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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 000-21657
SKYMALL, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 86-0651100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1520 EAST PIMA STREET, PHOENIX, ARIZONA 85034
(Address of principal executive offices) (Zip Code)
(602) 254-9777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 11, 2000, there were 15,817,420 shares of the Common Stock,
$.001 par value, of the Company outstanding and no shares of preferred stock
outstanding.
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<PAGE>
SKYMALL, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999............................................ 3
Condensed Consolidated Statements of Operations - Three and
Six months ended June 30, 2000 and 1999...................... 4
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 2000 and 1999................................. 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 30
Item 2. Changes in Securities and Use of Proceeds...................... 30
Item 3. Defaults Upon Senior Securities................................ 32
Item 4. Submission of Matters to a Vote of Security Holders............ 32
Item 5. Other Information.............................................. 34
Item 6. Exhibits and Reports on Form 8-K............................... 34
Signatures.............................................................. 35
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SKYMALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 30, December 31,
2000 1999
ASSETS ----------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 11,055 $ 16,060
Accounts receivable, net 6,816 11,994
Inventory 798 1,300
Income tax receivable 948 968
Prepaid catalog costs and other 2,253 2,914
-------- --------
Total current assets 21,870 33,236
Property and equipment, net 11,508 12,869
Goodwill, net 2,716 2,817
Other assets, net 1,220 1,327
-------- --------
Total assets $ 37,314 $ 50,249
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,127 $ 24,136
Accrued liabilities 2,664 3,979
Unearned revenue 555 1,298
Current portion of notes payable and capital leases 9,424 28
Current portion of restructuring reserve 698 0
-------- --------
Total current liabilities 28,468 29,441
Notes payable and capital leases,
net of current portion 180 5,190
Non-current portion of restructuring reserve 384 0
-------- --------
Total liabilities 29,032 34,631
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock 16 13
Additional paid-in capital 41,287 33,884
Accululated deficit (33,021) (18,279)
-------- --------
Total shareholders' equity 8,282 15,618
-------- --------
Total liabilities and shareholders' equity $ 37,314 $ 50,249
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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SKYMALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Merchandise sales, net $ 13,150 $ 12,922 $ 28,795 $ 22,740
Placement fees and other 3,832 4,310 8,195 8,671
---------- ---------- ---------- ----------
Total revenues 16,982 17,232 36,990 31,411
COST OF GOODS SOLD 9,695 10,012 22,456 17,524
---------- ---------- ---------- ----------
Gross margin 7,287 7,220 14,534 13,887
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Media expenses 3,265 2,538 6,291 5,140
Selling expenses 1,017 1,136 2,103 1,970
Customer service and fulfillment expenses 1,131 1,350 2,873 3,083
General and administrative expenses 6,460 10,143 15,098 15,240
Restructuring charge 2,595 -- 2,595 --
---------- ---------- ---------- ----------
Total operating expenses 14,468 15,167 28,960 25,433
---------- ---------- ---------- ----------
Loss from operations (7,181) (7,947) (14,426) (11,546)
Interest expense 225 9 375 20
Interest and other income (expense) 119 66 58 143
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (7,287) (7,890) (14,743) (11,423)
Income tax benefit -- (2,595) -- (3,913)
---------- ---------- ---------- ----------
NET LOSS $ (7,287) $ (5,295) $ (14,743) $ (7,510)
========== ========== ========== ==========
BASIC NET LOSS PER COMMON SHARE $ (0.55) $ (0.59) $ (1.12) $ (0.84)
========== ========== ========== ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 13,273,203 8,978,943 13,128,514 8,909,035
========== ========== ========== ==========
DILUTED NET LOSS PER COMMON SHARE $ (0.55) $ (0.59) $ (1.12) $ (0.84)
========== ========== ========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 13,273,203 8,978,943 13,128,514 8,909,035
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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SKYMALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six months ended
June 30,
-------------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,743) $ (7,510)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,036 823
Changes in operating assets and liabilities (3,578) (2,256)
---------- ---------
Net cash used in operating activities (16,285) (8,943)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (513) (3,049)
Net cash used in investing activities (513) (3,049)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants 7,406 1,969
Proceeds from long-term debt 4,400 2,853
Payments on notes payable and capital leases, net (13) (20)
---------- ---------
Net cash provided by financing activities 11,793 4,802
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (5,005) (7,190)
CASH AND CASH EQUIVALENTS,
beginning of period 16,060 7,951
---------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 11,055 $ 761
========== =========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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SkyMall, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
SkyMall, Inc. (the Company) was incorporated in 1989 as an Arizona
corporation (and reincorporated in Nevada in October 1996). The Company is a
multi-channel specialty retailer that markets high quality products and services
via various media, including the SkyMall in-flight print catalogs, workplace
catalogs and on the Internet at WWW.SKYMALL.COM and www.durham.skymall.com. The
Company maintains minimum levels of inventory related to products sold through
the Company's channels. Substantially all products displayed in the Company's
in-flight print catalogs and the Company's Web site are acquired from
participating merchants when a customer places an order with the Company.
CONSOLIDATION
The condensed consolidated financial statements include the accounts of
SkyMall, Inc. and its wholly owned subsidiaries, skymall.com, inc., Durham &
Company, Disc Publishing, Inc., SkyMall Ventures, Inc. and SkyMall Media
Ventures, Inc., and include all adjustments and reclassifications necessary to
eliminate the effect of significant inter-company accounts and transactions.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain information and footnote disclosures normally included in consolidated
financial statements have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. The condensed consolidated results of operations for the
three-month and six-month periods ended June 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - RESTRUCTURING CHARGE
In April 2000, the Company began execution of a plan to reduce costs and
improve profitability, which resulted in the Company recording a one-time
restructuring expense totaling $2.6 million in the second fiscal quarter ended
June 30, 2000.
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Of the total restructuring charge, $880,000 relates to plans to discontinue
various catalog programs that have not been profitable to the Company, including
the international catalog program, as well as other specialty catalog programs.
The ability to order products with international shipping destinations will
continue to be available through the existing business infrastructure. Under the
restructuring plan, the Company eliminated approximately 53 positions and 15
outside contractors in April 2000, resulting in a charge of $680,000. This cost
included special termination benefits related to the reduction in force. The
Company plans to consolidate operations located in New York and Utah to Phoenix
resulting in closure and payroll costs of $1 million, which have been included
in restructuring charges. The elimination of these locations will not result in
a discontinuation of product lines, but will, instead, consolidate management
and day-to-day operational control.
Approximately $1.3 million of the total restructuring charge has been paid
through June 30, 2000, of which approximately $228,000 relate to non-cash
transactions relating to the write-off of assets. The remaining charge has been
classified in current and non-current liabilities on the Consolidated Balance
Sheet and will be funded through cash provided by operating activities.
NOTE 3 - NET LOSS PER COMMON SHARE
Basic net loss per common share is based upon the weighted average shares
outstanding. Outstanding stock options and warrants are treated as common stock
equivalents for the purposes of computing diluted net loss per common share and
represent the difference between basic and diluted weighted average shares
outstanding. The following is a summary of the computation of basic and diluted
net loss per common share (amounts in thousands except shares and per share
amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic net income (loss) per common share:
Net income (loss) $ (7,287) $ (5,295) $ (14,743) $ (7,510)
========== ========== ========== ==========
Weighted average common shares 13,273,203 8,978,943 13,128,514 8,909,035
========== ========== ========== ==========
Basic per share amount $ (0.55) $ (0.59) $ (1.12) $ (0.84)
========== ========== ========== ==========
</TABLE>
7
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Diluted net income (loss) per common share:
Net income (loss) $ (7,287) $ (5,295) $ (14,743) $ (7,510)
========== ========== ========== ==========
Weighted average common shares 13,273,203 8,978,943 13,128,514 8,909,035
Options and warrants assumed exercised -- -- -- --
---------- ---------- ---------- ----------
Total common shares plus assumed
exercises 13,273,203 8,978,943 13,128,514 8,909,035
========== ========== ========== ==========
Diluted per share amount $ (0.55) $ (0.59) $ (1.12) $ (0.84)
========== ========== ========== ==========
</TABLE>
As a result of anti-dilutive effects, approximately 5,066 and 72,592
employee options and other common stock equivalents were not included in the
computation of diluted earnings per share for the three-month and six-month
periods ended June 30, 2000, respectively.
NOTE 4 - SEGMENT AND RELATED INFORMATION
The Company is a multi-channel specialty retailer that provides a large
selection of premium-quality products and services to consumers from a wide
variety of merchants and partners. The Company's operations are classified into
two reportable business segments: business-to-consumer and business-to-business.
Business initiatives for the Company's two reportable business segments are
managed separately while support functions are combined.
The business-to-consumer segment provides retail merchandise service
through the Company's in-flight catalogs placed in domestic airlines and through
the Company's Web site. The business-to-business segment provides retail
merchandise services, employee logo and corporate recognition merchandise and
advertising media to other businesses through loyalty programs, workplace
catalogs and the Company's Web sites. Previously, the Company defined its
reportable business segments by in-flight catalog, workplace catalog and Web
site. All periods presented have been adjusted to reflect the new reportable
business segments.
The Company evaluates the performance of its segments based on revenues and
gross margins. Operating expenses are included with corporate expense and are
not allocated to the business segments. The accounting policies of the
reportable segments are the same as those used in the consolidated financial
statements and described in Note 1 of these condensed consolidated financial
statements. Inter-segment transactions are not significant.
Revenues and gross margin for the Company's reportable segments for the
three months ended June 30, 2000 and 1999 and the six months ended June 30, 2000
and 1999 are shown in the following tables (amounts in thousands):
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Three Months Ended Business-to- Business-to-
June 30, Consumer Business Corporate Total
--------------------------------------------------------------------------------
2000
REVENUES $ 15,141 $ 1,841 $ - $ 16,982
Gross margin $ 6,764 $ 523 $ - $ 7,287
Operating expenses $ - $ - $ 14,468 $ 14,468
Loss from operations $ (7,181)
--------------------------------------------------------------------------------
1999
REVENUES $ 16,128 $ 1,104 $ - $ 17,232
Gross margin $ 6,764 $ 456 $ - $ 7,220
Operating expenses $ - $ - $ 15,167 $ 15,167
Loss from operations $ (7,947)
--------------------------------------------------------------------------------
Six Months Ended Business-to- Business-to-
June 30, Consumer Business Corporate Total
--------------------------------------------------------------------------------
2000
REVENUES $ 32,091 $ 4,899 $ - $ 36,990
Gross margin $ 13,122 $ 1,412 $ - $ 14,534
Operating expenses $ - $ - $ 28,960 $ 28,960
Loss from operations $ (14,426)
1999
--------------------------------------------------------------------------------
REVENUES $ 29,334 $ 2,077 $ - $ 31,411
Gross margin $ 13,051 $ 836 $ - $ 13,887
Operating expenses $ - $ - $ 25,433 $ 25,433
Loss from operations $ (11,546)
--------------------------------------------------------------------------------
Identifiable assets available to support the Company's business-to-business
segment approximate $4.5 million and $4.3 million at June 30, 2000 and 1999,
respectively. The remaining assets which are combined to support the Company's
two reportable business segments, approximate $33.8 million and $24 million at
June 30, 2000 and 1999, respectively.
NOTE 5 - BUSINESS 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 merger qualified as a tax-free exchange and was accounted for
as a pooling of interests. Accordingly, the Company's 1999 condensed
consolidated financial statements have been restated to include the combined
financial results of SkyMall and Disc Publishing, Inc. The following table
presents a reconciliation of revenues and net loss previously reported by the
individual companies to those presented in the accompanying condensed
consolidated financial statements (amounts in thousands).
9
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Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1999 1999
--------- ---------
REVENUES:
SkyMall $ 17,220 $ 31,398
Disc Publishing 12 13
--------- ---------
Total Revenues $ 17,232 $ 31,411
========= =========
NET LOSS:
SkyMall $ (5,202) $ (7,290)
Disc Publishing (93) (220)
--------- ---------
Net loss $ (5,295) $ (7,510)
========= =========
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 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 ended 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 No. 133 to the Company's quarter ending March 31, 2001. The Company
is currently evaluating the impact of SFAS No. 133 on its future results of
operations and financial position.
In January 1999, the Company adopted Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." This Statement of Position ("SOP") provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The statement identifies the characteristics of internal-use software, the
capitalization criteria and the amortization method. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Under SOP 98-1, the Company
capitalized costs of $146,000 and $398,000 during the three months ended June
30, 2000 and 1999, respectively, and $653,000 and $588,000 for the six months
ended June 30, 2000 and 1999, respectively.
The Company follows the guidance of Accounting Principles Board ("APB")
Opinion No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS." This APB opinion
provides guidance on accounting for transactions that involve primarily an
exchange of non-monetary assets, liabilities or services ("barter
transactions"). Placement fees and other revenues include barter revenues, which
represent an exchange by SkyMall of advertising space in its print and
e-commerce media for reciprocal services, including print and e-commerce
advertising. Revenues and expenses from barter transactions are recorded at the
lower of estimated fair value of the services received or delivered. The Company
did not recognize any revenue or expenses from barter transactions during the
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three months and six months ended June 30, 2000. Barter revenue and expenses
recognized during the three months and six months ended June 30, 1999 were
$308,000.
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.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition and should be read in conjunction with the
attached Condensed Consolidated Financial Statements and Notes thereto and with
the Company's audited Consolidated Financial Statements, the Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations relating thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.
Unless the context indicates otherwise, the terms "SkyMall," the "Company,"
"we," "us" or "ours" refer to SkyMall, Inc. and its subsidiaries, skymall.com,
inc., Durham & Company, Disc Publishing, Inc., SkyMall Ventures, Inc. and
SkyMall Media Ventures, Inc.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, in future filings by the Company with the
Securities and Exchange Commission and in the Company's written and oral
statements made by or with the approval of an authorized executive officer,
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. These statements discuss, among other items, the
Company's growth strategy and anticipated trends in our business. Words and
phrases such as "should be," "will be," "believes," "expects," "anticipates,"
"plans," "intends," "may" and similar expressions identify forward-looking
statements. Forward-looking statements are made based upon our belief as of the
date that such statements are made. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of the factors
described herein, including, among others, regulatory or economic influences.
Examples of uncertainties which could cause such differences include, but are
not limited to, the Company's dependence on its relationships with its airline,
merchant, and other partners, the ability of the Company to attract and retain
key personnel, especially highly skilled technology personnel, the ability of
the Company to secure additional capital to finance its business strategy,
fluctuations in paper prices and airline fuel costs, customer credit risks,
competition from other catalog companies, retailers and e-commerce companies,
and the Company's reliance on technology and information and telecommunications
systems, all of which are discussed more fully below and in the Company's other
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events, or otherwise.
OVERVIEW
Founded in 1989, SkyMall(R) is a multi-channel specialty retailer that
provides a large selection of premium-quality products and services to consumers
from a wide variety of merchants and partners. SkyMall is best known for its
in-flight catalog, which is available on more than 70% of all domestic airlines,
reaching approximately 500 million domestic airline passengers annually. Through
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its skymall.com, inc. subsidiary, SkyMall offers an expanded selection of
products and services to online shoppers. SkyMall provides a merchandise
redemption program for a number of loyalty programs, allowing consumers to
purchase SkyMall merchandise with loyalty points earned in other programs.
Through Durham & Company, a SkyMall subsidiary, SkyMall offers high-quality logo
merchandise via its catalogs, workplace initiatives and the durham.skymall.com
Web site. SkyMall's subsidiary, SkyMall Ventures, Inc., is responsible for the
Company's broadband, new media and business-to-business custom loyalty
initiatives. Through its SkyMall Media Ventures, Inc. subsidiary, the Company
intends to develop interactive media content in cooperation with participants
from numerous industries, including retail, entertainment and services, and
intends to distribute optical media, including CD-ROMs and DVDs, at no cost to
the consumer, across SkyMall's distribution channels.
Our principal executive offices are located at and our mailing address is
1520 East Pima Street, Phoenix, Arizona 85034. Our telephone number is (602)
254-9777.
OUR OPERATIONS
SkyMall operates two distinct business segments, which include its
business-to-consumer and business-to-business initiatives. The
business-to-consumer segment provides retail merchandise service through the
Company's in-flight catalogs placed in domestic airlines and through the
Company's Web site. The business-to-business segment provides retail merchandise
services, employee logo and corporate recognition merchandise and advertising
media to other businesses through loyalty programs and catalogs, workplace
catalogs, and the Company's Web site.
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, 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).
PRINT MEDIA
GENERAL. We market our merchandise through a number of print media,
including our in-flight catalogs. The merchandise of each participating merchant
13
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in our catalogs is presented in a separate section of each catalog to allow
browsing from "store-to-store," providing the convenience and variety of an
upscale shopping mall environment. Our print media provides consumers with a
selection of only the best-selling products from our most well-known merchant
partners. This ensures that consumers quickly see the most popular items,
without having to review hundreds of items that may be of little interest.
Through our skymall.com Web site, we offer online consumers a larger product
selection.
SKYMALL DOMESTIC IN-FLIGHT CATALOGS. Our in-flight catalogs, which are
placed in airline seat pockets, are our largest distribution channel. Over the
past ten years, we have experienced substantial growth in our domestic in-flight
catalog business. We have exclusive agreements to place our catalogs on 18
airlines, making our catalog available to approximately 500 million airline
passengers annually. These 18 airlines, which carried approximately 70% of all
domestic passengers in 1999, include America West Airlines, Continental
Airlines, Delta Air Lines, Northwest Airlines, Southwest Airlines, United
Airlines and US Airways. The Company's catalogs carry the SkyMall name on all
participating airlines, except US Airways, which offers the SkyMall catalog
under the name "Selections." In order to enhance the appeal of our product
offerings, we produce four new domestic in-flight catalogs per year. To gain
efficiency in production and printing, the catalog content is substantially the
same for all of our airline partners. The SkyMall program offers airlines a
low-risk means of incrementally increasing their earnings. In exchange for
placement of our catalogs in seat-back pockets, we pay each airline partner a
monthly commission based on net merchandise revenues generated by the Company
from sales to that airline's passengers. Some agreements also require payment of
a minimum monthly commission or a boarding cost that reimburses the airline for
the increased fuel costs attributable to the weight of the catalogs. We believe
our relations with each of our airline partners are good.
OTHER PRINT MEDIA PROGRAMS. The SkyMall catalogs are also available on
certain Northeastern routes of Amtrak.
ELECTRONIC MEDIA
GENERAL. We launched our first Internet Web site in January of 1996 and
since then have continued to refine and develop our e-commerce strategies. In
1999, we devoted substantial financial, marketing, technical and personnel
resources to further develop our electronic commerce initiatives. Our strategies
in this area included, among other things, (i) significantly improving the look
and feel, as well as the speed, performance and search functionality of our Web
sites, (ii) further development of our technology and other business
infrastructures used to convey orders and provide order status information to
our customers, (iii) conducting marketing and other promotional campaigns
through both online and off-line media designed to enhance brand awareness of
the SkyMall name and drive traffic to our Web site, (iv) significantly
increasing the selection and variety of products for our programs, and (v)
developing non-product travel-related content for our Web site that encourages
consumers to visit our site for information as well as shopping. In February
2000, we re-launched our Web site, skymall.com, representing the culmination of
our year-long technology development efforts. The new site includes both
improvements to the consumer shopping experience, as well as significant
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
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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.
BUSINESS-TO-BUSINESS SEGMENT
OVERVIEW
SkyMall's business-to-business segment provides unique solutions for
corporate clients. In particular, this segment offers retail merchandise
services through loyalty programs, workplace catalogs and the Company's various
Web sites. Through these initiatives, SkyMall offers custom solutions to loyalty
programs for redemption of program points for SkyMall merchandise. The workplace
catalog presents high-quality, customized logo merchandise. Additionally, the
skymall.com Web site provides our affiliate partners a mechanism to offer
products to their customer bases.
PRINT MEDIA
WORKPLACE MERCHANDISE CATALOGS. Through our subsidiary, Durham & Company, a
Utah corporation, acquired in October 1998, we offer logo merchandise and
recognition products to employees of a number of blue-chip organizations,
primarily through print catalogs and since September 1999, on the
durham.skymall.com Web site. Competing in the highly fragmented incentive
industry, Durham distinguishes itself by providing high-quality products and
excellent customer service and focuses its marketing efforts on large
organizations.
INCENTIVE AND LOYALTY PROGRAMS.
In March 2000, SkyMall entered into an agreement with The GM Card(R), a
division of General Motors Corporation(R), to provide a unique selection of
merchandise to customers who use The GM Card(R) and acquire The New GM CardSM,
allowing its card members to redeem earnings for non-vehicle offers including
unique merchandise from skymall.com. In April 2000, SkyMall entered into an
agreement with employeesavings.com to join its network of premium product and
service providers offering exclusive savings to more than 1.4 million Fortune
1000 employees and their families, and an agreement with ISP Channel, SoftNet
Systems, Inc.'s wholly-owned broadband Internet access-over-cable service
provider, to provide e-commerce opportunities for its customers by establishing
a co-branded closed e-commerce link from ISP Channel Neighborhood Web sites to
SkyMall's skymall.com Web site. In May 2000, the Company entered into an
agreement with Hilton Hotels Corporation to develop co-branded retail and custom
shopping solutions from Hilton's corporate website. The travelers e-shop, which
debuted at the beginning of June, consists of a customized Internet shopping
site from WWW.HILTON.COM. This "virtual mall" allows customers to make purchases
from a wide array of SkyMall's premier merchants. Both Hilton and SkyMall
promote the travelers e-shop program through newsletters and brochures, e-mails,
direct mail campaigns and other targeted communications to their respective
customers. Under the same agreement, the Company's subsidiary, Durham & Company,
will establish a separate Internet portal for meeting planners, businesses,
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associations and other organizations to purchase incentive awards and order
corporate logo merchandise for the thousands of meetings and conventions held at
Hilton's portfolio of properties each year.
ELECTRONIC MEDIA
AFFILIATE PROGRAM. In addition to developing our own Web sites, 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. 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. 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.
OTHER ELECTRONIC MEDIA.
SKYMALL VENTURES, INC. AND SKYMALL MEDIA VENTURES, INC. Our subsidiary,
SkyMall Ventures, Inc., is responsible for the Company's broadband, new media
and business-to-business custom loyalty initiatives. Through our subsidiary,
SkyMall Media Ventures, Inc. ("SMV"), we intend to develop interactive media
content in cooperation with participants from numerous industries, including
retail, entertainment and services, and intend to distribute optical media,
including CD-ROMs and DVDs, at no cost to the consumer, across SkyMall's
distribution channels. On June 20, 2000, the Company entered into an investment
agreement with MRT Technology, LLC. ("MRT"), the North American subsidiary of
Ritek Corporation. Under the agreement, MRT agreed to invest up to $15 million
in SMV through an in-kind contribution of optical discs, in consideration for up
to a 30% equity interest in SMV, subject to certain terms and conditions as set
forth in the agreement.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999.
REVENUES FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Merchandise sales, net $13,150 2% $12,922
Placement fees and other $ 3,832 (11)% $ 4,310
Total revenues $16,982 (2)% $17,232
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REVENUES FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Merchandise sales, net $28,795 27% $22,740
Placement fees and other $ 8,195 (6)% $ 8,671
Total revenues $36,990 18% $31,411
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
the three months ended June 30, 2000, reflects an increase in
business-to-business sales of $705,000, and a decrease in business-to-consumer
sales of $477,000. Growth in net merchandise sales in the six months ended June
30, 2000 reflects an increase in business-to-business sales of $2.7 million and
an increase in business-to-consumer sales of $3.4 million. Placement fees and
other are composed of fees paid by participating merchants to include their
products or advertisements in the Company's print and electronic media, outbound
shipping charges to customers and other revenues. Placement fees and other
decreased by $477,000, or 11%, for the three months ended June 30, 2000, and
$165,000, or 6%, for the six months ended June 30, 2000.
GROSS MARGIN FOR THE THREE MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Gross margin $ 7,287 1% $ 7,220
Gross margin percentage 43% 42%
GROSS MARGIN FOR SIX MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Gross margin $14,534 5% $13,887
Gross margin percentage 39% 44%
Gross margin consists of revenues less the cost of goods sold, which
consists of the cost of merchandise sold to customers as well as outbound and
inbound shipping costs. Gross margin remained level in absolute dollars, while
the gross margin percentage increased in the three months ended June 30, 2000,
reflecting an improvement in the mix of variable commission and fixed placement
fee merchant agreements. Gross margin increased by $646,000 in absolute dollars,
while gross margin percentage decreased by five percentage points in the six
months ended June 30, 2000. This is due in part to the increse in volume
generated through variable commission agreements.
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OPERATING EXPENSES FOR THE THREE MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Media expenses $ 3,265 29% $ 2,538
Selling expenses $ 1,017 (11)% $ 1,136
Customer service and
Fulfillment expenses $ 1,131 (16)% $ 1,350
General and administrative
Expenses $ 6,460 (36)% $10,143
Restructuring charge $ 2,595 0% $ 0
OPERATING EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Media expenses $ 6,291 22% $ 5,140
Selling expenses $ 2,103 7% $ 1,970
Customer service and
Fulfillment expenses $ 2,873 (7)% $ 3,083
General and administrative
Expenses $15,098 (1)% $15,240
Restructuring charge $ 2,595 0% $ 0
Media expenses consist of the cost to produce and distribute our in-flight
print catalogs and CD-ROM and DVD products. The media expenses increase in the
three months ended June 30, 2000 was $728,000, of which $794,000 was due to an
increase in paper and processing costs, $193,000 was due to an increase related
to the CD-ROM and DVD programs, and $259,000 was due to a decrease in catalog
circulation. The media expenses increase in the six months ended June 30, 2000
was $1.2 million, of which $1.7 million was due to an increase in paper and
processing costs, $200,000 was due to an increase related to the CD-ROM and DVD
programs, and $704,000 was due to a decrease in catalog circulation.
Selling expenses consist primarily of commissions paid to marketing
partners and are variable in nature. The decrease in selling expenses for the
three months ended June 30, 2000 reflects the decrease in sales volume in
business-to-consumer net merchandise sales. The increase in selling expenses for
the six months ended June 30, 2000 reflects the increase in sales volume in
business-to-consumer net merchandise sales.
Customer service and fulfillment expenses consist of costs to maintain a
full-service customer contact and order fulfillment center that generally vary
in correlation to net merchandise sales. Customer service and fulfillment
decreased in absolute dollars, but remained level as a percent of net
merchandise sales for the three months ended June 30, 2000. Customer service and
fulfillment decreased in absolute dollars and as a percent of net merchandise
sales for the six months ended June 30, 2000.
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General and administrative expenses consist primarily of department
expenses, except customer service and fulfillment expenses, including payroll
and related costs, professional fees, marketing, information technology and
general corporate expenses. The decreases in general and administrative expenses
of $3.7 million for the three months ended June 30, 2000, are a result of
changes in the following areas: $2.7 million decrease related to the sales tax
litigation settlement recorded in 1999; $1.2 million decrease in other general
and administrative expenses including salaries, consulting and new business
development related to a reduction in force and restructuring; $700,000 decrease
in marketing expense; $300,000 increase in information technology development
and support due to a shift of capitalized projects in 1999 to maintenance and
support programs in 2000; and $600,000 increase in depreciation primarily due to
investments in information technology made in 1999 that are now being
depreciated. The decreases in general and administrative expenses of $1.3
million for the six months ended June 30, 2000, are a result of changes in the
following areas: $2.7 million decrease related to the sales tax litigation
settlement recorded in 1999; $1.9 million decrease in other general
administrative expenses, including salaries and consulting fees related to a
reduction in work force and restructuring; $2.1 million increase in information
technology development and support due to a shift of capitalized development
projects in 1999 to maintenance and support programs in 2000; and $1.2 increase
in depreciation primarily due to investments in information technology made in
1999 that are now being depreciated.
INTEREST EXPENSE FOR THE THREE MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest expense $225 2,400% $9
INTEREST EXPENSE FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest expense $375 1,775% $20
Interest expense consists of interest paid on the various debt obligations
of the Company. The interest expense increase of $216,000 and $355,000 for the
three and six months ended June 30, 2000 is a result of additional borrowings,
primarily from the Company's revolving line of credit.
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INTEREST AND OTHER INCOME (EXPENSE) FOR THE THREE MONTHS ENDED JUNE 30,
2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest and other income
(expense) $119 80% $66
INTEREST AND OTHER INCOME (EXPENSE) FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Interest and other income
(expense) $ 58 (59)% $143
Interest and other income (expense) consist primarily of interest income on
cash and marketable securities and bank fees. Interest income increased in the
three and six months ended June 30, 2000 due to higher average account balances.
INCOME TAXES FOR THE THREE MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Provision (benefit) for
income taxes $0 0% $(2,595)
INCOME TAXES FOR THE SIX MONTHS ENDED JUNE 30, 2000
(In thousands)
---------------------------------------
2000 % CHANGE 1999
----------- -------- ----------
Provision (benefit) for
income taxes $0 0% $(3,913)
No income tax benefit was recorded in 2000. 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 and carryforward to offset future taxable income. The Company has
approximately $38 million of federal net operating loss carryforwards which may
be used to offset future taxable income. These loss carryforwards begin to
expire in 2019.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's cash balance was $11.1 million, compared to
$761,000 at June 30, 1999. Cash used in operating activities of $16.3 million
and $8.9 million for the six months ended June 30, 2000 and 1999, respectively,
was primarily attributable to the net loss and a decrease in accounts payable,
accrued expenses and unearned revenue offset by a decrease in accounts
receivable. Cash used in investing activities of $513,000 and $3.0 million for
the six months ended June 30, 2000 and 1999, respectively, was due primarily to
investments in information technology.
Cash provided by financing activities of $11.8 million for the six months
ended June 30, 2000, resulted primarily from long-term debt borrowings of $4.4
million, issuance of approximately $5.0 million of common stock from the
completion of a private placement in June 2000 with net proceeds of $4.5
million, and the exercise of stock options and warrants resulting in net
proceeds of $2.9 million. Cash provided by financing activities of $4.8 million
for the six months ended June 30, 1999, resulted from the issuance of $2.0
million of common stock from the exercise of stock options and warrants and
long-term debt borrowings of $2.8 million.
WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS
At June 30, 2000, the Company had negative net working capital of $6.6
million and cash and cash equivalents of $11.1 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 separate
private equity transactions, resulting in the entire $10 million being available
to the Company under such credit line that becomes due in May 2001. As of August
11, 2000, a total of $9.4 million had been drawn on the line of credit. As of
August 11, 2000, certain provisions of the credit line have limited the amount
currently available under the credit line to $8.3 million. Accordingly, $1.1
million is currently payable on the credit line.
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"). 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 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. The accompanying consolidated financial
statements have been adjusted to reflect the conversion of the Series A and
Series B Preferred into common stock as of December 31, 1999. In addition, on
June 30, 2000, the Company completed a private placement of approximately $5
million in shares of the Company's common stock (the "June 2000 Private
Offering"). See Part II, Item 2, "CHANGES IN SECURITIES AND USE OF PROCEEDS" for
complete details regarding the Private Offerings. The funds received from the
Private Offerings will be used for working capital purposes.
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The Company plans to finance its working capital needs and capital
expenditures through a combination of funds from operations and its existing
bank line of credit. See also, "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS."
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Quarterly Report on Form 10-Q, the
following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact or may have a significant impact on the Company's business, prospects,
financial condition and results of operations.
WE REPORTED LOSSES IN FISCAL 1999 AND THE FIRST SIX MONTHS OF FISCAL 2000.
While we have been profitable in the past, and are planning to be profitable by
the fourth quarter of 2000, we incurred a net loss of approximately $24.1
million for the fiscal year ended December 31, 1999, and net losses of
approximately $7.4 million and $7.3 million for the fiscal quarters ended March
31, 2000 and June 30, 2000, respectively. We expect to experience fluctuations
in our future operating results due to a variety of factors, many of which are
outside the Company's control, including the following:
o the demand for our products and services,
o the level of competition in the merchants we serve,
o our success in maintaining and expanding our distribution channels,
o our success in attracting and retaining motivated and qualified
personnel,
o our development and marketing of new products and services,
o our ability to control costs, and
o general economic conditions.
Our operating results will be materially and adversely affected if we do
not successfully address these and other risks.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL. Our existing line of credit
and cash resources may not be sufficient to permit the Company to fully
implement its business plan. In order to fully implement our business plan, we
may need to raise additional capital from third parties or otherwise secure
additional financing for the Company. There can be no assurance that the Company
will be able to successfully raise additional capital or secure other financing,
or that such funding will be available on terms that are favorable to the
Company. To the extent we are unable to raise sufficient additional capital or
secure other financing, this could have a material adverse effect on the
Company.
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:
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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.
OUR FUTURE GROWTH IS IN PART DEPENDENT UPON THE CONTINUED GROWTH OF THE
ELECTRONIC COMMERCE MARKET. The market for the sale of products and services
over the Internet is a new and rapidly evolving market. Our future growth
strategy is partially dependent upon the widespread acceptance and use of online
services as an avenue for retail purchases. There is no assurance that consumers
will continue to make purchases over the Internet in the future. In order for us
to grow our online customer base, we will need to attract purchasers who have
historically relied upon traditional venues for making their retail purchases.
If use of online services does not continue to grow as expected, or if the
technological infrastructure for the Internet is unable to effectively support
its growing use, our growth strategy, business and financial condition may be
materially adversely affected.
WE MAY BE UNABLE TO MANAGE THE POTENTIAL GROWTH OF OUR BUSINESS. Our
potential growth may place significant demands upon our personnel, management
and financial resources. There is no assurance that our current personnel,
systems, procedures and controls will be adequate to support our future
operations, that we will be able to train, retain, motivate and manage necessary
personnel, or that our management will be able to identify, manage and exploit
existing and potential strategic relationships and market opportunities. If we
are unable to effectively manage any potential growth, our business and
financial condition could be adversely affected.
WE FACE INTENSE COMPETITION. The distribution channels for our products are
highly competitive. From time to time in our airline catalog business,
competitors, typically other catalog retailers, have attempted to secure
contracts with various airlines to offer merchandise to their customers.
American Airlines and TWA currently offer merchandise catalogs to their
customers through a competitor. We also face competition for customers from
airport-based retailers, duty-free retailers, specialty stores, department
stores and specialty and general merchandise catalogs, many of which have
greater financial and marketing resources than we have. In addition, we compete
for customers with other in-flight marketing media, such as airline-sponsored
in-flight magazines and airline video programming. In our electronic commerce
sales, we face intense competition from other content providers and retailers
who seek to offer their products and/or services at their own Web sites or those
of other third parties. Results will also be affected by existing competition,
which the Company anticipates will intensify, and by additional entrants to the
market who may already have the necessary technology and expertise, many of whom
may have substantially greater resources than the Company.
DEPENDENCE ON CHANNEL RELATIONSHIPS. Our business depends significantly on
our relationships with the airlines, affiliate Web sites, hotels and other
channel partners. Some of our agreements with our channel partners are
short-term allowing the partner to terminate the relationship on 90 days'
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<PAGE>
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 we purchase from program participants. To the
extent that the placement fee receivable exceeds the sales of the merchant's
products and the merchant is unable or unwilling to pay the difference to us, we
may experience credit losses, which could have a material adverse effect on our
business, financial condition and results of operations.
WE ARE VULNERABLE TO INCREASES IN PAPER COSTS AND AIRLINE FUEL PRICES. The
cost of paper used to print our catalogs and the fees paid to airlines to
reimburse them for the increased fuel costs associated with carrying our
catalogs are significant expenses of our operations. Historically, paper and
airline fuel prices have fluctuated significantly from time to time. Prices in
the paper and airline fuel markets can and often do change dramatically over a
short period of time. Any significant increases in paper or airline fuel costs
that we must pay could have a material adverse effect on our business, financial
condition and results of operations.
OUR INFORMATION AND TELECOMMUNICATIONS SYSTEMS MAY FAIL OR BE INADEQUATE.
We process a large volume of relatively small orders. Consequently, our success
depends to a significant degree on the effective operation of our information
and telecommunications systems. These systems could fail for unanticipated
reasons or they may be inadequate to process any increase in our sales volume
that may occur. Any extended failure of our information and telecommunications
systems could have a material adverse effect on our business, 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,
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any breach in security, whether or not a result of our acts or omissions, may
cause us to be the subject of litigation, which could be very time-consuming and
expensive to defend.
WE MAY NOT BE ABLE TO ADAPT TO RAPIDLY CHANGING TECHNOLOGIES OR WE MAY
INCUR SIGNIFICANT COSTS IN DOING SO. The Internet is characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing customer demands. As a result of the rapidly
changing nature of the Internet business, we may be subject to risks, now and in
the future, of which we are not currently aware. To be successful, we must adapt
to our rapidly evolving market by continually enhancing our products and
services and introducing new products and services to address our customers'
changing and increasingly sophisticated requirements. We may use new
technologies ineffectively or we may fail to adapt our e-commerce
transaction-processing systems and infrastructure to meet customer requirements,
competitive pressures, or emerging industry standards. We could incur
substantial costs if we need to modify our services or infrastructure. Our
business could be materially and adversely affected if we incur significant
costs to adapt, or cannot adapt, to these changes.
BECAUSE WE DEPEND ON COMPUTER SYSTEMS, A SYSTEMS FAILURE WOULD CAUSE A
SIGNIFICANT DISRUPTION TO OUR BUSINESS. Our business, financial condition and
results of operations could be materially and adversely affected by any event
that interrupts or delays our operations. Our business depends on the efficient
and uninterrupted operation of our servers and communications hardware systems
and infrastructure. Any sustained or repeated systems interruptions that cause
our Web sites to become unavailable for use would result in our inability to
service our customers. While we have taken precautions against systems failure,
interruptions could result from our failure to maintain our computer systems and
equipment in effective working order, as well as natural disasters, power loss,
telecommunications failure, and similar events. We currently maintain our
computer systems at offices located in Arizona.
In addition, our users depend on telecommunications providers, Internet
service providers, and network administration for access to our products and
services. Our systems and equipment could experience outages, delays, and other
difficulties as a result of system failures unrelated to our systems.
OUR EQUIPMENT MAY BE UNABLE TO SUPPORT INCREASED VOLUME. Growth in the
number of users accessing our Web site may strain or exceed the capacity of our
computer and networking systems or the systems of our third party service
providers, which could result in impaired performance or systems failure. If
this occurs, customer service and satisfaction may suffer, which could lead to
dissatisfied users, reduced traffic, and an adverse impact on our business. Our
current systems may be inadequate to accommodate rapid traffic growth on our
servers.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION. Due to the
increasing popularity and use of the Internet, governmental or other regulatory
bodies in the United States and abroad may adopt additional laws and regulations
with respect to the Internet that cover issues such as content, privacy,
pricing, encryption standards, consumer protection, cross-border commerce,
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
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changes or development may have on our business, financial condition, and
results of operations. Changes in the regulatory environment relating to the
Internet could have a material adverse effect on our business, financial
condition, and results of operations.
SECURITY PROTECTION FOR OUR NETWORK MAY BE INSUFFICIENT. We believe that
concern regarding the security of confidential information, such as credit card
numbers, prevents many people from engaging in online commercial transactions.
We face potential security breaches from within our organization and from the
public at large. If we do not maintain sufficient security, we may be subject to
additional legal exposure. We have taken measures to protect the integrity of
our infrastructure and the privacy of confidential information contained within
our infrastructure. Nonetheless, our infrastructure is potentially vulnerable to
physical or electronic break-ins, viruses or similar problems. If a person
circumvents our security measures, he or she could jeopardize the security of
confidential information stored on our systems, misappropriate proprietary
information or cause interruptions in our operations. Although we intend to
continue to implement security measures, such measures have been circumvented in
the past and we cannot provide assurance that measures we implemented will not
be circumvented in the future. Although we do have "firewalls" protecting our
systems from outside circumvention, such "firewalls" do not completely protect
our systems from our own employees, should one or more of them become inclined
to inflict damage upon our systems. We may be required to make significant
additional investments and efforts to protect against or remedy security
breaches. Security breaches that result in access to confidential information
could damage our reputation and expose us to a risk of loss or liability.
Alleviating problems caused by computer viruses or other inappropriate uses or
security breaches may require interruptions, delays, or cessation in service to
our customers. In addition, since we expect that our users will increasingly use
the Internet for commercial transactions in the future, any malfunction or
security breach could cause these transactions to be delayed, not completed at
all, or completed with compromised security.
OUR BUSINESS IS SEASONAL. Our business is seasonal in nature, with the
greatest volume of sales typically occurring during the holiday selling season
of the fourth calendar quarter. During 1999, approximately 42% of our net
merchandise sales were generated in the fourth quarter. Any substantial decrease
in sales for the fourth quarter could have a material adverse effect on our
results of operations.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS. Our catalogs and our electronic
commerce sites feature products and services from numerous participating
merchants. Generally, our agreements with these participating merchants require
the merchants to indemnify us and thereby be solely responsible for any losses
arising from product liability claims made by customers, including the costs of
defending any such claims, and to carry product liability insurance that names
SkyMall as an additional insured. In addition, we maintain product liability
insurance in the aggregate amount of $2.0 million and $1.0 million per
occurrence. If a merchant was unable or unwilling to indemnify us as required,
and any such losses exceeded our insurance coverage or were not covered by our
insurer, our financial condition and results of operations could be materially
adversely affected.
WE RELY UPON CERTAIN KEY PERSONNEL. We depend on the continued services of
Robert M. Worsley, our chairman and chief executive officer, and on the services
of certain other executive officers. The loss of Mr. Worsley's services or of
the services of certain other executive officers could have a material adverse
effect on our business.
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THE WORSLEYS, WAND PARTNERS INC.AND/OR RS GROWTH GROUP, LLC CAN CONTROL
MANY IMPORTANT COMPANY DECISIONS. As of August 11, 2000, Mr. Worsley and his
wife (the "Worsleys") beneficially owned 4,830,280 shares, or approximately
30.5% of our outstanding common stock, and Wand Partners Inc. beneficially owned
2,114,286 shares, or approximately 13.4% of our outstanding common stock. David
J. Callard, the President of Wand Partners Inc., and Mr. Worsley are members of
the Board of Directors of the Company. In addition, RS Diversified Growth Fund,
The Paisley Fund, The Paisley Pacific Fund, RS Emerging Growth Pacific Partners,
RS Emerging Growth Partners LP and RS Premium Partners LP (collectively, the "RS
Funds"), as a group, own a total of 1,657,857 shares of Common Stock of the
Company, or 10.5% as of August 11, 2000. RS Growth Group LLC , as the General
Partner of the RS Funds beneficially controls such shares. As a result, the
Worsleys, Wand Partners and RS Growth Group LLC have the ability to
significantly influence the affairs of the Company and matters requiring a
shareholder vote, including the election of the Company's directors, the
amendment of the Company's charter documents, the merger or dissolution of the
Company, and the sale of all or substantially all of the Company's assets. The
voting power of the Worsleys, Wand Partners and RS Growth Group LLC may also
discourage or prevent any proposed takeover of the Company pursuant to a tender
offer.
THE PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE. The market price of
our common stock has been highly volatile. Occurrences that could cause the
trading price of our common stock to fluctuate dramatically in the future
include:
o new merchant agreements
o the acquisition or loss of one or more airline, electronic commerce or
other channel partners
o fluctuations in our operating results
o analyst reports, media stories, Internet chat room discussions, news
broadcasts and interviews
o market conditions for retailers and electronic commerce companies in
general o changes in airline fuel, paper or our other significant
expenses
o changes in the purchase price for products acquired from our merchants
The stock market has from time to time experienced extreme price and volume
fluctuations that have particularly affected the market price for companies that
do some or all of their business on the Internet. Accordingly, the price of our
common stock may be impacted by these or other trends.
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 August 11, 2000, there were outstanding warrants and options to
acquire up to 3,395,753 shares of common stock at exercise prices ranging from
$2.00 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,
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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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 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 ended 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 No. 133 to the Company's quarter ending March 31, 2001. The Company
is currently evaluating the impact of SFAS No. 133 on its future results of
operations and financial position.
In January 1999, the Company adopted Statement of Position 98-1,
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE." This Statement of Position ("SOP") provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The statement identifies the characteristics of internal-use software, the
capitalization criteria and the amortization method. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Under SOP 98-1, the Company
capitalized costs of $146,000 and $398,000 during the three months ended June
30, 2000 and 1999, respectively, and $653,000 and $588,000 for the six months
ended June 30, 2000 and 1999, respectively.
The Company follows the guidance of Accounting Principles Board ("APB")
Opinion No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS." This APB opinion
provides guidance on accounting for transactions that involve primarily an
exchange of non-monetary assets, liabilities or services ("barter
transactions"). Placement fees and other revenues include barter revenues, which
represent an exchange by SkyMall of advertising space in its print and
e-commerce media for reciprocal services, including print and e-commerce
advertising. Revenues and expenses from barter transactions are recorded at the
lower of estimated fair value of the services received or delivered. The Company
did not recognize any revenue or expenses from barter transactions during the
three months and six months ended June 30, 2000. Barter revenue and expenses
recognized during the three months and six months ended June 30, 1999 were
$308,000.
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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 a multi-channel specialty retailer that provides a large
selection of premium-quality products and services to consumers from a wide
variety of merchants and partners. The Company's operations are classified into
two reportable business segments: business-to-consumer and business-to-business.
Business initiatives for the Company's two reportable segments are managed
separately while support functions are combined.
The business-to-consumer segment provides retail merchandise service
through its in-flight catalogs placed in domestic airlines and through the
Company's Web site. The business-to-business segment provides retail merchandise
services, employee logo and corporate recognition merchandise and advertising
media to other businesses through loyalty catalogs, workplace catalogs and the
Company's Web sites. Previously, the Company defined its reportable business
segments by in-flight catalog, workplace catalog and Web sites. All periods
presented have been adjusted to reflect the new reportable business segments.
The Company evaluates the performance of its segments based on revenues and
gross margins. Operating expenses are included with corporate expenses and are
not allocated to the business segments. The accounting policies of the
reportable segments are the same as those used in the consolidated financial
statements and described in the notes to the condensed consolidated financial
statements. Inter-segment transactions are not significant.
Revenues and gross margins for the business segments are provided in the
notes to the condensed consolidated financial statements filed herewith.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk exposure is limited to the interest rate risk associated
with out credit instruments. We incur interest on loans made under a revolving
line of credit at a variable interest rate. We had outstanding borrowings on the
line of credit of approximately $9.4 million at June 30, 2000.
The Company does not have any financial derivative instruments.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management, there is no legal proceeding pending or asserted
against or involving the Company the outcome of which is likely to have a
material adverse effect upon the consolidated financial position or results of
operations of the Company.
On January 29, 1999, a securities class action complaint was filed against
SkyMall and Robert Worsley, the Company's Chief Executive Officer, Chairman and
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 and Mr. Worsley have filed a
motion to dismiss the complaint on the basis that the complaint fails to state a
claim upon which relief can be granted. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
JUNE 2000 PRIVATE PLACEMENT. In June 2000, the Company completed a private
placement of approximately $5 million in shares of the Company's common stock
pursuant to a Stock Purchase Agreement dated as of June 30, 2000 (the "June 2000
Private Offering"). A total of 2,483,000 shares of common stock were issued at a
purchase price of $2.00 per share. In addition, an aggregate of 179,813 warrants
to purchase shares of the Company's common stock were issued to the placement
agents in the June 2000 Private Offering, with exercise prices ranging from
$2.00 to $7.50 per share, and, pursuant to the anti-dilution provisions of
warrants previously issued by the Company to an advisor, as a result of the June
30, 2000 private placement, an additional 16,479 warrants to purchase 16,479
shares of common stock of the Company were issued to such advisor. The funds
received from the June 2000 Private Offering will be used primarily to fund
SkyMall's working capital requirements. The common stock issued in the June 2000
Private Offering and the warrants issued in connection therewith were issued in
reliance on the exemption provided under Section 4(2) of the Securities Act of
1933, as amended, and Regulation D thereunder.
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NOVEMBER 1999 PRIVATE PLACEMENT. In November 1999, the Company completed a
private placement of approximately $8 million in shares of the Company's common
stock and warrants to purchase additional shares of common stock pursuant to a
Stock and Warrant Purchase Agreement dated as of November 2, 1999 (the "November
1999 Private Offering"). A total of 1,142,885 shares of common stock were issued
at a purchase price of $7.00 per share, together with warrants to purchase an
additional 571,444 shares of common stock. The warrants have an exercise price
of $8.00 per share and, subject to certain conditions, are redeemable by the
Company at a nominal price if the Company's common stock trades over $12 per
share for twenty consecutive trading days. In addition, an aggregate of
approximately 129,136 warrants to purchase shares of the Company's common stock
were issued to the placement agents in the Private Offering, with exercise
prices ranging from $8.10 to $9.12 per share. The funds received from the
November 1999 Private Offering will be used primarily to fund SkyMall's working
capital requirements. The common stock and warrants issued in the November 1999
Private Offering were issued in reliance on the exemption provided under Section
4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder.
DECEMBER 1999 PRIVATE PLACEMENT OF SERIES A JUNIOR CONVERTIBLE PREFERRED
STOCK AND WARRANTS. In December 1999, the Company completed a private placement
of approximately $9 million in shares of the Company's Series A Junior
Convertible Preferred Stock (the "Series A Preferred") and warrants to purchase
additional shares of common stock (the "Series A Private Offering") pursuant to
a Stock and Warrant Purchase Agreement dated as of December 20, 1999 (the
"December 20, 1999 Agreement"). A total of 91,320 shares of Series A Preferred
were issued to investors, together with warrants to purchase an additional
652,289 shares of common stock (the "Investor Warrants"). The Investor Warrants
have an exercise price of $8.00 per share and, subject to certain conditions,
are redeemable by the Company at a nominal price if the Company's stock trades
over $12 per share for twenty consecutive trading days. In addition, an
aggregate of 200,742 warrants to purchase shares of the Company's common stock
were issued to the placement agents in the Series A Private Offering, with
exercise prices ranging from $7.00 to $9.12 per share. The funds received from
the Series A Private Offering will be used primarily to fund SkyMall's working
capital requirements. The Series A Preferred and warrants issued in the Series A
Private Offering were issued in reliance on the exemption provided under Section
4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder.
Pursuant to the terms of the December 20, 1999 Agreement, at the close of
business on March 10, 2000, all shares of Series A Preferred were automatically
converted into 1,304,571 shares of common stock of the Company upon receipt of
shareholder approval of such conversion at a Special Meeting of Shareholders
held on March 10, 2000. The resale of the shares of common stock issued upon
conversion of the Series A Preferred and the shares of common stock issuable
upon exercise of the warrants have been registered under the Securities Act of
1933, as amended. The condensed consolidated financial statements have been
adjusted to reflect the conversion of the Series A Preferred into common stock
as of December 31, 1999.
In April and May 2000, 339,286 of the Investor Warrants were exercised,
resulting in net proceeds to the Company of $ 2,714,288.
DECEMBER 1999 PRIVATE PLACEMENT OF SERIES B JUNIOR CONVERTIBLE PREFERRED
STOCK AND WARRANTS. In December 1999, the Company completed a private 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
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additional shares of common stock (the "Series B Private Offering") pursuant to
a Stock and Warrant Purchase Agreement dated as of December 30, 1999 (the
"December 30, 1999 Agreement"). A total of 80,000 shares of Series B Preferred
were issued to investors, together with warrants to purchase an additional
571,429 shares of common stock. The warrants have an exercise price of $8.00 per
share and, subject to certain conditions, are redeemable by the Company at a
nominal price if the Company's stock trades over $12 per share for twenty
consecutive trading days. In addition, an aggregate of 34,286 warrants to
purchase shares of the Company's common stock were issued to the placement agent
in the Series B Private Offering, with an exercise price of $7.00 per share, and
250,000 warrants to purchase shares of the Company's common stock were issued to
an advisor in connection with the Series B Private Offering, with an exercise
price of $8.00 per share. The funds received from the Series B Private Offering
will be used primarily to fund SkyMall's working capital requirements. The
Series B Preferred and warrants issued in the Series B Private Offering were
issued in reliance on the exemption provided under Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D thereunder.
Pursuant to the terms of the December 30, 1999 Agreement, at the close of
business on March 10, 2000, all shares of Series B Preferred were automatically
converted into 1,142,857 shares of common stock of the Company upon receipt of
shareholder approval of such conversion at a Special Meeting of Shareholders
held on March 10, 2000. The resale of the shares of common stock issued upon
conversion of the Series B Preferred and the shares of common stock issuable
upon exercise of the warrants issued to investors and the placement agents in
the December 30, 1999 private placement have been registered under the
Securities Act of 1933, as amended. The condensed consolidated financial
statements have been adjusted to reflect the conversion of the Series B
Preferred into common stock as of December 31, 1999.
ADDITIONAL WARRANT ISSUANCES
SHORELINE PACIFIC. Shoreline Pacific Institutional Finance ("Shoreline")
acted as an advisor to the Company in connection with the Company's November
1999 private placement and, as such, received warrants to purchase shares of the
Company's common stock. Such warrants contain anti-dilution provisions which
required the issuance of additional warrants in connection with the December 20,
1999 and December 30, 1999 private placements, and, as a result of the June 30,
2000 private placement, required the issuance of an additional 16,479 warrants
to purchase 16,479 shares of common stock of the Company. Pursuant to the terms
of the agreement between the Company and Shoreline, such warrants have been
issued to Shoreline Pacific Equity Ltd. and certain employees of Shoreline
Pacific Institutional Finance.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 9, 2000, the Company held its 2000 Annual Meeting of Shareholders
(the "Annual Meeting"). Stockholders representing 10,918,779 shares, or 83.22%
of the shares entitled to vote at the Annual Meeting, were present in person or
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by proxy. All of the directors standing for re-election were elected at the
Annual Meeting and all of the proposals were passed. The following sets forth
the voting results on the election of directors and the proposals submitted to
shareholders at the Annual Meeting:
1. Proposal 1 - Approval of an amendment to the Company's Articles of
Incorporation to provide for the classification of the Board of Directors into
three classes of directors with staggered three-year terms of office. Proposal 1
was passed by 75.14% of the shareholders voting thereon, as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS
8,204,902 296,981 37,520
2. Proposal 2 - To elect five directors to the Board of Directors to serve
for terms of one to three years, respectively, or until their successors are
elected and qualified if Proposal No. 1 is approved, or to elect the same
persons as directors for a term of one year if Proposal No. 1 is not approved.
Proposal 1 was passed, and the following directors were elected for the terms of
office set forth opposite their names, below:
TERM VOTES
DIRECTOR CLASS EXPIRES VOTES FOR WITHHELD
Lyle R. Knight I 2001 10,824,992 93,787
Thomas J. Litle II 2002 10,823,582 95,197
Randy Petersen II 2002 10,824,742 94,037
Robert M. Worsley III 2003 10,823,967 94,812
David J. Callard III 2003 10,825,362 93,417
3. Proposal 3 - To approve amendments to the Company's Non-Employee
Director Stock Option Plan (the "Director Plan") to (i) increase the aggregate
number of shares available for issuance thereunder from 100,000 to 375,000 and
(ii) to increase the automatic grants under the Director Plan to 25,000 options
upon election to the Board and 7,500 options annually subject to the terms and
conditions of the Director Plan. Proposal 3 was passed by 94.51% of the
shareholders voting thereon, as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS
10,318,850 578,904 21,025
4. Proposal 4 - Ratification of the appointment of Arthur Andersen L.L.P.
as independent public accountants of the Company for the fiscal year ending
December 31, 2000. Proposal 4 was passed by 99.33% of the shareholders voting
thereon, as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS
10,845,870 56,944 15,965
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
The following exhibits are included herein:
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
4.1 Form of Warrant issued to Shoreline, et al. (1)
4.2 Form of Warrant issued to Schneider Securities, Inc.
and Budd Zuckerman as placement agents in the June 30,
2000 private placement (1)
4.3 Form of Warrant issued to Ryan, Beck & Co., Inc., et al.
as placement agents in the June 30, 2000 private placement (1)
10.1(a) Stock Purchase Agreement between the Company and the
investors in the June 30, 2000 private placement (1)
10.1(b) Registration Rights Agreement between the Company and
the investors in the June 30, 2000 private placement (1)
10.2 Employment Agreement between the Company and Cary L. Deacon (2)
27 Financial Data Schedule (2)
-------------
(1) Incorporated by reference to Form S-3 Registration Statement #333-41498
(2) Filed herewith
(B) REPORTS ON FORM 8-K.
On May 8, 2000, the Company filed a Report on Form 8-K to announce its
financial results for the quarter ended March 31, 2000.
On June 30, 2000, the Company filed a Report on Form 8-K to announce that
it had entered into an investment agreement with MRT Technology, LLC. ("MRT"),
the North American subsidiary of Ritek Corporation. Under the agreement, MRT
agreed to invest up to $15 million in SkyMall's new subsidiary, SkyMall Media
Ventures, Inc. ("SMVI"), in consideration for up to a 30% equity interest in
SMVI. SMVI intends to develop interactive media content in cooperation with
participants from numerous industries, including retail, entertainment and
services.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SkyMall, Inc.
Date: August 14, 2000 By: /s/ Robert M. Worsley
---------------------------------
Robert M. Worsley
Chairman of the Board
(Chief Executive Officer)
Date: August 14, 2000 By: /s/ Lynne Berreman
---------------------------------
Lynne Berreman
Senior Director of Accounting &
Finance & Corporate Controller
(Principal Accounting Officer)
35
