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 March 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission File Number 000-21657
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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 May 6, 1998:
COMMON SHARES, $.001 PAR VALUE: 8,514,600 SHARES
<PAGE>
SKYMALL, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
March 31, 1998 and December 31, 1997................................. 3
Condensed Statements of Income -
Three months ended March 31, 1998 and 1997........................... 4
Condensed Statements of Cash Flows -
Three months ended March 31, 1998 and 1997........................... 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
Items 1. through 5......................................................... 9
Item 6. Exhibits and Reports on Form 8-K.................................. 9
SIGNATURES................................................................. 9
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SKYMALL, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands)
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including escrow accounts $ 7,249 $ 9,412
Accounts receivable, net 5,205 10,427
Prepaid catalog costs and other 1,805 1,863
Deferred income taxes 500 500
--------- ---------
Total current assets 14,759 22,202
PROPERTY AND EQUIPMENT, net 4,181 4,133
OTHER ASSETS, net 289 299
--------- ---------
Total assets $ 19,229 $ 26,634
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,607 $ 13,669
Accrued liabilities 1,549 1,863
Income taxes 605 556
Current portion of notes payable and capital leases 64 64
--------- ---------
Total current liabilities 8,825 16,152
DEFERRED INCOME TAXES 109 109
NOTES PAYABLE AND CAPITAL LEASES, net of
current portion 41 66
--------- ---------
Total liabilities 8,975 16,327
--------- ---------
SHAREHOLDERS' EQUITY
Common stock 9 9
Additional paid-in capital 6,596 6,723
Retained earnings 3,649 3,575
--------- ---------
Total shareholders' equity 10,254 10,307
--------- ---------
Total liabilities and shareholders' equity $ 19,229 $ 26,634
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
SKYMALL, INC.
CONDENSED STATEMENTS OF INCOME
(Amounts in thousands, except shares and per share data)
(Unaudited)
Three months ended
March 31,
------------------------
1998 1997
---------- ----------
REVENUES:
Merchandise sales, net $ 9,234 $ 8,084
Placement fees and other 3,930 3,507
---------- ----------
Total revenues 13,164 11,591
COST OF GOODS SOLD 6,809 6,610
---------- ----------
Gross margin 6,355 4,981
---------- ----------
OPERATING EXPENSES:
Catalog expenses 2,663 1,889
Selling expenses 864 670
Customer service and fulfillment expenses 1,099 987
General and administrative expenses 1,761 1,092
---------- ----------
Total operating expenses 6,387 4,638
---------- ----------
INCOME (LOSS) FROM OPERATIONS (32) 343
Interest expense (8) (42)
Other income 163 126
---------- ----------
INCOME BEFORE INCOME TAXES 123 427
Income taxes 49 --
---------- ----------
NET INCOME $ 74 $ 427
========== ==========
BASIC NET INCOME PER COMMON SHARE $ .01 $ .05
========== ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,509,701 8,654,000
========== ==========
DILUTED NET INCOME PER COMMON SHARE $ .01 $ .05
========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,518,801 8,818,016
========== ==========
See accompanying notes.
4
<PAGE>
SKYMALL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three months ended
March 31,
------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74 $ 427
Adjustments to reconcile net income to net cash
provided by (used for) operating activities -
Depreciation and amortization 218 123
Changes in operating assets and liabilities (2,044) (1,930)
---------- ----------
Net cash used in operating activities (1,752) (1,380)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (259) (433)
---------- ----------
Net cash used in investing activities (259) (433)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable and capital leases, net (25) (76)
Repurchase of common shares (127) --
---------- ----------
Net cash used in financing activities (152) (76)
---------- ----------
DECREASE IN CASH AND
CASH EQUIVALENTS (2,163) (1,889)
CASH AND CASH EQUIVALENTS,
beginning of period 9,412 11,491
---------- ----------
CASH AND CASH EQUIVALENTS,
end of period $ 7,249 $ 9,602
========== ==========
See accompanying notes.
5
<PAGE>
SKYMALL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(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, 1997. The results of operations for the three-month period
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
(2) NET INCOME PER COMMON SHARE
Basic net income 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 income 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 income per common share (amounts in thousands except per share amounts):
For the Three Months
Ended March 31,
--------------------
1998 1997
-------- --------
Basic net income per common share:
Net income $ 74 $ 427
======== ========
Weighted average common shares 8,510 8,654
======== ========
Basic per share amount $ .01 $ .05
======== ========
For the Three Months
Ended March 31,
--------------------
1998 1997
-------- --------
Diluted net income per common share:
Net income $ 74 $ 427
======== ========
Weighted average common shares 8,510 8,654
Options and warrants assumed converted 9 164
-------- --------
Total common shares plus assumed
conversions 8,519 8,818
======== ========
Diluted per share amount $ .01 $ .05
======== ========
6
<PAGE>
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, 1997.
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 in more detail 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 MONTHS ENDED MARCH 31, 1998 AND 1997.
REVENUES AND GROSS MARGIN. Net merchandise sales increased to $9.2 million
for the three months ended March 31, 1998 from $8.1 million for the same period
in 1997, or 14 percent. The increase is primarily due to increases over the
prior year in catalog distribution of seven percent. Placement fees and other
revenues increased to $3.9 million for the three months ended March 31, 1998
from $3.5 million for the same period in 1997, or 12 percent. Gross margin
increased to $6.4 million for the three months ended March 31, 1998 from $5.0
million for the same period in 1997, or 28 percent. Gross margin increased to 48
percent of total revenues for the three months ended March 31, 1998 from 43
percent for the same period in 1997. The increase in gross margin percentage was
primarily due to a change in the mix of agreements with merchants, which
resulted in lower placement fees as a percentage of total revenues but retention
of a higher percentage of net merchandise sales for the three months ended March
31, 1998.
OPERATING EXPENSES. Total operating expenses increased 38 percent to $6.4
million or 49 percent of total revenues for the three months ended March 31,
1998 from $4.6 million or 40 percent of total revenues for the same period in
1997. Catalog expenses, which consist of catalog production, paper and printing
costs, increased to $2.7 million for the three months ended March 31, 1998 from
$1.9 million for the same period in 1997, or 41 percent. The increase is due to
increases in (i) catalog distribution of seven percent, (ii) average pages per
catalog of 14 percent, and (iii) the average paper cost per hundred weight to
$45 in 1998 from $40 in 1997, or 13 percent. Selling expenses, which represent
commissions paid to airlines and other marketing partners and are generally
variable in nature, increased to seven percent of total revenues for the three
months ended March 31, 1998 compared to six percent for the same period in 1997.
The increase is as a result of commissions incurred in connection with the
Company's new business initiatives. Customer service and fulfillment expenses,
which include a full-service customer contact center and a drop-ship and
order-coordination center and are generally variable in nature, decreased to
eight percent of total revenues for the three months ended March 31, 1998
compared to nine percent for the same period in 1997 as a result of operational
improvements made during the three months ended March 31, 1998. General and
administrative expenses increased to $1.8 million for the three months ended
March 31, 1998 from $1.1 million for the same period in 1997, or 61 percent. The
increase is due primarily to infrastructure investments relating to the
Company's new business initiatives.
INCOME (LOSS) FROM OPERATIONS. The Company incurred a loss from operations
of $32,000 for the three months ended March 31, 1998 as a result of the items
discussed above, compared to income from operations of $343,000 for the same
period in 1997.
7
<PAGE>
INCOME TAXES. Income tax expense was $49,000 for the three months ended
March 31, 1998, or approximately 40 percent of pre-tax income. The Company
incurred no income tax expense for the three months ended March 31, 1997 due to
a reduction in certain temporary differences, as well as a reduction in the
valuation allowance for deferred tax asset items.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had net working capital of $5.9 million,
which included cash and cash equivalents of $7.2 million compared with working
capital of $6.0 million and cash and cash equivalents of $9.4 million at
December 31, 1997. Additionally, the Company maintains a reducing revolving line
of credit at a bank with a maximum available line of $4.0 million. As of May 6,
1998, the entire balance of the revolving line of credit was unused. The Company
believes that cash flow provided from operations and the Company's available
cash are adequate to supply required working capital and provide for investing
activities for the foreseeable future.
Cash used in operating activities was $1.8 million for the three months
ended March 31, 1998 compared to $1.4 million for the same period in 1997. The
increase in cash used is due primarily to the timing of cash receipts and cash
disbursements.
Cash used in investing activities was $0.3 million for the three months
ended March 31, 1998 compared to $0.4 million for the same period in 1997. Cash
used for in investing activities for both periods relates to purchases of
telecommunications and computer equipment and software, building improvements,
and furniture and fixtures.
Cash used in financing activities of $0.2 million for the three months
ended March 31, 1998 resulted from the repurchase of 27,000 shares of the
Company's common stock and payments on capital lease obligations.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 11, 1996, the Company's Registration Statement on Form S-1
(File No. 333-17609) (the "Form S-1"), was declared effective by the U.S.
Securities and Exchange Commission. The Form S-1 was prepared in connection with
an initial public offering by the Company of 2,000,000 shares (the "Shares") of
common stock (the "Offering"). The Offering commenced on December 11, 1996 and
terminated December 16, 1996, the date on which all of the Shares were sold. The
Offering was underwritten by Josephthal Lyon & Ross Incorporated and Cruttenden
Roth Incorporated on a firm commitment basis. The Shares were offered to the
public at a price of $8.00 per share, or $16.0 million in the aggregate for all
2,000,000 Shares offered, all of which were sold as of the date the offering
terminated.
The Company's actual expenses incurred in connection with the issuance and
distribution of the Shares registered pursuant to the Form S-1 equaled
approximately $2.0 million in the aggregate, which consisted of the following:
(i) $1.1 million in aggregate underwriting discounts and commissions, (ii) $0.2
million in expenses paid to or for the underwriter, and (iii) $0.7 million in
other expenses. Of the $0.7 million in other expenses, no direct or indirect
payments were made to the Company's officers, directors, holders of 10 percent
or more of any class of the Company's outstanding securities or other affiliated
parties (collectively "Affiliates").
After deducting the foregoing expenses, the Offering resulted in
approximately $14.0 million in net proceeds to the Company. For the period from
December 16, 1996 through March 31, 1998, the Company used the net proceeds as
follows: approximately (i) $1.1 million for building improvements to the
corporate offices and the customer contact center, (ii) $1.9 million for the
purchase and installation of telephone and computer software and equipment,
(iii) $4.0 million for the reduction of the Company's revolving line of credit,
(iv) $0.4 million for marketing and promotional expenses, (v) $0.6 million for
development of additional circulation media, (vi) $1.0 million for the
repurchase of 164,400 of the Company's common shares, and (vii) $5.0 million for
temporary investments consisting primarily of money market funds and commercial
paper. None of the above mentioned amounts consist of direct or indirect
payments to Affiliates. The preceding discussion of the Company's use of net
proceeds is based upon reasonable estimates by management. Except for capital
expenditures and the repurchase of the Company's common shares discussed in
items (i), (ii), and (iv) above, the Company's use of proceeds from the
Offering, as described herein, does not represent a material change from that
described in the Prospectus included in the Form S-1. The Company continues to
evaluate the use and allocation of the Offering proceeds and, as discussed in
the Form S-1, may re-allocate or use the Offering proceeds for different
purposes as business conditions warrant.
8
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1. THROUGH 5. - Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10.1) Incentive Compensation Plan
(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: May 14, 1998 By: /s/ Robert M. Worsley
------------------------ --------------------------------------
Robert M. Worsley
Chairman of the Board,
President (Chief Executive Officer)
Date: May 14, 1998 By: /s/ Darryl S. Baker
------------------------ --------------------------------------
Darryl S. Baker
Controller
(Principal Accounting Officer)
9
SKYMALL, INC.
INCENTIVE COMPENSATION PLAN
Plan: This plan shall be known as the SkyMall, Inc. Incentive
Compensation Plan (the "Plan").
Objective: To incentivize management to meet SkyMall's earnings goals and
other objectives.
Eligibility: SkyMall's executive and management employees are eligible to
receive bonuses and stock options under the Plan. Each year the
Board will designate categories of executive and management
employees who are eligible to participate in the Plan.
Earnings
Target: Each year the Board establishes an earnings target (the
"Targeted EBITDA") which is based on the Company's Earnings
Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
contained in the Company's annual budget approved by the Board of
Directors. The Board also determines a bonus percentage (the
"Bonus Percentage") for eligible employees.
Bonus
Payments: Bonuses, if any, will be paid under this Plan as soon as
practicable following the determination of the Company's annual
financial results and sign-off of such results by the Company's
independent public accountants. Bonuses for employees who have
been employed less than one year will be pro-rated. No employee
will be eligible to receive any bonus or stock options under this
Plan unless the employee is employed by the Company on the date
the bonuses are paid and the stock options are granted.
Stock
Options: Immediately following the determination of the cash bonus (the
"Cash Bonus") amounts payable to employees under the Plan for the
immediately preceding fiscal year (the "Determination Date"),
eligible employees will also be granted options to purchase that
number of shares of common stock of the Company determined by
dividing the employee's Cash Bonus for the year by the closing
bid price of the Company's common stock on the first business day
of the immediately preceding fiscal year. Calculations resulting
in a fraction of a share shall be rounded up to the next whole
share. Such options shall vest over a three-year period at a rate
of 1/3 per year and shall be priced at the closing bid price on
the Determination Date.
<PAGE>
Incentive Compensation Plan
Page Two
Board
Approval: Payment of Cash Bonuses and the grant of stock options shall be
subject to board approval.
Bonus
Calculations: Cash Bonuses under the Plan shall be calculated on an annual
basis as follows:
* Step 1 - Employee's base salary will be multiplied by the Bonus Percentage
("Bonus Dollars").
* Step 2 - The ratio of the Company's actual EBITDA for the applicable year
to the Targeted EBITDA will be determined (the "EBITDA Ratio").
* Step 3- The Bonus Dollars will be multiplied by the EBITDA Ratio to
determine the employee's Cash Bonus Potential (the "Cash Bonus Potential"),
subject to certain limitations including a floor on the EBITDA Ratio of 80%
and a ceiling on the EBITDA Ratio of 120%.
* Step 4 - The employee will be reviewed by the employee's supervisor as soon
as possible following the end of the Company's fiscal year. The review
shall assess the employee's contribution to the goals of the management
team as well as the employee's progress during the year toward specific
goals. The review process will include a self-evaluation by the employee.
* Step 5 - The employee will be paid 50% of the Cash Bonus Potential based
solely on the performance of the Company. The employee will also be paid
50% of the Cash Bonus Potential subject to a satisfactory evaluation from
the employee's supervisor. If the employee is not performing in a
satisfactory fashion as determined by the employee's supervisor, such
supervisor shall have the discretion to award any amount of the employee's
Cash Bonus Potential not to exceed 50%.
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AT MARCH 31, 1998 AND THE UNAUDITED CONDENSED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THIS FORM
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,249
<SECURITIES> 0
<RECEIVABLES> 5,555
<ALLOWANCES> 350
<INVENTORY> 0
<CURRENT-ASSETS> 14,759
<PP&E> 6,917
<DEPRECIATION> 2,736
<TOTAL-ASSETS> 19,229
<CURRENT-LIABILITIES> 8,825
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 10,254
<TOTAL-LIABILITY-AND-EQUITY> 19,229
<SALES> 9,234
<TOTAL-REVENUES> 13,164
<CGS> 6,809
<TOTAL-COSTS> 6,809
<OTHER-EXPENSES> 6,387
<LOSS-PROVISION> 138
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 123
<INCOME-TAX> 49
<INCOME-CONTINUING> 74
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
