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The following is an excerpt from a 10-K405 SEC Filing, filed by SKYMALL INC on 4/2/2001.
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SKYMALL INC - 10-K405 - 20010402 - BUSINESS

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%
                                                        ===

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.

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