-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WWCq8lOP8I9MTx4YWVqnih5MEJC4ZrqsFNeWakgC1xONhxtPSTZgvrgf090AxPtF lwMG/XiDyuaB3GxwrFv/ZA== 0000950147-01-500922.txt : 20010516 0000950147-01-500922.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950147-01-500922 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SKYMALL INC CENTRAL INDEX KEY: 0000862841 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 860651100 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21657 FILM NUMBER: 1639515 BUSINESS ADDRESS: STREET 1: 1520 EAST PIMA ST CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6022549777 MAIL ADDRESS: STREET 1: 1520 EAST PIMA ST CITY: PHOENIX STATE: AZ ZIP: 85034 10-Q 1 e-6826.txt QUARTERLY REPORT FOR THE QTR ENDED 3/31/01 ================================================================================ 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ 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) (602) 254-9777 (Registrant's telephone number, including area code) 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 [ ] As of April 30, 2001, there were 15,818,711 shares of the Common Stock, $.001 par value, of the Company outstanding and no shares of preferred stock outstanding. ================================================================================ SkyMall, Inc. Index Page ---- Part I: Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000................................................... 3 Condensed Consolidated Statements of Operations - Three months ended March 31, 2001 and 2000................................ 4 Condensed Consolidated Statements of Cash Flows - Three Months ended March 31, 2001 and 2000....................................... 5 Notes to Condensed Consolidated Financial Statements................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 20 Part II: Other Information Item 1. Legal Proceedings................................................... 21 Item 2. Changes in Securities and Use of Proceeds........................... 21 Item 3. Defaults Upon Senior Securities..................................... 21 Item 4. Submission of Matters to a Vote of Security Holders................. 22 Item 5. Other Information................................................... 22 Item 6. Exhibits and Reports on Form 8-K.................................... 22 Signatures.................................................................. 23 2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements SkyMall, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands)
March 31, December 31, 2001 2000 -------- -------- ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 5,108 $ 9,938 Accounts receivable, net 6,253 7,097 Inventory 13 837 Prepaid media costs and other 2,403 1,289 -------- -------- Total current assets $ 13,777 $ 19,161 Property and equipment, net 10,640 11,414 Goodwill, net -- 2,612 Other assets, net 4,057 685 -------- -------- Total assets $ 28,474 $ 33,872 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 13,210 $ 15,104 Accrued liabilities 2,024 2,291 Unearned revenue 488 536 Current portion of notes payable and capital leases 183 190 Current portion of restructuring reserve 743 425 -------- -------- Total current liabilities $ 16,648 $ 18,546 Notes payable and capital leases, net of current portion 7,400 8,400 Restructuring reserve 10 10 -------- -------- Total liabilities 24,058 26,956 -------- -------- Commitments and contingencies Shareholders' Equity: Common stock 16 16 Additional paid-in capital 41,221 41,221 Accumulated deficit (36,821) (34,321) -------- -------- Total shareholders' equity 4,416 6,916 -------- -------- Total liabilities and shareholders' equity $ 28,474 $ 33,872 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 SkyMall, Inc. Condensed Consolidated Statements of Operations (Amounts in thousands, except shares and per share data) (Unaudited) Three months ended March 31, ------------------------------- 2001 2000 ------------ ------------ REVENUES: Merchandise sales, net $ 13,539 $ 15,645 Placement fees and other 4,631 4,362 ------------ ------------ Total revenues 18,170 20,007 COST OF GOODS SOLD 10,973 12,761 ------------ ------------ Gross margin 7,197 7,246 ------------ ------------ OPERATING EXPENSES: Media expenses 2,513 3,026 Selling expenses 1,152 1,086 Customer service and fulfillment expenses 1,309 1,743 General and administrative expenses 4,112 8,638 Non-recurring business expense 518 -- ------------ ------------ Total operating expenses 9,604 14,493 ------------ ------------ LOSS FROM OPERATIONS (2,407) (7,247) Interest expense (113) (150) Interest and other income 19 (61) ------------ ------------ LOSS BEFORE INCOME TAXES (2,501) (7,458) Income tax benefit -- -- ------------ ------------ NET LOSS $ (2,501) $ (7,458) ============ ============ BASIC NET LOSS PER COMMON SHARE $ (0.16) $ (0.57) ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,818,711 12,983,824 ============ ============ DILUTED NET LOSS PER COMMON SHARE $ (0.16) $ (0.57) ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,818,711 12,983,824 ============ ============ See accompanying Notes to Condensed Consolidated Financial Statements. 4 SkyMall, Inc. Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited)
Three months ended March 31, -------------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (2,501) $ (7,458) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,047 944 Provision for doubtful accounts 62 -- Changes in operating assets and liabilities (2,210) (6,955) -------- -------- Net cash used in operating activities (3,602) (13,469) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (221) (603) -------- -------- Net cash used in investing activities (221) (603) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock and warrants -- 119 Proceeds from long-term debt -- 4,400 Payments on long-term debt (1,000) Payments on notes payable and capital leases, net (7) (6) -------- -------- Net cash used in financing activities (1,007) 4,513 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (4,830) (9,559) CASH AND CASH EQUIVALENTS, beginning of period 9,938 16,060 -------- -------- CASH AND CASH EQUIVALENTS end of period $ 5,108 $ 6,501 ======== ======== Supplemental disclosure of noncash activity Cost transfer of Durham goodwill and assets to investment in Awards.com and note receivable $ 2,643 $ -- ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 5 SkyMall, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2001 (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS 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. 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 our logo and corporate recognition products. Subsequent to the end of the 2000 fiscal year, SkyMall sold the assets of Durham & Company, 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. CONSOLIDATION The condensed consolidated financial statements include the accounts of SkyMall, Inc. and its wholly-owned subsidiaries, skymall.com, inc., Durham & Company, (see Note 6), Disc Publishing, Inc., SkyMall Ventures, Inc. and SkyMall Media Ventures, Inc., and include all adjustments and reclassifications necessary to eliminate the effect of significant inter-company accounts and transactions. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated 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. 6 Certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000. The condensed consolidated results of operations for the three-month period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - RESTRUCTURING CHARGE In April 2000, the Company began execution of a plan to reduce costs and improve profitability, which resulted in the Company recording a one-time restructuring expense totaling $2.6 million in the second fiscal quarter ended June 30, 2000, of which $228,000 related to non-cash transactions relating to the write-off of assets. Approximately $2.1 million of the total restructuring charge has been paid through March 31, 2001. The remaining charge has been classified in current and non-current liabilities on the Consolidated Balance Sheet and will be funded through cash provided by operating activities. Of the total restructuring charge taken in June 2000, $1.0 million related to plans to discontinue various catalog programs that had not been profitable to the Company, including the international catalog program, as well as other specialty catalog programs. This part of the plan has been executed and completed. The ability to order products with international shipping destinations will continue to be available through the existing business infrastructure. Under the restructuring plan, the Company eliminated approximately 53 employees and 15 outside contractors in April 2000, resulting in a charge of $687,000. This cost included special termination benefits related to the reduction in force. The Company has also consolidated operations previously located in New York and Utah to Phoenix resulting in closure and other payroll costs of $839,000, which have been included in restructuring charges. The elimination of these locations has not resulted in a discontinuation of product lines, but has, instead, consolidated management and day-to-day operational control. In addition to the $2.6 million restructuring charge taken in June 2000, the Company took an additional charge in February 2001 of $518,000 related to the reorganization of its loyalty business and terminated an employment contract with a term ending January 5, 2002. NOTE 3 - NET LOSS PER COMMON SHARE Basic net loss per common share is based upon the weighted average shares outstanding. Outstanding stock options and warrants are treated as common stock equivalents, but are anti-dilutive, for purposes of computing diluted net loss per common share. There is no difference between basic and diluted weighted average shares outstanding. The following is a summary of the computation of basic and diluted net loss per common share (amounts in thousands except shares and per share amounts): 7 Three months ended March 31, ----------------------------- 2001 2000 ----------- ----------- Basic net (loss) income per common share: Net (loss) income $ (2,501) $ (7,458) =========== =========== Weighted average common shares 15,818,711 12,983,824 =========== =========== Basic per share amount $ (0.16) $ (0.57) =========== =========== Three months ended March 31, ----------------------------- 2001 2000 ----------- ----------- Diluted net (loss) income per common share: Net (loss) income $ (2,501) $ (7,458) =========== =========== Weighted average common shares 15,818,711 12,983,824 Options and warrants assumed exercised -- -- =========== =========== Total common shares plus assumed exercises 15,818,711 12,983,824 Diluted per share amount $ (0.16) $ (0.57) =========== =========== As a result of anti-dilutive effects, approximately 53,401 and 266,520 employee options and other common stock equivalents were not included in the computation of diluted earnings per share for the three-month period ended March 31, 2001 and 2000, respectively. NOTE 4 - SEGMENT AND RELATED INFORMATION The Company is a multi-channel specialty retailer that provides a large selection of premium-quality products and services to consumers from a wide variety of merchants and partners. The Company's operations are classified into two reportable business segments: business-to-consumer and business-to-business. Business initiatives for the Company's two reportable business segments are managed separately while support functions are combined. The business-to-consumer segment provides retail merchandise service 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, retail merchandise services, corporate recognition merchandise and advertising media to other businesses through loyalty programs, workplace catalogs, the Company's Web sites and through the end of first quarter 2001, when we sold the assets of our Durham business, provided logo and corporate recognition products. The Company evaluates the performance of its segments based on revenues and gross margins. Operating expenses are included with corporate expense and are not allocated to the business segments. The accounting policies of the 8 reportable segments are the same as those used in the consolidated financial statements and described in Note 1 of these condensed consolidated financial statements. Inter-segment transactions are not significant. Revenues and gross margin for the Company's reportable segments for the three months ended March 31, 2001 are shown in the following tables (amounts in thousands): Three Months Ended Business-to- Business-to- March 31, Consumer Busies Corporate Total --------- -------- ------ --------- ----- 2001 Revenues $ 14,581 $3,589 $ -- $18,170 Gross margin $ 6,664 $ 533 $ -- $ 7,197 Operating expenses $ -- $ -- $ 9,604 $ 9,604 Loss from operations $(2,407) 2000 Revenues $ 16,949 $3,058 $ -- $20,007 Gross margin $ 6,357 $ 889 $ -- $ 7,246 Operating expenses $ -- $ -- $14,493 $14,493 Loss from operations $(7,247) Identifiable assets available to support the Company's business-to-business segment approximate $20,700 and $4.3 million at March 31, 2001 and 2000, respectively. The remaining assets which are combined to support the Company's two reportable business segments, approximate $28.5 million and $29.3 million at March 31, 2001 and 2000, respectively. NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 133 - Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS 137 - Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133. This statement deferred the effective date of SFAS No. 133 to the Company's quarter ending January 1, 2001. The Company has adopted a SFAS 133 and is immaterial to the Company's Consolidated financial statements. NOTE 6 - SALE OF DURHAM & Co. On March 28, 2001, the Company and its wholly-owned subsidiary, Durham & Company, ("Durham") executed an Asset Purchase Agreement (the "Agreement") with Awards.com, Inc. ("Awards.com"). Pursuant to the Agreement, Awards.com acquired substantially all of the business operations of Durham, which is engaged in the business of providing logo merchandise and corporate identity products to various major corporations. Awards.com acquired substantially all of the assets of Durham and assumed various liabilities associated with Durham's operations. 9 In exchange for Durham's assets, the Company obtained a note receivable in the face amount of $1,000,000 which bears interest at 10% per annum. Interest is due monthly and the principal balance is due on March 28, 2004. The Company also received an equity interest in Awards.com. The total consideration received by the Company was approximately equal to the net carrying balances of the Durham assets and liabilities as previously recorded in the Company's consolidated financial statements. The investment in Awards.com is accounted for by the cost method of accounting. The Note receivable of $1.0 million and investment in Awards.com of $1.6 million is included in Other Assets in the accompanying condensed consolidated financial statements. Assuming the Company had entered into the Agreement as of January 1, 2000, the impact on the Company's Consolidated Statement of Operations for the year ended December 31, 2000 would have been the following. Revenues would have decreased by approximately $4.5 million. Cost of goods sold would have decreased by approximately $3.1 million, which would have improved SkyMall's consolidated gross margin percentage to 42.1% from 41.5%. Operating costs would have been reduced by approximately $1.4 million. Assuming the Company had entered into the Agreement as of December 31, 2000, the impact on the Company's Consolidated Balance Sheet as of December 31, 2 000 the total assets, liabilities and shareholder's equity and the classification of assets and liabilities as current or long-term would not have been materially impacted. These assets are approximately equal to the carrying value of the Durham net assets and liabilities exchanged in the transaction. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - REVENUES (In thousands) -------------------------------------- 2001 % Change 2000 ---- -------- ---- Merchandise sales, net $13,539 (13.5)% $15,645 Placement fees and other $ 4,631 6.2% $ 4,362 Total revenues $18,170 (9.2)% $20,007 Net merchandise sales are composed of the selling price of merchandise and services sold by the Company, net of returns. A decline in net merchandise sales in the three months ended March 31, 2001 reflects a decrease in business-to-consumer sales of $2.7 million, while business-to-business sales increased by $620,000. Placement fees and other are composed of fees paid by participating merchants to include their products or advertisements in the Company's print and electronic media, outbound shipping charges to customers and other revenues. Placement fees and other increased by $269,000 or 6% for the three months ended March 31, 2001. GROSS MARGIN (In thousands) -------------------------------------- 2001 % Change 2000 ---- -------- ---- Gross margin $7,197 (.7%) $7,246 Gross margin percentage 39.6% 36.2% Gross margin consists of revenues less the cost of goods sold, which consists of the cost of merchandise sold to customers as well as outbound and inbound shipping costs. Gross margin remained level in absolute dollars, while the gross margin percentage increased in the three months ended March 31, 2001, reflecting an improvement in the mix of variable commission and fixed placement fee merchant agreements and the elimination of free shipping and handling and other promotions that adversley impacted gross margins during the first quarter of 2000. 11 OPERATING EXPENSES (In thousands) -------------------------------------- 2001 % Change 2000 ---- -------- ---- Media expenses $2,513 (17.0)% $3,026 Selling expenses $1,152 6.1% $1,086 Customer service and fulfillment expenses $1,309 (24.9)% $1,743 General and administrative expenses $4,112 (52.4)% $8,638 Non-recurring business expense $ 518 0% $ 0 Media expenses consist of the cost to produce and distribute our in-flight print catalogs and loyalty print pieces. The media expenses decrease in the three months ended March 31, 2001 was $513,000, of which $189,000 was due to a decrease in paper and processing costs, a $85,000 decrease was related to the elimination of CD and DVD programs and a $239,000 decrease related to expenses on discounted catalog programs. Selling expenses consist primarily of commissions paid to marketing partners and are variable in nature. The increase in selling expenses for the three months ended March 31, 2001 reflects the increase in commission rates. Customer service and fulfillment expenses consist of costs to maintain a full-service customer contact and order fulfillment center that generally vary in correlation to net merchandise sales. Customer service and fulfillment decreased in absolute dollars and also decreased as a percent of net merchandise sales for the three months ended March 31, 2001. This was due mainly to cost efficiencies and a reduction in call center overhead. General and administrative expenses consist primarily of department expenses, except customer service and fulfillment expenses, including payroll and related costs, professional fees, marketing, information technology and general corporate expenses. The decreases in general and administrative expenses of $4.5 million for the three months ended March 31, 2001 are the result of changes in the following areas: $1.7 million decrease in salaries and wages; $1.6 million decrease in consulting expenses; $857,000 decrease in other general and administrative expenses including travel and legal expenses; $441,000 decrease in marketing and advertising expense; and $103,000 increase in depreciation primarily due to investments in information technology made in 2000 that are now being depreciated. In addition to the $2.6 million restructuring charge taken in June 2000, the Company took and additional charge in February 2001 of $518,000 related to the reorganization of its loyalty business and terminated an employment contract with a term ending January 5, 2002. 12 INTEREST EXPENSE (In thousands) -------------------------------------- 2001 % Change 2000 ---- -------- ---- Interest expense $113 (24.7)% $150 Interest expense consists primarily of interest paid on the Company's line of credit. The interest expense decrease of $37,000 is a result of the repayment of $1 million on the Company's revolving line of credit in January 2001. INTEREST AND OTHER INCOME (EXPENSE) (In thousands) -------------------------------------- 2001 % Change 2000 ---- -------- ---- Interest and other income (expense) $ 19 131.1% $(61) Interest and other income (expense) consist primarily of interest income on cash and marketable securities and bank fees. Interest income increased in the three months ended March 31, 2001 due to higher average account balances. INCOME TAXES (In thousands) -------------------------------------- 2001 % Change 2000 ---- -------- ---- Provision (benefit) for Income taxes $ 0 0% $ 0 No income tax benefit was recorded in 2000 and 2001. At March 31, 2001, the Company had net operating losses available for federal and state income tax purposes of approximately $41 million. The Company's ability to utilize its net operating losses to offset future taxable income may be limited under provisions of the Internal Revenue Code due to changes in shareholder ownership. A valuation allowance has been provided since the Company believes the realizability of the deferred tax asset does not meet the more likely than not criteria under SFAS No. 109. The Company's accumulated net operating losses begin to expire in 2019. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company's cash balance was $5.1 million compared to $9.9 million at December 31, 2000. 13 Cash used in operating activities of $3.6 million and $13.5 million for the three months ended March 31, 2001 and 2000, respectively, was primarily attributable to the net loss and a decrease in accounts payable, accrued expenses and unearned revenue partially offset by a decrease in accounts receivable. Cash used in investing activities of $221,000 and $603,000 for the three months ended March 31, 2001 and 2000, respectively, was due to investments in information technology. Cash used by financing activities of $1.0 million for the three months March 31, 2001 resulted primarily from long-term debt repayments. Cash provided by financing activities of $4.5 million for the three months ended March 31, 2000, resulted primarily from long-term debt borrowings of $4.4 million and the issuance of $119,000 of common stock from the exercise of stock options. WORKING CAPITAL AND NEGATIVE PROFITABILITY TRENDS At March 31, 2001, the Company had negative net working capital of $2.9 million and cash and cash equivalents of $5.1 million. The Company has a $10 million revolving line of credit at a bank, that reduces to $8 million in March of 2002 and expires in June of 2002. At March 31, 2001 a total of $7.4 million was drawn on the line of credit, with $2.6 million available for borrowing by the Company. The Company plans to finance its working capital needs and capital expenditures through a combination of funds from operations and its existing bank line of credit. See also, "Additional Factors That May Affect Future Results." ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS In addition to other information in this Quarterly Report on Form 10-Q, the following important factors should be carefully considered in evaluating the Company and its business because such factors currently have a significant impact or may have a significant impact on the Company's business, prospects, financial condition and results of operations. WE REPORTED SIGNIFICANT LOSSES IN FISCAL 1999 AND 2000. We incurred a net loss of $24.1 million for the fiscal year ended December 31, 1999 and a net loss of $16.0 million for the fiscal year ended December 31, 2000. The Company had working capital of approximately $615,000 at December 31, 2000 and negative working capital of $2.9 million at March 31, 2001. Cash used in operating activities was $14.2 million and $13.3 in 2000 and 1999, respectively. Management has taken several steps to return the Company to operating profitability and positive cash flow. Those steps include, reducing general and administrative costs significantly, improving gross margins and implementing other cost control measures. Subsequent to year-end, the Company successfully negotiated and received a commitment letter for an extension of its revolving line of credit to June 30, 2002. The Company's plans are subject to a number of risks, certain of which are beyond its control. There can be no assurance that the Company will be successful in implementing its business strategy. In 2001, the Company expects to achieve breakeven earnings before interest, taxes, depreciation and amortization ("EBITDA") as well as breakeven cash flow. However, the Company expects to incur a net loss in 2001 in the range of $6.0 14 million or $0.38 per share. The Company expects to incur losses from operations in the first three quarters of 2001. Thus, much of the Company's ability to achieve the foregoing targets is dependent on the Company's financial performance in the fourth quarter of 2001. We expect to experience fluctuations in our future operating results may be adversely impacted due to a variety of factors, many of which are outside the Company's control, including the following: * the demand for our products and services, * the level of competition in the markets we serve, * our success in maintaining and expanding our distribution channels, * our success in attracting and retaining motivated and qualified personnel, * our ability to control costs, and * general economic conditions. WE MAY NOT BE ABLE TO MAINTAIN COMPLIANCE WITH COVENANTS UNDER OUR CREDIT FACILITY. In 1999, we entered into a credit facility with Imperial Bank, a Comerica Incorporated Company, which provides us with a $10,000,000 revolving line of credit (the "Credit Facility"). The Credit Facility was modified in March 2001 to extend the term to June 2002. The Credit Facility is secured by substantially all of the Company's assets and contains strict covenants requiring the Company to achieve certain financial ratios and maintain other covenants. As of the date of this Report, the Company was in compliance with all of the covenants under the Credit Facility. There can be no assurance that the Company's operations and financial performance will enable it to maintain such compliance in the future. The Company's failure to comply with any of these covenants could result in an event of default, thereby permitting acceleration of the related indebtedness, which could have a material adverse effect on the Company's financial condition and results of operation. In the event the lender were to foreclose on its security interest during the term of the Credit Facility, the Company would be unable to repay such indebtedness without obtaining additional sources of financing. OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ NATIONAL MARKET, WHICH MAY ADVERSELY AFFECT HOLDERS OF OUR COMMON STOCK. Our common stock is listed on the Nasdaq National Market. In order to continue to be listed on the Nasdaq National Market, we must meet specific quantitative standards, including a minimum net tangible asset requirement of $4.0 million (the "Net Tangible Asset Requirement"). At March 31, 2001, we exceeded the Net Tangible Asset Requirement by approximately $416,000. Any further losses incurred by the Company would further erode our net tangible assets and possibly cause the Company to fall out of compliance with the Net Tangible Asset Requirement. If the latter event occurs, we would likely receive a de-listing notice from Nasdaq advising us that we no longer meet the Net Tangible Asset Requirement. Although we would have an opportunity to appeal any decision by the Nasdaq National Market to delist our common stock, there can be no assurance that this appeal would be successful. If our common stock were delisted from the Nasdaq National Market, we would seek to have the common stock listed on the Nasdaq SmallCap Market or another exchange, such as AMEX or one of the regional exchanges. However, many of these exchanges and markets also have minimum quantitative standards that we may be unable to meet. If our common stock is delisted from the Nasdaq National Market and we are unable to have our shares included on another exchange or in the over-the-counter market, shareholders may find it more difficult to dispose of the shares. In addition, the market price of the shares could decline, news coverage about us may be unfavorable, and we could find it more difficult to obtain financing in the future. 15 WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL. Our existing line of credit and cash resources may not be sufficient to permit the Company to fully implement its business plan. In order to fully implement our business plan, we may need to raise additional capital from third parties or otherwise secure additional financing for the Company. There can be no assurance that the Company will be able to successfully raise additional capital or secure other financing, or that such funding will be available on terms that are favorable to the Company. To the extent we are unable to raise sufficient additional capital or secure other financing, this could have a material adverse effect on the Company. In addition, our line of credit with our bank becomes due in June 2002. If we are unable to repay this debt or renegotiate the terms of this loan, this could have a material adverse effect on the Company. OUR BUSINESS MAY NOT GROW IN THE FUTURE. Since our inception, we have rapidly expanded our operations, growing from total revenues of $200,000 in 1990 to total revenues of $82.1 million in 2000. Our continued future growth will depend to a significant degree on our ability to increase revenues from our existing businesses, maintain existing channel partner relationships and develop new channel partner relationships, expand our product and content offering to consumers, while maintaining adequate gross margins, and implement other programs that increase the circulation of the SkyMall print catalogs and generate traffic for our e-commerce programs. Our ability to implement our growth strategy will also depend on a number of other factors, many of which are or may be beyond our control, including: * our ability to select products that appeal to our customer base and effectively market them to our target audience, * sustained or increased levels of airline travel, particularly in domestic airline markets, * increasing adoption by consumers of the Internet for shopping, * the continued perception by participating merchants that we offer an effective marketing channel for their products and services, and * our ability to attract, train and retain qualified employees and management. There can be no assurance that we will be able to successfully implement our growth strategy. WE MAY BE UNABLE TO MANAGE THE POTENTIAL GROWTH OF OUR BUSINESS. Our potential growth may place significant demands upon our personnel, management and financial resources. There is no assurance that our current personnel, systems, procedures and controls will be adequate to support our future operations, that we will be able to train, retain, motivate and manage necessary personnel, or that our management will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. If we are unable to effectively manage any future growth, our business and financial condition could be adversely affected. WE FACE INTENSE COMPETITION. The distribution channels for our products are highly competitive. From time to time in our airline catalog business, competitors, typically other catalog retailers, have attempted to secure contracts with various airlines to offer merchandise to their customers. American Airlines and TWA currently offer merchandise catalogs to their customers through a competitor. We also face competition for customers from airport-based retailers, duty-free retailers, specialty stores, department stores and specialty and general merchandise catalogs, many of which have greater financial and marketing resources than we have. In addition, we compete for customers with other in-flight marketing media, such as airline-sponsored in-flight magazines and airline video programming. In our electronic commerce 16 sales, we face intense competition from other content providers and retailers who seek to offer their products and/or services at their own Web sites or those of other third parties. Results will also be affected by existing competition, which the Company anticipates will intensify, and by additional entrants to the market who may already have the necessary technology and expertise, many of whom may have substantially greater financial and other resources than the Company. OUR BUSINESS IS SEASONAL. Our business is seasonal in nature, with the greatest volume of sales typically occurring during the holiday selling season of the fourth calendar quarter. During 2000, approximately 35% of our net merchandise sales were generated in the fourth quarter. Any substantial decrease in sales for the fourth quarter could have a material adverse effect on our results of operations. DEPENDENCE ON KEY RELATIONSHIPS. Our business depends significantly on our relationships with airlines and certain other partners. Some of our agreements with our partners are short-term allowing the partner to terminate the relationship on 90 days' advance notice. There is no assurance that our partners will continue their relationships with us, and the loss of one or more of our significant partners could have a material adverse effect on our business, prospects, financial condition and results of operations. WE MAY BE UNABLE TO MAINTAIN HISTORICAL MARGIN LEVELS. We may be unable to increase or maintain our gross margins at historical levels. As competition intensifies or if the economy declines, our merchant participants may be unable or unwilling to participate in our programs under historical terms. Although many of our merchants have participated with us for several years, most of our relationships are short-term and may be re-negotiated by the merchant every 90 days. To the extent our gross margins decline from historical levels, our business, financial condition and results of operations may be adversely affected. WE FACE CREDIT RISKS. Some participating merchants agree to pay a placement fee to us for including their merchandise in our programs. We record an account receivable from the merchant for the placement fee. In some cases, we collect the placement fee either from the merchant or by withholding it from amounts due to the merchant for merchandise we purchase from program participants. To the extent that the placement fee receivable exceeds the sales of the merchant's products and the merchant is unable or unwilling to pay the difference to us, we may experience credit losses, which could have a material adverse effect on our business, prospects, financial condition and results of operations. WE ARE VULNERABLE TO INCREASES IN PAPER COSTS AND AIRLINE FUEL PRICES. The cost of paper used to print our catalogs and the fees paid to airlines to reimburse them for the increased fuel costs associated with carrying our catalogs are significant expenses of our operations. Historically, paper and airline fuel prices have fluctuated significantly from time to time and fuel prices, in particular, have increased significantly in recent months. Our airline partners may require us to pay additional fees to them to carry the catalog in times of higher fuel prices. Increases in paper or airline fuel costs that we must pay could have a material adverse effect on our business, financial condition and results of operations. OUR INFORMATION AND TELECOMMUNICATIONS SYSTEMS MAY FAIL OR BE INADEQUATE. We process a large volume of relatively small orders. Consequently, our success depends to a significant degree on the effective operation of our information and telecommunications systems. These systems could fail for unanticipated reasons or they may be inadequate to process any increase in our sales volume that may occur. In addition, we must ensure the secure transmission of confidential customer information over public telecommunications networks. Our 17 business depends on the efficient and uninterrupted operation of our servers and communications hardware systems and infrastructure. Any sustained or repeated systems interruptions that cause our Web sites to become unavailable for use would result in our inability to service our customers. Any extended failure of our information and telecommunications systems or a breach in our security systems could have a material adverse effect on our business, financial condition and results of operations WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION. Due to the increasing popularity and use of the Internet, governmental or other regulatory bodies in the United States and abroad may adopt additional laws and regulations with respect to the Internet that cover issues such as content, privacy, pricing, encryption standards, consumer protection, cross-border commerce, electronic commerce, taxation, copyright infringement, and other intellectual property issues. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation, and personal privacy is uncertain. Any new legislation or regulation or governmental enforcement of existing regulations may limit the growth of the Internet, increase our cost of doing business or increase our legal exposure. We currently are not subject to direct regulation by any governmental agency other than laws and regulations generally applicable to businesses and specifically, mail order businesses. We cannot predict the impact, if any, that any future regulatory changes or development may have on our business, financial condition, and results of operations. Changes in the regulatory environment relating to the Internet could have a material adverse effect on our business, financial condition, and results of operations. WE FACE A RISK OF PRODUCT LIABILITY CLAIMS. Our catalogs and our electronic commerce sites feature products and services from numerous participating merchants. Generally, our agreements with these participating merchants require the merchants to indemnify us and thereby be solely responsible for any losses arising from product liability claims made by customers, including the costs of defending any such claims, and to carry product liability insurance that names SkyMall as an additional insured. In addition, we maintain our own product liability insurance. If a merchant was unable or unwilling to indemnify us as required, and any such losses exceeded our insurance coverage or were not covered by our insurer, our financial condition and results of operations could be materially adversely affected. WE RELY UPON CERTAIN KEY PERSONNEL. We depend on the continued services of Robert M. Worsley, our chairman and chief executive officer, Cary L. Deacon, our president and chief operating officer, and on the services of certain other executive officers. The loss of Mr. Worsley's or Mr. Deacon's services or of the services of certain other executive officers could have a material adverse effect on our business. THE WORSLEYS, WAND PARTNERS INC. AND/OR RS INVESTMENT MANAGEMENT L.P. CAN CONTROL MANY IMPORTANT COMPANY DECISIONS. As of April 30, 2001, Mr. Worsley and his wife (the "Worsleys") owned 4,830,280 shares, or approximately 30.5% of our outstanding common stock, Wand Partners Inc. owned 1,292,857 shares, or approximately 8.2% of our outstanding common stock and RS Investment Management, L.P. and various affiliates beneficially own, a total of 2,079,900 shares of Common Stock of the Company, or 13.1%. As a result, the Worsleys, Wand Partners and RS Investment Management L.P. have the ability to significantly influence the affairs of the Company and matters requiring a shareholder vote, including the election of the Company's directors, the amendment of the Company's charter documents, the merger or dissolution of the Company, and the sale of all or substantially all of the Company's assets. The voting power of the Worsleys, Wand Partners and RS Investment Management L.P. may also discourage or prevent any proposed takeover of the Company pursuant to a tender offer. 18 THE PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE. The market price of our common stock has been highly volatile. Occurrences that could cause the trading price of our common stock to fluctuate dramatically in the future include: * new merchant agreements * the acquisition or loss of one or more airline or other key partner * fluctuations in our operating results * analyst reports, media stories, Internet chat room discussions, news broadcasts and interviews * market conditions for retailers and electronic commerce companies in general o changes in airline fuel, paper or our other significant expenses * changes in the purchase price for products acquired from our merchants * changes in the macroeconomic conditions of the United States and global economies. The stock market has from time to time experienced extreme price and volume fluctuations that have particularly affected the market price for companies that do some or all of their business on the Internet. Accordingly, the price of our common stock may be impacted by these or other trends. OUR OUTSTANDING SHARES MAY BE DILUTED. The market price of our common stock may decrease as more shares of common stock become available for trading. Certain events over which you have no control result in the issuance of additional shares of our common stock, which would dilute your ownership percentage in SkyMall. We may issue additional shares of common stock or preferred stock to raise additional capital or finance acquisitions, or upon the exercise or conversion of outstanding options and warrants. As of March 31, 2001, there were outstanding warrants and options to acquire up to 4,054,302 shares of common stock at prices ranging from $1.21 to $16.75 per share. If exercised, these securities will dilute the percentage ownership of holders of outstanding common stock of the Company. These securities, unlike the common stock, provide for anti-dilution protection upon the occurrence of stock splits, redemptions, mergers, reclassifications, reorganizations and other similar corporate transactions, and, in some cases, major corporate announcements. If one or more of these events occurs, the number of shares of common stock that may be acquired upon conversion or exercise would increase. RISK THAT FORWARD-LOOKING STATEMENTS MAY NOT COME TRUE. This prospectus and the documents incorporated herein by reference, contain forward-looking statements that involve risks and uncertainties. We use words and phrases such as "should be," "will be," "believes," "expects," "anticipates," "plans," "intends," "may" and similar expressions to identify forward-looking statements. Forward-looking statements are made based upon our belief as of the date that such statements are made. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. You should not place undue reliance on these forward-looking statements, which apply only as of the date of such documents. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described above and elsewhere in this report. 19 The Company evaluates the performance of its segments based on revenues and gross margins. Operating expenses are included with corporate expenses and are not allocated to the business segments. The accounting policies of the reportable segments are the same as those used in the consolidated financial statements and described in the notes to the condensed consolidated financial statements. Inter-segment transactions are not significant. Revenues and gross margins for the business segments are provided in the notes to the condensed consolidated financial statements filed herewith. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk exposure is limited to the interest rate risk associated with out credit instruments. We incur interest on loans made under a revolving line of credit at a variable interest rate. We had outstanding borrowings on the line of credit of $7.4 million at March 31, 2001. The Company does not have any financial derivative instruments. 20 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is involved in legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management, there is no legal proceeding pending or asserted against or involving the Company the outcome of which is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company. On January 29, 1999, a securities class action complaint was filed against SkyMall and Robert Worsley, the Company's Chief Executive Officer, Chairman and largest shareholder, in connection with certain disclosures made by the Company in December 1998 relating to its Internet sales. The complaint was filed in the United States District Court, District of Arizona, Case No. CIV-99-0166-PHX-ROS. The complaint alleges unlawful manipulation of the price of the Company's stock and insider selling during the period from December 28, 1998 through December 30, 1998. The complaint seeks unspecified damages for alleged violations of federal securities laws. SkyMall and Mr. Worsley filed a motion to dismiss the complaint on the basis that the complaint fails to state a claim upon which relief can be granted. In September 2000, the motion was granted in part and denied in part. SkyMall continues to believe that the allegations against it and Mr. Worsley are substantially without merit and intends to vigorously defend the lawsuit. On November 22, 1999, RGC International Investors, LDC, the parent company of Rose Glen Capital Management, filed a complaint in the Court of Chancery New Castle County Delaware, Cause Number 17600 NC, RGC International Investors, LDC v. SkyMall, Inc. RGC alleges that the Company was required to close on a transaction for an equity investment in SkyMall. SkyMall believes that the allegations against it are substantially without merit and intends to vigorously defend this lawsuit. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) REPORTS ON FORM 8-K. During the quarter ended March 31, 2001, the Company filed the following report on From 8-K: * Form 8-K filed on January 31, 2001 to announce its unaudited financial results for the Fourth Quarter ended December 31, 2001. 22 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. SkyMall, Inc. Date: May 15, 2001 By: /s/ Robert M. Worsley ------------------------------- Robert M. Worsley Chairman of the Board (Chief Executive Officer) Date: May 15, 2001 By: /s/ Christine A. Aguilera ------------------------------- Christine A. Aguilera Chief Financial Officer (Principal Accounting Officer) 23 -----END PRIVACY-ENHANCED MESSAGE-----