346,000. The balance
of approximately $592,000 related to other increases in operational expenses.
CONSOLIDATED LOSS FROM OPERATIONS. Loss from operations was $3.5 million
for the three months ended March 31, 1999 as a result of the items discussed
above, compared to a loss of $32,000 for the same period in 1998.
CONSOLIDATED INCOME TAXES. Income tax benefit was $1.3 million for the
three months ended March 31, 1999, compared to income tax expense of $49,000 for
the same period in 1998. The current year loss provides the Company with the
ability to recover taxes paid in prior years.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $4.6 million for the three months
ended March 31, 1999 compared to $1.8 million 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 $686,000 for the three months ended
March 31, 1999 compared to $259,000 for the same period in 1998. Cash used in
investing activities for both periods relates to purchases of telecommunications
and computer equipment and software, building improvements, and furniture and
fixtures.
Cash provided by financing activities was $1.0 million for the three months
ended March 31, 1999 compared to cash used of $152,000 for the same period in
1998. Cash provided by financing activities in 1999 resulted from the exercise
of warrants and options by others to purchase the Company's common stock. Cash
used in financing activities for the same period in 1998 resulted from the
repurchase of 27,000 shares of the Company's common stock and payments on
capital lease obligations.
WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS
The Company plans to spend substantial additional resources in 1999 in
connection with its electronic commerce and other growth initiatives. The
Company anticipates that such expenditures will approximate $27 million,
including approximately $7 million in capital expenditures, 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. Although the Company has been profitable in recent years, the
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Company expects that the significant investment spending it plans to undertake
in 1999 will cause it to incur losses in 1999 in the range of approximately
$1.00 to $1.20 per share.
At March 31, 1999, the Company had net working capital of $2.1 million,
which included cash and cash equivalents of $3.6 million. Additionally, the
Company maintains a reducing revolving line of credit at a bank with a maximum
available line of $3.0 million. As of March 31, 1999, the entire balance of the
revolving line of credit was unused. Existing working capital and credit lines
are 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
existing bank line of credit, and by securing additional capital resources
through the issuance of debt 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 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. We estimate that we will incur losses of approximately $1.00
- - $1.20 per share in 1999. 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. Our current working
capital, along with 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, 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.
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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
on-line 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 on-line
customer base, we will need to attract purchasers who have historically relied
upon traditional venues for making their retail purchases. If use of on-line
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.
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 their customers
through a competitor. Various international airlines also offer merchandise
catalogs to their passengers through our competitors. In addition, in July 1999,
TWA, a former SkyMall partner, will begin 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 on-line 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
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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. Although our gross
margin levels on sales of our products have increased in recent years, we may be
unable to further increase or maintain our gross margins at historical levels,
particularly for our electronic commerce initiatives. As competition in on-line
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
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 ON-LINE 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.
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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.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS. Our catalogs and electronic
commerce sites typically feature over 3,500 products and services from more than
100 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 May 11,
1999, Mr. Worsley and his wife (the "Worsleys") beneficially owned 4,577,416
shares, or approximately 51% 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 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. Although Internet sales
represent only a small portion of our business, the price of our Common Stock
may nonetheless be impacted by these or other trends.
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WE FACE RISKS ASSOCIATED WITH THE YEAR 2000
BACKGROUND. 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 the dates of September 9, 1999 or February 29, 2000. 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.
OUR STATE OF READINESS. 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 servers, both of
which are designed and represented to meet Year 2000 Issue functional
requirements. We are in the process of testing these systems to confirm that
they are Year 2000 compliant.
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.
COSTS. The financial and resource demands of our Year 2000 Issue project
are estimated to total less than $100,000. Much of this amount represents
existing resources which will be used to survey third parties, review internal
and external systems environments, analyze potential impacts and document our
efforts.
RISKS. 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.
We do not currently have enough data to make an accurate assessment of the
potential impact of a material failure of our vendors to be adequately prepared
for the Year 2000 Issue.
CONTINGENCY PLANS. We have not yet developed formal contingency plans to
address the possibility that our critical systems, as well as those of our key
business partners on which we rely, will experience significant interruption as
a result of the Year 2000 Issue. We will develop contingency plans in the coming
months if such plans are deemed necessary after a more thorough evaluation of
all of our mission critical systems and the results of our review of the systems
of our third-party providers.
UNCERTAINTY. 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 issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
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sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). Application of the Statement's requirements is not expected to have a
material impact on the Company's financial position, results of operations, or
earnings per share data as currently reported.
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 $190,000 during the three months ended March 31, 1999.
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.
SEGMENT DISCLOSURE
During the fourth quarter of 1998, the Company acquired Durham & Company,
and in January 1999, the Company formed SKYMALL.COM, INC. to operate its
Internet e-commerce Web site. The Durham acquisition and the formation of
SKYMALL.COM created three 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, operating revenues over expenses before general and
administrative expenses, general and administrative expenses, identifiable
assets and depreciation is provided in the Notes to Condensed Consolidated
Financial Statements filed herewith.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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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 alleges 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
alleges 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. The Company believes Ms.
Jordan's claims are substantially without merit and intends to vigorously defend
this action.
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.
In October 1996, the Company issued 180,000 warrants to purchase Common
Stock of the Company to preferred shareholders in a private placement, at an
exercise price of $8.00 per share (the "Pre-IPO Warrants"). As of December 31,
1998, 20,400 of the Pre-IPO Warrants had been exercised, resulting in net
proceeds to the Company for fiscal 1998 of $163,200. In addition, during the
first quarter of the 1999 fiscal year, 129,900 of the Pre-IPO Warrants were
exercised, resulting in net proceeds to the Company of $1,039,200. Total net
proceeds from the exercise of the Pre-IPO Warrants as of March 31, 1999 was
$1,202,400. All of such proceeds are designated for general corporate purposes.
The shares issued upon exercise of the Pre-IPO Warrants were issued in reliance
upon the exemption provided under Section 4(2) of the Securities Act of 1933 and
Regulation D thereunder.
In December 1996, the Company issued 200,000 Warrants to purchase Common
Stock of the Company to the underwriters in the Company's Offering, at an
exercise price of $9.60 per share (the "Underwriter Warrants"). As of December
31, 1998, 160,000 of the Underwriter Warrants were exercised by cashless
exercise. In addition, in January 1999, the remaining 40,000 of the Underwriter
Warrants were exercised by cashless exercise. The Company did not receive any
proceeds as a result of these warrant exercises. The shares were issued upon
exercise of the Underwriter Warrants in reliance on the exemption provided under
Section 4(2) of the Securities Act of 1933 and Regulation D thereunder.
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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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
The following exhibits are included herein:
EXHIBIT
NUMBER DESCRIPTION
10.1 Employment Agreement between the Company and Thomas C. Edwards
10.2 Employment Agreement between the Company and Curtis D. Brown
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter for which this
Report is filed.
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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: May 14, 1999 By: /s/ ROBERT M. WORSLEY
---------------------------------
Robert M. Worsley
Chairman of the Board, President
(Chief Executive Officer)
Date: May 14, 1999 By: /s/ STEPHEN R. PETERSON
---------------------------------
Stephen R. Peterson
Chief Financial Officer
(Principal Accounting Officer)
23
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective this 5th day of January, 1999, by and between
SkyMall, Inc., a Nevada corporation ("Employer"), and Thomas Edwards
("Employee"):
RECITALS
A. Employer wishes to retain the services of Employee;
B. Employee wishes to be employed by Employer as Chief Marketing Officer
for Employer's subsidiary, Skymall.com, Inc.; and
C. Employer and Employee wish to memorialize the terms of their
agreement.
AGREEMENT
In consideration of Employer's employment of Employee, the compensation to
be paid to Employee, and the mutual covenants and promises contained herein, the
parties agree as follows:
1. EMPLOYMENT. Employer shall employ Employee as Chief Marketing Officer
for Skymall.com, inc., and reporting directly to the CEO of the parent company
SkyMall Inc. Employee shall accept such employment and agrees to perform his
duties and responsibilities in accordance with the terms and conditions herein.
2. TERM. The term of the employment of Employee by Employer shall be for a
period of three years, commencing on January 5, 1999, and ending on January 5,
2002, unless sooner terminated in accordance with paragraph 17 of this
Agreement. The employment of Employee may be renewed by a written agreement
signed by the Employee and Employer specifically renewing Employee's employment
and specifying a renewal term. Neither the Employee nor Employer will have any
obligation to renew the employment.
3. EMPLOYEE'S OBLIGATIONS AND DUTIES. During the term of his employment,
Employee shall devote his full time and efforts to the business affairs of
Employer provided, however, the foregoing shall not prevent the employee from
pursuing other activities outside his employment with employer so long as such
activities do not interfere with his performance with his duties and the
employee keeps the CEO informed of his activities. Employee shall perform and
discharge in a diligent and professional manner such duties and responsibilities
as may be prescribed from time to time by Employer. Employee agrees to adhere to
all of Employer's rules, policies, and procedures as may be in effect from time
to time, including but not limited to Employer's policy requiring pre-employment
and routine random drug screening, and any policies contained in Employer's
employee guidebooks. Employer may amend, revise, or discontinue any of its
rules, policies, and procedures as Employer deems necessary or desirable. The
terms of Employer's rules, policies, procedures and employee guidebooks do not
create any contractual rights in favor of Employee.
<PAGE>
4. BOARD OF DIRECTORS. Employer shall cause Employee to be immediately
appointed to the Board of Directors of Skymall.com, Inc.
5. ANNUAL BASE SALARY. During the term of Employee's employment under this
Agreement, Employer shall pay Employee an annual base salary of a minimum of
$250,000.00. From time to time, or in connection with performance evaluations,
Employer may increase the amount of this base salary. All compensation paid
pursuant to this paragraph shall accrue and be payable in accordance with the
payroll practices of Employer as may be in effect from time to time. Employer's
current payroll practices provide for bi-weekly payment of wages.
6. SIGNING BONUS. On the first regularly occurring pay day after Employee
commences his employment, Employer shall pay Employee a one-time signing bonus
in the amount of $100,000.00.
7. INCENTIVE BONUS. During the term of Employee's employment under this
Agreement, Employee will be eligible to participate in Employee's incentive
compensation plan that will allow Employee to earn a cash bonus of up to
seventy-five percent (75%) of his annual base salary, with a guaranteed minimum
bonus of $150,000.00 annually.
8. STOCK OPTIONS. Employee shall be eligible to receive options to purchase
75,000 shares of stock of SkyMall, Inc. at the market price on the date of
acceptance of this agreement. One-third of such options shall be immediately
vested, and the remaining two-thirds shall vest as follows: one-third on the
first anniversary of the date of this agreement and one-third on the second
anniversary of this agreement. On the ninetieth day following the acceptance of
your employment and to the extent that the stock price of SkyMall's common stock
is less than the exercise price of the option granted to you on your start date,
the Board will consider granting additional options to you to give the
equivalent economic benefit of the options granted to you on your start date.
Employee shall be eligible for additional option grants in accordance with
Employer's policies as may be in effect during the term of this Agreement.
Employee shall be entitled to retain any options granted pursuant to this
Agreement, vesting will be accelerated to 100% upon change in control in
accordance with the terms of any applicable option agreement, even if
Skymall.com, Inc. is no longer owned by Employer. All options granted under this
agreement shall become fully vested upon a change in control of SkyMall Inc.
9. COMPENSATION BY RIPTIDE. During the term of Employee's employment under
this Agreement, Employer acknowledges that Riptide has agreed to pay Employee an
additional $200,000.00 each year for three years, to be pro-rated and paid
concurrently with the pay periods of Employer. If Riptide fails to make such
payments to Employee for any reason whatsoever, Employer shall guarantee such
payments and make such payments itself.
10. PERSONAL PAID TIME OFF. Employee shall be entitled to 24 personal paid
time off days per year (accrued at the rate of 7.38 hours per pay period). Any
unused days shall be forfeited, and no payment shall be made in lieu of taking
time off.
11. 401(K). After 90 days of employment, Employee shall be eligible to
participate in Employer's 401(k) Plan that is currently offered through Fidelity
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Investments. Employer shall match fifty percent (50%) of Employee's contribution
to the 401(k) Plan (up to 6% of Employee's annual base salary) in accordance
with the terms of the Plan documents.
12. EMPLOYEE BENEFITS. During the term of Employee's employment under this
Agreement, Employee shall be eligible for medical and dental insurance
(beginning on the first day of the month after one full month of employment),
short and long-term disability insurance and life insurance, all in accordance
with the standard benefits policies and procedures applicable to employees of
Employer during the term of this Agreement.
13. EXPENSES. During the term of Employee's employment under this
Agreement, Employer shall reimburse Employee for all reasonable travel (it is
expressly understood that it shall be reasonable to purchase First Class tickets
for air travel) and other expenses incurred by Employee in connection with the
performance by Employee of his duties and responsibilities hereunder, subject to
Employee's submission of receipts for the expenses, and in accordance with
Employer's standard policies as may be in effect from time to time.
14. RELOCATION REIMBURSEMENT. Employee shall be entitled to reimbursement
for reasonable travel expenses associated with up to three visits during which
he and his spouse locate a home in Arizona, and reasonable moving expenses
associated with Employee's relocation from California to Arizona. The
reimbursement shall be grossed up for tax purposes and shall include the
following items that are actually paid for by Employee and documented with
applicable receipts: closing costs on the sale of Employee's home in California
and purchase of a home in Arizona; packing, loading and transportation of
household goods and four cars; air fare for spouse, two children and nanny or
mileage (at 32 cents per mile) if cars are driven from California to Arizona by
Employee or his spouse; the cost of up to two rental cars while Employee's cars
are being moved; and other reasonable, incidental interim moving or living
expenses not to exceed ninety days from the date of employment. Employer shall
not purchase Employee's current home.
15. WITHHOLDING OF TAXES. Employer may withhold from any compensation or
benefits payable to Employee under this Agreement all federal, state and local
taxes as may be required to be withheld by law, regulation or ruling.
16. PERFORMANCE REVIEWS. Employer shall provide Employee with annual
performance reviews in a manner deemed reasonable by Employer in its sole
discretion.
17. TERMINATION. Employee's employment is at will and may be terminated at
any time, by either party, with or without cause, by providing written notice to
the other.
a. BY EMPLOYEE. If Employee's employment is terminated by Employee
for any reason, or for no reason, Employer shall have no further obligation or
liability other than: (i) to provide Employee his pro-rated annual base salary
through the last date Employee performs work for Employer; and (ii) to provide
Employee continuing benefits as required under COBRA or other applicable law.
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b. BY EMPLOYER. If Employee's employment is terminated by Employer
for any reason, then Employer shall, through January 5, 2002: (i) continue to
guarantee and pay to Employee the annual base salary of $250,000.00; (ii)
continue to guarantee the annual compensation of $200,000.00 promised by
Riptide; and (iii) continue to pay to Employee the guaranteed minimum bonus of
$150,000.00 annually through January 2002. Additionally, the stock options to be
awarded hereunder shall continue to vest, and Employee shall be eligible to
purchase additional options that would normally be made available to executives
at his level.
18. CONFIDENTIALITY.
a. CONFIDENTIAL MATERIAL. In the course of Employee's employment by
Employer, Employee will be given access to and become acquainted with trade
secrets and various other proprietary or confidential technical and commercial
information, including, but not limited to, the following: (i) business
strategies, pricing, marketing and cost data; (ii) technical information
regarding Employer's products and services; (iii) confidential customer
information; (iv) customer and supplier lists; (v) contents of contracts and
agreements with partners, merchants, customers and suppliers; (vi) customer
requirements and specifications; and (vii) e-commerce designs, plans,
development techniques and other products or processes, whether or not
copyrighted by Employer. All items described in the foregoing sentence are
defined herein as "Confidential Material." Employee further acknowledges that
the Confidential Material has been developed or acquired by the Employer through
expenditure of substantial time, effort and money, and that the Confidential
Material provides Employer with an advantage over competitors.
b. NON-DISCLOSURE AGREEMENT. In consideration for access to
Confidential Material, Employee agrees that during his employment and continuing
for five years thereafter, he shall not directly or indirectly disclose or use
for any reason whatsoever any Confidential Material obtained by him by reason of
his employment with Employer, except as required to conduct the business of
Employer or as authorized by express written permission of the Board of
Directors of Employer or as otherwise required by law.
c. OWNERSHIP OF DATA. Employee confirms that all Confidential
Material and all documents reflecting such information remain the exclusive
property of Employer. All business records, papers, documents or other data, in
whatever form, kept or made by Employee relating to the business of Employer,
shall be and shall remain the property of Employer during the term of Employee's
employment and at all times thereafter. Employee will grant and hereby grants to
Employer the sole and exclusive ownership of (including the sole and exclusive
right to reproduce, use or disclose for any purpose) any and all reports,
drawings, data, programs, plans, writings or other information made or prepared
by Employee alone or with others during the term of his employment that relate
to his employment or Employer's business.
d. REMEDIES. Employee hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by Employer upon any breach of the terms of this paragraph 18 by
Employee, and Employee therefore agrees that Employer, in addition to recovering
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on any claim for damages or obtaining any other remedy available at law, also
may enforce the terms of this paragraph 18 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
Employee further acknowledges and agrees that Employer shall be entitled to
recover attorneys' fees and costs associated with enforcement of this paragraph
18.
19. NON-COMPETE AGREEMENT.
a. HIGHLY-COMPETITIVE MARKET. Employee acknowledges and agrees that
Employer's products and services are sold and performed in a highly-competitive
market. Employee acknowledges that the services he may render to Employer, the
information exchanged between all parties in connection with rendering those
services, and Employer's relationships with customers, airlines, transportation
companies, catalog retailers, vendors, banks, accountants, and any other
Employer program participants, business partners or similar parties, are each of
a unique and valuable character. Employee acknowledges that the market for
Employer's products and services is national and international in scope.
b. LIMITATION OF ACTIVITIES. Employee agrees that, for a period of
two (2) years after the termination of this agreement or the date employer last
makes a payment to employee under this Agreement, he shall not engage in, plan
for, organize, work for, or assist, directly or indirectly, any business that is
competitive, directly or indirectly, with Employer's business, nor solicit
participants in or customers of the Employer's program, nor use Employee's
knowledge of Employer or its business in any manner that competes with Employer.
As used in this paragraph 19, the term Employer includes SkyMall, Inc. and any
of its affiliates or subsidiaries. The foregoing restrictions shall be
understood to prohibit Employee from participating in the following
non-exclusive list of activities:
(i) Provide services as an employee, director, consultant,
agent, or representative to any company or other entity that is competitive,
directly or indirectly, with Employer's plans and initiatives for the Internet
or interactive shopping.
(ii) Provide services as an employee, director, consultant,
agent, or representative to any catalog company or other entity that is
competitive, directly or indirectly, with Employer or its products and services
or entities in which SkyMall has an equity interest.
(iii) Directly or indirectly solicit Employer's vendors,
customers, employees, business partners or similar third parties for any
activity that is directly or indirectly competitive with Employer.
(iv) Participate in, be employed in any capacity by, serve as
director, consultant, agent or representative for, or have any interest,
directly or indirectly, in any entity or enterprise which is engaged in a
business directly or indirectly competitive to Employer, or which is competitive
to any products and services being actively developed by Employer with the bona
fide intent to market same. Without limiting the generality of the foregoing,
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Employee agrees that it shall be a violation of this Agreement for Employee to
participate in, be employed in any capacity by, serve as director, consultant,
agent or representative for, or have any interest, directly or indirectly, in
the following companies or any of their affiliates: Genesis Direct, Cornerstone
Group, CUC International, Inc., Hanover and Cinmar Group.
(v) Own, either directly or indirectly or through or in
conjunction with one or more members of his family or his spouse's family or
through any trust or other contractual arrangement, a greater than five percent
(5%) interest in, or otherwise control either directly or indirectly, any
partnership, corporation, or other entity which has products and services that
are competitive to any products and services being developed or otherwise
offered by Employer or being actively developed by Employer with a bona fide
intent to market same.
c. REMEDIES. Employee hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by Employer upon any breach of the terms of this paragraph 19 by
Employee, and Employee therefore agrees that Employer, in addition to recovering
on any claim for damages or obtaining any other remedy available at law, also
may enforce the terms of this paragraph 19 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
Employee further acknowledges and agrees that Employer shall be entitled to
recover attorneys' fees and costs associated with enforcement of this paragraph
19.
If any provision of this paragraph 19 is deemed, as a matter of law, to be
unreasonable as to time, area, or scope by any court, then such court shall have
authority to modify this paragraph as to time, area or scope, but only to the
limited extent necessary to make this paragraph reasonable and enforceable.
20. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES. Employee represents and
warrants that he is currently a member of the Boards of Directors of the
following entities, and no others: Riptide, Gravity, City Meals. Employee
represents and warrants that this Agreement does not violate the terms,
conditions or provisions of any employment relationship with any prior employer.
Employee shall not accept any appointments to serve on any other Boards without
prior written approval of Employer.
21. RETURN OF MATERIALS. Employee shall return to Employer promptly at its
request all materials furnished to Employee by Employer and all materials
prepared by Employee that contain Confidential Material together with all copies
thereof.
22. NOTICES. Any notice or other communication required or permitted
hereunder shall be sufficient if given in writing and delivered personally or
mailed by registered or certified mail, return receipt requested, postage
prepaid and addressed to the parties at the addresses listed below. Either party
may designate a different address by notice so given.
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Employer: Christine Aguilera
General Counsel
SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Employee: Tom Edwards
11 Ashdown Place
Half Moon Bay, CA 94404
23. GOVERNING LAW AND CHOICE OF FORUM. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Arizona without regard to its conflicts of law principles. The
parties agree that any legal suit, action or proceeding arising out of or
related to this Agreement shall be instituted in a state or federal court of
competent jurisdiction located in Maricopa County, Arizona. The parties accept
the exclusive jurisdiction of the aforesaid courts, and irrevocably agree to be
bound by any judgment rendered by said courts in connection with this Agreement.
24. SEVERABILITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
25. AMENDMENT. This Agreement shall not be modified, amended or rescinded
except by written instrument duly executed by Employee and Employer.
26. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
27. CAPTIONS AND HEADINGS. The captions and headings of this Agreement are
for convenience of reference only and shall not be considered to be a part of
this Agreement, affect the meaning or interpretation of this Agreement, or be
used in determining the intent of the parties.
28. SURVIVAL. The provisions of paragraphs 18 and 19 of this Agreement
shall remain in full force and effect following the termination of Employee's
employment or the termination of this Agreement.
29. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be unforceable by Employer's successors and assigns, and is fully assignable
by Employer to any of Employer's current or future affiliates and subsidiaries.
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30. ENTIRE AGREEMENT. Except as stated herein, this Agreement sets forth
the entire understanding of the parties hereto with respect to the subject
matter hereof.
SKYMALL, INC.,
A NEVADA CORPORATION
By: /s/ Robert M. Worsley Date: 1/5/99
-------------------------------- -----------------------
Robert M. Worsley
Its: President and CEO
/s/ Thomas C. Edwards Date: 1/5/99
- ------------------------------------ -----------------------
Thomas C. Edwards
8
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made this 14th day of January, 1999, by and between SkyMall,
Inc., a Nevada corporation ("Employer"), and Curtis D. Brown ("Employee"):
RECITALS
A. Employer wishes to retain the services of Employee in order to utilize
Employee's skills, talents and abilities;
B. Employee wishes to be employed by Employer as Chief Technology Officer
of SkyMall.com, a wholly-owned subsidiary of Employer;
C. Employer does not wish to receive or utilize in any manner any trade
secrets or other confidential or proprietary information of another company that
Employee may have had access to by virtue of his prior employment;
D. Employee understands that he must not provide Employer with any trade
secrets or other confidential or proprietary information of another company that
Employee may have had access to by virtue of his prior employment; and
E. Employer and Employee wish to memorialize the terms of their
agreement.
AGREEMENT
In consideration of Employer's employment of Employee, the compensation to
be paid to Employee, and the mutual covenants and promises contained herein, the
parties agree as follows:
1. EMPLOYMENT. Employer shall employ Employee as Chief Technology Officer
of SkyMall.com, and Employee shall accept such employment and agrees to perform
his duties and responsibilities in accordance with the terms and conditions
herein.
2. TERM. The term of the employment of Employee by Employer shall be for
a period of three years, commencing on February 16, 1999, and ending on February
16, 2002, unless sooner terminated in accordance with paragraph 14 of this
Agreement. The employment of Employee may be renewed by a written agreement
signed by Employee and Employer specifically renewing Employee's employment and
specifying a renewal term. Neither the Employee nor Employer will have any
obligation to renew the employment.
3. EMPLOYEE'S OBLIGATIONS AND DUTIES. During the term of his employment,
and except during vacation periods and reasonable periods of absence due to
sickness, personal injury or other approved leave of absence, Employee shall
devote his full time and efforts during normal business hours to the business
<PAGE>
affairs of Employer. Employee shall perform and discharge in a diligent and
professional manner such duties and responsibilities as may be prescribed from
time to time by Employer. Notwithstanding the foregoing, Employee shall report
only to the Chief Information Officer of Employer or, in the event the position
of President of SkyMall.com is created, to the person appointed to such
position. Employee agrees to adhere to all of Employer's rules, policies, and
procedures as may be in effect from time to time, including but not limited to
Employer's policy requiring pre-employment and routine random drug screening,
and any policies contained in Employer's employee guidebooks. Employer may
amend, revise, or discontinue any of its rules, policies, and procedures as
Employer deems necessary or desirable. The terms of Employer's rules, policies,
procedures and employee guidebooks do not create any contractual rights in favor
of Employee. Employer has provided to Employee copies of the Employer's employee
guidebooks that are in effect as of the date hereof.
4. ANNUAL BASE SALARY. During the term of Employee's employment under
this Agreement, Employer shall pay Employee an annual base salary of a minimum
of $250,000.00 (said amount, together with any increases thereto as shall be
determined at least annually within one week of the performance reviews
contemplated by paragraph 13 hereof, being hereinafter referred to as "Salary").
Any Salary paid pursuant to this paragraph shall accrue and be payable in
accordance with the payroll practices of Employer as may be in effect from time
to time.
5. SIGNING BONUS. In consideration for his employment, Employee shall be
paid a one-time signing bonus in the amount of $100,000.00 (absent applicable
taxes and withholding), which shall be distributed to Employee as follows:
one-quarter of said signing bonus ($25,000.00, absent applicable taxes and
withholding) shall be paid to Employee on February 16, 1999; one-half of said
signing bonus ($50,000.00, absent applicable taxes and withholding) shall be
paid to Employee on July 1, 1999; and one-quarter of said signing bonus
($25,000.00, absent applicable taxes and withholding) shall be paid to Employee
on October 1, 1999. In the event Employee is not still employed by Employer
through and until July 1, 1999, Employee is obligated and agrees to repay to
Employer the one-quarter of the signing bonus ($25,000.00, absent applicable
taxes and withholding), that Employee received on February 16, 1999.
6. INCENTIVE BONUS. During the term of Employee's employment under this
Agreement, Employee will be eligible to participate in Employer's incentive
compensation plan (a current copy of which has been provided to Employee) that
will allow Employee to receive, subject to Board approval, (i) a cash bonus of
up to seventy-five percent (75%) of his Salary (the "Cash Bonus") based on the
financial performance of Employer and other criteria as may be in good faith
agreed to and determined by the Board of Directors of Employer and Employee from
time to time; and (ii) additional awards of stock options based on the formula
provided in the above- referenced incentive compensation plan.
7. STOCK OPTIONS. Subject to approval by the Board of Directors of
Employer (which approval Employer expects to receive), Employee shall be
eligible to receive, pursuant to Employer's 1994 Stock Option Plan, as amended
on April 20, 1998 (a copy of which has been provided to Employee), options to
purchase 75,000 shares of common stock par value $.001 per share ("Common
Stock") at the market price of such Common Stock on the date of execution of
this Agreement. One-third of such options shall be immediately vested, and the
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remaining two-thirds shall vest as follows: one-third on the first anniversary
of this agreement and one-third on the second anniversary of this Agreement. The
options, shall be covered by a separate written option agreement between
Employer and Employee, containing customary terms and provisions, including
without limitation, full vesting upon a sale or change of control of Employer or
SkyMall.com, which option agreement shall be authorized by the Board of
Directors and delivered to Employee for execution by no later than ten days
after the date of this Agreement.
8. PERSONAL PAID TIME OFF. Employee shall be entitled to 15 personal paid
time off days per year (accrued at the rate of 4.615 hours per pay period). Any
unused days shall be forfeited, and no payment shall be made in lieu of taking
time off. Employer offers paid holidays to employees on a schedule adopted each
year.
9. 401(K). After 90 days of employment, Employee shall be eligible to
participate in Employer's 401(k) Plan that is currently offered through Fidelity
Investments. Employer shall match fifty percent (50%) of Employee's contribution
to the 401(k) Plan (up to 6% of Employee's Salary) in accordance with the terms
of the 401(k) Plan documents.
10. EMPLOYEE BENEFITS. During the term of Employee's employment under this
Agreement, Employee shall be eligible for medical and dental insurance
(beginning on the first day of the month after one full month of employment). In
the interim period during which Employee shall not be eligible for such medical
and dental insurance, the Employer will compensate Employee for actual COBRA
expenses up through the effective date of enrollment under the Employer's
programs. Employer shall also provide to Employee short and long-term disability
insurance and life insurance, all in accordance with the standard benefits
policies and procedures applicable to employees of Employer during the term of
this Agreement.
11. EXPENSES. During the term of Employee's employment under this
Agreement, Employer shall reimburse Employee for all reasonable travel and other
expenses incurred by Employee in connection with the performance by Employee of
his duties and responsibilities hereunder, subject to Employee's submission of
receipts for the expenses, and in accordance with Employer's standard policies
as may be in effect from time to time.
12. WITHHOLDING OF TAXES. Employer may withhold from any compensation or
benefits payable to Employee under this Agreement all federal, state and local
taxes as may be required to be withheld by law, regulation or ruling.
13. PERFORMANCE REVIEWS. Employer shall provide Employee with annual
performance reviews in a manner deemed reasonable by Employer in its sole
discretion.
14. TERMINATION. Subject to the express requirements of clauses (a) and
(b) below, Employee's employment is at will and may be terminated at any time,
by either party, with or without cause, by providing written notice to the
other.
A. BY EMPLOYEE. If Employee's employment is terminated by Employee
for any reason, or for no reason, Employer shall have no further obligation or
liability other than: (i) to provide Employee his pro-rated Salary through the
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last date Employee performs work for Employer; and (ii) to provide Employee
continuing benefits as required under COBRA or other applicable law.
B. BY EMPLOYER. If Employee's employment is terminated by Employer
for any reason other than Good Cause (as defined below), then Employer shall
continue to pay to Employee the Salary each year through February 16, 2002. If
Employee's employment is terminated by Employer for Good Cause, then Employer
shall have no further obligation or liability other than: (a) to provide
Employee his pro-rated Salary through the last date Employee performs work for
Employer; and (b) to provide Employee continuing benefits as required under
COBRA or other applicable law. Anything in the preceding sentences to the
contrary notwithstanding, (i) Employer must first give Employee reasonable
notice and an opportunity to meet with the President of Employer to discuss such
termination if Employee is to be terminated for any reason other than Good
Cause; and (ii) Employer must first give Employee written notice that Employee
is being terminated for Good Cause, specifying in writing in reasonable detail
the basis for such termination and such basis in fact constituting Good Cause.
"GoodCause" shall mean the occurrence of any of the following
circumstances: (i) Employee becomes unable to perform the duties and essential
functions of his job due to mental or physical disability for a period of more
than 13 weeks; (ii) Employee refuses or neglects to perform duties reasonably
assigned to him, provided that Employer first gives Employee written notice and
such refusal or neglect by Employee continues for a period of five days after
such notice; (iii) Employee fails to devote his full working time to Employer,
provided that Employee is first given an opportunity to cure; (iv) Employee
commits any act of dishonesty or disloyalty that is detrimental in a material
respect to the Employer; (v) Employee dies; or (vi) Employee breaches any of the
terms of this Agreement, including but not limited to paragraphs 3, 15, 16 and
17 hereof, and such breach has or is reasonably likely to have a material
adverse effect on Employer.
15. CONFIDENTIALITY.
A. CONFIDENTIAL MATERIAL. In the course of Employee's employment by
Employer, Employee will be given access to and become acquainted with trade
secrets and various other proprietary or confidential technical and commercial
information, including, but not limited to, the following: (i) business
strategies, pricing, marketing and cost data; (ii) technical information
regarding Employer's products and services; (iii) confidential customer
information; (iv) customer and supplier lists; (v) contents of contracts and
agreements with partners, merchants, customers and suppliers; (vi) customer
requirements and specifications; and (vii) e-commerce designs, plans,
development techniques and other products or processes, whether or not
copyrighted by Employer. All items described in the foregoing sentence are
defined herein as "Confidential Material," provided that the term Confidential
Material shall not include any information (x) that is or becomes generally
publicly available (other than as a result of violation of this Agreement by the
Employee), (y) that the Employee receives on a non-confidential basis from a
source (other than the Employer) that is not known by the Employee to be bound
by an obligation of secrecy or confidentiality to the Employer, or (z) that was
in the possession of the Employee prior to disclosure by the Employer. Employee
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further acknowledges that the Confidential Material has been developed or
acquired by the Employer through expenditure of substantial time, effort and
money, and that the Confidential Material provides Employer with an advantage
over competitors.
B. NON-DISCLOSURE AGREEMENT. In consideration for access to
Confidential Material, Employee agrees that during his employment and continuing
for two years thereafter, he shall not directly or indirectly disclose or use
for any reason whatsoever any Confidential Material obtained by him by reason of
his employment with Employer, except as required to conduct the business of
Employer or as authorized by express written permission of the Board of
Directors of Employer or as otherwise required by law.
C. OWNERSHIP OF DATA. Employee confirms that all Confidential
Material and all documents reflecting such information remain the exclusive
property of Employer. All business records, papers, documents or other data, in
whatever form, kept or made by Employee relating to the business of Employer,
shall be and shall remain the property of Employer during the term of Employee's
employment and at all times thereafter. Employee will grant and hereby grants to
Employer the sole and exclusive ownership of (including the sole and exclusive
right to reproduce, use or disclose for any purpose) any and all reports,
drawings, data, programs, plans, writings or other information made or prepared
by Employee alone or with others during the term of his employment that relate
to his employment or Employer's business.
D. REMEDIES. Employee hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by Employer upon any breach of the terms of this paragraph 15 by
Employee, and Employee therefore agrees that Employer, in addition to recovering
on any claim for damages or obtaining any other remedy available at law, also
may enforce the terms of this paragraph 15 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
Employee further acknowledges and agrees that Employer shall be entitled to
recover attorneys' fees and costs associated with enforcement of this paragraph
15.
16. NON-COMPETE AGREEMENT.
A. HIGHLY-COMPETITIVE MARKET. Employee acknowledges and agrees that
Employer's products and services are sold and performed in a highly-competitive
market. Employee acknowledges that the services he may render to Employer, the
information exchanged between all parties in connection with rendering those
services, and Employer's relationships with customers, airlines, transportation
companies, catalog retailers, vendors, banks, accountants, and any other
Employer program participants, business partners or similar parties, are each of
a unique and valuable character. Employee acknowledges that the market for
Employer's products and services is national and international in scope.
B. LIMITATION OF ACTIVITIES.
(i) Employee agrees that during his Employment with Employer and
for a period of two years after the later of either (x) the termination of
Employee's employment with Employer, or (y) February 16, 2002, Employee shall
not solicit, directly or indirectly, any vendors or customers of Employer for
any Competitor, as that term is defined below. In addition, Employee agrees that
5
<PAGE>
he will not, for that same period of time, recruit, hire or induce, directly or
indirectly, any employee or business partner of Employer to provide services to
any other person or entity other than Employer, unless the departure of that
employee or business partner from Employer would not reasonably be expected by
Employer to have a material impact on the operations of the employee's or
business partner's office, or otherwise have a detrimental effect on Employer as
a whole.
(ii) Employee agrees that during his Employment with Employer and
for a period of six months after the termination of Employee's employment with
Employer, Employee shall not engage in, plan for, organize, work for, or assist,
directly or indirectly, any Competitor in a manner that would be competitive to
Employer, nor use Employee's knowledge of Employer or its business in any manner
that competes with Employer. During this six month period, Employer will pay to
Employee the sum of $20,833.00 per month, to be paid in accordance with the
payroll practices of Employer at that time, except that Employer is not
obligated to pay Employee under this paragraph during any time that Employee is
receiving payments under paragraph 14(b) hereof. The foregoing restrictions
shall be understood to prohibit Employee from participating in the following
non-exclusive list of activities:
(a) Providing services as an employee, director,
consultant, agent, or representative to a Competitor;
(b) Owning, either directly or indirectly or through or in
conjunction with one or more members of his family or his spouse's family or
through any trust or other contractual arrangement, a greater than five percent
(5%) interest in, or otherwise controlling, either directly or indirectly, any
partnership, corporation, or other entity which has products and services that
are competitive to any products and services being developed or otherwise
offered by Employer or being actively developed by Employer with a bona fide
intent to market same.
(iii)In the event Employee breaches this provision of the
Agreement, he agrees to repay Employer within 10 days any payments he received
under paragraph 16(b)(ii) above, which repayment shall not release Employee from
any legal claims that Employer may have against Employee for his breach.
(iv) Notwithstanding the foregoing provisions, upon written
request by Employee explaining Employee's opportunities that would otherwise be
prohibited under paragraph 16(b)(ii) hereof or on Employer's own initiative,
Employer may waive the foregoing restrictions. In the event Employer does so
waive its rights to enforce the provisions of paragraph 16(b)(ii) hereof,
Employer will be relieved of its obligation to pay Employee in accordance with
that provision, which relief shall be effective immediately upon delivery to
Employee of Employer's written release of Employee under paragraph 16(b)(ii)
hereof.
(v) As used in this paragraph 16, the term Employer includes
SkyMall, Inc. and any of its affiliates or subsidiaries, or any entity in which
SkyMall, Inc. has a direct or indirect equity interest. A Competitor is
understood and agreed by Employer and Employee to mean any person or entity that
is engaged in, or has plans to engage in within the subsequent 6 months, any
6
<PAGE>
business activity or operations that Employer is also engaged in, or for which
Employer had written business plans to engage in (created in the usual course of
business), at the time of the Employee's departure from Employer; it being
agreed by Employer that, where necessary to enable Employee to avoid breaching
the provisions of this paragraph 16 and subject to Employee's compliance with
the provisions set forth in paragraph 15, Employee shall be given full access to
such plans
C. REMEDIES. Employee hereby agrees that damages and any other
remedy available at law would be inadequate to redress or remedy any loss or
damage suffered by Employer upon any breach of the terms of this paragraph 16 by
Employee, and Employee therefore agrees that Employer, in addition to recovering
on any claim for damages or obtaining any other remedy available at law, also
may enforce the terms of this paragraph 16 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
Employee further acknowledges and agrees that Employer shall be entitled to
recover attorneys' fees and costs associated with enforcement of this paragraph
16.
If any provision of this paragraph 16 is deemed, as a matter of
law, to be unreasonable as to time, area, or scope by any court, then such court
shall have authority to modify this paragraph as to time, area or scope, but
only to the limited extent necessary to make this paragraph reasonable and
enforceable.
17. EMPLOYEE'S REPRESENTATIONS AND WARRANTIES. As a material inducement to
Employer to enter this Agreement, Employee makes the following representations
and warranties:
A. BOARD OF DIRECTORS. Employee represents and warrants that he is
not currently a member of the board of directors of any other company or
business entity. Employee shall not accept any appointments to serve on any
other boards without prior written approval of Employer.
B. NO BREACH OF PRIOR AGREEMENT. Employee represents and warrants
that his employment with Employer and his recruitment of other employees on
behalf of Employer will not result in his violating any agreements that he may
have with any third party.
C. NO SHARING OF CONFIDENTIAL INFORMATION. Employee represents and
warrants that he shall not disclose to Employer any trade secrets or other
confidential or proprietary information of another company that Employee may
have had access to by virtue of his prior employment.
18. RETURN OF MATERIALS. Employee shall return to Employer promptly at its
request all materials furnished to Employee by Employer and all materials
prepared by Employee that contain Confidential Material together with all copies
thereof.
19. NOTICES. Any notice or other communication required or permitted
hereunder shall be sufficient if given in writing and delivered personally or
mailed by registered or certified mail, return receipt requested, postage
7
<PAGE>
prepaid and addressed to the parties at the addresses listed below. Either party
may designate a different address by notice so given.
Employer: Christine Aguilera, Esq.
General Counsel
SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Employee: Mr. Curtis D. Brown
200 Diplomat Drive
Mt. Kisco, New York 10549
With a
copy to: Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Attn: Kristopher D. Brown, Esq.
20. ARBITRATION. To the extent permitted by applicable law, all disputes
arising from or in connection with this Agreement will be finally settled by
arbitration. The arbitration will be held in Maricopa County, Arizona, in
accordance with arbitration rules of the American Arbitration Association, by an
arbitrator mutually agreed upon by the parties. The parties agree that judgment
upon the award return by the arbitrator may be entered in any court having
jurisdiction thereof.
21. GOVERNING LAW AND CHOICE OF FORUM. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Arizona without regard to its conflicts of law principles. The
parties agree that any legal suit, action or proceeding arising out of or
related to this Agreement shall be instituted in a state or federal court of
competent jurisdiction located in Maricopa County, Arizona. The parties accept
the exclusive jurisdiction of the aforesaid courts, and irrevocably agree to be
bound by any judgment rendered by said courts in connection with this Agreement.
All costs incurred in connection with any such suit, action or proceeding shall
be borne by the non-prevailing party.
22. INDEMNIFICATION OF EMPLOYEE. Employer and Employee will enter into
Employer's standard form Indemnification Agreement, a copy of which is attached
hereto as Exhibit A.
23. SEVERABILITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
24. AMENDMENT. This Agreement shall not be modified, amended or rescinded
except by written instrument duly executed by Employee and Employer.
8
<PAGE>
25. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
26. CAPTIONS AND HEADINGS. The captions and headings of this Agreement are
for convenience of reference only and shall not be considered to be a part of
this Agreement, affect the meaning or interpretation of this Agreement, or be
used in determining the intent of the parties.
27. SURVIVAL. The provisions of paragraphs 15 and 16 of this Agreement
shall remain in full force and effect following the termination of Employee's
employment or the termination of this Agreement, for the periods set forth
therein.
28. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be enforceable by Employer's successors and assigns, and is fully assignable
by Employer to any of Employer's current or future affiliates and subsidiaries.
29. ENTIRE AGREEMENT. Except as stated herein, this Agreement sets forth
the entire understanding of the parties hereto with respect to the subject
matter hereof.
SKYMALL, INC.,
A NEVADA CORPORATION
By: /s/ Robert M. Worsley Date: 1/15/99
--------------------------------- ----------------------
Robert M. Worsley
Its: President and CEO
/s/ Curtis D. Brown Date: 1/14/99
- ------------------------------------- ----------------------
Curtis D. Brown
9
<PAGE>
Exhibit A
INDEMNITY AGREEMENT
By this Indemnity Agreement (this "Agreement"), SkyMall, Inc., a Nevada
corporation , and its wholly-owned subsidiary, SkyMall.com (collectively, the
"Company"), and the undersigned officer ("Officer") of the Company, warrant,
covenant and agree as follows:
WHEREAS, Officer is a senior executive of the Company and in such capacity
is performing a valuable service for the Company; and
WHEREAS, in order to induce Officer to serve as an officer of the Company,
the Company desires to enter into this contact with Officer.
NOW, THEREFORE, in consideration of Officer's continued service as an
officer after the date hereof, the parties hereto agree as follows:
1. INDEMNIFICATION OF OFFICER. Subject to Section 2 below, the Company shall
hold harmless and indemnify Officer against any and all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by Officer in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, to which Officer is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Officer is, was or at
any time becomes a director, officer, employee or agent of the Company, or is or
was serving or at any time serves at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the extent currently set forth in the Company's
Bylaws, a copy of which is attached as Exhibit "A." No amendment or termination
of the Company's Articles of Incorporation or the Bylaws shall affect or
terminate the contracted rights granted to the Officer hereunder.
2. LIMITATIONS ON INDEMNIFICATION. No indemnity pursuant to Section 1 hereof
shall be paid by the Company:
(a) Except to the extent the aggregate of losses to be indemnified
hereunder exceeds the amount of the losses for which the Officer is indemnified
pursuant to any policy of insurance purchased and maintained by the Company;
(b) In respect to remuneration paid to Officer if it shall be determined
by a final judgment or other final adjudication that such remuneration was in
violation of law;
(c) On account of any suit in which final judgment is rendered against
Officer or an accounting of profits made from the purchase or sale by Officer of
securities of the Company pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions of
any law; or
<PAGE>
(d) If a final adjudication by a Court having jurisdiction in the matter
establishes that Officer's acts or omissions involved intentional misconduct,
fraud or a knowing violation of the law and was material to the cause of action.
3. CONTINUATION OF INDEMNIFICATION. All obligations of the Company hereunder
shall continue during the period Officer is a director, officer, employee or
agent of the Company (or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) and shall continue thereafter so long as
Officer shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Officer was a director of the Company or serving in
any other capacity referred to herein.
4. NOTIFICATION AND DEFENSE OF CLAIM. Officer shall promptly notify the
Company of any matter which is or may be the subject of any indemnification
claim hereunder. Promptly after receipt by Officer of notice of the commencement
of any action, suit or proceeding, Officer will notify the Company thereof. With
respect to any such action, suit or proceeding:
(a) The Company will be entitled to participate therein at its own
expense;
(b) Except as otherwise provided below, to the extent that it may wish,
the Company, jointly with any other indemnifying party may assume the defense
thereof, with counsel reasonably satisfactory to Officer. After notice from the
Company to Officer of its election so to assume the defense thereof, the Company
will not be liable to Officer for any legal or other expenses subsequently
incurred by Officer in connection with the defense thereof other than reasonable
costs of investigation or as otherwise provided below. Officer shall have the
right to employ counsel in such action, suit or proceeding, but the fees and
expenses of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at the expense of Officer unless (i)
the employment of counsel by Officer has been authorized by the Company, (ii)
Officer shall have reasonably concluded that there may be a material conflict of
interest between the Company and Officer in the conduct of the defense of such
action or (iii) the Company shall not in fact have employed counsel to assume
the defense of such action, in each of which cases the fees and expenses of
counsel shall be borne by the Company. The Company shall not be entitled to
assume the defense of any action, suit or proceeding brought by or on behalf of
the Company or as to which Officer shall have made the determination provided
for in (ii) above.
(c) The Company shall not be liable to indemnify Officer under the
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim in
any manner which would impose any material penalty or limitation on Officer
without Officer's consent. Neither the Company nor Officer will unreasonably
withhold its or his consent to any settlement proposed by the other of any
matter for which indemnity is provided hereunder, including any settlement
including a penalty or limitation on the Officer.
5. PREPAID EXPENSES. The expenses (including attorneys' fees) incurred by
Officer in investigating, defending, or appealing any threatened, pending or
completed action, suit or proceeding covered hereunder, whether civil criminal,
2
<PAGE>
administrative or investigative, including without limitation any action by or
in the right of the Company (other than expenses to be paid directly by the
Company in assuming the defense of any matter covered hereby under Section 4(b)
hereof), shall be paid in advance by the Company.
6. REPAYMENT OF EXPENSES. Officer shall reimburse the Company for all expenses
paid by the Company in defending any civil or criminal action, suit or
proceeding against Officer in the event and only to the extent that is shall be
finally determined that Officer is not entitled to be indemnified by the Company
for such expenses under the Agreement or otherwise.
7. OTHER RIGHTS AND REMEDIES. The rights provided by any provision of this
Agreement shall not be deemed exclusive or any other rights to which Officer may
be entitled under any provision of law, any Articles, any Bylaw, this or other
agreement, vote of Stockholders or otherwise, both as to action in his official
capacity and as to action in another capacity while occupying any of the
positions or having any of the relationships referred to in Section 1 of this
Agreement, and shall continue after Officer has ceased to occupy such position
or have such relationship.
8. ENFORCEMENT. In the event Officer is required to bring any action to
enforce rights or to collect monies due under this Agreement and is successful
in such action, Company shall reimburse Officer for all of Officer's reasonable
fees and expenses in bringing and pursuing such action.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate and
distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof.
10. MISCELLANEOUS. This Agreement shall be interpreted and enforced in
accordance with the laws of Nevada. This Agreement shall be binding upon Officer
and upon Company, its successors and assigns, and shall inure to the benefit of
Officer, his heirs, personal representatives and assigns and to the benefit of
the Company, its successors and assigns. No amendment, modification, termination
or cancellation of this Agreement, other than pursuant to Section 9, shall be
effective unless in writing signed by both parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
January 14, 1999.
SKYMALL, INC.
By: /s/ Robert M. Worsley
---------------------------------
Name: Robert M. Worsley
Title: CEO
OFFICER
/s/ Curtis D. Brown
- -------------------------------------
Name: Curtis D. Brown
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,560
<SECURITIES> 0
<RECEIVABLES> 6,458
<ALLOWANCES> 1,450
<INVENTORY> 679
<CURRENT-ASSETS> 13,845
<PP&E> 6,810
<DEPRECIATION> 349
<TOTAL-ASSETS> 25,151
<CURRENT-LIABILITIES> 11,698
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 13,215
<TOTAL-LIABILITY-AND-EQUITY> 25,151
<SALES> 9,964
<TOTAL-REVENUES> 13,142
<CGS> 6,489
<TOTAL-COSTS> 10,183
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 370
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (3,405)
<INCOME-TAX> (1,318)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,087)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
