================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 000-21657
SkyMall, Inc.
(Exact name of Registrant as specified in its charter)
NEVADA 86-0651100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1520 EAST PIMA STREET, PHOENIX, ARIZONA 85034
(Address of principal executive offices) (Zip Code)
(602) 254-9777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 10, 2000, there were 15,817,420 shares of the Common
Stock, $.001 par value, of the Company outstanding and no shares of preferred
stock outstanding.
================================================================================
<PAGE>
SkyMall, Inc.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2000
and December 31, 1999........................................ 3
Condensed Consolidated Statements of Operations - Three
and Nine months ended September 30, 2000 and 1999............ 4
Condensed Consolidated Statements of Cash Flows - Nine
Months ended September 30, 2000 and 1999..................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 27
PART II: OTHER INFORMATION
Item 1. Legal Proceedings............................................... 29
Item 2. Changes in Securities and Use of Proceeds....................... 29
Item 3. Defaults Upon Senior Securities................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............. 31
Item 5. Other Information............................................... 32
Item 6. Exhibits and Reports on Form 8-K................................ 32
Signatures............................................................... 33
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SkyMall, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
September 30, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 8,313 $ 16,060
Accounts receivable, net 5,796 11,994
Inventory 756 1,300
Income tax receivable 18 968
Prepaid catalog costs and other 2,943 2,914
-------- --------
Total current assets 17,826 33,236
Property and equipment, net 11,703 12,869
Goodwill, net 2,663 2,817
Other assets, net 1,140 1,327
-------- --------
Total assets $ 33,332 $ 50,249
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,667 $ 24,136
Accrued liabilities 2,226 3,979
Unearned revenue 538 1,298
Current portion of notes payable
and capital leases 8,417 28
Current portion of restructuring reserve 195 0
-------- --------
Total current liabilities 27,043 29,441
Notes payable and capital leases, net
of current portion 180 5,190
Non-current portion of restructuring reserve 384 0
-------- --------
Total liabilities 27,607 34,631
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock 16 13
Additional paid-in capital 41,173 33,884
Accumulated deficit (35,464) (18,279)
-------- --------
Total shareholders' equity 5,725 15,618
-------- --------
Total liabilities and shareholders' equity $ 33,332 $ 50,249
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SkyMall, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Merchandise sales, net $ 11,984 $ 12,337 $ 40,779 $ 35,077
Placement fees and other 4,316 4,058 12,510 12,729
----------- ----------- ----------- -----------
Total revenues 16,300 16,395 53,289 47,806
COST OF GOODS SOLD 9,047 9,213 31,502 26,736
----------- ----------- ----------- -----------
Gross margin 7,253 7,182 21,787 21,070
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Media expenses 2,694 3,686 8,986 8,825
Selling expenses 1,020 1,219 3,123 3,190
Customer service and fulfillment expenses 1,146 1,441 4,019 4,524
General and administrative expenses 4,742 7,234 19,841 22,474
Restructuring charge -- -- 2,595 --
----------- ----------- ----------- -----------
Total operating expenses 9,602 13,580 38,564 39,013
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (2,350) (6,398) (16,777) (17,943)
Interest expense 230 129 605 150
Interest and other income 137 39 195 182
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (2,442) (6,488) (17,187) (17,911)
Income tax benefit -- (3,044) -- (6,957)
----------- ----------- ----------- -----------
NET LOSS $ (2,442) $ (3,444) $ (17,187) $ (10,954)
=========== =========== =========== ===========
BASIC NET LOSS PER COMMON SHARE $ (0.15) $ (0.38) $ (1.22) $ (1.22)
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,817,420 9,027,000 14,031,358 8,959,000
=========== =========== =========== ===========
DILUTED NET LOSS PER COMMON SHARE $ (0.15) $ (0.38) $ (1.22) $ (1.22)
=========== ========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,817,420 9,027,000 14,031,358 8,959,000
=========== ========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
SkyMall, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended
September 30,
---------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,187) $ (10,954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,051 1,475
Changes in operating assets and liabilities (2,786) (818)
----------- -----------
Net cash used in operating activities (16,922) (10,297)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,491) (6,243)
----------- -----------
Net cash used in investing activities (1,491) (6,243)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
and warrants 7,292 2,175
Proceeds from notes payable 4,400 7,400
Payments on notes payable and capital
leases, net (1,026) (41)
----------- -----------
Net cash provided by financing activities 10,666 9,534
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (7,747) (7,006)
CASH AND CASH EQUIVALENTS,
beginning of period 16,060 7,951
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 8,313 $ 945
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
SkyMall, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30 2000
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
SkyMall, Inc. (the Company) was incorporated in 1989 as an Arizona
corporation (and reincorporated in Nevada in October 1996). The Company is a
multi-channel specialty retailer that markets high quality products and services
via various media, including the SkyMall in-flight print catalogs, workplace
catalogs and on the Internet at www.skymall.com and www.durham.skymall.com. The
Company maintains minimum levels of inventory related to products sold through
the Company's channels. Substantially all products displayed in the Company's
in-flight print catalogs and the Company's Web site are acquired from
participating merchants when a customer places an order with the Company.
CONSOLIDATION
The condensed consolidated financial statements include the accounts
of SkyMall, Inc. and its wholly-owned subsidiaries, skymall.com, inc., Durham &
Company, Disc Publishing, Inc., SkyMall Ventures, inc. and SkyMall Media
Ventures, Inc., and include all adjustments and reclassifications necessary to
eliminate the effect of significant inter-company 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 fiscal year ended
December 31, 1999. The condensed consolidated results of operations for the
three-month and nine-month periods ended September 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - RESTRUCTURING CHARGE
In April 2000, the Company began execution of a plan to reduce costs
and improve profitability, which resulted in the Company recording a one-time
restructuring expense totaling $2.6 million in the second fiscal quarter ended
June 30, 2000, of which $228,000 relates to non-cash transactions relating to
the write-off of assets.
6
<PAGE>
Approximately $2.0 million of the total restructuring charge has been
paid through September 30, 2000. The remaining charge has been classified in
current and non-current liabilities on the Consolidated Balance Sheet and will
be funded through cash provided by operating activities.
Of the total restructuring charge taken in June, 2000, $1.0 million
related to plans to discontinue various catalog programs that had not been
profitable to the Company, including the international catalog program, as well
as other specialty catalog programs. This part of the plan has been executed and
completed. The ability to order products with international shipping
destinations will continue to be available through the existing business
infrastructure. Under the restructuring plan, the Company eliminated
approximately 53 employees and 15 outside contractors in April 2000, resulting
in a charge of $687,000. This cost included special termination benefits related
to the reduction in force. The Company has also consolidated operations
previously located in New York and Utah to Phoenix resulting in closure and
other payroll costs of $839,000, which have been included in restructuring
charges. The elimination of these locations has not resulted in a
discontinuation of product lines, but has, instead, consolidated management and
day-to-day operational control.
NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share is based upon the weighted average
shares outstanding. Outstanding stock options and warrants are treated as common
stock equivalents, but are anti-dilutive, for purposes of computing diluted net
loss per common share. There is no difference between basic and diluted weighted
average shares outstanding. The following is a summary of the computation of
basic and diluted net loss per common share (amounts in thousands except shares
and per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic net income (loss) per common share:
Net income (loss) $ (2,442) $ (3,444) $ (17,187) $ (10,954)
=========== =========== =========== ===========
Weighted average common shares 15,817,420 9,027,000 14,031,358 8,959,000
=========== =========== =========== ===========
Basic per share amount $ (0.15) $ (0.38) $ (1.22) $ (1.22)
=========== =========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Diluted net income (loss) per common share:
Net income (loss) $ (2,442) $ (3,444) $ (17,187) $ (10,954)
=========== =========== =========== ===========
Weighted average common shares 15,817,420 9,027,000 14,031,358 8,959,000
Options and warrants assumed exercised -- -- -- --
----------- ----------- ----------- -----------
Total common shares plus assumed
exercises 15,817,420 9,027,000 14,031,358 8,959,000
Diluted per share amount $ (0.15) $ (0.38) $ (1.22) $ (1.22)
=========== =========== =========== ===========
</TABLE>
As a result of anti-dilutive effects, approximately 32,789 and 87,624
employee options and other common stock equivalents were not included in the
computation of diluted earnings per share for the three-month and nine-month
periods ended September 30, 2000, respectively.
NOTE 4 - SEGMENT AND RELATED INFORMATION
The Company is a multi-channel specialty retailer that provides a large
selection of premium-quality products and services to consumers from a wide
variety of merchants and partners. The Company's operations are classified into
two reportable business segments: business-to-consumer and business-to-business.
Business initiatives for the Company's two reportable business segments are
managed separately while support functions are combined.
The business-to-consumer segment provides retail merchandise service
through the Company's in-flight catalogs placed in domestic airlines and through
the Company's Web site. The business-to-business segment provides retail
merchandise services, employee logo and corporate recognition merchandise and
advertising media to other businesses through loyalty programs, workplace
catalogs, and the Company's web sites. Previously, the Company defined its
reportable business segments by in-flight catalog, workplace catalog and Web
site. All periods presented have been adjusted to reflect the new reportable
business segments.
The Company evaluates the performance of its segments based on revenues
and gross margins. Operating expenses are included with corporate expense and
are not allocated to the business segments. The accounting policies of the
reportable segments are the same as those used in the consolidated financial
statements and described in Note 1 of these condensed consolidated financial
statements. Inter-segment transactions are not significant.
Revenues and gross margin for the Company's reportable segments for the
three months and nine months ended September 30, 2000 and 1999 are shown in the
following tables (amounts in thousands):
8
<PAGE>
Three Months Ended Business-to- Business-to-
September 30, Consumer Business Corporate Total
--------------------------------------------------------------------------------
2000
Revenues $ 15,152 $ 1,148 $ -- $ 16,300
Gross margin $ 6,776 $ 477 $ -- $ 7,253
Operating expenses $ -- $ -- $ 9,603 $ 9,603
Loss from operations $ (2,350)
--------------------------------------------------------------------------------
1999
Revenues $ 14,877 $ 1,518 $ -- $ 16,395
Gross margin $ 6,519 $ 663 $ -- $ 7,182
Operating expenses $ -- $ -- $ 13,580 $ 13,580
Loss from operations $ (6,398)
--------------------------------------------------------------------------------
Nine Months Ended Business-to- Business-to-
September 30, Consumer Business Corporate Total
--------------------------------------------------------------------------------
2000
Revenues $ 47,241 $ 6,048 $ -- $ 53,289
Gross margin $ 19,926 $ 1,861 $ -- $ 21,787
Operating expenses $ -- $ -- $ 38,564 $ 38,564
Loss from operations $ (16,777)
--------------------------------------------------------------------------------
1999
Revenues $ 44,211 $ 3,595 $ -- $ 47,806
Gross margin $ 19,570 $ 1,500 $ -- $ 21,070
Operating expenses $ -- $ -- $ 39,013 $ 39,013
Loss from operations $ (17,943)
--------------------------------------------------------------------------------
Identifiable assets available to support the Company's
business-to-business segment approximate $4.5 million and $4.3 million at
September 30, 2000 and 1999, respectively. The remaining assets which are
combined to support the Company's two reportable business segments, approximate
$28.8 million and $29.3 million at September 30, 2000 and 1999, respectively.
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133 - Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
In June 1999, the FASB issued SFAS 137 - Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133. This statement deferred the effective date of SFAS No. 133 to the Company's
quarter ending January 1, 2001. The Company is currently evaluating the impact
of SFAS 133 on its future results of operations and financial position.
9
<PAGE>
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 $776,000 and $2.2 million during the three months ended
September 30, 2000 and 1999, respectively, and $1.5 million and $3.3 million for
the nine months ended September 30, 2000 and 1999, respectively.
The Company follows the guidance of Accounting Principles Board ("APB")
Opinion No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS." This APB opinion
provides guidance on accounting for transactions that involve primarily an
exchange of non-monetary assets, liabilities or services ("barter
transactions"). Placement fees and other revenues include barter revenues, which
represent an exchange by SkyMall of advertising space in its print and
e-commerce media for reciprocal services, including print and e-commerce
advertising. Revenues and expenses from barter transactions are recorded at the
lower of estimated fair value of the services received or delivered. The Company
did not recognize any revenue or expenses from barter transactions during the
three months and nine months ended September 30, 2000. Barter revenues and
expenses recognized during the three months and nine months ended September 30,
1999 were $292,000 and $600,000 respectively.
On December 3, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, which provides additional guidance in applying generally accepted
accounting principles for revenue recognition in consolidated financial
statements. The issuance of SAB No. 101 did not have a material impact on the
revenue recognition method of the Company.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition and should be read in
conjunction with the attached Condensed Consolidated Financial Statements and
Notes thereto and with the Company's audited Consolidated Financial Statements,
the Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations relating thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Unless the context indicates otherwise, the terms "SkyMall," the
"Company," "we," "us" or "ours" refer to SkyMall, Inc. and its subsidiaries,
skymall.com, inc., Durham & Company, Disc Publishing, Inc., SkyMall Ventures,
Inc. and SkyMall Media Ventures, Inc.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, in future filings by the Company with
the Securities and Exchange Commission and in the Company's written and oral
statements made by or with the approval of an authorized executive officer,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. These statements discuss, among other items, the
Company's growth strategy and anticipated trends in its 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, 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
Founded in 1989, SkyMall(R) is a multi-channel specialty retailer that
provides a large selection of premium-quality products and services to consumers
from a wide variety of merchants and partners. SkyMall is best known for its
in-flight catalog, which is available on more than 70% of all domestic airlines,
reaching approximately 500 million domestic airline passengers annually. Through
its skymall.com, inc. subsidiary, SkyMall offers an expanded selection of
11
<PAGE>
products and services to online shoppers. SkyMall provides a merchandise
redemption program for a number of loyalty programs, allowing consumers to
purchase SkyMall merchandise with loyalty points earned in other programs.
Through Durham & Company, a SkyMall subsidiary, SkyMall offers high-quality logo
merchandise via its catalogs, workplace initiatives and the durham.skymall.com
Web site.
Our principal executive offices are located at and our mailing address
is 1520 East Pima Street, Phoenix, Arizona 85034. Our telephone number is (602)
254-9777.
OUR OPERATIONS
SkyMall operates two distinct business segments, which include its
business-to-consumer and business-to-business initiatives. The
business-to-consumer segment provides retail merchandise service through the
Company's in-flight catalogs placed in domestic airlines and through the
Company's Web site. The business-to-business segment provides retail merchandise
services, employee logo and corporate recognition merchandise and advertising
media to other businesses through loyalty programs and catalogs, workplace
catalogs, and the Company's Web site.
During the nine months ended September 30, 2000, SkyMall restructured
and consolidated the operations of Disc Publishing, Inc., SkyMall Ventures, Inc.
and SkyMall Media Ventures, Inc. in an effort to reduce operating costs and
return to profitability in the fourth quarter of 2000. As part of such
restructuring, the Company has consolidated operations previously located in New
York and Utah to Phoenix. The consolidation of the operations of these
subsidiaries and the elimination of these locations has not resulted in a
discontinuation of product lines, but has, instead, consolidated management and
day-to-day operational control.
BUSINESS-TO-CONSUMER SEGMENT
OVERVIEW
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 by SkyMall, both in its
print catalogs and on its skymall.com(TM) Web site, is available from other
catalog and retail companies, each of these companies typically has its own
policies for shipping and handling charges, merchandise returns, sales taxes and
price guarantees, as well as its own Web site. In addition, each company
typically has different customer service hours and credit and payment policies.
By aggregating the merchandise of our various participating merchants into a
single location in our print catalog and on our Web site, we offer our customers
a diverse variety of products from numerous retailers and 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. Some of the
retailers who offer their products and/or services through our print catalogs or
on our Web site are: American Historic Society, Balducci's, Frontgate(R),
FTD.com, Hammacher Schlemmer(R), Improvements(R), Lillian Vernon(R), L.L.
Bean(R), Magellan's(R), Orvis(R), Plow & Hearth(R), Reliable Home Office, Seiko
Instruments, Successories(R), The Sharper Image(R), T. Shipley(R), and The Wine
Enthusiast(TM).
12
<PAGE>
PRINT MEDIA
GENERAL. We market our merchandise through a number of print media,
including our in-flight catalogs. 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. Our print media provides consumers with a
selection of only the best-selling products from our most well-known merchant
partners. This ensures that consumers quickly see the most popular items,
without having to review hundreds of items that may be of little interest.
Through our skymall.com Web site, we offer online consumers a larger product
selection.
SKYMALL DOMESTIC IN-FLIGHT CATALOGS. Our in-flight catalogs, which are
placed in airline seat pockets, are our largest distribution channel. Over the
past ten years, we have experienced substantial growth in our domestic in-flight
catalog business. We have exclusive agreements to place our catalogs on 18
airlines, making our catalogs available to approximately 500 million airline
passengers annually. These 18 airlines, which carried approximately 70% of all
domestic passengers in 1999, include America West Airlines, Continental
Airlines, Delta Air Lines, Northwest Airlines, Southwest Airlines, United
Airlines and US Airways. The Company's catalogs carry the SkyMall name on all
participating airlines, except US Airways, which offers the SkyMall catalog
under the name "Selections." 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. 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 revenues generated by the Company
from sales to that airline's passengers. Some agreements also require payment of
a minimum monthly commission or a boarding cost that reimburses the airline for
the increased fuel costs attributable to the weight of the catalogs. We believe
our relations with each of our airline partners are good.
OTHER PRINT MEDIA PROGRAMS. The SkyMall catalogs are also available on
certain Northeastern routes of Amtrak.
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. In
1999, we devoted substantial financial, marketing, technical and personnel
resources to further develop our electronic commerce initiatives. Our strategies
in this area included, among other things, (i) significantly improving the look
and feel, as well as the speed, performance and search functionality of our Web
sites, (ii) further development of our technology and other business
infrastructures used to convey orders and provide order status information to
our customers, (iii) conducting marketing and other promotional campaigns
through both online and off-line media designed to enhance brand awareness of
the SkyMall name and drive traffic to our Web site, (iv) significantly
increasing the selection and variety of products for our programs, and (v)
developing non-product travel-related content for our Web site that encourages
consumers to visit our site for information as well as shopping. In February
2000, we re-launched our Web site, skymall.com, representing the culmination of
our year-long technology development efforts. The new site includes both
improvements to the consumer shopping experience, as well as significant
13
<PAGE>
advances in the overall performance, speed and stability of the site. Our new
Web site is more consumer-friendly due to improved navigation capabilities, new
features and an enhanced search engine, which enables customers to search and
define their shopping needs. The most noticeable change for consumers is the
redesign of our home page, which is visually more appealing with key consumer
features prominently displayed. In addition, based on formal user testing
surveys, the flow of the user checkout process has been vastly simplified. In
addition, we have added e-reminders, e-cards and wishlist functionality,
together with a "specials" area, which features new promotions on a regular
basis to encourage consumers to return to the site to take advantage of special
offers.
INFLIGHTONLINE. In October 2000, SkyMall entered into an agreement with
inflightonline, a supplier of Web server software and Internet content to the
airline industry, which has plans to provide Internet access to passengers
onboard commercial airplanes. Once launched, the inflight online service will
feature SkyMall's online catalog.
BUSINESS-TO-BUSINESS SEGMENT
OVERVIEW
SkyMall's business-to-business segment provides unique solutions for
corporate clients. In particular, this segment offers retail merchandise
services through loyalty programs, workplace catalogs and the Company's various
Web sites. Through these initiatives, SkyMall offers custom solutions to loyalty
programs for redemption of program points for SkyMall merchandise. The workplace
catalog presents high-quality, customized logo merchandise. Additionally, the
skymall.com Web site provides our affiliate partners a mechanism to offer
products to their customer bases.
PRINT AND ELECTRONIC MEDIA
WORKPLACE MERCHANDISE CATALOGS. Through our subsidiary, Durham &
Company, a Utah corporation, acquired in October 1998, we offer logo merchandise
and recognition products to employees of a number of blue-chip organizations,
primarily through print catalogs and since September 1999, on the
durham.skymall.com Web site. Competing in the highly fragmented incentive
industry, Durham distinguishes itself by providing high-quality products and
excellent customer service and focuses its marketing efforts on large
organizations.
INCENTIVE AND LOYALTY PROGRAMS. In March 2000, SkyMall entered into an
agreement with The GM Card(R), a division of General Motors Corporation(R), to
provide a unique selection of merchandise to customers who use The GM Card(R)
and acquire The New GM CardSM, allowing its card members to redeem earnings for
non-vehicle offers including unique merchandise from skymall.com. In April 2000,
SkyMall entered into an agreement with employeesavings.com to join its network
of premium product and service providers offering exclusive savings to more than
1.4 million Fortune 1000 employees and their families, and an agreement with ISP
Channel, SoftNet Systems, Inc.'s wholly-owned broadband Internet
access-over-cable service provider, to provide e-commerce opportunities for its
customers by establishing a co-branded closed e-commerce link from ISP Channel
Neighborhood Web sites to SkyMall's skymall.com Web site. In May 2000, the
14
<PAGE>
Company entered into an agreement with Hilton Hotels Corporation to develop
co-branded retail and custom shopping solutions from Hilton's corporate website.
The travelers e-shop, which debuted at the beginning of June, consists of a
customized Internet shopping site from www.hilton.com. This "virtual mall"
allows customers to make purchases from a wide array of SkyMall's premier
merchants. Both Hilton and SkyMall promote the travelers e-shop program through
newsletters and brochures, e-mails, direct mail campaigns and other targeted
communications to their respective customers. Under the same agreement, the
Company's subsidiary, Durham & Company, will establish a separate Internet
portal for meeting planners, businesses, associations and other organizations to
purchase incentive awards and order corporate logo merchandise for the thousands
of meetings and conventions held at Hilton's portfolio of properties each year.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
REVENUES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Merchandise sales, net $11,984 (3)% $12,337
Placement fees and other $ 4,316 6% $ 4,058
Total revenues $16,300 (1)% $16,395
REVENUES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Merchandise sales, net $40,779 16% $35,077
Placement fees and other $12,510 (2)% $12,729
Total revenues $53,289 11% $47,806
Net merchandise sales are composed of the selling price of merchandise
and services sold by the Company, net of returns. A decline in net merchandise
sales in the three months ended September 30, 2000 reflects a decrease in
business-to-business sales of $391,000, while business-to-consumer sales
remained flat. Growth in net merchandise sales in the nine months ended
September 30, 2000 reflects an increase in business-to-business sales of $2.3
million and an increase in business-to-consumer sales of $3.4 million. Placement
fees and other are composed of fees paid by participating merchants to include
their products or advertisements in the Company's print and electronic media,
outbound shipping charges to customers and other revenues. Placement fees and
other increased by $258,000 or 6% for the three months ended September 30, 2000
and decreased by $219,000 or 2% for the nine months ended September 30, 2000.
15
<PAGE>
GROSS MARGIN FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Gross margin $ 7,253 0% $ 7,182
Gross margin percentage 44% 44%
GROSS MARGIN FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Gross margin $21,787 3% $21,070
Gross margin percentage 41% 44%
Gross margin consists of revenues less the cost of goods sold, which
consists of the cost of merchandise sold to customers as well as outbound and
inbound shipping costs. Gross margin remained level in absolute dollars, while
the gross margin percentage increased in the three months ended September 30,
2000, reflecting an improvement in the mix of variable commission and fixed
placement fee merchant agreements. Gross margin increased by $717,000 in
absolute dollars, while gross margin percentage decreased by three percentage
points in the nine months ended September 30, 2000. The decrease in gross margin
percent is partly attributable to the increase in volume generated through
variable commission agreements.
OPERATING EXPENSES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Media expenses $ 2,695 (27)% $ 3,686
Selling expenses $ 1,020 (16)% $ 1,219
Customer service and
Fulfillment expenses $ 1,146 (20)% $ 1,441
General and administrative
Expenses $ 4,742 (34)% $ 7,234
Restructuring charge $ 0 0% $ 0
16
<PAGE>
OPERATING EXPENSES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Media expenses $ 8,986 2% $ 8,825
Selling expenses $ 3,123 (2)% $ 3,190
Customer service and
Fulfillment expenses $ 4,019 (11)% $ 4,524
General and administrative
Expenses $19,841 (12)% $ 22,474
Restructuring charge $ 2,595 0% $ 0
Media expenses consist of the cost to produce and distribute our
in-flight print catalogs, loyalty print pieces and the CD-ROM and DVD product.
The media expenses decrease in the three months ended September 30, 2000 was
$991,000, of which $782,000 was due to a decrease in paper and processing costs,
a $95,000 increase was related to the CD and DVD programs and a $304,000
decrease related to expenses on discounted catalog programs. The media expenses
increase in the nine months ended September 30, 2000 was $161,000, of which
$216,000 was due to an increase in paper and processing costs, a $361,000
increase was related to the CD and DVD programs and a $416,000 decrease related
to expenses on discontinued catalog programs.
Selling expenses consist primarily of commissions paid to marketing
partners and are variable in nature. The decrease in selling expenses for the
three months and nine months ended September 30, 2000 reflects the elimination
of catalog programs with higher commission rates.
Customer service and fulfillment expenses consist of costs to maintain
a full-service customer contact and order fulfillment center that generally vary
in correlation to net merchandise sales. Customer service and fulfillment
decreased in absolute dollars and also decreased as a percent of net merchandise
sales for the three months ended September 30, 2000. Customer service and
fulfillment decreased in absolute dollars and as a percent of net merchandise
sales for the nine months ended September 30, 2000.
General and administrative expenses consist primarily of department
expenses, except customer service and fulfillment expenses, including payroll
and related costs, professional fees, marketing, information technology and
general corporate expenses. The decreases in general and administrative expenses
of $2.5 million for the three months ended September 30, 2000 are the result of
changes in the following areas: $1.5 million decrease in salaries, wages and
consulting expenses; $500,000 decrease in other general and administrative
expenses including travel and legal expenses; $850,000 decrease in marketing and
advertising expense; and $400,000 increase in depreciation primarily due to
investments in information technology made in 1999 that are now being
depreciated. The decreases in general and administrative expenses of $2.6
million for the nine months ended September 30, 2000 are a result of changes in
the following areas: $2.7 million decrease related to the sales tax litigation
settlement recorded in 1999; $1.2 million decrease in salaries and wages; $1.1
million decrease in other general administrative expenses including travel,
17
<PAGE>
legal and bad debt expense; $626,000 decrease in marketing and advertising
expense; $1.5 million increase in information technology development and support
due to capitalizable development projects in 1999 to maintain and support
programs in 2000; and $1.6 million increase in depreciation primarily due to
investments in information technology made in 1999 that are now being
depreciated.
INTEREST EXPENSE FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest expense $230 78% $129
INTEREST EXPENSE FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest expense $605 303% $150
Interest expense consists of interest paid on the various debt
obligations of the Company. The interest expense increase of $101,000 and
$455,000 for the three and nine months ended September 30, 2000, respectively,
is a result of additional borrowings primarily from the Company's revolving line
of credit.
INTEREST AND OTHER INCOME (EXPENSE) FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest and other income
(expense) $137 251% $ 39
INTEREST AND OTHER INCOME (EXPENSE) FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest and other income
(expense) $195 7% $182
18
<PAGE>
Interest and other income (expense) consist primarily of interest
income on cash and marketable securities and bank fees. Interest income
increased in the three and nine months ended September 30, 2000 due to higher
average account balances.
INCOME TAXES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Provision (benefit) for
Income taxes $0 0% $(3,044)
INCOME TAXES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Provision (benefit) for
Income taxes $0 0% $(6,957)
No income tax benefit was recorded in 2000. The income tax benefit for
1999 was due to operating losses for income tax purposes which were available to
carryback and apply against prior years taxable income resulting in an income
tax refund and carryforward to offset future taxable income. At September 30,
2000, the Company had net operating losses available for federal and state
income tax purposes of approximately $41 million. The Company's ability to
utilize its net operating losses to offset future taxable income may be limited
under provisions of the Internal Revenue Code due to changes in shareholder
ownership. A valuation allowance has been provided since the Company believes
the realizability of the deferred tax asset does not meet the more likely than
not criteria under SFAS No. 109. The Company's accumulated net operating losses
begin to expire in 2019.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's cash balance was $8.3 million
compared to $16.1 million at December 31, 1999.
Cash used in operating activities of $16.9 million and $10.3 million
for the nine months ended September 30, 2000 and 1999, respectively, was
primarily attributable to the net loss and a decrease in accounts payable,
accrued expenses and unearned revenue partially offset by a decrease in accounts
receivable.
Cash used in investing activities of $1.5 million and $6.2 million for
the nine months ended September 30, 2000 and 1999, respectively, was due to
investments in information technology.
Cash provided by financing activities of $10.7 million for the nine
months ended September 30, 2000 resulted primarily from net short-term debt
borrowings of $3.4 million, issuance of $5.0 million of common stock from the
19
<PAGE>
completion of a private placement in June 2000 with net proceeds of $4.4
million, and the exercise of stock options and warrants resulting in net
proceeds of $2.9 million. Cash provided by financing activities of $9.5 million
for the nine months ended September 30, 1999 resulted from the issuance of $2.1
million of common stock from the exercise of stock options and warrants and
long-term debt borrowings of $7.4 million.
WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS
At September 30, 2000, the Company had negative net working capital of
$9.2 million and cash and cash equivalents of $8.3 million. On June 30, 1999,
the Company secured a $10 million revolving line of credit at a bank, under the
terms of which $5 million was immediately available and the remaining $5 million
was to become available, subject to certain conditions, upon the Company raising
a minimum of $15 million in subordinated debt and/or equity. In the fourth
quarter of 1999, the Company raised approximately $25 million in a series of
private equity transactions, resulting in the entire $10 million being available
to the Company under such credit line that becomes due in May 2001. As of
September 30, 2000, a total of $8.4 million had been drawn on the line of
credit. At September 30, 2000 the most restrictive provision of the Company's
borrowing arrangements was the senior debt to capital ratio requirements of at
least 50%. At September 30, 2000, the Company's senior debt to capital ratio was
59%. The Company received waivers from its lender addressing the deficiency.
The Company complied with all other debt covenants as of September 30, 2000.
On November 4, 1999, the Company completed a private placement of
approximately $8 million in shares of the Company's common stock and warrants to
purchase additional shares of common stock (the "November Private Offering"). In
December 1999, the Company completed two additional private placements, the
first for approximately $9.1 million in shares of Series A Junior Convertible
Preferred Stock ("Series A Preferred") of the Company (the "Series A Private
Offering") and the second for approximately $8 million in shares of Series B
Junior Convertible Preferred Stock ("Series B Preferred") of the Company (the
"Series B Private Offering"). The shares of Series A and Series B Convertible
Preferred Stock were automatically convertible into shares of common stock upon
approval by the Company's shareholders. On March 10, 2000, the Company held a
special meeting of shareholders and received approval from the shareholders to
convert the Series A and Series B Preferred into 1,304,571 and 1,142,857 shares
of common stock, respectively. The accompanying consolidated financial
statements have been adjusted to reflect the conversion of the Series A and
Series B Preferred into common stock as of December 31, 1999. In addition, on
June 30, 2000, the Company completed a private placement of approximately $5
million in shares of the Company's common stock (the "June 2000 Private
Offering"). See Part II, Item 2, "CHANGES IN SECURITIES AND USE OF PROCEEDS" for
complete details regarding the Private Offerings. The funds received from the
Private Offerings will be used for working capital purposes.
The Company plans to finance its working capital needs and capital
expenditures through a combination of funds from operations and its existing
bank line of credit. 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
20
<PAGE>
impact or may have a significant impact on the Company's business, prospects,
financial condition and results of operations.
WE REPORTED LOSSES IN FISCAL 1999 AND THE FIRST NINE MONTHS OF FISCAL
2000. While we have been profitable in the past, we incurred a net loss of
approximately $24.1 million for the fiscal year ended December 31, 1999, and net
losses of approximately $7.4 million, $7.3 million and $2.4 million for the
fiscal quarters ended March 31, June 30, and September 30, 2000, respectively.
We expect to experience fluctuations in our future operating results due to a
variety of factors, many of which are outside the Company's control, including
the following:
o the demand for our products and services,
o the level of competition in the merchants we serve,
o our success in maintaining and expanding our distribution channels,
o our success in attracting and retaining motivated and qualified
personnel,
o our development and marketing of new products and services,
o our ability to control costs, and
o general economic conditions.
Our operating results will be materially and adversely affected if we do not
successfully address these and other risks.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL. Our existing line of
credit and cash resources may not be sufficient to permit the Company to fully
implement its business plan. In order to fully implement our business plan, we
may need to raise additional capital from third parties or otherwise secure
additional financing for the Company. There can be no assurance that the Company
will be able to successfully raise additional capital or secure other financing,
or that such funding will be available on terms that are favorable to the
Company. To the extent we are unable to raise sufficient additional capital or
secure other financing, this could have a material adverse effect on the
Company. In addition, our line of credit with our bank becomes due in May 2001.
If we are unable to repay this debt or renegotiate the terms of this loan, this
could have a material adverse effect on the Company.
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 $78.9 million in 1999. 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:
o our ability to select products that appeal to our customer base
and effectively market them to our target audience,
o sustained or increased levels of airline travel, particularly in
domestic airline markets,
o increasing adoption by consumers of the Internet for shopping,
21
<PAGE>
o the continued perception by participating merchants that we offer
an effective marketing channel for their products and services, and
o our ability to attract, train and retain qualified employees and
management.
There can be no assurance that we will be able to successfully implement our
growth strategy.
OUR FUTURE GROWTH IS IN PART DEPENDENT UPON THE CONTINUED GROWTH OF THE
ELECTRONIC COMMERCE MARKET. The market for the sale of products and services
over the Internet is a new and rapidly evolving market. Our future growth
strategy is partially dependent upon the widespread acceptance and use of online
services as an avenue for retail purchases. There is no assurance that consumers
will continue to make purchases over the Internet in the future. In order for us
to grow our online customer base, we will need to attract purchasers who have
historically relied upon traditional venues for making their retail purchases.
If use of online services does not continue to grow as expected, or if the
technological infrastructure for the Internet is unable to effectively support
its growing use, our growth strategy, business and financial condition 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. There is no assurance that our current personnel,
systems, procedures and controls will be adequate to support our future
operations, that we will be able to 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 future growth, our business and financial
condition could be adversely affected.
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 and TWA currently offer merchandise catalogs to their
customers through a competitor. 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. 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 financial and other 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. Some of our agreements with our channel partners are
short-term allowing the partner to terminate the relationship on 90 days'
advance notice. There is no assurance that our channel partners will continue
22
<PAGE>
their relationships with us, and the loss of one or more of our significant
channel partners could have a material adverse effect on our business,
prospects, financial condition and results of operations.
WE MAY BE UNABLE TO MAINTAIN HISTORICAL MARGIN LEVELS. We may be unable
to increase or maintain our gross margins at historical levels, particularly for
our electronic commerce initiatives. As competition in online shopping
intensifies, our merchant participants may be unable or unwilling to participate
in our programs when more favorable economic arrangements may be available from
other third parties. Although many of our merchants have participated with us
for several years, most of our relationships are short-term and may be
re-negotiated by the merchant every 90 days. To the extent our gross margins
decline from historical levels, our business, prospects, 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 we purchase from program
participants. 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 business, prospects, 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 and airline fuel markets 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 business,
prospects, 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 business,
prospects, financial condition and results of operations.
WE FACE RISKS ASSOCIATED WITH ONLINE SECURITY BREACHES OR FAILURES. In
order to successfully make sales over the Internet, it is necessary that we can
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
23
<PAGE>
making purchases over the Internet is not secure, even if unfounded, may 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.
WE MAY NOT BE ABLE TO ADAPT TO RAPIDLY CHANGING TECHNOLOGIES OR WE MAY
INCUR SIGNIFICANT COSTS IN DOING SO. The Internet is characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing customer demands. As a result of the rapidly
changing nature of the Internet business, we may be subject to risks, now and in
the future, of which we are not currently aware. To be successful, we must adapt
to our rapidly evolving market by continually enhancing our products and
services and introducing new products and services to address our customers'
changing and increasingly sophisticated requirements. We may use new
technologies ineffectively or we may fail to adapt our e-commerce
transaction-processing systems and infrastructure to meet customer requirements,
competitive pressures, or emerging industry standards. We could incur
substantial costs if we need to modify our services or infrastructure. Our
business could be materially and adversely affected if we incur significant
costs to adapt, or cannot adapt, to these changes.
BECAUSE WE DEPEND ON COMPUTER SYSTEMS, A SYSTEMS FAILURE WOULD CAUSE A
SIGNIFICANT DISRUPTION TO OUR BUSINESS. Our business, financial condition and
results of operations could be materially and adversely affected by any event
that interrupts or delays our operations. Our business depends on the efficient
and uninterrupted operation of our servers and communications hardware systems
and infrastructure. Any sustained or repeated systems interruptions that cause
our Web sites to become unavailable for use would result in our inability to
service our customers. While we have taken precautions against systems failure,
interruptions could result from our failure to maintain our computer systems and
equipment in effective working order, as well as natural disasters, power loss,
telecommunications failure, and similar events. We currently maintain our
computer systems at offices located in Arizona.
In addition, our users depend on telecommunications providers, Internet
service providers, and network administration for access to our products and
services. Our systems and equipment could experience outages, delays, and other
difficulties as a result of system failures unrelated to our systems.
OUR EQUIPMENT MAY BE UNABLE TO SUPPORT INCREASED VOLUME. Growth in the
number of users accessing our Web site may strain or exceed the capacity of our
computer and networking systems or the systems of our third party service
providers, which could result in impaired performance or systems failure. If
this occurs, customer service and satisfaction may suffer, which could lead to
dissatisfied users, reduced traffic, and an adverse impact on our business. Our
current systems may be inadequate to accommodate rapid traffic growth on our
servers.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION. Due to the
increasing popularity and use of the Internet, governmental or other regulatory
bodies in the United States and abroad may adopt additional laws and regulations
with respect to the Internet that cover issues such as content, privacy,
pricing, encryption standards, consumer protection, cross-border commerce,
24
<PAGE>
electronic commerce, taxation, copyright infringement, and other intellectual
property issues. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, content, taxation, defamation, and
personal privacy is uncertain. Any new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase our cost of doing business or increase our legal exposure. We currently
are not subject to direct regulation by any governmental agency other than laws
and regulations generally applicable to businesses and specifically, mail order
businesses. We cannot predict the impact, if any, that any future regulatory
changes or development may have on our business, financial condition, and
results of operations. Changes in the regulatory environment relating to the
Internet could have a material adverse effect on our business, financial
condition, and results of operations.
SECURITY PROTECTION FOR OUR NETWORK MAY BE INSUFFICIENT. We believe
that concern regarding the security of confidential information, such as credit
card numbers, prevents many people from engaging in online commercial
transactions. We face potential security breaches from within our organization
and from the public at large. If we do not maintain sufficient security, we may
be subject to additional legal exposure. We have taken measures to protect the
integrity of our infrastructure and the privacy of confidential information
contained within our infrastructure. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
Although we intend to continue to implement security measures, such measures
have been circumvented in the past and we cannot provide assurance that measures
we implemented will not be circumvented in the future. Although we do have
"firewalls" protecting our systems from outside circumvention, such "firewalls"
do not completely protect our systems from our own employees, should one or more
of them become inclined to inflict damage upon our systems. We may be required
to make significant additional investments and efforts to protect against or
remedy security breaches. Security breaches that result in access to
confidential information could damage our reputation and expose us to a risk of
loss or liability. Alleviating problems caused by computer viruses or other
inappropriate uses or security breaches may require interruptions, delays, or
cessation in service to our customers. In addition, since we expect that our
users will increasingly use the Internet for commercial transactions in the
future, any malfunction or security breach could cause these transactions to be
delayed, not completed at all, or completed with compromised security.
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 1999, approximately 42% of our net
merchandise sales were generated in the fourth quarter. Any substantial decrease
in sales for the fourth quarter could have a material adverse effect on our
results of operations.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS. Our catalogs and our
electronic commerce sites feature products and services from numerous
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
25
<PAGE>
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 CERTAIN KEY PERSONNEL. We depend on the continued services
of Robert M. Worsley, our chairman 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, WAND PARTNERS INC. AND/OR RS INVESTMENT MANAGEMENT L.P.
CAN CONTROL MANY IMPORTANT COMPANY DECISIONS. As of November 10, 2000, Mr.
Worsley and his wife (the "Worsleys") beneficially owned 4,830,280 shares, or
approximately 30.5% of our outstanding common stock, and Wand Partners Inc.
beneficially owned 2,114,286 shares, or approximately 13.4% of our outstanding
common stock. David J. Callard, the President of Wand Partners Inc., and Mr.
Worsley are members of the Board of Directors of the Company. In addition, RS
Diversified Growth Fund, The Paisley Fund, The Paisley Pacific Fund, London
Pacific Diversified Growth Fund and Nvest Diversified Growth Fund (collectively,
the "RS Entities") as a group, own a total of 2,517,700 shares of Common Stock
of the Company, or 15.9% as of November 10, 2000. RS Investment Management L.P.,
as the holding company of the various RS Entities, beneficially controls such
shares. As a result, the Worsleys, Wand Partners and RS Investment Management
L.P. 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, Wand Partners and RS
Investment Management L.P. may also discourage or prevent any proposed takeover
of the Company pursuant to a tender offer.
THE PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE. The market price
of our common stock has been highly volatile. Occurrences that could cause the
trading price of our common stock to fluctuate dramatically in the future
include:
o new merchant agreements
o the acquisition or loss of one or more airline, electronic commerce
or other channel partners
o fluctuations in our operating results
o analyst reports, media stories, Internet chat room discussions,
news broadcasts and interviews
o market conditions for retailers and electronic commerce companies
in general
o changes in airline fuel, paper or our other significant expenses
o changes in the purchase price for products acquired from 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. Accordingly, the price of our
common stock may be impacted by these or other trends.
26
<PAGE>
OUR OUTSTANDING SHARES MAY BE DILUTED. The market price of our common
stock may decrease as more shares of common stock become available for trading.
Certain events over which you have no control result in the issuance of
additional shares of our common stock, which would dilute your ownership
percentage in SkyMall. We may issue additional shares of common stock or
preferred stock:
o to raise additional capital or finance acquisitions; or
o upon the exercise or conversion of outstanding options and warrants
As of November 10, 2000, there were outstanding warrants and options to
acquire up to 3,832,987 shares of common stock at exercise prices ranging from
$2.00 to $16.75 per share. If exercised, these securities will dilute the
percentage ownership of holders of outstanding common stock of the Company.
These securities, unlike the common stock, provide for anti-dilution protection
upon the occurrence of stock splits, redemptions, mergers, reclassifications,
reorganizations and other similar corporate transactions, and, in some cases,
major corporate announcements. If one or more of these events occurs, the number
of shares of common stock that may be acquired upon conversion or exercise would
increase.
RISK THAT FORWARD-LOOKING STATEMENTS MAY NOT COME TRUE. This prospectus
and the documents incorporated herein by reference, contain forward-looking
statements that involve risks and uncertainties. We use words and phrases such
as "should be," "will be," "believes," "expects," "anticipates," "plans,"
"intends," "may" and similar expressions to 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. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of such
documents. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us described above and elsewhere in this prospectus.
SEGMENT DISCLOSURE
The Company is a multi-channel specialty retailer that provides a large
selection of premium-quality products and services to consumers from a wide
variety of merchants and partners. The Company's operations are classified into
two reportable business segments: business-to-consumer and business-to-business.
Business initiatives for the Company's two reportable segments are managed
separately while support functions are combined.
The business-to-consumer segment provides retail merchandise service
through its in-flight catalogs placed in domestic airlines and through the
Company's Web site. The business-to-business segment provides retail merchandise
services, employee logo and corporate recognition merchandise and advertising
media to other businesses through loyalty catalogs, workplace catalogs and the
Company's Web sites. Previously, the Company defined its reportable business
segments by in-flight catalog, workplace catalog and Web sites. All periods
presented have been adjusted to reflect the new reportable business segments.
The Company evaluates the performance of its segments based on revenues
and gross margins. Operating expenses are included with corporate expenses and
27
<PAGE>
are not allocated to the business segments. The accounting policies of the
reportable segments are the same as those used in the consolidated financial
statements and described in the notes to the condensed consolidated financial
statements. Inter-segment transactions are not significant.
Revenues and gross margins for the business segments are provided in
the notes to the condensed consolidated financial statements filed herewith.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk exposure is limited to the interest rate risk
associated with out credit instruments. We incur interest on loans made under a
revolving line of credit at a variable interest rate. We had outstanding
borrowings on the line of credit of $8.4 million at September 30, 2000.
The Company does not have any financial derivative instruments.
28
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management, there is no 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 January 29, 1999, a securities class action complaint was filed
against SkyMall and Robert Worsley, the Company's Chief Executive Officer,
Chairman and largest 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 and Mr. Worsley filed a motion to
dismiss the complaint on the basis that the complaint fails to state a claim
upon which relief can be granted. In September 2000, the motion was granted in
part and denied in part. SkyMall continues to believe that the allegations
against it and Mr. Worsley are substantially without merit and intends to
vigorously defend the lawsuit. The case will now proceed to the class
certification stage.
On November 22, 1999, RGC International Investors, LDC, the parent
company of Rose Glen Capital Management, filed a complaint in the Court of
Chancery New Castle County Delaware, Cause Number 17600 NC, RGC International
Investors, LDC v. SkyMall, Inc. RGC alleges that the Company was required to
close on a transaction for an equity investment in SkyMall. The Company has
filed a Petition for Removal to move the case to Delaware Federal Court, and has
filed a motion for dismissal on the basis that the complaint fails to state a
claim upon which relief can be granted. SkyMall believes that the allegations
against it are substantially without merit and intends to vigorously defend this
lawsuit. Trial in this matter is scheduled for February 6, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
JUNE 2000 PRIVATE PLACEMENT. In June 2000, the Company completed a
private placement of approximately $5 million in shares of the Company's common
stock pursuant to a Stock Purchase Agreement dated as of June 30, 2000 (the
"June 2000 Private Offering"). A total of 2,483,000 shares of common stock were
issued at a purchase price of $2.00 per share and an aggregate of 179,813
warrants to purchase shares of the Company's common stock were issued to the
placement agents in the June 2000 Private Offering, with exercise prices ranging
from $2.00 to $7.50 per share. The funds received from the June 2000 Private
Offering will be used primarily to fund SkyMall's working capital requirements.
The common stock issued in the June 2000 Private Offering and the warrants
issued in connection therewith were issued in reliance on the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
thereunder.
29
<PAGE>
NOVEMBER 1999 PRIVATE PLACEMENT. In November 1999, the Company
completed a private placement of approximately $8 million in shares of the
Company's common stock and warrants to purchase additional shares of common
stock pursuant to a Stock and Warrant Purchase Agreement dated as of November 2,
1999 (the "November 1999 Private Offering"). A total of 1,142,885 shares of
common stock were issued at a purchase price of $7.00 per share, together with
warrants to purchase an additional 571,444 shares of common stock. The warrants
have an exercise price of $8.00 per share and, subject to certain conditions,
are redeemable by the Company at a nominal price if the Company's common stock
trades over $12 per share for twenty consecutive trading days. In addition, an
aggregate of approximately 129,136 warrants to purchase shares of the Company's
common stock were issued to the placement agents in the Private Offering, with
exercise prices ranging from $8.10 to $9.12 per share. The funds received from
the November 1999 Private Offering will be used primarily to fund SkyMall's
working capital requirements. The common stock and warrants issued in the
November 1999 Private Offering were issued in reliance on the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
thereunder.
DECEMBER 1999 PRIVATE PLACEMENT OF SERIES A JUNIOR CONVERTIBLE
PREFERRED STOCK AND WARRANTS. In December 1999, the Company completed a private
placement of approximately $9 million in shares of the Company's Series A Junior
Convertible Preferred Stock (the "Series A Preferred") and warrants to purchase
additional shares of common stock (the "Series A Private Offering") pursuant to
a Stock and Warrant Purchase Agreement dated as of December 20, 1999 (the
"December 20, 1999 Agreement"). A total of 91,320 shares of Series A Preferred
were issued to investors, together with warrants to purchase an additional
652,289 shares of common stock (the "Investor Warrants"). The Investor Warrants
have an exercise price of $8.00 per share and, subject to certain conditions,
are redeemable by the Company at a nominal price if the Company's stock trades
over $12 per share for twenty consecutive trading days. In addition, an
aggregate of 200,742 warrants to purchase shares of the Company's common stock
were issued to the placement agents in the Series A Private Offering, with
exercise prices ranging from $7.00 to $9.12 per share. The funds received from
the Series A Private Offering will be used primarily to fund SkyMall's working
capital requirements. The Series A Preferred and warrants issued in the Series A
Private Offering were issued in reliance on the exemption provided under Section
4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder.
Pursuant to the terms of the December 20, 1999 Agreement, at the close
of business on March 10, 2000, all shares of Series A Preferred were
automatically converted into 1,304,571 shares of common stock of the Company
upon receipt of shareholder approval of such conversion at a Special Meeting of
Shareholders held on March 10, 2000. The resale of the shares of common stock
issued upon conversion of the Series A Preferred and the shares of common stock
issuable upon exercise of the warrants have been registered under the Securities
Act of 1933, as amended. The condensed consolidated financial statements have
been adjusted to reflect the conversion of the Series A Preferred into common
stock as of December 31, 1999.
In April and May 2000, 339,286 of the Investor Warrants were exercised,
resulting in net proceeds to the Company of $ 2,714,288.
DECEMBER 1999 PRIVATE PLACEMENT OF SERIES B JUNIOR CONVERTIBLE
PREFERRED STOCK AND WARRANTS. In December 1999, the Company completed a private
30
<PAGE>
placement of approximately $8 million in shares of the Company's Series B Junior
Convertible Preferred Stock (the "Series B Preferred") and warrants to purchase
additional shares of common stock (the "Series B Private Offering") pursuant to
a Stock and Warrant Purchase Agreement dated as of December 30, 1999 (the
"December 30, 1999 Agreement"). A total of 80,000 shares of Series B Preferred
were issued to investors, together with warrants to purchase an additional
571,429 shares of common stock. The warrants have an exercise price of $8.00 per
share and, subject to certain conditions, are redeemable by the Company at a
nominal price if the Company's stock trades over $12 per share for twenty
consecutive trading days. In addition, an aggregate of 34,286 warrants to
purchase shares of the Company's common stock were issued to the placement agent
in the Series B Private Offering, with an exercise price of $7.00 per share, and
250,000 warrants to purchase shares of the Company's common stock were issued to
an advisor in connection with the Series B Private Offering, with an exercise
price of $8.00 per share. The funds received from the Series B Private Offering
will be used primarily to fund SkyMall's working capital requirements. The
Series B Preferred and warrants issued in the Series B Private Offering were
issued in reliance on the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D thereunder.
Pursuant to the terms of the December 30, 1999 Agreement, at the close
of business on March 10, 2000, all shares of Series B Preferred were
automatically converted into 1,142,857 shares of common stock of the Company
upon receipt of shareholder approval of such conversion at a Special Meeting of
Shareholders held on March 10, 2000. The resale of the shares of common stock
issued upon conversion of the Series B Preferred and the shares of common stock
issuable upon exercise of the warrants issued to investors and the placement
agents in the December 30, 1999 private placement have been registered under the
Securities Act of 1933, as amended. The condensed consolidated financial
statements have been adjusted to reflect the conversion of the Series B
Preferred into common stock as of December 31, 1999.
ADDITIONAL WARRANT ISSUANCES
SHORELINE PACIFIC. Shoreline Pacific Institutional Finance
("Shoreline") acted as an advisor to the Company in connection with the
Company's 1999 Private Offerings and, as such, received warrants to purchase
shares of the Company's common stock. Such warrants contained anti-dilution
provisions which required the issuance of additional warrants in connection with
the December 20, 1999, December 30, 1999 and June 30, 2000 Private Offerings,
and as a result of such anti-dilution provisions, an additional 16,479 warrants
were issued to purchase shares of common stock of the Company. Pursuant to the
terms of the agreement between the Company and Shoreline, such warrants have
been issued to Shoreline Pacific Equity Ltd. and certain employees of Shoreline
Pacific Institutional Finance.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
31
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
The following exhibits are included herein:
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
27 Financial Data Schedule (1)
-------------
(1) Filed herewith
(b) REPORTS ON FORM 8-K.
On July 13, 2000, the Company filed a Report on Form 8-K to announce
that it had secured equity funding of approximately $5.0 million through a
private placement.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
SkyMall, Inc.
Date: November 14, 2000 By: /S/ ROBERT M. WORSLEY
---------------------------------
Robert M. Worsley
Chairman of the Board
(Chief Executive Officer)
Date: November 14, 2000 By: /S/ LYNNE BERREMAN
---------------------------------
Lynne Berreman
Senior Director of Accounting &
Finance & Corporate Controller
(Principal Accounting Officer)
33
