SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
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)
Registrant's telephone number, including area code (602) 254-9777
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On March 27, 2000, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $47,914,556. The aggregate
market value was based on the closing price of common stock as reported by the
Nasdaq National Market.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
At March 27, 2000, the number of shares of common stock outstanding was
12,990,134 and there were no shares of preferred stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its Annual Meeting of
Shareholders, to be held on June 9, 2000, which will be filed pursuant to
Regulation 14A within 120 days of the close of the Registrant's fiscal year, is
incorporated by reference in answer to Part III of this report, but only to the
extent indicated therein.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 17
Item 3. Legal Proceedings............................................. 17
Item 4. Submission of Matters to a Vote of Security Holders........... 18
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................ 19
Item 6. Selected Financial Data........................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 38
Item 8. Financial Statements and Supplementary Data.................... 39
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............................ 40
PART III
Item 10. Directors and Executive Officers of the Registrant............. 41
Item 11. Executive Compensation......................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management. 41
Item 13. Certain Relationships and Related Transactions................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................ 42
SIGNATURES................................................................. 46
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PART I
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, may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, 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, 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS."
ITEM 1. BUSINESS
GENERAL
Founded in 1989, SkyMall, Inc., a Nevada corporation, is an integrated
specialty retailer that markets high-quality products and services through a
number of unique channels and partnerships. The Company offers its products and
services via various media, including the SkyMall in-flight print catalogs,
workplace catalogs, multi-media CD-ROM, DVD and on the Internet at
WWW.SKYMALL.COM, WWW.SKYMALLTRAVEL.COM, WWW.DURHAM.SKYMALL.COM and
WWW.SKYDISC.COM 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, which operates the SKYMALL.COM(TM) and SKYMALLTRAVEL.COM(TM) Web
sites, SkyMall offers an expanded selection of products and services to online
shoppers and enables other companies to conduct electronic commerce using
skymall.com's merchant solution. Through another subsidiary, Durham & Company,
SkyMall offers high-quality logo merchandise via its catalogs, workplace
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initiatives and the DURHAM.SKYMALL.COM Web site. SkyMall's subsidiary, Disc
Publishing, Inc., produces the CD-ROM, SkyDisc(TM), which provides advertising,
entertainment and e-commerce shopping links to travelers through airline seat
pocket distribution and the SKYDISC.COM Web site.
SkyMall operates two distinct 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 and international 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, CD-ROM, DVD and the Company's Web site.
Unless the context indicates otherwise, the terms "SkyMall," the
"Company," "we," "us" or "ours" refer to SkyMall, Inc. and its subsidiaries.
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 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, Australian Outback
Collection, Balducci's, Canadian Geographic, Frontgate(R), FTD.com,
garden.com(TM), 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).
CUSTOMER RELATIONSHIPS
SkyMall is committed to fostering a high-quality, one-to-one customer
experience that exceeds expectations and engages customers in long-term
relationships. We provide high-quality customer service and a vast selection of
specialty products and services through unique channels and partnerships.
SkyMall has adopted the following strategies for satisfying the needs of
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time-pressed consumers, particularly those who have adopted the Internet as a
preferred method of shopping and have grown to expect higher standards of
customer service and convenience.
o PROVIDE CUSTOMERS WITH ONLY THE BEST-SELLING, HIGH-QUALITY
MERCHANDISE FROM WELL-KNOWN BRANDS. SkyMall's Web site offers its
customers more than 7,600 SKUs from numerous merchants. 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.
o PROVIDE CUSTOMERS WITH A CONVENIENT ONE-STOP SHOPPING SERVICE.
SkyMall is a "one-stop" shopping source for customers who may
purchase a variety of merchandise from many different well-known
merchants in a single transaction. Although most of the
merchandise offered by SkyMall 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 catalogs and on the Web, we afford our
customers access to thousands of products offered by numerous
participating merchants and the convenience of one-stop shopping.
o PROVIDE OUR ONLINE CUSTOMERS WITH THE LATEST WEB SITE
TECHNOLOGIES. For the convenience of our customers, our Web site
provides a search engine, which enables customers to search and
define their shopping needs, and a Gift Shop, with a search
feature that enables the user to shop according to occasion,
price categories and gender. Products and services are sorted by
category and sub-category, which enables customers to search and
define their shopping needs faster and easier. In addition, our
Web site provides 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. The
"specials" area also provides easy access to the Company's travel
site, SKYMALLTRAVEL.COM, as well as other rewards partners. See
"BUSINESS-TO-CONSUMER SEGMENT - ELECTRONIC MEDIA - GENERAL" and
"TECHNOLOGY."
o PROVIDE SUPERIOR CUSTOMER SERVICE, ORDER PROCESSING AND
FULFILLMENT. The Company maintains a well-trained, in-house staff
of customer service representatives located in Phoenix, Arizona,
for its domestic business and uses outsource call centers with
expertise in as many as eight languages for its international
orders. Our global customers enjoy the convenience of being able
to shop twenty-four hours a day, seven days a week. The Company's
customer service representatives encourage customers to purchase
additional products with each order to increase the Company's
average order size. Consumers can shop while traveling by
ordering from free in-flight phones or by phones anywhere using
our toll-free number. Consumers can also shop online wherever an
Internet connection is available. The Company offers telephone
support to its online consumers twenty-four hours a day, seven
days a week, providing the Company's online consumers the benefit
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of live customer service assistance. Online consumers can also
make customer service inquiries via e-mail. To facilitate prompt
delivery of products, all orders taken by the Company are
forwarded to the Company's merchant partners who ship merchandise
directly to consumers. We currently offer expedited shipping
options for most products.
o PROVIDE CUSTOMER GUARANTEES AND EASY RETURNS. We offer a no
mark-up, low price guarantee under which we will refund the price
difference if the customer finds the same item advertised
elsewhere at a lower price. We also offer a total satisfaction
guarantee that lets a customer return merchandise for any reason
within 60 days of purchase.
PRINT MEDIA
GENERAL. We market our merchandise through a number of print media,
including our in-flight catalogs and international 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, which accounted for approximately 85% of net merchandise sales
and substantially all of our placement fees and other revenue from all of our
business segments in 1999. During 1999, we had exclusive agreements to place our
catalogs on 18 airlines, making our catalog available to approximately 500
million airline passengers in 1999. 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.
The following airline partners each accounted for in excess of 10% of
the Company's net merchandise sales for the fiscal year ended 1999:
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Percent of Net Merchandise Sales
Name of Airline Through December 31, 1999
--------------- --------------------------------
Delta 15%
United 12%
Continental 10%
---
Total 37%
===
We continue to develop marketing and promotional programs focused on
increasing revenue per passenger enplanement, some of which are facilitated
through the unique relationships between the Company and our airline partners.
Among the plans in various stages of implementation are (i) enhancing promotion
of our shopping services through in-flight announcements, including video and
audio programming, (ii) encouraging repeat customer purchases through discounts
and other special offers, (iii) offering airlines and key airline employees
incentives for promoting the use of our catalogs among airline passengers, (iv)
conducting in-flight promotions, such as gift certificates, discount
certificates and special offers to passengers who order while in-flight, and (v)
expanding the selection and variety of products. The Company has tested a number
of the foregoing initiatives with some of its airline partners and, where
successful, plans to expand the programs to other airline partners.
SKYMALL INTERNATIONAL IN-FLIGHT CATALOGS. We believe that the
demographic and technological trends that are driving the domestic consumer to
shift from traditional retail shopping are also present in many international
markets, which we believe are substantially under-served. In early 1998, we
launched an international initiative under which we began making specialized
catalogs available to passengers on certain international flights traveling to
Japan and serving the Pacific Rim featuring merchandise tailored to this
audience. In March 1999, the Company began offering SkyMall catalogs on certain
transatlantic flights originating from New York and Boston.
Although international sales have been immaterial to our total net
merchandise sales, we plan to continue exploring opportunities in these markets.
International sales increased to $334,000 in 1999 compared to $132,000 in 1998.
SkyMall continues to gain experience in international markets, including the
areas of merchandising, customer service and fulfillment. The Company plans to
continue to maintain its presence in large international markets through
cooperative ventures with its current domestic airline partners. The Company
believes that its experience in the domestic in-flight business, as well as its
Web-based infrastructure, will enable it to maintain its presence in
international markets, particularly those with a strong interest in U.S.
products or where remote shopping already has some level of acceptance by
consumers.
OTHER PRINT MEDIA PROGRAMS. 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.
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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. 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, in the
culmination of our year-long technology development efforts. The new site
includes both improvements to the consumer shopping experience as well as
significant 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.
Using data modeling, skymall.com created its newest feature, the Gift
Shop, with a search feature that enables the user to shop according to occasion,
price categories and gender. Data modeling also has been used more extensively
on the Web site to sort by category and sub-category, which enables customers to
search and define their shopping needs faster and easier. 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. The
"specials" area also provides easy access to skymall.com's travel site,
SKYMALLTRAVEL.COM, as well as other rewards partners. For further discussion,
see "BUSINESS-TO-BUSINESS SEGMENT," "TECHNOLOGY" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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. We have increased 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.
During 1999, SkyMall focused substantial resources on its
information-technology infrastructure and Web initiatives and, as a result, we
experienced a significant increase in our e-commerce activity. Net merchandise
sales from our e-commerce initiatives for fiscal 1999 were $13 million, compared
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to net merchandise sales in fiscal 1998 of $2.5 million; an increase of
approximately 420%. Our e-commerce sales (i.e., sales from our various Web
sites) accounted for approximately 37% of our business-to-consumer net
merchandise sales in the fourth quarter of 1999, compared to 8% in the same
period of 1998. We believe this trend demonstrates that the Internet is
increasingly becoming a more popular way to shop and we plan to continue to
leverage our merchandise content, customer service expertise, off-line channels
and back-end infrastructure to capitalize on the opportunities of the Internet.
During 2000, we plan to further expand our e-commerce initiatives. For further
discussion, see "GROWTH STRATEGY - ELECTRONIC MEDIA," "TECHNOLOGY" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
CONSUMER INCENTIVE AND LOYALTY PROGRAMS. The loyalty and award point
industry is anticipated to become a strong market for the Company, both for
print catalogs, CD-ROM and DVD. We are in the process of defining programs and
services that will be offered to customers of other companies' loyalty programs.
Net merchandise sales from loyalty program initiatives for fiscal 1999 were $3.9
million.
GOLD POINTS. In November 1998, Gold Points Corporation selected SkyMall
as a primary merchandise redemption source for its Gold Points customer loyalty
program. Gold Points Corporation is a subsidiary of Carlson Companies Inc.,
which owns such well-known brands as Regent International Hotels, Radisson
Hotels Worldwide, Radisson Seven Seas Cruises, Country Inns & Suites By Carlson,
Carlson Wagonlit Travel, T.G.I. Friday's and Italianni's, and operates Carlson
Marketing Group, the largest relationship marketing company in the United
States. Through a network of well-known brands in different industries, the Gold
Points program offers participants the opportunity to earn and redeem points
with a variety of network merchants. Participants in the Gold Points program
include Carlson-owned hospitality and service companies, as well as MCI
Worldcom, the American Bar & Grill and others. The SkyMall redemption catalog
became available from participating Gold Points merchants in April 1999 and is
the primary general merchandise catalog promoted to consumers for point
redemption. SkyMall also participates in the Gold Points merchant network and
awards consumers Gold Points at their request.
RELATIONSHIP WITH NETCENTIVES. In February 1998, SkyMall entered into
an affiliate relationship with Netcentives Inc. Through this relationship,
SkyMall is able to offer customers the ability to earn "ClickMiles" on the
purchase of merchandise through SKYMALL.COM. In turn, customers can utilize
Netcentives' ClickRewards Program and redeem "ClickMiles" for frequent flyer
miles and merchandise from a variety of retailers. SkyMall and Netcentives are
considering other promotional opportunities.
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, CD-ROM, DVD and the
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Company's Web site. 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. The
CD-ROM program and, upon distribution, the DVD program will provide customers
with an opportunity to experience a broadband experience from the comfort of
their home or on the road through a laptop. This channel provides businesses
with a new advertising medium combined with SkyMall's favorable demographics.
Additionally, the SKYMALL.COM Web site provides our affiliate partners a
mechanism to offer products to their customer bases.
PRINT 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 Web
site. Sales in 1999 were the highest ever for Durham. Net merchandise sales from
Durham accounted for approximately 8% of the Company's total net merchandise
sales in 1999. Competing in the highly fragmented incentive industry, Durham
distinguishes itself by providing high-quality products and excellent customer
service and focuses its marketing efforts on large organizations. SkyMall
provides Durham's clients with unique, high-quality merchandise offered through
other SkyMall channels as well as logo merchandise and recognition products for
corporate gift giving, employee recognition, sales promotions and incentives and
similar programs.
INCENTIVE AND LOYALTY PROGRAMS. The loyalty and award point industry is
anticipated to become a strong market segment for the Company, both for print
catalogs, CD-ROM and DVD. We are in the process of defining programs and
services that will be offered in the future to loyalty programs. In late 1999,
we entered into an agreement with Mariott to allow loyalty program participants
to redeem points for specially selected merchandise. This agreement will expire
in April 2000.
ELECTRONIC MEDIA
AFFILIATE PROGRAM. In addition to developing our own Web 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. Visitors
to SkyMall's affiliate sites go directly to a SkyMall site, which is typically
co-branded with the affiliate partner, for shopping services. After shopping,
the customers are directed back exclusively to the site from which they began so
that the affiliate partner does not lose the benefit of the traffic to its site.
Although an online store can be privately labeled for our affiliate partners,
most of our affiliate sites are co-branded to increase SkyMall's brand awareness
as well as generate affinity for our online partners.
Our affiliate program offers advantages to both consumers and our
partners. Consumers enjoy the convenience of SkyMall's online shopping and our
partner sites enjoy the benefit of increased revenue, while ensuring that their
customers return to their site.
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Participants in our affiliate program include some of our airline
partners and related entities, such as Delta Air Lines, Delta Crown Room,
Continental Airlines, Northwest Airlines, America West Airlines and US Airways.
Other participants include Visa USA, Visa International, First USA, the largest
Visa card issuer and a banking leader in electronic commerce. The Company
continues to evaluate the success of its individual affiliates and, in some
cases, has terminated relationships while it continues to pursue new
affiliations.
AFFILIATE RELATIONSHIP WITH QUINTEL COMMUNICATIONS. In November 1999,
SkyMall entered into a Promotional Agreement with Quintel Communications, Inc.
Under the agreement, the parties agreed to participate in certain joint
marketing efforts, including offering SkyMall's products and services to
Quintel's MultiBuyer.com Program. The parties are also pursuing other co-branded
marketing opportunities, including promoting each party's goods and services.
THE SKYMALLTRAVEL.COM WEB SITE. In July 1999, SkyMall launched its
SKYMALLTRAVEL.COMWeb site targeted to frequent travelers, which provides
one-stop access for all their travel needs. SKYMALLTRAVEL.COM organizes many of
the best travel resources in one place, including linked directories for
airlines, hotels, rental car and online booking services, as well as content and
tools that assist business travelers before, during and after their trips. The
site was designed to help travelers get the most out of online travel planning
while minimizing the effort and time involved. Some of the leading online travel
companies are affiliates at our SKYMALLTRAVEL.COM Web site, including
webflyer.com, Trip.com, ontheroad.com, mapquest.com, weather.com, homefair.com
and MyFamily.com.
THE DURHAM & COMPANY WEB SITE. In September 1999, Durham & Company
launched its Web site at DURHAM.SKYMALL.COM, which offers high quality logo and
corporate recognition merchandise to organizations.
DISC PUBLISHING, INC. In September 1999, SkyMall acquired Disc
Publishing, Inc., a Utah corporation. Disc Publishing's SkyDisc(TM) is an
interactive CD-ROM targeted to the business traveler. SkyDisc integrates
high-quality print, broadcast and online media to provide an exciting mix of
topics that entertain, inform and enhance the business travelers' life. SkyDisc
offers the consumer the option of using the disk on their laptop computer
whether onboard the aircraft, in a hotel, at the office, or at home. While using
the disk online, consumers can link to Web sites promoted on SkyDisc to get more
information and services. With the continued proliferation of new Web sites,
SkyDisc will help consumers sort through the clutter of the Web and drive
traffic to the sites of our program participants. Every other month a new
"issue" of SkyDisc is available free in airline seatback pockets to more than
400,000 SkyWest Airlines passengers per month. SkyDisc has already attracted
many program participants such as Amazon.com, Earthlink Network, Inc., Interplay
Entertainment, Inc. and U. S. WEST(R). The Company intends to expand
distribution of SkyDisc through its airline partners and other channels.
GROWTH STRATEGY
We plan to continue to increase our product offering and
non-merchandise travel-related content to consumers through our online media. We
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also plan to further broaden our distribution channels and our customer base
through, among other things, additional and on-going electronic commerce
initiatives, expansion of our in-flight catalog program, expansion of our DVD
and SkyDisc initiatives, expansion of our incentive and loyalty programs and
implementation of additional workplace marketing programs. From time to time, we
may also consider further expanding our media capabilities and distribution
channels, either through joint venture relationships, acquisitions or other
arrangements.
Our new technology platform will allow us to quickly implement new
best-of-breed consumer features and functionality, many of which are planned for
the current fiscal year. Our technology infrastructure now has the capability of
supporting significant increases in order volume and provides us with a platform
for expanding our marketing and channel development efforts. Our focus in 2000
will be on the addition of new consumer features to our Web site and on the key
drivers for our sales growth, including improving customer reach, conversion,
repeat business and average order size. We plan to further tap into the more
than 1.3 million demographically desirable consumers who see our in-flight
catalog each day as we work to improve our revenue growth and profitability. Our
profitable customer acquisition model, together with our strong gross margins,
form the foundation for future growth and our plans to return to profitability.
For further discussion, please see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS."
Our marketing strategy is designed to strengthen the SkyMall brand name
online, increase customer traffic to the SKYMALL.COM Web site, build strong
customer loyalty, maximize repeat purchases and develop revenue opportunities.
We seek to build customer loyalty by creatively applying technology to deliver
personalized programs and services, as well as employing creative and flexible
merchandising strategies. The Company employs a variety of media, marketing and
promotional methods to achieve these goals.
We believe our in-flight readership is a valuable asset as we expand
our business, particularly our electronic commerce initiatives. SkyMall is
uniquely positioned among Internet retailers because it promotes its Internet
site at a relatively low cost to more than 1.3 million airline passengers each
day through the SkyMall in-flight print catalogs. As we grow our in-flight
presence, we believe the brand awareness and visibility we gain with our
high-profile consumer audience will strengthen the visibility of our Web
initiative and help to promote traffic to our Web site. While other companies
expend tremendous resources on off-line advertising to reach a portion of our
audience, SkyMall has the advantage of promoting its site in another proven
distribution channel.
COMPETITION
BUSINESS-TO-CONSUMER.
PRINT MEDIA. All aspects of our print media business are highly
competitive. We compete for customers to some degree with all retailers and
catalog companies, including airport retailers, duty-free retailers, specialty
stores, incentive and logo merchandise companies, department stores, specialty
catalog companies and general merchandise catalog companies. Although we believe
that our long-standing relationships with our business partners and
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participating merchants create substantial barriers to competition, many of our
competitors and potential competitors have greater financial, marketing and
other resources, and may seek to enter or expand penetration into the markets we
serve. In our in-flight business, we compete with other advertisers, including
those who advertise in in-flight magazines and other periodicals. Several
companies, some of which have greater resources than the Company, have announced
they may develop seatback interactive video shopping services. As seatback
interactive video shopping services become more available to airline passengers,
competition in the in-flight marketing business is likely to increase. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
ELECTRONIC MEDIA. The Internet online commerce market is relatively
new, rapidly evolving and intensely competitive. The Company expects that
competition in the online commerce market will intensify in the future. Barriers
to entry are minimal and current and new competitors can launch new Web sites at
a relatively low cost. Many competitors in this area have greater financial,
technical and marketing resources than the Company. In addition, new
technologies and the expansion of existing technologies may increase the
competitive pressures on online retailers, including the Company. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
BUSINESS-TO-BUSINESS.
The market for business-to-business e-commerce solutions is rapidly
changing and intensely competitive. We expect competition to intensify as the
number of entrants and new technologies increases. We may not be able to compete
successfully against current or future competitors. Although we believe that our
long-standing relationships with our business partners and merchants create
substantial barriers to competition, many of our competitors and potential
competitors have greater financial, marketing and other resources, and may seek
to enter or expand penetration into the markets we currently serve. In addition,
negotiating and maintaining favorable customer and strategic relationships is
critical to our business. Our competitors may be able to negotiate strategic
relationships on more favorable terms than we are able to negotiate. Many of our
competitors also may have well-established relationships with our existing and
prospective customers.
INCENTIVE AND LOYALTY PROGRAMS. The market for incentive and loyalty
programs is rapidly changing and intensively competitive. As the number of
entrants increases and technology changes, we expect greater competition. We may
not be able to successfully compete against current or future competitors. Many
of our competitors have more experience developing Internet-based
business-to-business solutions and have larger technical staffs, larger customer
bases, greater financial resources and other resources than we do. Our
competitors may be better able to develop products and/or services, create
superior functionality and/or achieve greater customer acceptance.
OTHER BUSINESS-TO-BUSINESS SOLUTIONS (CD-ROM, DVD, CORPORATE
MERCHANDISE). The market for corporate advertising and logo merchandise is also
highly competitive and changing rapidly. In each instance, there are numerous,
large competitors who have longer operating histories, larger customer bases,
greater brand recognition, and significantly greater financial, marketing and
other resources than we do. These competitors may enter strategic or commercial
relationships with larger more established and well-financed companies. Some of
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our competitors may be able to secure alliances with customers and affiliates on
more favorable terms, devote great resources and achieve superior marketing
results than we do. The environment for corporate services is constantly
changing as a result of new technologies. We may not be able to compete
successfully in light of the changing technical requirements and competitive
conditions may harm our business, operating results and financial condition. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
TECHNOLOGY
ENHANCED WEB SITE. The Company spent approximately $15 million during
fiscal 1999, including approximately $8 million in capital expenditures, on its
information-technology and Web infrastructure. During 1999, our technology team
developed a cutting edge technology solution to ensure that skymall.com has an
e-commerce site that is as stable, salable and robust and to provide a solid
technology platform for our future sales growth. In February 2000, we
re-launched our Web site, SKYMALL.COM, in the culmination of our year-long
efforts. The new site includes both improvements to the consumer shopping
experience as well as significant advances in the overall performance, speed and
scalability of the site. This new technology platform will allow us to quickly
implement new best-of-breed consumer features and functionality, many of which
are planned for the current year. 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.
With the launch of our new Web site, SkyMall has converted to an n-tier
architecture. This framework provides SkyMall with a highly-modular
object-oriented architecture that will allow SkyMall to rapidly integrate the
best of today's off-the-shelf and custom built technical product solutions. The
new platform relies heavily on the use of Java in a middle tier communications
layer, which provides a technology agnostic integration solution for diverse
applications.
In addition to the open architecture of the software, the new platform
is based on a fully redundant and highly scalable systems and network
architecture, which is supported in part through an alliance with PKS
Information Services, a subsidiary company of Level 3 Communications Systems,
which is a leading provider of state-of-the-art infrastructure, applications and
e-business services. In connection with the launch of our new Web site, the
Company migrated to a Solaris operating system that runs on Sun Microsystems and
Intel hardware. The system runs on an Oracle database and uses a data repository
consisting of a massively parallel storage solution provided by EMC, a leading
supplier of enterprise-wide intelligent storage and retrieval technology.
ORDER ENTRY AND CUSTOMER SERVICE SYSTEM. We have implemented order
entry, transaction-processing and fulfillment services and systems using a
combination of our own proprietary technologies and commercially available
licensed technologies. The Company's current strategy is to focus its
development efforts on creating and enhancing the specialized, proprietary
software that is unique to its business and to license commercially developed
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technology for other applications where available and appropriate. Our
Internet-based system provides the Company with many advantages, including
giving us significant flexibility in implementing marketing programs and other
promotions, allowing quick implementation of affiliate programs, permitting us
to establish call center operations in foreign countries to support our
international operations and enabling us to reduce costs in our print media
business.
BUSINESS OPERATIONS
MERCHANT AGREEMENTS. We enter into agreements with merchants who supply
the products and services offered in our business-to-consumer and
business-to-business segments. Under merchant contracts, we earn fees based on
percentages of revenues generated by sales or placement fees for inclusion of
the merchant's products in SkyMall programs. Participating merchants agree to
maintain sufficient levels of inventory to satisfy customer demand and to ship
all orders within 72 hours unless the merchandise is out-of-stock. Generally,
our agreements with participating merchants provide that prices for products be
honored by merchants as long as the Company receives orders for them. The
agreements typically have an initial term of a single quarterly catalog and
automatically renew thereafter for successive catalog editions. The merchants
typically agree to indemnify the Company for any losses associated with injuries
caused to customers from the use of such merchant's products, to carry product
liability insurance that names SkyMall as an additional insured, and to
indemnify the Company against claims that their products infringe on the
intellectual property rights of third parties. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS
THAT MAY AFFECT FUTURE RESULTS" and "RECENTLY ISSUED ACCOUNTING STANDARDS."
AFFILIATE AGREEMENTS. We enter into agreements with affiliates who
offer our products and services to their customers. Under our affiliate
agreements, we typically pay a commission based on net merchandise sales
attributable to purchases made by consumers who purchase products and services
from SkyMall vis-a-vis these affiliate channels. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL
FACTORS THAT MAY AFFECT FUTURE RESULTS."
ORDER PROCESSING, CUSTOMER SERVICE AND FULFILLMENT. We maintain no
significant inventory. Therefore, once we receive a customer's order, we
transmit it to the appropriate merchant who ships the merchandise directly to
the customer. Although expedited service is available, most orders are delivered
to customers within 7-to-10 days. The Company's average order size is
approximately $115. Our customer service representatives are given incentives
for increasing order size. We outsource part of our call volume during peak
order times.
REGULATION
Our operations are subject to various federal, state and local laws and
regulations, including state sales tax laws and various Federal Trade Commission
regulations governing the sale of merchandise by mail. The Federal Trade
Commission regulations applicable to our operations impose various requirements
on the processing of customer orders, including shipping deadlines, delay
notices, order cancellations and refunds. Our subsidiary, Durham & Company,
operates a small manufacturing facility where it manufacturers recognition
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jewelry and related products. These operations involve certain hazardous
chemicals that are used in the manufacturing process and are subject to various
federal, state and local environmental laws and regulations.
EMPLOYEES
At March 27, 2000, the Company had 324 employees. The Company makes
significant use of temporary and part-time employees to process orders during
the fourth quarter of each year. The Company believes it has good relations with
its employees.
The Company believes that its future success will depend in part on its
continued ability to attract, hire and retain qualified personnel. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
TRADEMARKS AND TRADE NAMES
SkyMall(R) is a registered trademark of the Company and skymall.com(TM)
is a trademark of the Company. The loss of such trademarks could have a material
adverse effect on the Company. In addition, the Company uses a number of other
trademarks and trade names in its business, none of which the Company believes
are material to its overall operations.
ITEM 2. PROPERTIES
Our executive offices are located in Phoenix, Arizona, where we lease
approximately seven acres of land under long-term leases expiring in 2012, with
an option to extend to 2062. We own the improvements to this land, which include
offices, storage facilities and a small retail shopping center, consisting of an
aggregate of approximately 50,000 square feet. We also lease approximately
12,000 square feet of office space in New York City, under a lease which expires
in December 2000, for the operations of our subsidiary, skymall.com, inc. Our
logo merchandise subsidiary, Durham & Company, leases approximately 18,000
square feet of space in an industrial park in Tempe, Arizona, under a lease
expiring in 2002, where it houses a small warehouse and manufacturing facility.
Our subsidiary, Disc Publishing, Inc., leases approximately 2,800 square feet of
office space in Orem, Utah under a lease expiring in 2004.
ITEM 3. 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 May 13, 1998, Kathy Jordan, a purchaser of products through a
SkyMall catalog in March 1998, filed an action in the District Court of Cherokee
County, Oklahoma, styled as Kathy Jordan, Plaintiff v. SkyMall, Inc. a
corporation, and John Doe(s), et al., Defendants, which is designated as Case
No. CJ-98-208. Plaintiff alleged that SkyMall improperly collected from her
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certain state and local taxes relating to her purchase. Plaintiff brought the
action on behalf of herself and a class of persons in the United States
similarly situated. She alleged causes of action for unjust enrichment, fraud,
breach of contract, and declaratory judgment, and seeks return of allegedly
unlawful revenue collected with interest, an injunction against collecting taxes
improperly, compensatory and punitive damages, and attorneys' fees and costs.
While the Company believed Ms. Jordan's claims were substantially without merit,
in order to minimize overall litigation risks and ongoing litigation costs, and
to reduce the management time and attention required to be devoted to this
matter, the Company entered into a Settlement Agreement with Plaintiff and the
alleged class. The agreement received final court approval on October 14, 1999.
As a part of the agreement, the Company has agreed, among other things, to offer
discounts during 2000 to SkyMall customers who purchased merchandise from the
Company prior to December 31, 1998. The agreement also calls for SkyMall to
issue to Plaintiff's attorneys approximately 65,000 shares of common stock
valued at $600,000 and $100,000 cash. The Company recorded a reserve for this
settlement amount and the related expenses in the second quarter of 1999 in the
amount of $1.436 million, representing approximately $700,000 payable to
Plaintiff's attorneys in stock and cash, $356,000 in anticipated customer
discounts associated with the offer to customers and $380,000 in professional
fees incurred.
On January 29, 1999, a securities class action complaint was filed
against SkyMall and Robert Worsley, the Company's Chief Executive Officer,
Chairman and principal shareholder, in connection with certain disclosures made
by the Company in December 1998 relating to its Internet sales. The complaint
was filed in the United States District Court, District of Arizona, Case No.
CIV-99-0166-PHX-ROS. The complaint alleges unlawful manipulation of the price of
the Company's stock and insider selling during the period from December 28, 1998
through December 30, 1998. The complaint seeks unspecified damages for alleged
violations of federal securities laws. SkyMall has filed a Motion to Dismiss.
SkyMall believes that the allegations against it and Mr. Worsley are
substantially without merit and intends to vigorously defend the lawsuit.
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 dismiss 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
SkyMall's common stock is traded on the Nasdaq Stock Market's National
Market under the symbol "SKYM". The following table sets forth, for the periods
indicated, the high and low sales prices per share of the common stock for the
two most recent fiscal years as reported on Nasdaq. As of March 27, 2000, the
closing sale price for SkyMall's common stock was $7.125 per share. On that
date, there were 168 holders of record of SkyMall's Common Stock. This figure
does not reflect beneficial stockholders whose shares are held in nominee names.
YEAR ENDED 1999 HIGH LOW
1st Quarter $27.125 $11.375
2nd Quarter $23.125 $ 9.000
3rd Quarter $12.625 $ 5.500
4th Quarter $13.125 $ 5.250
YEAR ENDED 1998 HIGH LOW
1st Quarter $ 5.375 $ 4.000
2nd Quarter $ 7.500 $ 4.000
3rd Quarter $ 5.625 $ 2.250
4th Quarter $48.000 $ 1.875
The Company has never paid a dividend on its common stock and does not
anticipate paying dividends on its common stock in the foreseeable future. It is
the current policy of the Company's Board of Directors to retain any earnings to
finance operations and expand the Company's business. The payment of future
dividends is within the discretion of the Board of Directors and will depend
upon the Company's future earnings, if any, its capital requirements, financial
condition, and other relevant factors.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OPERATING DATA)
The selected financial data as of and for each of the five years ended
December 31, 1999 are derived from the Consolidated Financial Statements of the
Company and its subsidiaries, which have been audited by Arthur Andersen LLP,
independent public accountants, and should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this Form 10-K and the
related notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Merchandise sales, net $ 60,880 $ 49,320 $ 42,844 $ 30,978 $ 26,883
Placement fees and other 18,061 22,722 23,532 14,921 19,128
----------- ----------- ----------- ----------- -----------
Total revenues 78,941 72,042 66,376 45,899 46,011
Cost of goods sold 46,422 39,292 40,657 26,471 27,494
----------- ----------- ----------- ----------- -----------
Gross Margin 32,519 32,750 25,719 19,428 18,517
----------- ----------- ----------- ----------- -----------
Media expenses 13,587 11,353 9,082 7,670 9,532
Selling expenses 4,482 3,474 3,450 2,476 2,229
Customer service and fulfillment expenses 7,123 5,567 4,438 2,823 2,136
General and administrative expenses 32,149 8,767 6,340 3,340 3,112
----------- ----------- ----------- ----------- -----------
Total operating expenses 57,341 29,161 23,310 16,309 17,009
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (24,822) 3,589 2,409 3,119 1,508
Interest and other income (expense), net (231) 404 462 (651) (750)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (25,053) 3,993 2,871 2,468 758
Provision (benefit) for income taxes (913) 1,707 300 280 0
----------- ----------- ----------- ----------- -----------
Net income (loss) (24,140) 2,286 2,571 2,188 758
Preferred stock dividends 0 0 0 77 0
----------- ----------- ----------- ----------- -----------
Net income (loss) available for
common shares $ (24,140) 2,286 2,571 2,111 758
=========== =========== =========== =========== ===========
Diluted net income (loss) per common share $ (2.60) $ .27 $ .30 $ .38 $ .14
=========== =========== =========== =========== ===========
Diluted weighted average shares outstanding 9,271,330 8,602,177 8,675,803 5,599,443 5,431,337
=========== =========== =========== =========== ===========
SELECTED OPERATING DATA (UNAUDITED):
Number of domestic enplanements
(in 000's)(1) 699,896 604,169 579,822 530,661 498,611
Domestic enplanement percentage (2) 71% 68% 70% 63% 64%
Revenue per passenger enplanement (3) $ 0.12 $ 0.12 $ 0.11 $ 0.09 $ 0.08
Number of airlines at end of period (4) 18 16 16 15 20
Number of catalogs produced (in 000's) (5) 17,015 17,973 16,933 15,729 17,162
Average number of pages per catalog (6) 197 192 168 148 137
Revenue per catalog produced (7) $ 3.58 $ 2.74 $ 2.53 $ 1.97 $ 1.57
Revenue per page printed (8) $ 0.018 $ 0.014 $ 0.015 $ 0.013 $ 0.011
BALANCE SHEET DATA:
Cash and cash equivalents $ 16,060 $ 7,951 $ 9,412 $ 11,491 $ 775
Working capital (deficit) 3,795 5,007 6,050 6,692 (4,734)
Total assets 50,249 31,925 26,634 19,721 4,726
Long-term debt 5,190 242 66 139 10,818
Shareholders' equity (deficit) $ 15,618 $ 14,234 $ 10,307 $ 8,601 $ (15,033)
</TABLE>
(1) Approximate number of revenue passengers flown on scheduled domestic
airlines in the given period.
(2) Approximate number of passenger enplanements on domestic airlines that
carried the SkyMall catalogs during the period as a percentage of total
domestic passenger enplanements in the period by all scheduled domestic
airlines.
(3) Revenue per passenger enplanement is net merchandise sales from all Company
programs for the period divided by the approximate number of domestic
enplanements during the period on all scheduled domestic airlines that
carried the SkyMall catalogs.
(4) Represents the number of airlines at end of period with which the Company
had an agreement to carry the SkyMall catalogs. During the year ended
December 31, 1996, the Company eliminated unprofitable circulation of the
SkyMall catalogs by eliminating routes on certain airlines and terminating
agreements with certain smaller regional airlines.
(5) Represents the number of SkyMall catalogs produced by the Company during
the period for distribution to airlines.
(6) Represents the average number of pages in the SkyMall catalogs during the
period.
(7) Represents net merchandise sales from all Company programs for the period
divided by the number of SkyMall catalogs produced by the Company during
the period.
(8) Represents net merchandise sales from all Company programs for the period
divided by the result of the number of SkyMall catalogs produced multiplied
by the average number of pages per catalog during the period.
In September 1999, the Company completed a merger with Disc Publishing,
Inc. The merger qualified as a tax-free exchange and was accounted for as a
pooling of interests. Accordingly, the 1999 and 1998 Selected Financial and
Operating Data has been restated to include the combined financial results of
SkyMall and Disc Publishing, which was formed in 1998.
Certain reclassifications have been made to the 1998, 1997, 1996 and
1995 Selected Financial and Operating Data to conform with the 1999
presentation. Shipping costs which were previously netted against shipping
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revenue and recorded in placement fees and other revenue have been reclassified
from placement fees and other revenue to cost of goods sold. Shipping revenue is
included in placement fees and other revenue.
ITEM 7. 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. The discussion should
be read in conjunction with the Consolidated Financial Statements and the
related notes thereto, and the Selected Financial and Operating Data contained
elsewhere herein.
RESULTS OF OPERATIONS
REVENUES
(In thousands)
-----------------------------------------------------
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Merchandise sales, net $60,880 23.4% $49,320 15.1% $42,844
Placement fees and other $18,061 (20.5)% $22,722 (3.4)% $23,532
Total revenues $78,941 9.6% $72,042 8.5% $66,376
Net merchandise sales are composed of the selling price of merchandise
and services sold by the Company, net of returns. Growth in net merchandise
sales in 1999 and 1998 reflects an increase in business-to-business sales of
$7.8 million and $1.1 million, respectively, and business-to-consumer sales of
$3.8 million and $5.3 million, respectively. Growth in business-to-business net
merchandise sales in 1999 and 1998 include net merchandise sales from business
acquisitions of $3.9 million and $1.1 million, respectively. 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. The increase and decrease in
placement fees and other revenues in 1999 and 1998 reflects changes in the mix
of agreements with merchants between variable compensation agreements and fixed
placement fees. During 1999, the Company offered certain free shipping
promotions which contributed to the decrease in placement fees and other
revenues.
GROSS MARGIN
(In thousands)
-----------------------------------------------------
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Gross margin $32,519 (0.7)% $32,750 27.3% $25,719
Gross margin percentage 41.2% 45.5% 38.7%
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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 declined in 1999 reflecting the effect of the mix of
merchant agreements between variable compensation agreements and fixed placement
fees, lower margin agreements to increase certain business-to-business
initiatives and free shipping promotions offered in 1999. Gross margin increased
in absolute dollars and as a percentage of sales in 1998 reflecting the
Company's increased sales volume and the effect of the mix of merchant
agreements between variable compensation agreements and fixed placement fees.
OPERATING EXPENSES
(In thousands)
-----------------------------------------------------
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Media expenses $13,587 19.7% $11,353 25.0% $9,082
Selling expenses $ 4,482 29.0% $ 3,474 0.7% $3,450
Customer service and
fulfilllment expenses $ 7,123 28.0% $ 5,567 25.4% $4,438
General and administrative
expenses $32,149 266.7% $ 8,767 38.2% $6,340
Media expenses consist of the cost to produce and distribute our
in-flight print catalogs and CD-ROM. The media expenses increase in 1999 and
1998 primarily reflects the increase in the average pages per catalog,
circulation, paper costs and catalog production costs. Included in the 1999
increase are incremental costs associated with the acquisition of Disc
Publishing.
Selling expenses consist primarily of commissions paid to marketing
partners and are variable in nature. The increase in selling expenses in 1999
reflects the increased sales volume and addition of marketing partners. Selling
expense remained level in absolute dollars in 1998.
Customer service and fulfillment expenses consist of costs to maintain
a full-service customer contact and order fulfillment center. Customer service
and fulfillment increase in 1999 and 1998 reflected the increase 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 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 1999 increase in general and administrative
expenses reflected increases in the following areas: $6.3 million in marketing
efforts; $6.3 million in information technology development and support; $1.6
million in additional expenses associated with acquired entities; $1.3 million
in depreciation primarily due to investments in information technology; $2.0
million in legal costs including legal settlements; $1.2 million in salaries
associated with the hiring of additional personnel in the remaining general and
administrative departments; and $4.7 million in other general and administrative
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expenses related to the Company's business initiatives. The 1998 increase is due
primarily to the addition of management personnel and other infrastructure
investments to support business initiatives.
INTEREST EXPENSE
(In thousands)
-----------------------------------------------------
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Interest expense $283 784% $32 (68)% $99
Interest expense consists of interest paid on the various debt
obligations of the Company. Interest expense increase in 1999 is a result of
additional borrowings, primarily from the Company's revolving line of credit.
INTEREST AND OTHER INCOME
(In thousands)
-----------------------------------------------------
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Interest and other income $52 (88)% $436 (22)% $561
Interest income and other consists primarily of interest income on cash
and marketable securities. Interest income decreased in 1999 and 1998 due to
lower investment balances resulting from funding the Company's business
initiatives.
INCOME TAXES
(In thousands)
-----------------------------------------------------
1999 % Change 1998 % Change 1997
---- -------- ---- -------- ----
Provision (benefit) for
income taxes $(913) (153)% $1,707 469% $300
The income tax benefit for 1999 is due to operating losses for income
tax purposes which are available to carryback and apply against prior years
taxable income resulting in an income tax refund. The tax provision increase in
1998 is a result of certain timing differences in 1997 resulting in a lower tax
provision in 1997. The Company has approximately $20.6 million of federal net
operating loss carryforwards which may be used to offset future taxable income.
These loss carryforwards begin to expire in 2019.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's cash balance was $16 million
compared to $8 million at December 31, 1998.
Cash used in operating activities in 1999 of $13.3 million was
primarily attributable to the net loss and increase in assets offset by non-cash
expenses and the increase in accounts payable and accrued liabilities. Cash
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<PAGE>
provided by operating activities in 1998 and 1997 of $4.1 million and $2.6
million, respectively, was primarily attributable to net income and non-cash
expenses.
Cash used in investing activities of $8.8 million, $6.1 million and
$2.8 million for 1999, 1998 and 1997, respectively, was due to the purchase of
property and equipment and business combinations.
Cash provided by financing activities of $30.3 million in 1999 resulted
from the issuance of $25.3 million in common and convertible preferred stock,
including private placement offerings and the exercise of stock options and
warrants, and borrowings on a revolving line of credit of $7.5 million offset by
long-term debt repayments of $2.5 million. Cash provided by financing activities
of $555,000 in 1998 resulted from the issuance of $742,000 in common stock from
the exercise of stock options and warrants and long-term debt borrowings offset
by $187,000 in treasury stock purchases and long-term debt repayments. Cash used
in financing activities of $1.9 million in 1997 resulted from $865,000 in
treasury stock purchases and $1 million in long-term debt repayments.
WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS
At December 31, 1999, the Company had net working capital of $3.8
million and cash and cash equivalents of $16.1 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. As of March 27, 2000, a total of $9.4
million had been drawn on the line of credit, with $600,000 available for
borrowing by the Company.
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. The funds received
from the Series A and Series B Private Offering will be used primarily to fund
SkyMall's on-going e-commerce initiatives. 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, its
existing bank line of credit and by securing additional financing resources
through the issuance of debt and/or equity securities. There can be no assurance
25
<PAGE>
that the Company will be able to secure additional financing to meet its working
capital needs or to secure such financing on terms favorable to the Company. A
failure to secure such financing 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."
CHANGES IN SECURITIES AND USE OF PROCEEDS
1996 PRIVATE PLACEMENT. 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"). During fiscal 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 1999, 145,800 of the Pre-IPO Warrants were exercised, resulting in net
proceeds to the Company of $1,166,400. In December 1999, the remaining 13,800
warrants, which were unexercised expired and all of such unexercised warrants
were cancelled. All of such proceeds received upon exercise of the Pre-IPO
Warrants were 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, as amended, and
Regulation D thereunder.
SHAREHOLDER RIGHTS PLAN. In September 1999, the Board of Directors of
the Company adopted a Shareholder Rights Plan (the "Plan") designed to deter
coercive or unfair takeover tactics and to prevent a person or group from
gaining control of the Company without offering a fair price to all
stockholders. Under the terms of the Plan, a dividend distribution of one
Preferred Stock Purchase Right ("Right") for each outstanding share of the
Company's common stock outstanding was made to holders of record on October 15,
1999. These Rights entitle the holder to purchase one one-hundredth of a share
of the Company's Series R Preferred Stock ("Preferred Stock") at an exercise
price of $65 per one one-hundredth of a share. The Rights become exercisable (a)
10 days after a public announcement that a person or group has acquired shares
representing 15% or more of the outstanding shares of common stock, or (b) 10
business days following commencement of a tender or exchange offer for 15% or
more of such outstanding shares of common stock. The Company can redeem the
Rights for $0.001 per Right at any time prior to their becoming exercisable. The
Rights will expire on October 15, 2009, unless redeemed earlier by the Company
or exchanged for common stock. Under certain circumstances, if a person or group
acquires 15% or more of the Company's common stock, the Rights permit
stockholders other than the acquiror to purchase common stock having a market
value of twice the exercise price of the Rights, in lieu of the Preferred Stock.
In addition, in the event of certain business combinations, the Rights permit
stockholders to purchase the common stock of an acquiror at a 50% discount.
Rights held by the acquiror will become null and void in both cases.
DISC PUBLISHING, INC. ACQUISITION. In September 1999, the Company
completed a merger with Disc Publishing, Inc. SkyMall issued 280,555 shares of
its common stock in exchange for all of the outstanding common stock of Disc
Publishing based on a merger exchange ratio of 2.8 shares of the Company's
common stock for each share of Disc Publishing common stock. The issuance of
shares of the Company's common stock in exchange for Disc Publishing common
stock was completed in reliance on the exemption provided under Section 4(2) of
the Securities Act of 1933, as amended, and Regulation D thereunder.
26
<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
on-going e-commerce initiatives and 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 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 on-going e-commerce initiatives and 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 consolidated financial statements have been
adjusted to reflect the conversion of the Series A Preferred into common stock
as of December 31, 1999.
DECEMBER 1999 PRIVATE PLACEMENT OF SERIES B JUNIOR CONVERTIBLE
PREFERRED STOCK AND WARRANTS. In December 1999, the Company completed a private
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
27
<PAGE>
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. The
funds received from the Series B Private Offering will be used primarily to fund
SkyMall's on-going e-commerce initiatives and 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 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.
RYAN, BECK & CO., INC. In June 1999, the Company entered into an
agreement with Ryan, Beck & Co., Inc. for financial advisory services. Pursuant
to such agreement, the Company issued warrants (the "Ryan Beck Advisor
Warrants") to acquire up to 25,000 shares of common stock of the Company. The
Ryan Beck Advisor Warrants are exercisable for three years at an exercise price
of $9.31 per share. The funds received, if any, upon exercise of the Ryan Beck
Advisor Warrants will be used primarily to fund SkyMall's on-going e-commerce
initiatives and working capital requirements. The issuance of the Ryan Beck
Advisor Warrants was exempt under Section 4(2) of the Securities Act of 1933, as
amended. The resale of the shares of common stock issuable upon exercise of the
Ryan Beck Advisor Warrants has been registered under the Securities Act of 1933,
as amended.
DURHAM NOTE CONVERSION. In connection with the 1998 acquisition of
Durham & Company, the Company issued a note in the amount of $200,000 to Mr. and
Mrs. Durham (the "Durham Note"). In November 1999, the parties converted the
Durham Note into common stock and warrants of the Company. Pursuant to such
conversion, a total of 28,838 shares of common stock were issued upon conversion
of the Durham Note, together with warrants to purchase an additional 14,420
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. The funds received, if any, upon exercise of the
warrants will be used primarily to fund SkyMall's on-going e-commerce
initiatives and working capital requirements. The common stock and warrants
issued upon conversion of the Durham Note were issued in reliance on the
28
<PAGE>
exemption provided under Section 4(2) of the Securities Act of 1933, as amended.
The resale of the shares of common stock issued upon conversion of the Durham
Note and the shares of common stock issuable upon exercise of the warrants have
been registered under the Securities Act of 1933, as amended.
GENESIS SELECT. In December 1999, the Company entered into an agreement
with Genesis Select for investor relations advisory services. Pursuant to such
agreement, the Company issued warrants (the "Genesis Warrants") to acquire up to
50,000 shares of common stock of the Company. The Genesis Warrants are
exercisable for three years at an exercise prices ranging from $8.19 to $14.40
per share. The funds received, if any, upon exercise of the Genesis Warrants
will be used primarily to fund SkyMall's on-going e-commerce initiatives and
working capital requirements. The issuance of the Genesis Warrants was exempt
under Section 4(2) of the Securities Act of 1933, as amended. The resale of the
shares of common stock issuable upon exercise of the Genesis Warrants has been
registered under the Securities Act of 1933, as amended.
WAND PARTNERS INC. Pursuant to the December 30, 1999 Agreement and in
connection with the December 30, 1999 private placement, Wand Partners Inc.
rendered advisory services in connection with the transactions contemplated by
the December 30, 1999 Agreement. Pursuant to such agreement, the Company issued
warrants to Wand Partners Inc. to acquire up to 250,000 shares of common stock
of the Company (the "Wand Partners Warrants"). The Wand Partners Warrants are
exercisable for three years at an exercise price of $8.00 per share. The funds
received, if any, upon exercise of the Wand Partners Warrants will be used
primarily to fund SkyMall's on-going e-commerce initiatives and working capital
requirements. The issuance of the Wand Partners Warrants was exempt under
Section 4(2) of the Securities Act of 1933, as amended. The resale of the shares
of common stock issuable upon exercise of the Wand Partners Warrants has been
registered under the Securities Act of 1933, as amended.
FLUCTUATION IN QUARTERLY RESULTS
The Company's operating results may fluctuate from period-to-period as
a result of the seasonal nature of the retail industry. The Company typically
recognizes its highest sales levels during the fourth quarter, and during 1999
the fourth quarter accounted for approximately 42% of the Company's annual net
merchandise sales.
The following table sets forth certain unaudited information about the
Company's revenue and results of operations on a quarterly basis for 1999 and
1998.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
------------------------------------- -------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merchandise sales, net $ 9,818 $12,928 $12,464 $25,670 $ 9,234 $10,131 $ 9,657 $20,298
Placement fees and other 4,361 4,304 3,931 5,465 4,990 4,960 5,143 7,629
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 14,179 17,232 16,395 31,135 14,224 15,091 14,800 27,927
------- ------- ------- ------- ------- ------- ------- -------
Gross margin 6,668 7,219 7,183 11,449 6,355 6,639 7,225 12,531
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
------------------------------------- -------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Media expenses 2,602 2,536 3,675 4,774 2,663 2,717 2,723 3,250
Selling expenses 834 1,136 1,220 1,292 864 821 816 973
Customer service and
fulfillment expenses 1,798 1,479 1,551 2,295 1,099 912 940 2,616
General and
administrative
expenses 5,033 10,015 7,134 9,967 1,761 1,939 2,223 2,844
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 10,267 15,166 13,580 18,328 6,387 6,389 6,702 9,683
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations $(3,599) $(7,947) $(6,397) $(6,879) $ (32) $ 250 $ 523 $ 2,848
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
In September 1999, the Company completed a merger with Disc Publishing,
Inc. The merger qualified as a tax-free exchange and was accounted for as a
pooling of interests. Accordingly, the 1999 and 1998 quarterly operating results
have been restated to include the combined financial results of SkyMall and Disc
Publishing, which was formed in 1998.
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.
The statement, which was to be applied prospectively, is effective for the
Company's quarter ending March 31, 2000. In June 1999, the FASB issued 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 133 to the Company's quarter ending March 31, 2001. The Company is
currently evaluating the impact of SFAS 133 on its future results of operations
and financial position.
In January 1999, the Company adopted Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." This Statement of Position ("SOP") provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The statement identifies the characteristics of internal-use software, the
capitalization criteria and the amortization method. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company capitalized costs of
$5.5 million in 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.
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
30
<PAGE>
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. Revenue and
expenses recognized from barter transactions were approximately $370,000 in
1999. Prior to 1999, barter transactions were not significant.
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.
SEGMENT DISCLOSURE
The Company is an integrated e-commerce specialty retailer that
provides a vast 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 the domestic and international 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, CD-ROM, DVD 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
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 consolidated financial statements.
Inter-segment transactions are not significant.
Revenues and gross margins for the business segments are provided in
the notes to consolidated financial statements filed herewith.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K,
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.
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<PAGE>
WE REPORTED LOSSES IN FISCAL 1999 AND MAY NOT BE PROFITABLE IN THE
FUTURE. While we have been profitable in the past, we incurred a net loss of
$24,140,000 for the fiscal year ended December 31, 1999. 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 ability to expand into existing and new domestic, as well as
international markets,
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 is not sufficient to permit the Company to fully implement its business
plan. In order to fully implement our growth strategy, we will need to raise
additional capital from third parties or otherwise secure additional financing
for the Company. There can be no assurance that the Company will be able to
successfully raise additional capital or secure other financing, or that such
funding will be available on terms that are favorable to the Company. To the
extent we are unable to raise sufficient additional capital or secure other
financing, this could have a material adverse effect on the Company and we may
be unable to fully implement our planned growth strategy.
OUR BUSINESS MAY NOT GROW IN THE FUTURE. Since our inception, we have
rapidly expanded our operations, growing from total revenues of $200,000 in 1990
to total revenues of $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,
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.
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<PAGE>
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. 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 OPERATIONS POSE ADDITIONAL RISKS. We have
limited experience in selling our products and services internationally.
International operations place additional burdens upon our management, personnel
and financial resources and may cause the Company to incur losses. We also face
different and additional competition in these international markets. In
addition, international operations have 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 operate or expand our business internationally, we also are
subject to risks associated with international monetary exchange fluctuations.
Any one of these risks could affect our international operations, as well as
have a material adverse impact upon our overall business operations, growth and
financial condition.
WE FACE INTENSE COMPETITION. The distribution channels for our products
are highly competitive. From time to time in our airline catalog business,
competitors, typically other catalog retailers, have attempted to secure
contracts with various airlines to offer merchandise to their customers.
American Airlines currently offers merchandise catalogs to its customers through
a competitor. In addition, in July 1999, TWA, a former SkyMall partner, began
carrying a competitor's catalog. We also face competition for customers from
airport-based retailers, duty-free retailers, specialty stores, department
stores and specialty and general merchandise catalogs, many of which have
greater financial and marketing resources than we have. In addition, we compete
for customers with other in-flight marketing media, such as airline-sponsored
in-flight magazines and airline video programming. In our electronic commerce
sales, we face intense competition from other content providers and retailers
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<PAGE>
who seek to offer their products and/or services at their own Web sites or those
of other third parties. The success of online marketing cannot be currently
determined, and further penetration in this market will require substantial
additional financial resources, acquisition of technology, investments in
marketing and contractual relationships with third parties. Results will also be
affected by existing competition, which the Company anticipates will intensify,
and by additional entrants to the market who may already have the necessary
technology and expertise, many of whom may have substantially greater resources
than the Company.
DEPENDENCE ON CHANNEL RELATIONSHIPS. Our business depends significantly
on our relationships with the airlines, affiliate Web sites, hotels and other
channel partners. Some of our agreements with our channel partners are
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 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, 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 business,
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 business, 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
34
<PAGE>
sales volume that may occur. Any extended failure of our information and
telecommunications systems could have a material adverse effect on our business,
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
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, Utah and New York.
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
35
<PAGE>
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,
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
36
<PAGE>
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
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 AND WAND PARTNERS INC. CAN CONTROL MANY IMPORTANT COMPANY
DECISIONS. As of March 27, 2000, Mr. Worsley and his wife (the "Worsleys")
beneficially owned 4,798,530 shares, or approximately 36.9% of our outstanding
common stock, and Wand Partners Inc. beneficially owned 1,964,286, or
approximately 15.1% of our outstanding common stock. As a result, the Worsleys
and Wand Partners 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 and Wand Partners may
also discourage or prevent any proposed takeover of the Company pursuant to a
tender offer.
THE PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE. The market price
of our common stock has been highly volatile. Occurrences that could cause the
trading price of our common stock to fluctuate dramatically in the future
include:
o new merchant agreements
o the acquisition or loss of one or more airline, electronic
commerce or other channel partners
o fluctuations in our operating results
o analyst reports, media stories, Internet chat room discussions,
news broadcasts and interviews
o market conditions for retailers and electronic commerce companies
in general
o changes in airline fuel, paper or our other significant expenses
o changes in the commissions we are able to negotiate with our
merchants
The stock market has from time to time experienced extreme price and
volume fluctuations that have particularly affected the market price for
companies that do some or all of their business on the Internet. During the
fourth quarter of 1999, net merchandise sales from the Internet represented
approximately 30% of our net merchandise sales. Accordingly, the price of our
common stock may be impacted by these or other trends.
37
<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 March 27, 2000, there were outstanding warrants and options to acquire up
to 3,554,413 shares of common stock at prices ranging from $2.13 to $24.50 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 such as "believe,"
"expect," "anticipate," "plan" or similar words 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.
WE FACE RISKS ASSOCIATED WITH THE YEAR 2000. As of March 27, 2000, we
have not experienced any significant disruptions or computer processing errors
or failures related to any Year 2000 Issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 approximately $5 million at December 31,
1999.
The Company does not have any financial derivative instruments.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................................. F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997....................................... F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997........................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................................... F-5
Notes to Consolidated Financial Statements................................ F-6
SUPPLEMENTARY DATA:
Report of Independent Public Accountants.................................. S-1
Schedule II - Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 1999, 1998 and 1997................... S-2
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SkyMall, Inc.:
We have audited the accompanying consolidated balance sheets of SKYMALL, INC. (a
Nevada corporation) AND SUBSIDIARIES (the Company), as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SkyMall, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
February 25, 2000
F-1
<PAGE>
SKYMALL, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except shares and par value)
December 31,
-----------------
1999 1998
------- -------
ASSETS
Current Assets:
Cash and cash equivalents $16,060 $ 7,951
Accounts receivable, net 11,994 11,444
Inventories 1,300 630
Prepaid media costs 2,914 1,513
Income tax receivable 968 --
Deferred income taxes -- 709
------- -------
Total current assets 33,236 22,247
Property and equipment, net 12,869 6,474
Goodwill, net 2,817 3,022
Other assets, net 1,327 182
------- -------
Total assets $50,249 $31,925
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 24,136 $11,663
Accrued liabilities 3,979 1,217
Unearned revenue 1,298 3,373
Income taxes payable -- 761
Current portion of long-term debt and capital leases 28 226
------- -------
Total current liabilities 29,441 17,240
Deferred income taxes -- 209
Long-term debt and capital leases 5,190 242
------- -------
Total liabilities 34,631 17,691
------- -------
Commitments and contingencies (Note 7)
Shareholders' equity :
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; no shares -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; issued and outstanding shares:
12,981,425 in 1999 and 9,005,970 in 1998 13 9
Additional paid-in capital 33,884 8,364
Retained earnings (deficit) (18,279) 5,861
------- -------
Total shareholders' equity 15,618 14,234
------- -------
Total liabilities and shareholders' equity $50,249 $31,925
======= =======
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
<PAGE>
SKYMALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Merchandise sales, net $ 60,880 $ 49,320 $ 42,844
Placement fees and other 18,061 22,722 23,532
----------- ----------- -----------
Total revenues 78,941 72,042 66,376
Cost of goods sold 46,422 39,292 40,657
----------- ----------- -----------
Gross margin 32,519 32,750 25,719
Operating expenses:
Media expenses 13,587 11,353 9,082
Selling expenses 4,482 3,474 3,450
Customer service and fulfillment expenses 7,123 5,567 4,438
General and administrative expenses 32,149 8,767 6,340
----------- ----------- -----------
Total operating expenses 57,341 29,161 23,310
----------- ----------- -----------
Income (loss) from operations (24,822) 3,589 2,409
Interest expense (283) (32) (71)
Interest expense to shareholders -- -- (28)
Interest and other income 52 436 561
----------- ----------- -----------
Income (loss) before taxes (25,053) 3,993 2,871
Provision (benefit) for income taxes (913) 1,707 300
----------- ----------- -----------
Net income (loss) $ (24,140) $ 2,286 $ 2,571
=========== =========== ===========
Basic income (loss) per common share $ (2.60) $ .27 $ .30
=========== =========== ===========
Diluted income (loss) per common share $ (2.60) $ .27 $ .30
=========== =========== ===========
Basic weighted average shares outstanding 9,271,330 8,583,195 8,620,482
=========== =========== ===========
Diluted weighted average shares outstanding 9,271,330 8,602,177 8,675,803
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
SKYMALL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except shares)
<TABLE>
<CAPTION>
Convertible Retained
Preferred Stock Common Stock Additional Earnings
--------------------- --------------------------- Paid-In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 -- $ -- 8,654,000 $ 9 $ 7,588 $ 1,004 $ 8,601
Repurchase of common
stock -- -- (137,400) -- (865) -- (865)
Net income -- -- -- -- -- 2,571 2,571
--------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 8,516,600 9 6,723 3,575 10,307
Repurchase of common
stock -- -- (27,000) -- (127) -- (127)
Stock option plans and other,
net of mature shares
exchanged -- -- 235,815 -- 1,432 -- 1,432
Warrants issued in connection
with asset purchase -- -- -- -- 100 -- 100
Disc Publishing
pooling of interest -- -- 280,555 -- 236 -- 236
Net income -- -- -- -- -- 2,286 2,286
--------------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- -- 9,005,970 9 8,364 5,861 14,234
Stock option plans -- -- 385,142 -- 2,727 -- 2,727
Common stock, net of
issuance costs -- -- 1,114,047 1 6,869 -- 6,870
Conversion of note payable
to common stock -- -- 28,838 -- 200 -- 200
Series A preferred stock, net
of issuance costs 91,320 -- -- -- 8,047 -- 8,047
Series B preferred stock, net
of issuance costs 80,000 -- -- -- 7,680 -- 7,680
Conversion of preferred stock
to common stock (171,320) -- 2,447,428 3 (3) -- --
Net loss -- -- -- -- -- (24,140) (24,140)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1999 -- $ -- 12,981,425 $ 13 $ 33,884 $ (18,279) $ 15,618
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
SKYMALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $(24,140) $ 2,286 $ 2,571
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,360 1,118 609
Provision for doubtful accounts 859 281 343
Loss on disposal of property and equipment 469 -- --
Deferred income taxes and other tax effects, net 500 878 (391)
Change in assets and liabilities, net of effects of
acquisition:
(Increase) decrease in:
Accounts receivable (1,409) (423) (6,620)
Inventories (670) 22 --
Prepaid media costs (1,401) 351 51
Income tax receivable (968) -- --
Other assets (1,317) 117 (174)
(Decrease) increase in:
Accounts payable 12,473 (2,256) 5,046
Accrued liabilities 2,762 (1,413) 1,071
Unearned revenue (2,075) 2,911 --
Income taxes payable (761) 205 276
Reserve for restructure charges -- -- (165)
-------- -------- --------
Net cash (used in) provided by operating activities (13,318) 4,077 2,617
-------- -------- --------
Cash flows used in investing activities:
Purchase of property and equipment (8,847) (3,193) (2,760)
Payments for acquisition, net of cash acquired -- (2,900) --
-------- -------- --------
Net cash used in investing activities (8,847) (6,093) (2,760)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from long-term debt 7,500 195 --
Payments on long-term debt (2,550) (60) (951)
Payments on notes payable to shareholders -- -- (120)
Proceeds from issuance of preferred stock, net of
issuance costs 15,727 -- --
Proceeds from issuance of common stock, net of issuance costs 9,597 547 --
Repurchase of common shares -- (127) (865)
-------- -------- --------
Net cash provided by (used in) financing activities 30,274 555 (1,936)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 8,109 (1,461) (2,079)
Cash and cash equivalents, beginning of year 7,951 9,412 11,491
-------- --------- --------
Cash and cash equivalents, end of year $ 16,060 $ 7,951 $ 9,412
======== ========= ========
Income taxes paid $ -- $ 623 $ 415
======== ========= ========
Total interest paid $ 283 $ 32 $ 99
======== ========= ========
Interest paid to shareholders $ -- $ -- $ 28
======== ========= ========
Supplemental disclosure of noncash activity:
Long-term debt incurred with business acquisition $ -- $ 200 $ --
======== ========= ========
Conversion of long-term debt to common stock $ 200 $ -- $ --
======== ========= ========
Employee receivable for stock options exercised $ -- $ 401 $ --
======== ========= ========
Mature shares received for stock options exercised $ -- $ 208 $ --
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
SKYMALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) THE COMPANY:
NATURE OF ORGANIZATION
SkyMall, Inc. (the Company) was incorporated in 1989 as an Arizona corporation
(and reincorporated in Nevada in October 1996). The Company is an integrated
specialty retailer that markets high quality products and services via various
media, including the SkyMall in-flight print catalogs, workplace catalogs,
multi-media CD-ROM and on the Internet at WWW.SKYMALL.COM,
WWW.SKYMALLTRAVEL.COM, WWW.DURHAM.SKYMALL.COM and WWW.SKYDISC.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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries; skymall.com, inc., Durham & Company and Disc
Publishing, Inc. All significant inter-company accounts and transactions have
been eliminated.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and disclosures.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform with the 1999 presentation. Shipping costs which
were previously netted against shipping revenue and recorded in placement fees
and other revenue have been reclassified from placement fees and other revenue
to cost of goods sold. Shipping revenue is included in placement fees and other
revenue.
F-6
<PAGE>
CASH AND CASH EQUIVALENTS
Cash equivalents include investments purchased with an original maturity of
three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1999 and 1998, primarily include amounts due
from participating merchants, credit card companies and products shipped but not
billed. The allowance for doubtful accounts as of December 31, 1999 and 1998,
was approximately $744,000 and $1,205,000, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Such cost includes raw materials, direct labor
and overhead.
PREPAID MEDIA COSTS
Prepaid media costs primarily include catalog production costs and paper costs,
which are deferred and amortized on a straight-line basis over the period each
catalog issue is in use, currently three months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets leased under capital lease
agreements are included in property and equipment. Depreciation of property and
equipment is provided by the straight-line method over the estimated useful
lives of the respective assets or capital lease term. Periodically, the Company
evaluates property and equipment whenever significant events or changes occur
that might impair recovery of recorded asset costs.
The Company capitalizes labor cost associated with the development of computer
software for internal use in accordance with Statement of Position ("SOP") 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." Costs capitalized under SOP 98-1 totaled $5,520,120 for 1999.
GOODWILL
Goodwill represents the excess of the purchase price and related costs over the
value assigned to net tangible assets in connection with the acquisition of
Durham & Company in October 1998. Goodwill is amortized using the straight-line
method over 15 years. Amortization expense for 1999 and 1998 was $204,947 and
$52,192, respectively. Accumulated amortization at December 31, 1999 and 1998
was $257,139 and $52,192, respectively. Periodically, the Company evaluates
goodwill and other intangibles whenever significant events or changes occur that
might impair recovery of recorded asset costs. There were no asset impairments
recorded in 1999, 1998 or 1997.
F-7
<PAGE>
UNEARNED REVENUE
Unearned revenue represents amounts charged to customer credit cards and
customers with corporate recognition programs in which all related products for
that charge have not been shipped. Unearned revenue is recognized as net
merchandise sales when the related product is shipped.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for the expected future tax
benefits to be realized from operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Deferred tax assets are reviewed
periodically for recoverability and valuation allowances are provided as
necessary.
REVENUE RECOGNITION
The Company has two primary sources of revenue, net merchandise sales and
placement fees. Net merchandise sales are recognized as revenue upon shipment of
product by the Company or participating merchants, net of estimated returns and
allowances. Placement fees represent fees paid to the Company by participating
merchants for inclusion of their products in the Company's media channels.
Placement fee revenue is recognized on a straight-line basis over the
circulation period of a media channel, generally three months. Customer charges
for shipping and handling are included in placement fees and other revenue.
Revenue from gift certificates is recognized upon product shipment following
redemption.
Placement fees and other revenue also include barter revenue which includes an
exchange by the Company of advertising space or services for reciprocal
advertising space or services. Revenues and expenses from barter transactions
are recorded at the lower of estimated fair value of the advertising or services
received or delivered. Barter revenue and expenses are recognized when the
advertising or services performed are delivered. Revenue and expenses recognized
from barter transactions were approximately $370,000 in 1999. The Company did
not recognize barter revenue and expenses in 1998 and 1997.
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.
F-8
<PAGE>
COST OF GOODS SOLD
Cost of goods sold represents net amounts paid to participating merchants to
acquire products sold to customers. For products sold by Durham & Company, cost
of goods sold includes manufacturing costs, including materials, labor and
overhead. Shipping costs incurred related to product delivery are included in
cost of goods sold.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123 ACCOUNTING FOR
STOCK-BASED COMPENSATION encourages, but does not require, companies to adopt a
fair value based method for determining expense related to stock-based
compensation. The Company continues to account for stock-based compensation
using the intrinsic value method as prescribed under Accounting Principles Board
("APB") opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
interpretations. See Note 8 for disclosures required under SFAS No. 123
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of accounts receivable and accounts payable.
Concentrations of credit risk with respect to accounts receivable and accounts
payable may be limited due to the large number of participating merchants
comprising the balances and the fact that certain receivable and payable
balances may be offset. The Company performs ongoing credit evaluations of its
merchants, but does not require collateral to support receivables. In addition,
the Company has a right to offset using amounts payable to merchants on future
purchases. The Company has established an allowance for doubtful accounts based
on factors surrounding the credit risk of specific customers, historical trends,
and other information.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed in accordance with SFAS No. 128,
EARNINGS PER SHARE. Basic income (loss) per common share is based upon the
weighted average shares outstanding. Diluted income (loss) per common share is
based on the weighted average shares outstanding and dilutive common stock
equivalents.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, accounts
payable, notes payable, and capital leases. Due to the short-term nature of
cash, accounts receivable, and accounts payable, the fair value of these
instruments approximates their recorded value. In the opinion of management,
based upon current information, the fair value of notes payable and capital
leases approximates market value. The Company does not have material financial
instruments with off-balance sheet risk.
F-9
<PAGE>
(3) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (amounts in thousands):
Estimated
Useful Life December 31
----------- --------------------
(Years) 1999 1998
----------- --------- ----------
Equipment and software 2-10 $ 13,747 $ 6,461
Buildings and leasehold improvements 15-40 3,347 2,735
Furniture, fixtures and other 3-7 991 668
-------- --------
18,085 9,864
Accumulated depreciation (5,216) (3,390)
-------- --------
$ 12,869 $ 6,474
======== ========
(4) OTHER ASSETS:
Purchased airline contracts are amortized using the straight-line method over
their estimated useful lives . Other assets consists of the following (amounts
in thousands):
Estimated
Useful Life December 31
----------- --------------------
(Years) 1999 1998
----------- --------- ----------
Purchased airline contracts 3-10 $ 1,323 $ 323
Other 425 108
------- -------
1,748 431
Accumulated amortization (421) (249)
------- -------
$ 1,327 $ 182
======= =======
(5) LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases consist of the following (amounts in
thousands):
F-10
<PAGE>
December 31,
------------------
1999 1998
------- --------
Revolving line of credit $ 5,000 $ --
Note payable to employee, interest at 6%,
due October 2001 180 198
Capital leases, interest at varying rates of
18% to 23%, due in monthly installments
(including interest) of approximately $2,700
through May 2001, secured by equipment 38 70
Note payable, interest at 9%, paid in 1999 -- 200
------- -------
5,218 468
Less current portion (28) (226)
------- -------
$ 5,190 $ 242
======= =======
At December 31, 1999, aggregate annual maturities of long-term debt and capital
leases were as follows (amounts in thousands):
2000 $ 28
2001 5,190
------
$5,218
======
In June 1999, the Company obtained a $10 million revolving line of credit (the
"Line") from a bank that matures in May 2001. At the Company's option, advances
made on the Line bear interest at either Prime or LIBOR. The Line is
collateralized by substantially all assets of the Company, and contains
covenants that require maintenance of certain financial ratios. The balance
outstanding on the Line at December 31, 1999 was $5,000,000.
(6) SEGMENT AND RELATED INFORMATION:
The Company is an integrated e-commerce specialty retailer that provides a vast
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 and international 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, CD-ROM, DVD and the Company's Web site. 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.
F-11
<PAGE>
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 2 of the consolidated financial statements.
Inter-segment transactions are not significant.
Revenues and gross margin for the business segments are as follows (amounts in
thousands):
Business-to- Business-to-
December 31, Consumer Business Corporate Total
- --------------------------------------------------------------------------------
1999
Revenues $70,018 $ 8,923 $ -- $78,941
Gross margin 29,491 3,028 -- 32,519
Operating expenses -- -- 57,341 57,341
Income (loss) from
operations (24,822)
- --------------------------------------------------------------------------------
1998
Revenues $70,920 $ 1,122 $ -- $72,042
Gross margin 32,300 450 -- 32,750
Operating expenses -- -- 29,161 29,161
Income (loss) from
operations 3,589
- --------------------------------------------------------------------------------
1997
Revenues $66,376 $ -- $ -- $66,376
Gross margin 25,719 -- -- 25,719
Operating expenses -- -- 23,310 23,310
Income (loss) from
operations 2,409
- --------------------------------------------------------------------------------
Identifiable assets available to support the Company's business-to-business
segment approximate $4,587,000 and $4,371,000 at December 31, 1999 and 1998,
respectively. There were no identifiable assets for the business-to-business
segment at December 31, 1997. The remaining assets which are combined to support
the Company's two reportable business segments, approximate $45,662,000,
$27,554,000 and $26,634,000 at December 31, 1999, 1998 and 1997, respectively.
(7) COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time-to-time subject to complaints and claims arising in the
ordinary course of business. Management believes that none of the claims and
complaints of which it is currently aware will materially affect its business,
financial position, or future operating results, although no assurance can be
given with respect to the ultimate outcome of any such claims or with respect to
the occurrence of any future claims.
A purchaser of products through a SkyMall catalog filed an action
alleging that SkyMall improperly collected from her certain state and local
taxes relating to her purchase. Plaintiff brought the action on behalf of
herself and a class of persons in the United States similarly situated. She
alleged causes of action for unjust enrichment, fraud, breach of contract, and
F-12
<PAGE>
declaratory judgment, and seeks return of allegedly unlawful revenue collected
with interest, an injunction against collecting taxes improperly, compensatory
and punitive damages, and attorneys' fees and costs. While the Company believed
her claims were substantially without merit, in order to minimize overall
litigation risks and ongoing litigation costs, and to reduce the management time
and attention required to be devoted to this matter, the Company entered into a
Settlement Agreement with Plaintiff and the alleged class. As a part of the
agreement, the Company has agreed, among other things, to offer discounts during
2000 to SkyMall customers who purchased merchandise from the Company prior to
December 31, 1998. The agreement also calls for SkyMall to issue to Plaintiff's
attorneys approximately 65,000 shares of common stock valued at $600,000 and
$100,000 cash. The Company recorded a reserve for this settlement amount and the
related expenses in the second quarter of 1999 in the amount of $1.436 million,
representing approximately $700,000 payable to Plaintiff's attorneys in stock
and cash, $356,000 in anticipated customer discounts associated with the offer
to customers and $380,000 in professional fees incurred.
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 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
has filed a Motion to Dismiss. SkyMall believes that the allegations against it
and Mr. Worsley are substantially without merit and intends to vigorously defend
the lawsuit.
RGC International Investors, LDC, the parent company of Rose Glen
Capital Management, filed a complaint alleging 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 dismiss 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.
LEASES
The Company has entered into several operating leases for equipment and
facilities. As of December 31, 1999, the future minimum payments under these
leases are as follows (amounts in thousands):
2000 $ 1,840
2001 1,316
2002 730
2003 91
2004 55
Thereafter 512
--------
$ 4,544
========
Other equipment and property are leased on a monthly basis. Total lease expense
for the years ended December 31, 1999, 1998 and 1997 was approximately
$1,299,000, $141,000, and $106,000, respectively.
F-13
<PAGE>
LEASE REVENUE
The Company leases certain of its facilities to others under non-cancelable
leases and month-to-month agreements. Lease revenue of approximately $185,000,
$74,000 and $99,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, is included in interest and other income in the accompanying
consolidated financial statements. As of December 31, 1999, future minimum lease
payments to be received under non-cancelable leases are as follows (amounts in
thousands):
2000 $ 176
2001 179
2002 117
2003 105
2004 105
--------
$ 682
========
401(K) PLAN
Under the Company's 401(k) plan (the Plan) adopted in 1992, eligible employees
may direct a portion of their compensation, up to a legally established maximum,
be withheld by the Company and contributed to their account. All contributions
are placed in a trust fund which is invested by the Plan's trustee. The Plan
permits participants to direct the investment of their account balances among
mutual or investment funds and the Company provides a matching contribution of
50% of the first 6% of a participant's contributions.
The total contributions made by the Company during the years ended December 31,
1999, 1998 and 1997 were approximately $116,000 , $77,000, and $33,000,
respectively.
EMPLOYMENT CONTRACTS
The Company entered into employment contracts with certain officers, which
expire in January 2002. The contracts may be terminated earlier under terms and
circumstances described in the agreements. Under certain circumstances, certain
officers may receive the remaining amounts under the contract upon termination,
which total $850,000 for 2000 and 2001.
(8) STOCK-BASED COMPENSATION:
STOCK OPTION PLANS
The Company has an incentive and nonqualified stock option plan, which allows
the Company to grant to officers and key employees (the "Officer and Employee
Plan") options covering up to 1,500,000 shares of common stock at an exercise
price of not less than fair market value at the date of grant.
Under the Officer and Employee Plan, the option exercise price equals or exceeds
the stock's fair market value on date of grant. The Plan options generally fully
vest on varying schedules upon completion of three years of employment; options
expire ten years after the date of grant or three months after grantee's
employment termination.
F-14
<PAGE>
In October 1996, the Company adopted a Non-Employee Director Stock Option Plan
(the "Director Plan"), which allows the Company to grant non-employee directors
options covering up to 375,000 shares of common stock at an exercise price of
not less than fair market value on the date of grant.
Under the Director Plan, each non-employee Board member is granted an option to
purchase 25,000 common shares upon appointment to the Board and an option to
purchase 7,500 shares annually, subject to certain limitations. Options are
fully vested upon grant and expire ten years after the date of issuance.
A summary of the status of the Company's Plans at December 31, 1999, 1998 and
1997, and changes during the years ended December 31, 1999, 1998 and 1997, are
presented in the table below (share amounts in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998 1997
------------------ ------------------- -------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 544 $ 5.82 604 $ 6.39 458 $ 6.21
Granted 636 13.42 312 4.66 319 6.52
Exercised (13) 3.62 (106) 6.89 -- --
Forfeited (159) 10.63 (266) 6.67 (173) 6.13
Expired -- -- -- -- -- --
------ -------- ------ -------- ------ --------
Outstanding at end of period 1,008 $ 9.88 544 $ 5.82 604 $ 6.39
====== ======== ====== ======== ====== ========
</TABLE>
Stock options outstanding and exercisable at December 31, 1999, are as follows
(option amounts in thousands):
Outstanding Exercisable
-------------------------- ------------------
Exercise Average Average
Price Average Exercise Exercise
Range Options Life(a) Price Options Price
--------------- ------- ------- -------- ------- --------
$ 2.13 $ 5.56 336 8.67 $ 4.46 226 $ 4.65
7.00 12.81 468 8.99 9.43 129 9.12
13.19 24.50 204 9.26 19.83 -- --
--------------- ------ ------ ------ ------- ------
$ 2.13 $24.50 1,008 8.93 $ 9.88 355 $ 6.27
=============== ====== ====== ====== ======= ======
(a) Average contractual life remaining.
The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to or in excess of the fair value of
the Company's common stock on the date of grant. The Company estimated the fair
value of each option grant as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
F-15
<PAGE>
interest rate of 5.5%, expected life of 1 to 10 years, dividend rate of zero,
and expected volatility of approximately 107%, 77%, and 45% for 1999, 1998, and
1997, respectively. Using these assumptions, the fair value of the stock options
granted in 1999, 1998, and 1997 is approximately $5,200,000, $930,000, and
$709,000, respectively, which would be amortized as compensation expense over
the vesting period of the options. Options generally vest over three years. Had
compensation costs been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net income (loss) and net income
(loss) per common share would have been adjusted to the following pro forma
amounts (amounts in thousands except per common share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Net income (loss) available to common shareholders:
As reported $ (24,140) $ 2,286 $ 2,571
Pro forma (25,182) 2,167 2,378
Basic net income (loss) per common share:
As reported $ (2.60) $ .27 $ .30
Pro forma (2.72) .25 .28
Diluted net income (loss) per common share:
As reported $ (2.60) $ .27 $ .30
Pro forma (2.72) .25 .27
</TABLE>
STOCK WARRANTS
A summary of the status of the Company's Stock Purchase Warrants at December 31,
1999, 1998 and 1997, and changes during the years ended December 31, 1999, 1998
and 1997, are presented in the table below (share amounts in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998 1997
------------------ ------------------- -------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 358 $ 8.18 539 $ 8.59 439 $ 8.73
Granted 2,499 8.04 -- -- 100 8.00
Exercised (294) 8.21 (181) 9.42 -- --
Expired (14) 8.00 -- -- -- --
------ -------- ------- -------- ------ --------
Outstanding at end of period 2,549 $ 8.04 358 $ 8.18 539 $ 8.59
====== ======== ======= ======== ====== ========
</TABLE>
The Company has 2,548,746 warrants outstanding warrants to purchase common stock
at prices ranging from $7.00 to $9.60 per share with an average exercise price
of $8.04 per share. These warrants expire five years from the date of issuance
and have an average contractual life remaining of 4.29 years.
F-16
<PAGE>
(9) INCOME TAXES:
The provision (benefit) for income taxes includes the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Current:
Federal $ (917) $ 1,374 $ 587
State (496) 364 104
---------- -------- ---------
Total current (1,413) 1,738 691
---------- -------- ---------
Deferred:
Federal 425 (26) (332)
State 75 (5) (59)
---------- ------- ---------
Total deferred 500 (31) (391)
---------- ------- ---------
Provision (benefit) for income taxes $ (913) $ 1,707 $ 300
========== ======= =========
</TABLE>
The provision (benefit) for income taxes is different from the statutory Federal
income tax rate primarily due to the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Federal statutory rate (34)% 34% 34%
Change in deferred tax asset
valuation allowance 37 -- (32)
State taxes, net of federal benefit (5) 6 6
Other (2) 3 2
----- --- ---
Income tax provision (benefit) (4)% 43% 10%
===== === ===
</TABLE>
The primary components of the Company's deferred tax assets and liabilities and
the related valuation allowance are as follows (amounts in thousands):
F-17
<PAGE>
December 31,
------------------
1999 1998
------- --------
Deferred tax assets:
Nondeductible charges including bad
debts, sales returns and other $1,163 $ 526
Accrued liabilities 319 113
Other 138 70
Net operating loss carry forward 8,261 --
Valuation allowance (9,317) --
------ -------
Deferred tax assets 564 709
------ -------
Deferred tax liabilities:
Tax depreciation in excess of book
depreciation 564 209
------ -------
Net deferred tax assets $ -- $ 500
====== =======
The valuation allowance for deferred tax assets as of December 31, 1999 was
$9,317,000. As of December 31, 1999, the Company has approximately $20.6 million
of federal net operating loss carryforwards which may be used to offset future
taxable income. These loss carryforwards begin to expire in 2019.
(10) BUSINESS COMBINATIONS:
In October 1998, the Company acquired all 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. The note payable was
due October 1999, and was settled through the issuance of 28,838 shares of
common stock of the Company and warrants to purchase an additional 14,420 shares
of common stock.
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
==========
F-18
<PAGE>
The following unaudited consolidated pro forma information is presented as if
the Durham & Company acquisition had occurred at the beginning of the periods
presented.
Year Ended
December 31,
------------------
1999 1998
------- --------
Total revenues $74,974 $ 70,798
Net income 2,124 2,453
Basic income per common share .25 .28
Diluted income per common share .25 .28
The consolidated pro forma information includes adjustments to give effect to
amortization of goodwill. The unaudited consolidated pro forma information is
not necessarily indicative of the combined results that would have occurred had
the acquisition been made at the beginning of the periods presented, nor is it
indicative of the results that may occur in the future.
In September 1999, the Company completed a merger with Disc Publishing, Inc.
SkyMall issued 280,555 shares of its common stock in exchange for all of the
outstanding common stock of Disc Publishing based on a merger exchange ratio of
2.8 shares of the Company's common stock for each share of Disc Publishing
common stock. The merger qualified as a tax free exchange and was accounted for
as a pooling of interests. Accordingly, the Company's 1999 and 1998 consolidated
financial statements have been restated to include the combined financial
results of SkyMall and Disc Publishing, Inc., which was formed in 1998. The
following table presents a reconciliation of net merchandise sales and net
income (loss) previously reported by the individual companies to those presented
in the accompanying consolidated financial statements (amounts in thousands).
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
REVENUES:
SkyMall, Inc. $ 78,710 $ 72,042 $ 66,376
Disc Publishing, Inc. 231 -- --
--------- -------- --------
Total revenues $ 78,941 $ 72,042 $ 66,376
========= ======== ========
NET INCOME (LOSS):
SkyMall, Inc. $(23,437) $ 2,551 $ 2,571
Disc Publishing, Inc. (703) (265) --
-------- -------- --------
Total net income (loss) $(24,140) $ 2,286 $ 2,571
======== ======== ========
</TABLE>
(11) CAPITAL STOCK
SHAREHOLDER RIGHTS PLAN
In September 1999, the Company's Board of Directors adopted a Preferred Stock
Purchase Rights Plan and distributed to shareholders one preferred stock
F-19
<PAGE>
purchase right (a "Right") for each outstanding share of common stock. In the
event a person or group acquires or announces a tender to acquire 15% or more of
the Company's common stock, the Right may be exercised (except by the acquiring
person or group whose Rights are canceled). Each Right entitles the holder to
purchase from the Company one one-hundredth of a share of a new series of
preferred stock at an initial exercise price of $65 per Right. Under certain
circumstances, each Right entitles the holder (except the acquiring person or
group) to purchase common stock of the Company having a market value equivalent
to two times the exercise price of the Rights, in lieu of preferred stock. In
the event of certain business combinations, each Right permits the holder to
purchase common stock of the acquiring company at a 50% discount. The Rights
expire on October 15, 2009, and may be redeemed by the Company for $.001 per
Right prior to a person or group acquiring or announcing a tender offer to
acquire 15% or more of the Company's common stock.
PREFERRED STOCK
The Company is authorized to issue up to ten million shares of preferred stock,
$.001 par value. The power to issue any shares of preferred stock of any class
or any series of any class and designations, voting powers, preferences, and
relative participating, optional or other rights, if any, or the qualifications,
limitations, or restrictions thereof, shall be determined by the Board of
Directors.
In 1999, the Company issued 91,320 shares of Series A Junior Convertible
Preferred Stock (the "Series A Preferred") and 80,000 shares of Series B Junior
Convertible Preferred Stock (the "Series B Preferred") in two separate private
offerings. The Series A and Series B Preferred had no voting rights and were
subject to certain redemption rights, conversion terms and liquidation values.
The shares of Series A and Series B Preferred 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. Calculation of the basic weighted average shares outstanding
includes the effect of the conversion of the Series A and Series B Preferred
into common stock from the original date of issuance.
COMMON STOCK
In 1999, the Company issued 1,142,885 shares of common stock at $7 per share in
a private offering.
STOCK WARRANTS
In 1999, the Company issued 652,289 stock purchase warrants to Series A
Preferred shareholders, 571,429 stock purchase warrants to Series B Preferred
shareholders and 571,444 stock purchase warrants to common shareholders in
connection with various private placement offerings. The warrants are
exercisable at $8.00 per share and expire in 2004. The Company issued 200,742,
34,286 and 129,316 stock purchase warrants to placement agents in connection
with the Series A Preferred, Series B Preferred and common stock private
placement offerings, respectively. The Company issued 339,240 stock purchase
warrants in various transactions in 1999. These stock purchase warrants are
exercisable at prices ranging from $7.00 to $9.12 per share and expire in 2004.
F-20
<PAGE>
(12) INCOME (LOSS) PER COMMON SHARE:
The following table sets forth the computation of basic and diluted income
(loss) per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Basic income (loss) per common share:
Income (loss) available to common
shareholders $ (24,140) $ 2,286 $ 2,571
========= ======== =========
Weighted average shares outstanding 9,271 8,583 8,621
========= ======== =========
Basic income (loss) per common share $ (2.60) $ .27 $ .30
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Diluted income (loss) per common share:
Income (loss) available to common
shareholders $ (24,140) $ 2,286 $ 2,571
========= ======== ========
Weighted average shares outstanding 9,271 8,583 8,621
Dilutive effect of options and
warrants assumed converted -- 19 55
--------- -------- ---------
Total weighted average shares
outstanding plus assumed
conversions 9,271 8,602 8,676
========= ======== ========
Diluted income (loss) per common share $ (2.60) $ .27 $ .30
========= ======== ========
</TABLE>
As a result of anti-dilutive effects, approximately 366,000 employee options and
other common stock equivalents were not included in the computation of diluted
earnings per share for 1999.
(13) MAJOR MERCHANTS AND AIRLINES:
Revenue generated through net merchandise sales and fixed placement fees for the
Company's largest participating merchants for the years ended December 31, 1999,
1998 and 1997, is as follows:
Year Ended
December 31,
-----------------------------------
1999 1998 1997
---------- -------- ---------
Number of merchants 2 2 2
Percentage of total merchandise
sales and placement fees 21% 21% 24%
F-21
<PAGE>
There were no other merchants that exceeded 10% of total revenues.
Net merchandise sales originating from the Company's five largest participating
airlines approximated 51%, 72% and 79% for the years ended December 31, 1999,
1998 and 1997, respectively.
(14) TRANSACTIONS WITH RELATED PARTIES:
The Company has an agreement with a company, which is owned by one of the
Company's directors, to provide order conveyance services. Expenses related to
this agreement totaled $485,000, $343,000 and $200,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
At December 31, 1998, the Company recorded an employee receivable of
approximately $401,000 for the exercise price of employee stock options. This
receivable was collected in 1999.
Disc Publishing, Inc. entered into a note payable agreement with one of its
officers prior to the merger with the Company. The note payable bears interest
at 6% and matures in October 2001. As of December 31, 1999 and 1998 the balance
outstanding was $180,000 and $198,000, respectively.
The Company has an agreement with a company, which is owned by one of the
Company's officers, to provide professional services. Expenses related to this
agreement totaled $97,000 during 1999.
The Company has an agreement with a company, which is owned by one of the
Company's officers, to provide Internet content. Expenses related to this
agreement totaled $45,000 during 1999.
The Company has an agreement with a company, which is owned by former
shareholders of Disc Publishing, Inc., to provide professional services.
Expenses related to this agreement totaled $71,000 in 1999.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SkyMall, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of SKYMALL, INC. AND SUBSIDIARIES (the
Company) included in this Annual Report filed on Form 10-K, and have issued our
report thereon dated February 25, 2000. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule on page S-2 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
February 25, 2000
S-1
<PAGE>
SKYMALL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARD ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning Expense to Other End of
of Period Recorded Accounts Other of Period
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1999 $1,204,876 $ 858,641 $ -- $(1,319,153)(1) 744,364
Year ended December 31, 1998 422,330 1,119,215 -- (336,669)(1) 1,204,876
Year ended December 31, 1997 2,140,562 342,764 -- (2,060,996)(1) 422,330
General Reserves(3):
Year ended December 31, 1999 $ 256,805 $2,926,446 $ -- $(1,775,156)(2) 1,408,095
Year ended December 31, 1998 200,000 56,805 -- -- 256,805
Year ended December 31, 1997 -- 200,000 -- -- 200,000
</TABLE>
(1) Write-off of bad debts
(2) Payments, settlements, sales returns activities and reversal of reserves
(3) General reserves primarily include amounts reserved for litigation, sales
tax assessments and sales returns
S-2
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors and executive officers of the
Company is incorporated herein by reference to the Definitive Proxy Statement
relating to the Company's Annual Meeting to be held on June 9, 2000 (the "2000
Annual Meeting").
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated
herein by reference to the Definitive Proxy Statement relating to the 2000
Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Definitive Proxy Statement relating to 2000 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions is incorporated herein by reference to the Definitive Proxy
Statement relating to the 2000 Annual Meeting.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
PAGE
(a)(1) Consolidated Financial Statements.
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31,
1999 and 1998 F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1999, 1998
and 1997 F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) and (d) Consolidated Financial Statement Schedules.
Report of Independent Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts
and Reserves For the Years Ended December 31,
1999, 1998 and 1997 S-2
(a)(3) and (c) Exhibits.
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
3.1(a) Articles of Incorporation of Registrant (1)
3.1(b) Certificate of Amendment to Articles of Incorporation (1)
3.2 Certificate of Designations, Rights, Preferences and
Limitations of the Series A Junior Convertible Preferred
Stock (10)
3.3 Certificate of Designations, Rights, Preferences and
Limitations of the Series B Junior Convertible Preferred
Stock (12)
3.4 Certificate of Designation of Rights, Preferences and
Terms of the Series R Preferred Stock (See Exhibit 10.11(a),
below) (5)
3.5 Bylaws of Registrant (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Series A Junior Convertible Preferred Stock
Certificate (10)
4.3 Form of Series B Junior Convertible Preferred Stock
Certificate (12)
42
<PAGE>
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
4.4 Form of Right Certificate (5)
10.1 Employment Agreement between the Company and Robert M.
Worsley (1)
10.2 Employment Agreement between the Company and Thomas C.
Edwards (2)
10.3 Employment Agreement between the Company and Curtis D. Brown (2)
10.4(a) Form of Airline Customer Services Agreement (1)
10.4(b) Schedule of Omitted Material Terms from Material Airline
Customer Services Agreement (1)
10.5 Form of Tax Indemnification Agreement (1)
10.6 SkyMall, Inc. 1994 Stock Option Plan, as amended (6)
10.7 Non-Employee Director Stock Option Plan, as amended (7)
10.8(a) Lease Agreement between Pasqualetti Properties, Inc.
and Smitty's Super Valu, Inc. dated June 24, 1960 (1)
10.8(b) Agreement between Rose Pasqualetti Perkins, Amos
Pasqualetti, Anthony Pasqualetti, Ben Pasqualetti and
Smitty's Super Valu, Inc. dated March 2, 1961 (1)
10.8(c) Addendum to Lease between Amos Pasqualetti, Ben S.
Pasqualetti, Rose Pasqualetti Jenkins, Estate of Anthony J.
Pasqualetti and Smitty's Super Valu, Inc. dated May 11, 1966 (1)
10.8(d) Sublease between Schwan Brothers Properties and Smitty's
Super Valu, Inc. dated August 1, 1984 (1)
10.8(e) Lease Amending Agreement between Smitty's Super Valu, Inc.,
Pasquo Investments, and Amos Pasqualetti and Victoria
McFarland dated October 1, 1984 (1)
10.8(f) Addendum to Sublease between Smitty's Super Valu, Inc. and
Schwan Brothers Properties dated January 1, 1985 (1)
10.8(g) Assignment of Sublease from Pima Partners to SkyMall, Inc.
dated July 12, 1990 (1)
10.9 Warrant issued to Ryan, Beck & Co., Inc. in connection with
financial advisory services dated June 30, 1999 (9)
10.10(a) Credit and Security Agreement between SkyMall, Inc.,
skymall.com, inc., Durham & Company and Imperial Bank dated
as of June 30, 1999 (3)
10.10(b) Promissory Note between SkyMall, Inc., skymall.com, inc.,
Durham & Company and Imperial Bank dated as of June 30, 1999 (3)
43
<PAGE>
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
10.11(a) Rights Agreement between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent, dated as of
September 15, 1999 (including as Exhibit A the form of
Certificate of Designation of Rights, Preferences and Terms
of the Series R Preferred Stock, as Exhibit B the form of
Right Certificate, and as Exhibit C the Summary of Terms of
Rights Agreement) (4)
10.11(b) Form of Letter to SkyMall, Inc. shareholders, dated
October 15, 1999 (4)
10.12(a) Stock Acquisition Agreement, dated as of August 26, 1999,
by and among SkyMall, Inc., Disc Publishing, Inc., Lorne
Grierson, Warren Osborn, Flamingo Partnership, Kyle Love,
Bart Howell and David E. Hardy (4)
10.12(b) Amendment to Stock Acquisition Agreement, dated as of
September 20, 1999, by and among SkyMall, Inc., Disc
Publishing, Inc., Lorne Grierson, Warren Osborn, Flamingo
Partnership, Kyle Love, Bart Howell and David E. Hardy (4)
10.13 Form of Warrant issued to the Mark P. Durham and Mary R.
Durham Trusts (9)
10.14(a) Stock and Warrant Purchase Agreement between SkyMall, Inc.
and the investors in the November 1999 Private Placement (4)
10.14(b) Form of Warrant issued to investors in the November 1999
Private Placement (8)
10.14(c) Form of Warrant issued to Ryan, Beck & Co., Inc., Michael J.
Kollender and Randy Rock as placement agents in the November
1999 Private Placement (8)
10.14(d) Form of Warrant issued to Shoreline Pacific as a placement
agent in the November 1999 Private Placement (8)
10.15 Form of Warrant issued to Genesis Select for advisory
services (10)
10.16(a) Stock and Warrant Purchase Agreement between the Company
and the investors in the December 20, 1999 Private Placement (10)
10.16(b) Form of Warrant issued to investors in the December 20, 1999
Private Placement (10)
10.16(c) Form of Warrant issued to Ryan, Beck & Co., Inc., Michael J.
Kollender and Randy Rock as placement agents in the
December 20, 1999 Private Placement (10)
10.16(d) Form of Warrant issued to Schneider Securities and Budd
Zuckerman as placement agents in the December 20, 1999
Private Placement (10)
10.16(e) Form of Warrant issued to Shoreline Pacific, et al., as a
placement agent in the December 20, 1999 Private Placement (10)
10.17(a) Stock and Warrant Purchase Agreement between the Company
and the investors in the December 30, 1999 Private Placement (12)
44
<PAGE>
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
10.17(b) Form of Warrant issued to investors in the December 30, 1999
Private Placement (12)
10.17(c) Form of Warrant issued to Ryan, Beck & Co., Inc., Michael J.
Kollender and Randy Rock as placement agents in the
December 30, 1999 Private Placement (12)
10.17(d) Form of Advisory Fee Warrant issued to Wand Partners Inc.
pursuant to the December 30, 1999 Private Placement (12)
21 Subsidiaries of Registrant *
23 Consent of Independent Public Accountants *
24 Powers of Attorney See
Signature
Page
27 Financial Data Schedule *
- ---------------
* Filed herewith.
(1) Incorporated by reference to Form S-1 Registration Statement (File No.
333-14539).
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 1999.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1999.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1999.
(5) Incorporated by reference to the Company's Current Report on Form 8-K filed
October 5, 1999.
(6) Incorporated by reference to Form S-8 Registration Statement (File No.
333-92807).
(7) Incorporated by reference to Form S-8 Registration Statement (File No.
333-71543).
(8) Incorporated by reference to Form S-3 Registration Statement (File No.
333-91279).
(9) Incorporated by reference to Form S-3 Registration Statement (File No.
333-91433).
(10) Incorporated by reference to Form S-3 Registration Statement (File No.
333-94099).
(11) Incorporated by reference to Amendment No. 1 to Form S-3 Registration
Statement (File No. 333-94099).
(12) Incorporated by reference to Form S-3 Registration Statement (File No.
333-94731).
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the fourth quarter of
1999, as follows:
o Form 8-K filed October 5, 1999 to report the acquisition of Disc
Publishing, Inc.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 30th
day of March, 2000.
SKYMALL, INC.
By /S/ ROBERT M. WORSLEY
-------------------------------------
Robert M. Worsley
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints ROBERT M. WORSLEY and MARK E. TRUXAL, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K Annual
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert M. Worsley Chairman of the Board, March 30, 2000
- ------------------------ President and Chief Executive
Robert M. Worsley Officer (Principal Executive
Officer)
/s/ Mark E. Truxal Vice President and Controller March 30, 2000
- ------------------------ (Principal Financial and
Mark E. Truxal Accounting Officer)
/s/ Lyle R. Knight Director March 30, 2000
- ------------------------
Lyle R. Knight
46
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Thomas J. Litle Director March 30, 2000
- ------------------------
Thomas J. Litle
/s/ Randy Petersen Director March 30, 2000
- ------------------------
Randy Petersen
/s/ David J. Callard Director March 30, 2000
- ------------------------
David J. Callard
47
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
3.1(a) Articles of Incorporation of Registrant (1)
3.1(b) Certificate of Amendment to Articles of Incorporation (1)
3.2 Certificate of Designations, Rights, Preferences and
Limitations of the Series A Junior Convertible Preferred
Stock (10)
3.3 Certificate of Designations, Rights, Preferences and
Limitations of the Series B Junior Convertible Preferred
Stock (12)
3.4 Certificate of Designation of Rights, Preferences and
Terms of the Series R Preferred Stock (See Exhibit 10.11(a),
below) (5)
3.5 Bylaws of Registrant (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Series A Junior Convertible Preferred Stock
Certificate (10)
4.3 Form of Series B Junior Convertible Preferred Stock
Certificate (12)
4.4 Form of Right Certificate (5)
10.1 Employment Agreement between the Company and Robert M.
Worsley (1)
10.2 Employment Agreement between the Company and Thomas C.
Edwards (2)
10.3 Employment Agreement between the Company and Curtis D. Brown (2)
10.4(a) Form of Airline Customer Services Agreement (1)
10.4(b) Schedule of Omitted Material Terms from Material Airline
Customer Services Agreement (1)
10.5 Form of Tax Indemnification Agreement (1)
10.6 SkyMall, Inc. 1994 Stock Option Plan, as amended (6)
10.7 Non-Employee Director Stock Option Plan, as amended (7)
10.8(a) Lease Agreement between Pasqualetti Properties, Inc.
and Smitty's Super Valu, Inc. dated June 24, 1960 (1)
10.8(b) Agreement between Rose Pasqualetti Perkins, Amos
Pasqualetti, Anthony Pasqualetti, Ben Pasqualetti and
Smitty's Super Valu, Inc. dated March 2, 1961 (1)
10.8(c) Addendum to Lease between Amos Pasqualetti, Ben S.
Pasqualetti, Rose Pasqualetti Jenkins, Estate of Anthony J.
Pasqualetti and Smitty's Super Valu, Inc. dated May 11, 1966 (1)
10.8(d) Sublease between Schwan Brothers Properties and Smitty's
Super Valu, Inc. dated August 1, 1984 (1)
48
<PAGE>
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
10.8(e) Lease Amending Agreement between Smitty's Super Valu, Inc.,
Pasquo Investments, and Amos Pasqualetti and Victoria
McFarland dated October 1, 1984 (1)
10.8(f) Addendum to Sublease between Smitty's Super Valu, Inc. and
Schwan Brothers Properties dated January 1, 1985 (1)
10.8(g) Assignment of Sublease from Pima Partners to SkyMall, Inc.
dated July 12, 1990 (1)
10.9 Warrant issued to Ryan, Beck & Co., Inc. in connection with
financial advisory services dated June 30, 1999 (9)
10.10(a) Credit and Security Agreement between SkyMall, Inc.,
skymall.com, inc., Durham & Company and Imperial Bank dated
as of June 30, 1999 (3)
10.10(b) Promissory Note between SkyMall, Inc., skymall.com, inc.,
Durham & Company and Imperial Bank dated as of June 30, 1999 (3)
10.11(a) Rights Agreement between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent, dated as of
September 15, 1999 (including as Exhibit A the form of
Certificate of Designation of Rights, Preferences and Terms
of the Series R Preferred Stock, as Exhibit B the form of
Right Certificate, and as Exhibit C the Summary of Terms of
Rights Agreement) (4)
10.11(b) Form of Letter to SkyMall, Inc. shareholders, dated
October 15, 1999 (4)
10.12(a) Stock Acquisition Agreement, dated as of August 26, 1999,
by and among SkyMall, Inc., Disc Publishing, Inc., Lorne
Grierson, Warren Osborn, Flamingo Partnership, Kyle Love,
Bart Howell and David E. Hardy (4)
10.12(b) Amendment to Stock Acquisition Agreement, dated as of
September 20, 1999, by and among SkyMall, Inc., Disc
Publishing, Inc., Lorne Grierson, Warren Osborn, Flamingo
Partnership, Kyle Love, Bart Howell and David E. Hardy (4)
10.13 Form of Warrant issued to the Mark P. Durham and Mary R.
Durham Trusts (9)
10.14(a) Stock and Warrant Purchase Agreement between SkyMall, Inc.
and the investors in the November 1999 Private Placement (4)
10.14(b) Form of Warrant issued to investors in the November 1999
Private Placement (8)
10.14(c) Form of Warrant issued to Ryan, Beck & Co., Inc., Michael J.
Kollender and Randy Rock as placement agents in the November
1999 Private Placement (8)
10.14(d) Form of Warrant issued to Shoreline Pacific as a placement
agent in the November 1999 Private Placement (8)
10.15 Form of Warrant issued to Genesis Select for advisory
services (10)
10.16(a) Stock and Warrant Purchase Agreement between the Company
and the investors in the December 20, 1999 Private Placement (10)
49
<PAGE>
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
10.16(b) Form of Warrant issued to investors in the December 20, 1999
Private Placement (10)
10.16(c) Form of Warrant issued to Ryan, Beck & Co., Inc., Michael J.
Kollender and Randy Rock as placement agents in the
December 20, 1999 Private Placement (10)
10.16(d) Form of Warrant issued to Schneider Securities and Budd
Zuckerman as placement agents in the December 20, 1999
Private Placement (10)
10.16(e) Form of Warrant issued to Shoreline Pacific, et al., as a
placement agent in the December 20, 1999 Private Placement (10)
10.17(a) Stock and Warrant Purchase Agreement between the Company
and the investors in the December 30, 1999 Private Placement (12)
10.17(b) Form of Warrant issued to investors in the December 30, 1999
Private Placement (12)
10.17(c) Form of Warrant issued to Ryan, Beck & Co., Inc., Michael J.
Kollender and Randy Rock as placement agents in the
December 30, 1999 Private Placement (12)
10.17(d) Form of Advisory Fee Warrant issued to Wand Partners Inc.
pursuant to the December 30, 1999 Private Placement (12)
21 Subsidiaries of Registrant *
23 Consent of Independent Public Accountants *
24 Powers of Attorney See
Signature
Page
27 Financial Data Schedule *
- ---------------
* Filed herewith.
(1) Incorporated by reference to Form S-1 Registration Statement (File No.
333-14539).
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 1999.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1999.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1999.
(5) Incorporated by reference to the Company's Current Report on Form 8-K filed
October 5, 1999.
(6) Incorporated by reference to Form S-8 Registration Statement (File No.
333-92807).
(7) Incorporated by reference to Form S-8 Registration Statement (File No.
333-71543).
(8) Incorporated by reference to Form S-3 Registration Statement (File No.
333-91279).
(9) Incorporated by reference to Form S-3 Registration Statement (File No.
333-91433).
(10) Incorporated by reference to Form S-3 Registration Statement (File No.
333-94099).
(11) Incorporated by reference to Amendment No. 1 to Form S-3 Registration
Statement (File No. 333-94099).
(12) Incorporated by reference to Form S-3 Registration Statement (File No.
333-94731).
50
EXHIBIT 21
SUBSIDIARIES OF SKYMALL, INC.
JURISDICTION OF PERCENT OF
NAME INCORPORATION OWNERSHIP
Disc Publishing, Inc. Utah 100%
Durham & Company Utah 100%
skymall.com, inc. Nevada 100%
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 25, 2000, included in this Form 10-K, into the Company's
previously filed Registration Statements on Forms S-3 (File Nos. 333-14539,
333-71541, 333-91279, 333-91433, 333-94099, 333-94731), and on Forms S-8 (File
Nos. 333-50881, 333-71543, 333-92799, 333-92807).
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 27, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,060
<SECURITIES> 0
<RECEIVABLES> 12,738
<ALLOWANCES> (744)
<INVENTORY> 1,300
<CURRENT-ASSETS> 33,236
<PP&E> 18,085
<DEPRECIATION> (5,216)
<TOTAL-ASSETS> 50,249
<CURRENT-LIABILITIES> 29,441
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 15,605
<TOTAL-LIABILITY-AND-EQUITY> 50,249
<SALES> 60,880
<TOTAL-REVENUES> 78,941
<CGS> 46,422
<TOTAL-COSTS> 57,341
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,783
<INTEREST-EXPENSE> 283
<INCOME-PRETAX> (25,053)
<INCOME-TAX> (913)
<INCOME-CONTINUING> (24,140)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,140)
<EPS-BASIC> (2.60)
<EPS-DILUTED> (2.60)
</TABLE>
