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, 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
August 13, 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 -
June 30, 1998 and December 31, 1997............................ 3
Condensed Statements of Income -
Three and six months ended June 30, 1998 and 1997.............. 4
Condensed Statements of Cash Flows -
Six months ended June 30, 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
ITEM 3. NOT APPLICABLE................................................. 10
PART II: OTHER INFORMATION
ITEMS 1. THROUGH 3. NOT APPLICABLE..................................... 10
ITEMS 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 10
ITEM 5. NOT APPLICABLE................................................. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 11
SIGNATURES.............................................................. 11
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SKYMALL, INC.
CONDENSED BALANCE SHEETS
(Amounts in thousands)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,888 $ 9,412
Accounts receivable, net 6,991 10,427
Prepaid catalog costs and other 3,242 1,863
Deferred income taxes 374 500
------- -------
Total current assets 18,495 22,202
PROPERTY AND EQUIPMENT, net 4,371 4,133
OTHER ASSETS, net 280 299
------- -------
Total assets $23,146 $26,634
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $10,777 $13,669
Accrued liabilities 966 1,863
Income taxes 597 556
Current portion of notes payable
and capital leases 64 64
------- -------
Total current liabilities 12,404 16,152
DEFERRED INCOME TAXES 109 109
NOTES PAYABLE AND CAPITAL LEASES, net of
Current portion 25 66
------- -------
Total liabilities 12,538 16,327
------- -------
SHAREHOLDERS' EQUITY
Common stock 9 9
Additional paid-in capital 6,735 6,723
Retained earnings 3,864 3,575
------- -------
Total shareholders' equity 10,608 10,307
------- -------
Total liabilities and shareholders' equity $23,146 $26,634
======= =======
See accompanying notes.
3
<PAGE>
SKYMALL, INC.
CONDENSED STATEMENTS OF INCOME
(Amounts in thousands, except shares and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Merchandise sales, net $ 10,131 $ 8,596 $ 19,365 $ 16,680
Placement fees and other 3,639 3,703 7,569 7,210
----------- ----------- ----------- -----------
Total revenues 13,770 12,299 26,934 23,890
COST OF GOODS SOLD 7,131 6,953 13,940 13,563
----------- ----------- ----------- -----------
Gross margin 6,639 5,346 12,994 10,327
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Catalog expenses 2,717 2,033 5,380 3,922
Selling expenses 821 702 1,685 1,372
Customer service and fulfillment expenses 912 987 2,011 1,974
General and administrative expenses 1,939 1,443 3,700 2,535
----------- ----------- ----------- -----------
Total operating expenses 6,389 5,165 12,776 9,803
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 250 181 218 524
Interest expense (10) (16) (18) (58)
Other income 119 156 282 282
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 359 321 482 748
Income taxes 144 -- 193 --
----------- ----------- ----------- -----------
NET INCOME $ 215 $ 321 $ 289 $ 748
=========== =========== =========== ===========
BASIC NET INCOME PER COMMON SHARE $ .03 $ .04 $ .03 $ .09
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 8,508,810 8,654,000 8,509,253 8,654,000
=========== =========== =========== ===========
DILUTED NET INCOME PER COMMON SHARE $ .03 $ .04 $ .03 $ .09
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 8,517,267 8,706,936 8,517,983 8,712,228
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
SKYMALL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six months ended
June 30,
---------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 289 $ 748
Adjustments to reconcile net income to net
cash used in operating activities -
Depreciation and amortization 449 277
Changes in operating assets and liabilities (1,560) (3,891)
-------- --------
Net cash used in operating activities (822) (2,866)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (673) (571)
-------- --------
Net cash used in investing activities (673) (571)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit -- 1,800
Payments on notes payable and capital leases, net (41) (741)
Repurchase of common shares (127) --
Proceeds from issuance of common stock 139 --
-------- --------
Net cash provided by (used in)
financing activities (29) 1,059
-------- --------
DECREASE IN CASH AND
CASH EQUIVALENTS (1,524) (2,378)
CASH AND CASH EQUIVALENTS,
beginning of period 9,412 11,491
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 7,888 $ 9,113
======== ========
See accompanying notes.
5
<PAGE>
SKYMALL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 and six month
periods ended June 30, 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):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic net income per common share:
Net income $ 215 $ 321 $ 289 $ 748
====== ====== ====== ======
Weighted average common shares 8,509 8,654 8,509 8,654
====== ====== ====== ======
Basic per share amount $ .03 $ .04 $ .03 $ .09
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Diluted net income per common share:
Net income $ 215 $ 321 $ 289 $ 748
====== ====== ====== ======
Weighted average common shares 8,509 8,654 8,509 8,654
Options and warrants assumed converted 8 53 9 58
------ ------ ------ ------
Total common shares plus assumed conversions 8,517 8,707 8,518 8,712
====== ====== ====== ======
Diluted per share amount $ .03 $ .04 $ .03 $ .09
====== ====== ====== ======
</TABLE>
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 AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES AND GROSS MARGIN. Net merchandise sales increased to $10.1 and
$19.4 million for the three and six months ended June 30, 1998 from $8.6 and
$16.7 million for the same periods in 1997, or 18 and 16 percent, respectively.
The increases are primarily due to increases over the same periods in the prior
year in catalog density of 13 and 17 percent, respectively. Placement fees and
other revenues as a percent of total revenues decreased to 26 and 28 percent,
respectively, for the three and six months ended June 30, 1998 from 30 percent
for the same periods in 1997. Gross margins increased to $6.6 and $13.0 million,
or 48 percent of total revenues, for the three and six months ended June 30,
1998, from $5.3 and $10.3 million, or 43 percent of total revenues, for the same
periods in 1997. The increases in gross margins were 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 and six months ended June 30, 1998.
OPERATING EXPENSES. Total operating expenses increased to $6.4 and $12.8
million, or 46 and 47 percent of total revenues, for the three and six months
ended June 30, 1998, from $5.2 and $9.8 million, or 42 and 41 percent of total
revenues, for the same periods in 1997, respectively. Catalog expenses, which
consist of catalog production, paper and printing costs, increased to $2.7 and
$5.4 million for the three and six months ended June 30, 1998, from $2.0 and
7
<PAGE>
$3.9 million for the same periods in 1997, or 34 and 37 percent respectively.
The increases are due to increases in (i) catalog distribution of two and four
percent, (ii) average pages per catalog of 10 and 12 percent, and (iii) the
average paper cost per hundred weight to $48 and $46, respectively, for the
three and six months ended June 30, 1998 from $41 for the same periods in 1997,
or 17 and 12 percent, respectively. Selling expenses, which represent
commissions paid to airlines and other marketing partners and are generally
variable in nature, remained consistent, at six percent of total revenues for
all periods reported. 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 seven percent of
total revenues for the three and six months ended June 30, 1998, compared to
eight percent for the same periods in 1997 as a result of operational
improvements made during the three and six months ended June 30, 1998. General
and administrative expenses increased to $1.9 and $3.7 million for the three and
six months ended June 30, 1998, from $1.4 and $2.5 million for the same periods
in 1997, or 34 and 46 percent, respectively. The increases are due primarily to
infrastructure investments relating to the Company's new business initiatives.
INCOME FROM OPERATIONS. The Company reported income from operations of
$250,000 and $218,000 for the three and six months ended June 30, 1998 as a
result of the items discussed above, compared to income from operations of
$181,000 and $524,000 for the same periods in 1997.
INCOME TAXES. Income tax expense was $144,000 and $193,000 for the three
and six months ended June 30, 1998, or approximately 40 percent of pre-tax
income. The Company incurred no income tax expense for the three and six months
ended June 30, 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 June 30, 1998, the Company had net working capital of $6.1 million,
which included cash and cash equivalents of $7.9 million compared with working
capital of $6.1 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 August
14, 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 $0.8 million for the six months ended
June 30, 1998 compared to $2.9 million for the same period in 1997. The decrease
in cash used is due primarily to the timing of cash receipts and cash
disbursements.
Cash used in investing activities was $0.7 million for the six months ended
June 30, 1998 compared to $0.6 million for the same period in 1997. Cash used 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 was $29,000 for the six months ended June
30, 1998 compared to $1.1 million of cash provided by the six months ended June
30, 1997. Cash used in financing activities for the six months ended June 30,
8
<PAGE>
1998 resulted primarily from payments on capital lease obligations and
repurchases of common stock, offset by proceeds from the issuance of common
stock. Cash provided by the six months ended June 30, 1997 resulted from
borrowing under the Company's line of credit offset by payments on notes payable
to vendors, shareholders, and others.
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 June 30, 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) $2.3 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) $0.7 million for marketing and promotional expenses, (v) $1.6 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) $3.3 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, the reduction of the line of credit, and the repurchase of the
Company's common shares discussed in items (i), (ii), (iii), and (vi) 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.
9
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998). Application of the Statement's requirements is not expected to have a
material impact on the Company's financial position, results of operations, or
earnings per share data as currently reported.
ITEM 3. NOT APPLICABLE
PART II. OTHER INFORMATION
ITEMS 1. THROUGH 3. NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1998, at the Company's annual meeting of shareholders, the
following members were elected to the Board of Directors:
Votes
Director Votes For Withheld
----------------- --------- --------
Robert M. Worsley 7,835,197 2,500
Alan C. Ashton 7,835,197 2,500
Lyle R. Knight 7,833,032 4,665
Thomas J. Litle 7,727,433 110,264
Randy Petersen 7,835,197 2,500
Amendment to SkyMall, Inc. 1994 Stock Option Plan (Proposal No. 2) to
increase shares available under the Plan from 650,000 to 1,100,000:
Votes For 6,132,217
Votes Against 319,514
Abstentions 5,600
10
<PAGE>
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(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, 1998 By: /s/ Robert M. Worsley
--------------------- -----------------------------------
Robert M. Worsley
Chairman of the Board,
President (Chief Executive Officer)
Date: August 14, 1998 By: /s/ Darryl S. Baker
--------------------- -----------------------------------
Darryl S. Baker
Controller
(Principal Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AT JUNE 30, 1998 AND THE UNAUDITED CONDENSED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,888
<SECURITIES> 0
<RECEIVABLES> 7,391
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 18,495
<PP&E> 7,331
<DEPRECIATION> 2,960
<TOTAL-ASSETS> 23,146
<CURRENT-LIABILITIES> 12,404
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 10,599
<TOTAL-LIABILITY-AND-EQUITY> 23,146
<SALES> 19,365
<TOTAL-REVENUES> 26,934
<CGS> 13,940
<TOTAL-COSTS> 13,940
<OTHER-EXPENSES> 12,776
<LOSS-PROVISION> 188
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 482
<INCOME-TAX> 193
<INCOME-CONTINUING> 289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
