ITEM 1. BUSINESS
GENERAL
Founded in 1989, SkyMall, Inc., a Nevada corporation, is a specialty
retailer that markets high-quality products and services through a number of
unique channels and partnerships. The Company offers its products and services
via various media, including the SkyMall in-flight print catalogs, and on the
Internet at WWW.SKYMALL.COM. SkyMall is best known for its in-flight catalog,
which is available on domestic flights carrying approximately 73% of all
domestic passengers, reaching approximately 540 million domestic airline
passengers annually. Through its skymall.com, inc. subsidiary, which operates
the SKYMALL.COM(R) Web site, 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. During 2000, Durham &
Company, a SkyMall subsidiary, offered high-quality logo merchandise via its
catalogs, workplace initiatives and the WWW.DURHAM.SKYMALL.COM Web site.
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SkyMall operates two distinct segments, which include its
business-to-consumer and business-to-business initiatives. The
business-to-consumer segment provides retail merchandise through the Company's
in-flight catalogs placed in domestic airlines and through the Company's Web
site. The business-to-business segment provides merchandise redemption offerings
for a number of point-based loyalty programs and, during 2000, offered logo and
corporate recognition products. Subsequent to the end of the 2000 fiscal year,
SkyMall sold the assets of Durham & Company, our logo and corporate recognition
product business, to a third party. See "Business-to-Business Segment - Logo and
Corporate Recognition Merchandise Programs".
Unless the context indicates otherwise, the terms "SkyMall," the "Company,"
"we," "us" or "ours" refer to SkyMall, Inc. and its subsidiaries.
BUSINESS-TO-CONSUMER SEGMENT
OVERVIEW
SkyMall is a "one-stop" shopping source for customers who may purchase a
variety of merchandise typically offered by 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, Frontgate(R),
FTD.com, Hammacher Schlemmer(R), Improvements(R), Lillian Vernon(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).
Our business-to-consumer segment accounted for approximately 84% of net
merchandise sales and substantially all of our placement fees and other revenue
from all of our business segments in 2000. Approximately 30% of our net
merchandise sales in our business-to-consumer segment in 2000 were Web-based,
accounting for approximately $15.5 million of our business-to-consumer net
merchandise sales.
CUSTOMER RELATIONSHIPS
SkyMall is committed to fostering a high-quality, one-to-one customer
experience that exceeds expectations and engages customers in long-term
relationships. We provide high-quality customer service and a large selection of
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specialty products and services through unique channels and partnerships.
SkyMall has adopted the following strategies for satisfying the needs of
time-pressed consumers, particularly those who have adopted the Internet as a
preferred method of shopping and have grown to expect higher standards of
customer service and convenience.
* PROVIDE CUSTOMERS WITH ONLY THE BEST-SELLING, HIGH-QUALITY MERCHANDISE
FROM WELL-KNOWN BRANDS. Our print media, which typically includes
approximately 2,000 items per catalog, provides consumers with a
selection of only the best-selling products from our most well-known
merchant partners. This ensures that consumers quickly see the most
popular items, without having to review hundreds of items that may be
of little interest. SkyMall's Web site offers customers a more
comprehensive merchandise selection of more than 7,600 SKUs from
numerous merchants.
* PROVIDE CUSTOMERS WITH A CONVENIENT ONE-STOP SHOPPING SERVICE. SkyMall
is a "one-stop" shopping source for customers who may purchase a
variety of merchandise typically offered by many different well-known
merchants in a single transaction. Although most of the merchandise
offered by SkyMall is available from other catalog and retail
companies, each of these companies typically has its own policies for
shipping and handling charges, merchandise returns, sales taxes and
price guarantees, as well as its own Web site. In addition, each
company typically has different customer service hours and credit and
payment policies. By aggregating the merchandise of our various
participating merchants into a single location in our print catalogs
and on the Web, we afford our customers access to thousands of
products offered by numerous participating merchants and the
convenience of one-stop shopping.
* PROVIDE SUPERIOR CUSTOMER SERVICE, ORDER PROCESSING AND FULFILLMENT.
The Company maintains a well-trained, in-house staff of customer
service representatives located in Phoenix, Arizona. Our customers
enjoy the convenience of being able to shop twenty-four hours a day,
seven days a week. The Company's customer service representatives
encourage customers to purchase additional products with each order to
increase the Company's average order size. Consumers can shop while
traveling by ordering from free in-flight phones or by phones anywhere
using our toll-free number. Consumers can also shop online wherever an
Internet connection is available. The Company offers telephone support
to its online consumers twenty-four hours a day, seven days a week,
providing the Company's online consumers the benefit of live customer
service assistance. Online consumers can also make customer service
inquiries via e-mail. To facilitate prompt delivery of products, all
orders taken by the Company are forwarded to the Company's merchant
partners who ship merchandise directly to consumers. We currently
offer expedited shipping options for most products.
* PROVIDE CUSTOMER GUARANTEES AND EASY RETURNS. We offer a no mark-up,
low price guarantee under which we will refund the price difference if
the customer finds the same item advertised elsewhere at a lower
price. We also offer a total satisfaction guarantee that lets a
customer return merchandise for any reason within 60 days of purchase.
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* PROVIDE OUR ONLINE CUSTOMERS WITH THE LATEST WEB SITE TECHNOLOGIES.
For the convenience of our customers, our Web site provides a search
engine, which enables customers to search and define their shopping
needs. Products and services are sorted by category and sub-category,
which enables customers to search and define their shopping needs
faster and easier.
SKYMALL DOMESTIC IN-FLIGHT CATALOGS. Our in-flight catalogs, which are
placed in airline seat pockets, are our largest distribution channel. We have
exclusive agreements to place our catalogs on nineteen airlines, making our
catalogs available to approximately 540 million airline passengers in 2000.
These nineteen airlines, which carried approximately 73% of all domestic
passengers in 2000, 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. 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 catalogs are also available on certain
Northeastern routes of Amtrak.
The SkyMall program offers airlines a low-risk means of incrementally
increasing their revenues. In exchange for placement of our catalogs in
seat-back pockets, we pay each airline partner a monthly commission based on net
merchandise revenues generated by the Company from sales to that airline's
passengers. Some agreements also require payment of a minimum monthly commission
or a boarding cost that reimburses the airline for the increased fuel costs
attributable to the weight of the catalogs. We believe our relations with each
of our airline partners are good.
The following airline partners each accounted for in excess of 10% of the
Company's business-to-consumer segment net merchandise sales for the fiscal year
ended 2000:
Percent of Net Merchandise Sales
Name of Airline Through December 31, 2000
--------------- -------------------------
Delta 19%
United 15%
Continental 12%
Southwest 11%
---
Total 57%
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ELECTRONIC COMMERCE
We launched our first Internet Web site in January of 1996 and since then
have continued to refine and develop our e-commerce strategies. Our e-commerce
channel showcases products offered in our print catalogs and provides customers
an additional means of customer service and support. In addition, the Web site
offers products and services from a greater number of merchants and a full
complement of products from merchants who offer only their best-selling items in
our catalogs.
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Over the past two years, we have made significant improvements to our
e-commerce channel. In 1999 and 2000, 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 site, (ii) further development of our
technology and other business infrastructures used to convey orders and provide
order status information to our customers, and (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.
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 improvements to the consumer shopping experience, including improved
navigation, speed and performance, an enhanced search engine, redesigned home
page, a simplified checkout process and new user enhancements such as
e-reminders, e-cards and wish list functionality.
BUSINESS-TO-BUSINESS SEGMENT
OVERVIEW
SkyMall's business-to-business segment provides unique solutions for
corporate clients. Using both print and electronic media, this segment offers
customized programs for various loyalty programs that allow program participants
to redeem accumulated points for SkyMall merchandise. During 2000, we also sold
logo merchandise and recognition products to various major corporations and
other entities. In 2000, this segment accounted for approximately 17% of our
total net merchandise sales.
LOYALTY PROGRAMS. During late 1999, we entered into an agreement with
Marriott Corporation to provide participants in Marriott's loyalty program,
Marriott Rewards, an opportunity to redeem points for specially selected
merchandise. Under this program, participants in Marriott's loyalty program can
"spend" their accumulated loyalty points for SkyMall merchandise. Marriott and
SkyMall cooperate to market the program to the Marriott Reward members through a
variety of media, including print brochures and catalogs and various Web-based
programs. Marriott reimburses SkyMall for the product costs at agreed upon
prices. The agreement with Marriott represents our principal loyalty program
revenue source. We also maintain similar loyalty program agreements with General
Motors Corporation, Hilton Hotels Corporation, Milepoint.com. and XYLO, Inc.
(formerly known as employeesavings.com).
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LOGO AND CORPORATE RECOGNITION MERCHANDISE PROGRAMS. During 2000, through
our subsidiary, Durham & Company, we offered logo merchandise and recognition
products to employees of a number of blue-chip organizations, primarily through
print catalogs and various Web sites, including www.durham.skymall.com.
Competing in the highly fragmented incentive industry, Durham distinguished
itself by providing high-quality products and excellent customer service and
focused its marketing efforts on large organizations. Subsequent to the end of
fiscal 2000, SkyMall sold substantially all the assets of Durham & Company to
Awards.com, Inc. In exchange for the assets of Durham, SkyMall received a
minority equity interest in Awards.com and a note for $1,000,000, which bears
interest at 10% annually that is due and payable on March 26, 2004 and is
secured by the assets of Durham. Awards.com is a private, venture-backed firm
that offers and sells trophies, awards, incentive and logo merchandise through
catalogs and on the Web. Awards.com is the Internet's largest award,
recognition, and motivational resource.
GROWTH STRATEGY
We intend to continue to grow our business through a series of strategic
initiatives. Our marketing strategy is designed to build strong customer
loyalty, maximize repeat purchases, strengthen the SkyMall brand, increase
customer traffic to the SKYMALL.COM Web site and develop new revenue
opportunities. The Company employs a variety of media, marketing and promotional
methods to achieve these goals.
In the business-to-consumer segment, we intend to increase net merchandise
sales through marketing efforts to our core in-flight consumers. In 2001, we
will seek to create new promotional opportunities such as direct mail to
frequent flyer program participants and joint marketing initiatives with our
airline partners. We plan to combine these initiatives with our online presence
to take advantage of the efficiencies that can be gained by driving consumers to
our Web site. Additionally, we intend to increase placement fee revenues,
through contracts with premier merchandise brands, who we believe will be more
likely to pay placement fees in order to further establish brand equity. In the
business-to-business segment, we intend to continue to service our existing
merchandise redemption programs, including renewing our existing loyalty program
contracts, and to expand the loyalty program through agreements with new
participants.
For further discussion, please see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS."
COMPETITION
BUSINESS-TO-CONSUMER
IN-FLIGHT CATALOG. All aspects of our in-flight catalog business are highly
competitive. We compete for customers to some degree with all retailers and
catalog companies, including airport retailers, duty-free retailers, specialty
stores, department stores, specialty catalog companies and general merchandise
catalog companies. Although we believe that our long-standing relationships with
our business partners and participating merchants create substantial barriers to
competition, many of our competitors and potential competitors have greater
financial, marketing and other resources, and may seek to enter or expand
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penetration into the markets we serve. In our in-flight business, we compete
with other advertisers, including those who advertise in in-flight magazines and
other periodicals. Several companies, some of which have greater resources than
the Company, have announced they may develop seatback interactive video shopping
services. As seatback interactive video shopping services become more available
to airline passengers, competition in the in-flight marketing business is likely
to increase. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
ELECTRONIC MEDIA. The Internet online commerce market is relatively new,
rapidly evolving and intensely competitive. Barriers to entry are minimal and
current and new competitors can launch new Web sites at a relatively low cost.
Many competitors in this area have greater financial, technical and marketing
resources than the Company. In addition, new technologies and the expansion of
existing technologies may increase the competitive pressures on online
retailers, including the Company. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS."
BUSINESS-TO-BUSINESS
The market for our business-to-business programs is rapidly changing and
intensely competitive. We may not be able to compete successfully against
current or future competitors. Many of our competitors and potential competitors
have greater financial, marketing and other resources, and may have
well-established relationships with our existing and prospective customers. In
addition, negotiating and maintaining favorable customer and strategic
relationships is critical to our business. Our competitors may be able to
negotiate strategic relationships on more favorable terms than we are able to
negotiate.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
BUSINESS OPERATIONS
MERCHANT AGREEMENTS. We enter into agreements with merchants who supply the
products and services offered in our programs. Under merchant contracts, we buy
merchandise at pre-established rates or receive placement fees for inclusion of
the merchant's products in SkyMall programs. Participating merchants agree to
maintain sufficient levels of inventory to satisfy customer demand and to ship
all orders within 72 hours unless the merchandise is out-of-stock. Generally,
our agreements with participating merchants provide that prices for products be
honored by merchants as long as the Company receives orders for them. The
agreements vary in length typically from one quarter to one year or more in the
case of our larger merchant partners. The merchants typically agree to indemnify
the Company for any losses associated with injuries caused to customers from the
use of such merchant's products, to carry product liability insurance that names
SkyMall as an additional insured, and to indemnify the Company against claims
that their products infringe on the intellectual property rights of third
parties. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
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ORDER PROCESSING, CUSTOMER SERVICE AND FULFILLMENT. We maintain no
significant inventory. Therefore, once we receive a customer's order, we
transmit it to the appropriate merchant who ships the merchandise directly to
the customer. Although expedited service is available, most orders are delivered
to customers within 7-to-10 days. In 2000, the Company's average order size was
approximately $118. Our customer service representatives are given incentives
for increasing order size. We outsource part of our call volume during peak
order times.
ENHANCED WEB SITE. The Company spent significant resources during 1999 and
2000 on its information-technology and Web infrastructure. In February 2000, we
re-launched our Web site, SKYMALL.COM, in the culmination of our year-long
efforts. Our new Web site is more consumer-friendly due to a redesigned home
page, improved navigation capabilities, new features and an enhanced search
engine, which enables customers to search and define their shopping needs.
ORDER ENTRY AND CUSTOMER SERVICE SYSTEM. We have implemented order entry,
transaction-processing and fulfillment services and systems using a combination
of our own proprietary technologies and commercially available licensed
technologies. The Company's current strategy is to spend minimal development
efforts on enhancing the specialized, proprietary software that is unique to its
business and to license commercially developed technology for other applications
where available and required. Our Web-based system provides the Company with
many advantages, including giving us significant flexibility in implementing
marketing programs and enabling us to reduce costs in our in-flight catalog
business.
REGULATION
Our operations are subject to various federal, state and local laws and
regulations, including state sales tax laws and various Federal Trade Commission
regulations governing the sale of merchandise by mail. The Federal Trade
Commission regulations applicable to our operations impose various requirements
on the processing of customer orders, including shipping deadlines, delay
notices, order cancellations and refunds. During 2000, Durham & Company operated
a small facility where it manufactured recognition jewelry and related products.
These operations involve certain hazardous chemicals that are used in the
manufacturing process and are subject to various federal, state and local
environmental laws and regulations.
EMPLOYEES
At March 14, 2001, the Company had 199 employees. The Company makes
significant use of temporary and part-time employees to process orders during
the fourth quarter of each year. The Company believes it has good relations with
its employees. The Company believes that its future success will depend in part
on its continued ability to attract, hire and retain qualified personnel. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS."
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TRADEMARKS AND TRADE NAMES
SkyMall(R) and skymall.com(R) are registered trademarks of the Company. The
loss of such trademarks could have a material adverse effect on the Company. In
addition, the Company uses a number of other trademarks and trade names in its
business, none of which the Company believes are material to its overall
operations.