<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 000-21657
SKYMALL, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 86-0651100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1520 East Pima Street, Phoenix, Arizona 85034
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 254-9777
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 [ ]
The number of shares outstanding of the issuer's common shares, as of
August 12, 1997:
COMMON SHARES, $.001 PAR VALUE: 8,654,000 SHARES
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SKYMALL, INC.
INDEX
<TABLE>
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets -
June 30, 1997 and December 31, 1996........................................................... 3
Condensed Statements of Income -
Three and six months ended June 30, 1997 and 1996............................................. 4
Condensed Statements of Cash Flows -
Six months ended June 30, 1997 and 1996....................................................... 5
Notes to Condensed Financial Statements........................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................. 7
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................. 9
ITEM 2. CHANGES IN SECURITIES......................................................................... 9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 9
ITEM 5. OTHER INFORMATION............................................................................. 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 9
SIGNATURES.............................................................................................. 9
EXHIBITS
Exhibit Index..................................................................................... 10
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SKYMALL, INC.
CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------- -------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including escrow accounts $ 9,113 $11,491
Accounts receivable, net 1,700 4,150
Merchandise inventory, net 67 14
Prepaid catalog costs and other 2,438 1,900
Deferred income taxes 47 59
------- -------
Total current assets 13,365 17,614
PROPERTY AND EQUIPMENT, net 2,243 1,949
OTHER ASSETS, net 182 158
------- -------
Total assets $15,790 $19,721
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,594 $ 8,623
Accrued liabilities 540 792
Income taxes -- 280
Reserve for restructure charges -- 165
Current portion of line of credit 1,800 --
Current portion of notes payable and capital leases 72 72
Current portion of notes payable to vendors 304 870
Notes payable to shareholders -- 120
------- -------
Total current liabilities 6,310 10,922
DEFERRED INCOME TAXES 47 59
NOTES PAYABLE AND CAPITAL LEASES, net of
current portion 84 128
NOTES PAYABLE TO VENDORS, net of
current portion -- 11
------- -------
Total liabilities 6,441 11,120
------- -------
SHAREHOLDERS' EQUITY 9,349 8,601
------- -------
Total liabilities and shareholders' equity $15,790 $19,721
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
SKYMALL, INC.
CONDENSED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Merchandise sales, net $ 8,596 $ 6,550 $ 16,680 $ 12,432
Placement fees and other 3,703 2,720 7,210 5,793
----------- ----------- ----------- -----------
Total revenues 12,299 9,270 23,890 18,225
COST OF GOODS SOLD 6,953 4,857 13,563 9,553
----------- ----------- ----------- -----------
Gross margin 5,346 4,413 10,327 8,672
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Catalog expenses 2,033 1,828 3,922 3,979
Selling expenses 702 620 1,372 1,134
Customer service and fulfillment expenses 987 516 1,974 973
General and administrative expenses 1,443 695 2,535 1,448
----------- ----------- ----------- -----------
Total operating expenses 5,165 3,659 9,803 7,534
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 181 754 524 1,138
Interest expense (16) (209) (58) (405)
Other income 156 12 282 37
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 321 557 748 770
Income taxes - - - -
----------- ----------- ----------- -----------
NET INCOME $ 321 $ 557 $ 748 $ 770
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ .04 $ .11 $ .09 $ .15
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 8,706,936 5,150,000 8,712,228 5,150,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
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SKYMALL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 748 $ 770
Adjustments to reconcile net income to net cash
provided by (used for) operating activities --
Depreciation and amortization 277 141
Changes in operating assets and liabilities (3,891) (543)
-------- --------
Net cash provided by (used for) operating activities (2,866) 368
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (571) (175)
-------- --------
Net cash used for investing activities (571) (175)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 1,800 --
Payments on notes payable and capital leases (44) (2)
Payments on notes payable to vendors (577) (913)
Proceeds from (payments on) notes payable to shareholders (120) 402
-------- --------
Net cash provided by (used for) financing activities 1,059 (513)
-------- --------
DECREASE IN CASH AND
CASH EQUIVALENTS (2,378) (320)
CASH AND CASH EQUIVALENTS,
beginning of period 11,491 775
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 9,113 $ 455
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SKYMALL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed 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 financial statements have been
condensed or omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. The results of operations for the three and six month
periods ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
(2) NET INCOME PER COMMON SHARE
Net income per common share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128),
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly held
common stock. The Company will adopt SFAS No. 128 for the year ended December
31, 1997. The effect that the adoption of the new standard would have had on the
accompanying financial statements is not significant on any period presented.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
attached condensed financial statements and notes thereto and with the Company's
audited financial statements, notes to the financial statements, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations relating thereto included or incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain statements 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. The words and phrases "should be," "will be,"
"believes," "expects," "anticipates," "plans," "intends" and similar expressions
identify forward-looking statements. These forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to the
Company's operations and business environment, which may cause the actual
results of the Company to be materially different from any future results
expressed or implied by such forward-looking statements. Examples of such
uncertainties include, but are not limited to, the Company's dependence on its
relationships with its airline partners, fluctuations in paper prices and
airline fuel costs, customer credit risks, competition from other catalog
companies and retailers and the Company's reliance on information and
telecommunications systems, all of which are discussed more fully 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.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996.
Revenue and Gross Margin. Net merchandise sales increased to $8.6 and
$16.7 million for the three and six months ended June 30, 1997, respectively,
from $6.6 and $12.4 million for the comparable periods in the prior year,
respectively, or 30% and 35%, respectively, due primarily to increased focus on
product merchandising, increased catalog distribution, and promotional
activities during the first six months of 1997 compared to the comparable
periods in the prior year. As a result of the increase in net merchandise sales,
net merchandise sales per catalog increased to $2.03 and $1.99 for the three and
six months ended June 30, 1997, respectively, from $1.75 and $1.63 for the
comparable periods in the prior year, respectively. Placement fees and other
revenues increased to $3.7 and $7.2 million for the three and six months ended
June 30, 1997, respectively, from $2.7 and $5.8 million for the comparable
periods in the prior year, respectively, or 37% and 24%, respectively, due to a
change in the mix of agreements with merchants. Although gross margin increased
by 21% and 19% to $5.3 and $10.3 million for the three and six months ended June
30, 1997, respectively, from $4.4 and $8.7 million for the comparable periods in
the prior year, respectively, gross margin as a percent of total revenues
decreased from 48% for the three and six months ended June 30, 1996,
respectively, to 43% for the three and six months ended June 30, 1997,
respectively. The decrease in gross margin percentage was primarily due to a
change in the mix of agreements with merchants, which resulted in higher
placement fees but retention of a lower percentage of net merchandise sales for
the first six months of 1997 compared to the comparable periods in the prior
year.
Operating Expenses. Total operating expenses increased to $5.2 and $9.8
million for the three and six months ended June 30, 1997, respectively, from
$3.7 and $7.5 million for the comparable periods in the prior year,
respectively, or 41% and 31%, respectively. The increases were due primarily to
increases of $0.5 and $1.0 million in customer service and fulfillment expenses
and $0.7 and $1.1 million in general and administrative expenses for the three
and six months ended June 30, 1997, respectively, compared to the comparable
prior periods. The increases in customer service and fulfillment expenses were
primarily due to the increases in net merchandise sales, and the addition of
personnel in anticipation of increased sales volumes. General and administrative
expenses increased primarily due to the addition of key personnel and
infrastructure growth.
Income from Operations. Income from operations decreased to $0.2 and
$0.5 million for the three and six months ended June 30, 1997, respectively,
from $0.8 and $1.1 million for the comparable periods in the prior year,
respectively. The decreases were primarily due to the $1.5 and $2.3 million
increases in the Company's total operating expenses, which were partially offset
by the $0.9 and $1.7 million increases in gross margin for the three and six
months ended June 30, 1997, respectively, compared to the comparable prior
periods.
7
<PAGE> 8
Other Income and Interest Expense. Interest expense decreased to $0.02
and $0.06 million for the three and six months ended June 30, 1997,
respectively, from $0.2 and $0.4 million for the comparable periods in the prior
year. The decreases were due to a reduction of notes payable to vendors and
shareholders in the fourth quarter of 1996. Other income increased to $0.2 and
$0.3 million for the three and six months ended June 30, 1997, respectively,
from $0.01 and $0.04 for the comparable periods in the prior year. The increases
were due primarily to interest earned on cash balances in 1997.
Income Taxes. Prior to October 21, 1996, the Company had elected to be
taxed under Subchapter S of the Internal Revenue Code and corresponding
provisions of Arizona tax laws. As a result of the election, federal and state
income taxes on the net income of the Company were payable personally by the
shareholders. Accordingly, no provision for income taxes was recorded for the
three and six months ended March 31, 1996 and June 30, 1996, respectively.
Upon conversion from an S Corporation to a C Corporation, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS No. 109). In accordance with the provisions
of SFAS No. 109, the Company recorded a valuation allowance against deferred tax
assets due to the uncertainty as to whether the Company would be able to realize
all deferred tax assets. As a result of profitable operations for the three and
six months ended June 30, 1997, respectively, the Company reduced a portion of
its deferred tax asset valuation allowance, and did not record a provision for
income taxes for the three and six months ended June 30, 1997. It is the
Company's policy to evaluate its ability to reduce the deferred tax asset
valuation allowance on a period-by-period basis.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $7.1 million and a
current ratio of 2.12 to 1, compared to working capital of $6.7 million and a
current ratio of 1.61 to 1 at December 31, 1996. The Company used cash from
operations and a portion of the proceeds of the December 1996 public offering to
significantly reduce accounts payable and accrued liabilities, including notes
payable to vendors. The Company believes that its working capital will be
sufficient to liquidate its remaining notes payable and to satisfy its other
liabilities as they become due for the foreseeable future.
Cash provided by (used for) operating activities was ($2.9) million and
$0.4 million for the six months ended June 30, 1997 and 1996, respectively. Cash
used for operating activities in the six months ended June 30, 1997 was used
primarily to reduce accounts payable by $5.0 million and to increase prepaid
catalog costs by $0.5 million. These uses were partially offset by cash provided
through a $2.5 million reduction in accounts receivable. Cash provided by
operating activities in the six months ended June 30, 1996 was provided
primarily through an increase of $0.7 increase in accounts payable, which was
partially offset by an increase in prepaid catalog costs of $0.6 million.
Cash used for investing activities was $0.6 million and $0.2 million
for the six months ended June 30, 1997 and 1996, respectively. These investments
were primarily for computer software and telecommunications equipment in each
period, respectively.
Cash provided by (used for) financing activities was $1.1 million and
($0.5) million for the six months ended 1997 and 1996, respectively. Cash
provided by financing for the six months ended June 30, 1997 resulted from
borrowing under the Company's line-of-credit of $1.8 million, which was offset
by approximately $0.7 million in payments on notes payable to vendors,
shareholders, and others. Cash used for financing in 1996 was from payments on
notes payable to vendors of $0.9 million, and was offset by proceeds from notes
payable to shareholders of $0.4 million.
8
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 15, 1997. At
the meeting, all of the Company's directors, as previously reported in the
Company's Annual Report on Form 10-K, were re-elected to the Board of Directors.
In addition, the Company's Shareholders ratified the appointment of Arthur
Andersen, L.L.P. as the Company's independent accountants. Of the votes cast at
the meeting, 4,687,161 or 54% of the Company's outstanding stock was voted in
favor of each director standing for election and in favor of the ratification of
the Company's independent accountants.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(11) Statement Re: Computation of Net Income Per Common Share.
(27) Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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.
Date: August 14, 1997 By: /s/ Robert M. Worsley
-------------------------- ---------------------------
Robert M. Worsley
Chairman of the Board,
President (Chief Executive Officer)
Date: August 14, 1997 By: /s/ Darryl S. Baker
-------------------------- --------------------------
Darryl S. Baker
Acting Chief Financial and Principal
Accounting Officer
9
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------------- ---------------------------------------------------------
<S> <C>
11 Statement Re: Computation of Net Income Per Common Share
27 Financial Data Schedule
</TABLE>
10
<PAGE> 1
EXHIBIT 11
SKYMALL, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
For Primary Income Per Common Share(1)(2) 1997 1996
---------- ----------
<S> <C> <C>
Weighted average number of common shares outstanding 8,654,000 5,150,000
Net dilutive impact of stock options and warrants -- based on the treasury
stock method using average market price 52,935 --
---------- ----------
Weighted average number of common and common equivalent shares outstanding 8,706,936 5,150,000
========== ==========
Net income $ 321,000 $ 557,000
========== ==========
Net income per common share $ 0.04 $ 0.11
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
For Primary Income Per Common Share(1)(2) 1997 1996
---------- ----------
<S> <C> <C>
Weighted average number of common shares outstanding 8,654,000 5,150,000
Net dilutive impact of stock options and warrants -- based on the treasury
stock method using average market price 58,227 --
---------- ----------
Weighted average number of common and common equivalent shares outstanding
8,712,228 5,150,000
========== ==========
Net income $ 748,000 $ 770,000
========== ==========
Net income per common share $ 0.09 $ 0.15
========== ==========
</TABLE>
- ---------
(1) No calculation of fully diluted income per share has been provided as
fully diluted income per share is equal to primary income per share.
(2) Common and common equivalent shares have been adjusted to reflect a 1,592
-for-1 stock exchange upon incorporation in Nevada in October 1996.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE UNAUDITED
CONDENSED BALANCE SHEET AT JUNE 30, 1997 AND THE UNAUDITED CONDENSED STATEMENT
OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,113
<SECURITIES> 0
<RECEIVABLES> 1,950
<ALLOWANCES> 250
<INVENTORY> 67
<CURRENT-ASSETS> 13,365
<PP&E> 4,488
<DEPRECIATION> 2,245
<TOTAL-ASSETS> 15,790
<CURRENT-LIABILITIES> 6,310
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 9,340
<TOTAL-LIABILITY-AND-EQUITY> 15,790
<SALES> 16,680
<TOTAL-REVENUES> 23,890
<CGS> 13,563
<TOTAL-COSTS> 13,563
<OTHER-EXPENSES> 9,803
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 748
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
