Skymall Inc – ‘10-K’ for 12/31/97

As of:  Monday, 3/30/98   ·   For:  12/31/97   ·   Accession #:  950153-98-285   ·   File #:  0-21657

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         41    226K 
 2: EX-27.1     Financial Data Schedule (Pre-XBRL)                     1      6K 
 3: EX-27.2     Financial Data Schedule (Pre-XBRL)                     2±    10K 
 4: EX-27.3     Financial Data Schedule (Pre-XBRL)                     1      7K 

10-K   —   Annual Report
Document Table of Contents

10-K
1st Page of 41
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ---------------------

 FORM 10-K

(MARK ONE)                                                                      

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934                                        

For the fiscal year ended  DECEMBER 31, 1997                                    

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)    

Registrant's telephone number, including area code  (602) 254-9777              

Securities registered pursuant to Section 12(b) of the Act:                     

                                                  Name of each exchange on which
Title of each class                                   registered    
None                                                                          

Securities registered pursuant to Section 12(g) of the Act:                     

Common Stock, .001 par value
(Title of class)

10-K
2nd Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 2nd
         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 [ ]                        

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,  
to the best of registrant's knowledge, in definitive proxy or information       
statements incorporated by reference in Part III of this Form 10-K or any       
amendment to this Form 10-K. [ ]                                                

       On March 12, 1998, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $11,792,000. The aggregate   
market value was based on the closing price of Common Stock as reported by the  
Nasdaq Stock Market's National Market.                                          

 APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

       Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities   
Exchange Act of 1934 subsequent to the distribution of securities under a plan  
confirmed by a court. Yes [ ] No [ ]                                            

APPLICABLE ONLY TO CORPORATE REGISTRANTS

       Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.                     

         At March 12, 1998, the number of shares of Common Stock outstanding was
8,489,600 and there were no shares of Preferred Stock outstanding.              

 DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant's Definitive Proxy Statement for its Annual Meeting of
Shareholders, to be held on May 20, 1998, which will be filed pursuant to       
regulation 14A within 120 days of the close of the Registrant's fiscal year, is 
incorporated by reference in answer to Part III of this report, but only to the 
extent indicated therein.                                                       

10-K
3rd Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 3rd
 TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I                                                                          
      Item 1.  Business...................................................     1
      Item 2.  Properties.................................................    10
      Item 3.  Legal Proceedings..........................................    10
      Item 4.  Submission of Matters to a Vote of Security Holders........    10

PART II                                                                         
Item 5.  Market for the Registrant's Common Stock and Related       
                 Stockholder Matters......................................    10
      Item 6.  Selected Financial Data....................................    11
Item 7.  Management's Discussion and Analysis of Financial          
                 Condition and Results of Operations......................    13
      Item 7A. Quantitative and Qualitative Disclosure About Market Risk..    19
      Item 8.  Financial Statements and Supplementary Data................   F-1
Item 9.  Changes in and Disagreements with Accountants on           
                 Accounting and Financial Disclosure......................    20

PART III                                                                        
      Item 10. Directors and Executive Officers of the Registrant.........    20
      Item 11. Executive Compensation.....................................    20
Item 12. Security Ownership of Certain Beneficial Owners            
                 and Management...........................................    20
      Item 13. Certain Relationships and Related Transactions.............    20

PART IV                                                                         
Item 14. Exhibits, Financial Statement                              
                 Schedules and Reports on Form 8-K........................    20

SIGNATURES................................................................   S-1

10-K
4th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 4th
ITEM 1.  BUSINESS                                                               

GENERAL                                                                         

   SkyMall, Inc. ("SkyMall" or the "Company"), the largest in-flight
catalog company in the United States, makes high-quality products and services  
available to more than 400 million airline passengers per year. The Company     
markets and sells a broad selection of premium merchandise provided by          
participating merchants, including major catalog companies and specialty        
retailers, such as Brookstone(R), Frontgate(R), Hammacher Schlemmer, Norm       
Thompson(R)/Solutions(R), The Sharper Image(R) and the Wine Enthusiast(R). The  
merchandise of each participating merchant is presented in a separate section of
the SkyMall catalog to allow browsing from "store to store," providing the      
convenience and variety of an upscale shopping mall environment. Substantially  
all of the merchandise sold by the Company is shipped directly to customers by  
participating merchants, thus avoiding significant inventory risk. The Company  
has exclusive agreements to place its catalogs in aircraft seat pockets on 16   
airlines, which carried approximately 70 percent of all domestic passengers in  
1997, including America West, Continental, Delta, Southwest, TWA, United and US 
Airways. As a result, the Company believes the SkyMall catalog is available to  
over 1.0 million domestic airline passengers each day. The Company has          
experienced substantial growth since it restructured operations in 1994. Total  
revenues have increased from approximately $30.3 million in 1994 to             
approximately $60.8 million in 1997, for a compound annual growth rate of 26    
percent. The Company's revenue per passenger enplanement on flights carrying the
SkyMall catalog increased from approximately $0.06 in 1994 to approximately     
$0.11 in 1997, for a compound annual growth rate of 22 percent.                 

The Company's foundation is built on its relationships with its   
customers, airline, and merchant partners. The Company's customers enjoy the    
convenience of being able to shop for a wide variety of innovative products     
while traveling. The Company offers a no mark-up, fair price guarantee under    
which the Company will refund the price difference if the customer finds the    
same item advertised elsewhere at a lower price. In order to enhance the ongoing
appeal of its product offerings, the Company produces four new catalogs per     
year. The Company maintains a toll free 24-hour telephone ordering service (from
air and ground phones), and an in-house staff of customer service               
representatives who are trained to provide exemplary service in order to build  
strong customer loyalty and increase revenue from repeat and referral business. 

     In exchange for placement of its catalogs in aircraft seat pockets, the
Company pays each airline partner a monthly commission based on net merchandise 
revenues generated by the Company from sales to that airline's passengers. Some 
of the Company's airline agreements also require payment of minimum monthly     
fees. The Company's airline partners benefit from additional revenue and from   
being able to enhance the in-flight experience of their passengers by providing 
the Company's catalog as an additional amenity.                                 

     Participating merchants obtain exposure for their products and services
to a demographically diverse group of potential customers with strong economic  
profiles, generate additional revenues, and acquire new customers to add to     
their own proprietary mailing lists. Under contracts with participating         
merchants, the Company earns percentages of revenues generated by the Company's 
sales, placement fees for inclusion of the merchants' products in the SkyMall   
catalog, or a combination thereof. The SkyMall catalog typically features over  
60 participating merchants.                                                     

MARKET OVERVIEW                                                                 

    A broad spectrum of companies market goods and services to airline
passengers. Fifty-five percent of people with household incomes in excess of    
$40,000 per year fly at least once each year, while only 23 percent of people   
with household incomes of $40,000 or less travel on airlines. A significant     
portion of in-flight marketing consists of "direct-response" marketing, where   
the merchant seeks to entice the passenger to take immediate action in response 
to viewing the advertisement or marketing materials, such as placing a telephone
call to obtain the goods or services offered. By contrast, "image" marketing,   
which is also conducted in-flight, seeks to build brand awareness and foster a  
favorable image of products or services and the company offering them. Although 
the primary goal of the SkyMall catalog is to elicit a direct-response from     
passengers, merchants that offer goods and services in the SkyMall catalog also 
build their brand awareness and image.                                          

-1- 

10-K
5th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 5th
     Although many products and services are offered to passengers while
in-flight through a number of media, the SkyMall catalog is unique in the       
airline marketing industry because it is devoted exclusively to catalog         
shopping. Most airlines provide their passengers with airline-sponsored         
"in-flight" magazines, which are placed in airline seat pockets along with the  
SkyMall catalog, as well as other magazines and periodicals. Many in-flight     
magazines contain pages devoted exclusively to marketing products and services. 
None of these in-flight magazines, however, is devoted solely to shopping.      

         Video marketing is also conducted while passengers are in-flight in the
form of video promotions played on monitors located at the front of or          
interspersed throughout passenger cabins and on seatback video displays. Video  
marketing on the monitors frequently consists of various in-flight programming  
prepared by the airline and sponsored by companies targeting airline passengers 
with favorable economic profiles. Although video shopping has not historically  
been a significant source of revenue for the Company, in recent years, the      
Company has offered video shopping services on both video monitors and seatback 
video displays on selected flights.                                             

    On many international flights, airlines offer passengers duty-free
products while in-flight through their flight attendants who deliver the        
merchandise to passengers at the time of purchase. Because airlines carry the   
merchandise on the plane, the product selections are somewhat limited,          
consisting principally of spirits, tobacco, perfume, and gift items.            

         Of the various media employed by merchants to market goods and services
to airline passengers, the Company believes the SkyMall catalog is among the    
most effective, due in part to the increasing popularity of catalog shopping in 
general. Over the past 15 years, consumers have increasingly relied on catalogs 
and direct mail to purchase goods and services. Approximately 44 percent of     
households in the United States ordered merchandise from catalogs in 1997,      
generating an estimated $78.6 billion in consumer catalog sales. If current     
trends continue, the Company believes in-flight catalog shopping will gain      
increasing acceptance by airline passengers, particularly those who appreciate  
the time-saving convenience of catalog shopping.                                

CUSTOMER RELATIONSHIPS                                                          

        The Company's primary target customers are frequent business travelers
with medium-to-high incomes. The Company's targeted customer spends             
approximately $1,200 annually for merchandise while traveling. According to the 
Company's market research, passengers who shop from the SkyMall catalog while   
traveling do so because they have limited time to shop and the SkyMall catalog  
offers a convenient alternative to shopping in retail stores. In addition, the  
Company's research indicates that many customer purchases are "impulse"         
purchases, as well as purchases for gifts. The key elements of the Company's    
strategy to cater to the needs of its targeted customers are:                   

        Offer Premium Merchandise. The Company offers high-quality merchandise
      from leading catalog and retail suppliers at competitive prices. The
  Company maintains close working relationships with participating
         merchants and carefully studies the buying patterns of its customers to
         ensure that catalog space is devoted to products and services that have
   proven appeal to the Company's customers. In order to enhance the
        ongoing appeal of its product offerings, the Company produces four new
catalogs per year.                                            

   Offer Competitive Pricing and a No Mark-Up, Fair Price Guarantee.
       SkyMall offers its customers the convenience of in-flight shopping at
         prices competitive with those of merchants offering the same or similar
         products. To emphasize its competitive pricing strategy, SkyMall offers
      its customers a no mark-up, fair price guarantee under which SkyMall
        will refund the price difference to the customer if the customer finds
the same item advertised elsewhere at a lower price.          

        Appeal to a Broad Consumer Base. Airline travelers represent a diverse
      cross-section of the public. Accordingly, the Company's catalogs are
        designed to have a much broader appeal than most catalogs. The Company
      offers a wide variety of products, including health and beauty aids,
       children's toys, executive gifts, educational foreign language tapes,
     gourmet cooking aids, exercise equipment, luggage, travel aids, and
     stylish home accessories. Many of the Company's products are luxury
       items, which are particularly well-suited to the diverse demographics
        of airline passengers who have higher-than-average disposable incomes.

-2- 

10-K
6th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 6th
        Provide Customers with a Convenient One-Stop Shopping Service. SkyMall
        is a "one-stop" shopping source for customers who, with a single phone
call, may purchase a variety of merchandise offered by many   
      participating merchants. Although most of the merchandise offered in
the SkyMall catalog is available from other catalog and retail
       companies, each of these companies typically has its own policies for
     shipping and handling charges, merchandise returns, sales taxes and
     price guarantees. In addition, each company typically has different
         customer service hours and credit and payment policies. Unlike SkyMall,
      few of these companies offer frequent flier credit for purchases. By
         compiling the merchandise of its various participating merchants into a
       single catalog, the Company affords its customers access to more than
   1,250 products offered by over 60 participating merchants and the
convenience of uniform customer service policies.             

  Provide Outstanding Customer Service and Toll-Free Ordering. The
         Company maintains an in-house staff of customer service representatives
      who are trained to resolve customer problems. The Company's customer
        service staff is friendly and helpful with customers and knowledgeable
     about the wide range of products sold by the Company. The Company's
  customer service representatives encourage customers to purchase
       additional products with each order to increase the Company's average
         revenue per order. The Company believes the customer goodwill developed
        by its customer service representatives builds strong customer loyalty
      and increases revenue from repeat and referral business. The Company
        also offers services designed to maximize convenience to the traveler,
including 24-hour telephone, internet, and facsimile ordering,
       toll-free ordering from air phones, and a 60-day "no questions asked"
return or exchange policy.                                    

AIRLINE RELATIONSHIPS                                                           

    The Company has exclusive relationships with its airline partners,
which are a vital component of the Company's business strategy. The SkyMall     
program offers airlines a low-risk means of incrementally increasing their      
earnings. Since commencing operations in 1991, the Company has grown from a     
single airline partner to 16 airline partners, including most of the major      
domestic airlines. In exchange for placement of its catalogs in seat-back       
pockets, the Company pays each airline partner a monthly commission based on net
merchandise revenues generated by the Company from sales to that airline's      
passengers. Some agreements also require payment of a minimum monthly commission
or a boarding cost that reimburses the airline for the increased fuel costs     
attributable to the weight of the catalogs. For 1997, total commissions paid or 
payable to SkyMall's airline partners amounted to approximately $3.4 million    
which included minimum monthly commissions and boarding costs of approximately  
$2.2 million. In addition to increasing airline earnings, the Company's airline 
partners also benefit from enhancing the in-flight experience of their          
passengers by providing the Company's catalog as an additional amenity.         
SkyMall's agreements with its airline partners generally have a term of at least
one year and thereafter annually are automatically renewable subject to         
termination with 60 to 180 days' advance notice by either SkyMall or the        
airline. The Company believes its relations with each of its airline partners   
are good.                                                                       

-3- 

10-K
7th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 7th
         SkyMall's catalogs are currently available on all domestic and selected
international flights of the following air carriers:                            

                                                                [Download Table]

                               1997 DOMESTIC                      
      CARRIERS(1)              ENPLANEMENTS            INITIAL    
                             (IN MILLIONS)(2)        CATALOG(3)   
-------------------------    ------------------     --------------
                                                                  
Alaska                               13                 July 1991 
America West                         17                  Feb 1994 
Atlantic Southeast                    4                 July 1991 
Continental                          40                April 1991 
Delta                               103                 July 1991 
Frontier                              2                 Sept 1995 
Horizon                               4                 July 1991 
Midway                                2                 June 1994 
Pan Am                                1                  Nov 1997 
Reno Air                              4                April 1997 
SkyWest                               3                 July 1991 
Southwest                            56                 July 1996 
Sun Country                           3                  Jan 1995 
TWA                                  24                  Feb 1991 
United                               73                 June 1992 
US Airways                           57                 July 1991 
                             ------------------                   
         Total                      406                           
                             ==================                   

----------                                                                      
(1) The Company's catalog carries the SkyMall name on all participating airlines
except (a) United, where the Company's catalog carries the name "High Street    
Emporium" and (b) US Airways, where the catalog carries the name "Selections".  

(2) Source:  U.S. Monitor.                                                      

(3) The Company's catalog has been available on these airlines continuously from
the date the initial catalog was placed on the airline, except for (a) US       
Airways, which suspended carrying the SkyMall catalog on July 1, 1996 but       
resumed carrying the SkyMall catalog effective November 1, 1996 and (b) Pan Am, 
which ceased operations in February 1998. To the extent Pan Am resumes          
operations, the Company may continue to provide the SkyMall catalog to Pan Am.  

   The following airline partners each accounted for in excess of 10
percent of the Company's net merchandise sales for the year ended 1997:         

                                                                [Download Table]

                             PERCENT OF NET MERCHANDISE SALES
NAME OF AIRLINE                 THROUGH DECEMBER 31, 1997    
----------------------       --------------------------------
                                                             
Delta                                     23%                
United                                    21%                
Continental                               16%                
Southwest Airlines                        10%                
                                          ---                

         Total                            70%                
                                          ===                

-4- 

10-K
8th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 8th
MERCHANT RELATIONSHIPS                                                          

        Merchant Agreements. The Company enters into agreements with merchants
who supply the products and services offered in the Company's catalog. Under its
contracts with participating merchants, the Company earns percentages of        
revenues generated by the Company's sales or placement fees for inclusion of the
merchants' products in the SkyMall catalog, or a combination thereof.           
Participating merchants agree to maintain sufficient levels of inventory to     
satisfy customer demand and to ship all orders within 72 hours unless the       
merchandise is out of stock. Generally, the Company's agreements with           
participating merchants provide that prices for products included in the SkyMall
catalogs be honored by merchants as long as the Company receives orders from a  
catalog edition. The agreements typically have an initial term of a single      
quarterly catalog and automatically renew thereafter for successive catalog     
editions. During 1997, the Company renegotiated many of its merchant partner    
agreements to establish more favorable cost structures and in some cases to     
extend the term of the arrangements to one year. The merchants typically agree  
to indemnify the Company for any losses associated with injuries caused to      
customers from the use of such merchant's product, to carry product liability   
insurance that names SkyMall as an additional insured, and to indemnify the     
Company against claims that their products infringe on the intellectual property
rights of third parties.                                                        

  Name Brand Stores in the SkyMall Catalog. The Company's catalogs
assemble premium, name brand merchandise and are formatted to allow the         
traveling customer to browse from "store-to-store," providing the convenience   
and variety of an upscale shopping mall environment. Its largest "stores" are   
generally well-known catalog and retail companies that have chosen to           
participate in the SkyMall program in order to generate additional revenue,     
build name recognition and brand awareness, and acquire new customers to add to 
their own proprietary mailing lists.                                            

  The major catalog and retail companies currently featured in the
SkyMall catalog or those who have participated in recent editions of the catalog
include:                                                                        

NAME BRAND STORES IN THE SKYMALL CATALOG

Balducci's                                        Mrs. Field's                  
British Links                                     Nightingale Conant            
Brookstone(R)                                     Norm Thompson(R)/Solutions(R) 
Calyx & Corrolla                                  Orvis(R)                      
Competitive Edge Golf(R)                          Successories(R)               
Frontgate(R)                                      Sundance                      
Hammacher Schlemmer                               Syber Vision(R)               
Hello Direct(R)                                   The Cigar Enthusiast          
Huntington Clothiers(R)                           The Safety Zone               
Johnston & Murphy                                 The Sharper Image(R)          
Last Best Place                                   The Wine Enthusiast(R)        
Mattel(R)                                                                       

     Merchandise Selection. The Company continually responds to numerous
merchants who inquire about showcasing their products or services in the SkyMall
catalog. As a result, the Company has been able to identify and offer to its    
customers the unique products they desire at competitive prices. Products are   
selected for each catalog by the Company's merchandising staff with the help of 
each of the major participating merchants. Approximately one-third of the       
products in each new edition of the SkyMall catalog have not been previously    
featured in the SkyMall catalog.                                                

         Products Offered. The Company typically offers more than 1,250 products
in each of its catalogs, which average 168 pages per edition. In order to       
enhance the ongoing appeal of its product offerings, the Company produces four  
new catalogs per year and regularly replaces the products in its catalogs. The  
Company seeks out new and unique items that may not be available in ordinary    
retail stores, with an emphasis on upscale merchandise selling for $29.95 or    
more. During 1997, the Company's more popular product categories included       
household items, electronics, personal care items, clothing, multimedia items,  
and travel accessories. In 1997, two merchants accounted for 16 percent and 13  
percent, respectively, of the Company's net merchandise sales. No other merchant
in 1997 accounted for more than 10 percent of the Company's net merchandise     
sales.                                                                          

-5- 

10-K
9th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 9th
GROWTH STRATEGY                                                                 

       Increase Revenue Per Passenger. The Company's primary growth strategy
is to increase its revenue per passenger enplanement. The Company's revenue per 
passenger enplanement on flights carrying the SkyMall catalog has increased to  
approximately $0.11 in 1997 from $0.06 in 1994, for a compound annual growth    
rate of 22 percent. To increase revenue per passenger enplanement, the Company  
has implemented or may implement the following programs:                        

                 Marketing and Promotional Programs. The Company has developed
      several innovative marketing and promotional programs, some of which
      are facilitated through the unique relationships between the Company
    and its airline partners. Some of these programs are modeled after
       historically successful "duty-free", in-flight sales programs offered
       on international flights. Although the Company does not plan to offer
         duty-free merchandise to airline passengers, it believes it can emulate
    several of the marketing aspects of duty-free shopping to increase
  sales of merchandise offered in the SkyMall catalog. The Company
       believes that duty-free merchandising is successful for many reasons,
       including (i) the high-level of awareness of duty-free shopping among
       airline passengers, (ii) the perception among duty-free shoppers that
       they are purchasing merchandise at a discount, (iii) the limited time
      offer of duty-free merchandise which requires passengers to purchase
   merchandise while the plane is in flight to take advantage of the
   perceived discount, (iv) the participation of commissioned flight
      attendants who encourage passengers to purchase merchandise, and (v)
the optimal mix of duty-free products, some of which encourage
"impulse" purchases by passengers.                            

              Among the plans in various stages of implementation by the
        Company are (i) enhancing promotion of the Company's shopping services
        through on-board announcements, including video and audio programming,
       (ii) mailing inserts in frequent flyer statements in order to promote
  awareness of the Company's products and services, (iii) offering
        airlines and key airline employees incentives for promoting the use of
  the Company's catalogs among airline passengers, (iv) conducting
    in-flight, gate, and jetway promotions, such as gift certificates,
         discount certificates, and special offers to passengers who order while
   in-flight, (v) making the Company's catalogs available in airport
       lounges, (vi) continually upgrading and analyzing the appropriate mix
of products for inclusion in the SkyMall catalog to encourage 
       passengers to make purchases, and (vii) point-of-sale promotions. The
  Company believes the foregoing programs may increase revenue per
  passenger enplanement and may also increase the awareness of the
   SkyMall catalog generally so that airline passengers will be more
       likely to make purchases from the SkyMall catalog. However, there can
      be no assurance that the Company will be able to fully implement the
        foregoing marketing programs, including those modeled after successful
       duty-free programs, and there can be no assurance that the successful
        implementation of the foregoing programs will result in an increase in
the Company's revenue per passenger enplanement.              

           Direct Marketing and Related Programs. Through its data
 management system, the Company maintains a database of customer
information, including customer names, addresses, and product 
      purchases. From this database, the Company obtains information about
  customer buying patterns and preferences. The Company strives to
     develop customer loyalty and to increase revenues from its existing
         customer base. To increase the number of repeat customer purchases, the
       Company has implemented various programs designed to develop customer
         loyalty and increase the customer's average order size. The Company may
       expand its direct marketing and related programs to selected customer
       groups and tailor the marketing materials to the preferences of those
groups as demonstrated by their prior purchasing history.     

        Increase Catalog Circulation and Develop New Distribution Channels. To
increase its customer base, the Company seeks to continually expand its catalog 
circulation on major airlines and to establish new distribution channels when   
appropriate. The Company has implemented or may implement a number of programs  
designed to increase the circulation of the SkyMall catalog and reach new       
customers, including the following:                                             

-6- 

10-K
10th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 10th
                 Expanding Domestic Airline Partnerships. The Company seeks to
       secure agreements from additional major airlines to carry the SkyMall
      catalog. In addition, the Company from time-to-time includes a small
         selection of its products and services in in-flight magazine inserts to
         give new airlines the opportunity to test the Company's services and to
        make the Company's products and services available on smaller airlines
where a full-length catalog is not cost effective.            

                Developing International Airline Partnerships. Although some
         duty-free and shopping catalogs are available on international flights,
        the Company believes that this market is substantially underserved. In
       1997, the Company launched a new international initiative with United
        Airlines and Empire Airport Service Co., Ltd., a Japan-based duty-free
         retail company, to provide a Japanese language catalog to the more than
      five million international passengers who travel each year on United
        Airlines' flights serving Tokyo and Osaka, Japan. The first edition of
     the Japanese language catalog, which was placed on board in January
 1998, features merchandise from some of SkyMall's long-standing
        merchant partners and is targeted to the tastes and preferences of the
       Japanese customer. As more information regarding the effectiveness of
     this program becomes available, the Company may consider additional
     controlled and carefully planned expansion into large international
        markets through cooperative ventures with its current domestic airline
partners as well as new international partners.               

                  Electronic Commerce Initiative. In the fourth quarter of 1997,
         the Company launched an electronic commerce initiative that included an
  improved Web site at www.skymall.com and a program for providing
 internet-based shopping to SkyMall's airline partners and other
       entities interested in providing SkyMall's merchandise to visitors to
        their own Web sites. The Company's Web site showcases products offered
     in the Company's print catalog and provides customers an additional
        channel of customer service and support. The Company plans to continue
        to evaluate the results of the electronic commerce initiative and may,
depending on such results, consider expanding such initiative.

                  Other Distribution Channels. The Company believes its shopping
services will appeal to consumers in airports as well as other
         locations and may test and, if effective, implement additional programs
  when appropriate. In 1997, the Company began testing several new
       distribution channels, including an electronic hotel shopping program
      and an upscale specialty catalog for one of its airline partners for
     distribution in its member-oriented lounges. The Company frequently
      receives inquiries from its airline partners and other third parties
         for similar programs. Based on the results of such testing, the Company
     may consider expanding or eliminating these additional distribution
channels.                                                     

BUSINESS OPERATIONS                                                             

        Customer Service Center; Order Processing and Fulfillment. The Company
maintains a well-trained, in-house staff of customer service representatives    
located in Phoenix, Arizona and outsources "overflow" calls to independent call 
centers when appropriate. Sales calls are accepted 24 hours each day, 7 days a  
week. The Company monitors the quality of its customer service operations       
closely and regularly implements improvements in its customer service           
operations.                                                                     

-7- 

10-K
11th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 11th
    At March 12, 1998, the Company employed approximately 140 customer
service representatives. In 1997, the Company expanded its customer contact     
center by 133 telephone service stations, bringing the total capacity of the    
customer contact center to 211. The Company's telephone equipment distributes   
calls to sales representatives and provides detailed call reporting and         
analysis, assisting the Company with order processing and marketing efforts. The
Company's customer service representatives are given incentives for outstanding 
service. The Company maintains no significant inventory. Therefore, once the    
Company receives a customer order, it is transmitted to the appropriate merchant
which ships the merchandise directly to the customer. Most orders are delivered 
to customers within seven to ten days. The Company's average order size is      
approximately $95.                                                              

Over 87 percent of the Company's daily orders are received on 
"toll-free" numbers, including seven percent from toll-free air phones, with the
remaining orders arriving by U.S. mail, facsimile, and the internet. Air phones 
offer customers a convenient way to order goods and services from the Company   
while in flight. Most airline passengers who have access to air phones are able 
to place orders with the Company while in flight by using a "speed dial" number 
programmed into the air phone. In late 1997, the Company renegotiated its       
agreements with air phone service providers which serve substantially all of the
Company's airline partners. These new arrangements, which include joint         
marketing programs, have enabled the Company to more actively promote ordering  
via the air phone. The Company plans to continue testing various air phone      
promotions and implementing new programs when appropriate to promote "impulse"  
purchasing from the SkyMall catalog while in flight.                            

         Credit Sales. Most of the more than 550,000 customer orders received by
the Company during 1997 were billed to customer credit cards. The remaining     
customers generally paid for their purchases by personal check. To minimize     
credit losses, the Company obtains approval from the customer's credit card     
company prior to processing each order. In addition, when the customer requests 
that his or her merchandise be shipped to an address that is different than the 
customer's billing address, the Company typically verifies the charge           
authorization directly with the credit card holder at his or her billing        
address. The Company verifies personal bank checks received from customers with 
an independent service bureau prior to processing the customer's order. Although
the Company's credit losses are generally immaterial, under its agreements with 
participating merchants, the Company has the right to obtain reimbursement from 
the merchants for any credit losses it reasonably incurs.                       

       Information Systems. The Company maintains an information system that
is used primarily to capture and process customer orders. The Company typically 
receives approximately 2,200 calls per day in off-peak seasons and approximately
6,400 calls per day during the peak of the holiday season. The Company's        
information system has the capacity to process approximately 10,000 calls per   
day.                                                                            

     After the Company processes an order in its information system, the
order is forwarded to a merchant to be filled. In late 1996, the Company began  
implementation of a uniform electronic transmission system which allows the     
Company to transmit customer orders to merchants electronically. Under this     
system, orders received through the Company's information system are forwarded  
to a third party, the LitleNet Direct Commerce Network(SM) (the "Network"), for 
further processing. The Network has developed a proprietary system that         
electronically delivers order information to the merchants in a form that is    
compatible with each such merchant's information systems. The Company contracts 
for access to the Network on a per transaction basis, permitting the Company to 
expand the capabilities of its information systems without additional           
infrastructure development, maintenance, and upgrade expense. Currently,        
approximately 50 percent of the Company's orders are processed electronically   
via the Network.                                                                

         Catalog Production and Distribution. Catalog design and layout for each
section of the Company's catalog is generally provided directly by the          
participating merchant but must be within the Company's design guidelines. After
the catalog is designed, the Company submits its catalog to each of its airline 
partners for approval. The cover and some pages of the airline catalogs are     
customized to achieve a look and feel unique to that airline, although the      
products featured and the balance of the basic content are common to all of the 
Company's catalogs. After the catalogs are printed, the Company ships the       
catalogs to its airline partners who distribute the catalogs to the cities in   
which they operate and place the catalogs on their aircraft. Each catalog has a 
source code that permits the Company to track catalog distribution and sales    
attributable to catalogs carried by its airline's partners.                     

-8- 

10-K
12th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 12th
HOUSE FILE                                                                      

 The Company maintains a customer database or "house file" which
contains a variety of information about the more than one million customers who 
have purchased merchandise or services from the Company. In addition to the     
customer's name and address, the Company's house file also contains a detailed  
history of purchases made by customers with the Company. This information serves
as a useful tool in evaluating the effectiveness of marketing efforts and in    
identifying the Company's best customers. Like other catalog companies, the     
Company "rents" its house file for a fee. By renting its house file, the Company
is able to generate incremental revenues without incurring significant costs.   
The house file is updated on a daily basis as orders are received. In 1997, the 
Company undertook various database analysis initiatives with some of its airline
partners that enabled the Company to learn more about the buying habits and     
preferences of the Company's existing customers as well as frequent flyers in   
general. This information has been used by the Company to better merchandise the
SkyMall catalog, develop marketing programs, and to cost effectively evaluate   
certain new business initiatives.                                               

COMPETITION                                                                     

 In-Flight Shopping. The Company believes that its long standing
relationships with its airline partners and participating merchants create      
substantial barriers to competition in the in-flight catalog shopping business. 
However, in 1997, Northwest Airlines began offering a merchandise catalog to its
customers though a competitor of the Company. Some competitors of the Company   
have greater financial, marketing, and other resources, and may seek to enter or
expand penetration into the in-flight catalog shopping market in competition    
with the Company.                                                               

    In-Flight Marketing. The Company competes with other companies who
market products and services to passengers while in flight, including those who 
advertise in in-flight magazines and other periodicals, sponsor airline video   
and audio programming, and offer in-flight video shopping services. Several     
companies have announced they may develop seatback interactive video shopping   
services, some of which have greater resources than the Company. As seatback    
interactive video shopping services become more available to airline passengers,
competition in the in-flight marketing business is likely to increase.          

        General Catalog and Retail Sales. The catalog sales and retail markets
are both highly fragmented and highly competitive. The Company competes for     
customers to some degree with all retailers and catalog companies, including    
airport retailers, duty-free retailers, specialty stores, department stores,    
specialty catalog companies, and general merchandise catalog companies, many of 
which have significantly greater financial, marketing, and other resources than 
the Company. However, because many of the Company's competitors target people   
with strong economic profiles, a number of the Company's competitors are also   
participants in the SkyMall catalog program.                                    

REGULATION                                                                      

     The Company's operations are subject to various federal, state, and
local laws and regulations, including state sales tax laws and various Federal  
Trade Commission regulations governing the sale of merchandise by mail. The     
Company collects applicable sales taxes from its customers on all merchandise   
sales and remits the sales taxes to state taxing authorities. The Federal Trade 
Commission regulations applicable to the Company's operations impose various    
requirements on the processing of customer orders, including shipping deadlines,
delay notices, order cancellations, and refunds. The Company believes that these
regulations do not have a material impact on its business operations.           

EMPLOYEES                                                                       

    At March 12, 1998, the Company had 190 employees. Approximately 90
percent of the Company's employees are full-time employees. The Company makes   
significant use of temporary and part-time employees to process orders during   
the holiday season. The Company believes it has good relations with its         
employees.                                                                      

-9- 

10-K
13th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 13th
TRADEMARKS AND TRADE NAMES                                                      

   SkyMall is a registered trademark of the Company. The loss of the
SkyMall trademark could have a material adverse effect on the Company. In       
addition, the Company uses a number of other trademarks and trade names in its  
business, none of which the Company believes are material to its overall        
operations.                                                                     

ITEM 2.  PROPERTIES                                                             

        The Company's executive offices are located in Phoenix, Arizona, where
the Company leases approximately seven acres of land under long-term leases     
expiring in 2012, with an option to extend to 2062. The Company owns the        
improvements to this land which include offices, warehouses, storage facilities,
and a small retail shopping center, consisting of an aggregate of approximately 
50,000 square feet.                                                             

ITEM 3.  LEGAL PROCEEDINGS                                                      

The Company is not a party to any pending or threatened legal 
proceedings that it believes will have a material impact on the Company's       
business.                                                                       

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

None.                                                         

 PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER       
MATTERS                                                       

   The Company's Common Stock is traded on the Nasdaq Stock Market's
National Market under the symbol "SKYM". The high and low closing prices of the 
Company's Common Stock from December 16, 1996 (the date of the Company's initial
public offering) through December 31, 1997 are set forth in the following table.
As of March 12, 1998, the Company had 74 record holders of its Common Stock.    

                                                                [Download Table]

                1997                     1996       
         ------------------       ------------------
          High        Low           High       Low  
         -------    -------       -------    -------
                                                    
Q1       $10.500    $ 8.000         N/A        N/A  
Q2       $ 8.500    $ 5.500         N/A        N/A  
Q3       $ 7.750    $ 4.125         N/A        N/A  
Q4       $ 6.875    $ 4.125        $9.125     $8.250

        The Company has never paid a dividend on its Common Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. It is
the current policy of the Company's Board of Directors to retain any earnings to
finance operations and expand the Company's business. The payment of future     
dividends is within the discretion of the Board of Directors and will depend    
upon the Company's future earnings, if any, its capital requirements, financial 
condition, and other relevant factors.                                          

-10-

10-K
14th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 14th
ITEM 6.  SELECTED FINANCIAL DATA                                                

 SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE, AND OPERATING DATA) 

The selected financial data as of and for each of the five years ended
December 31, 1997 are derived from the Financial Statements of the Company,     
which have been audited by Arthur Andersen LLP, independent public accountants, 
and should be read in conjunction with the Financial Statements included        
elsewhere in this Form 10-K and the related notes thereto and "Management's     
Discussion and Analysis of Financial Condition and Results of Operations."      

                                                        [Enlarge/Download Table]

                                                                         YEAR ENDED DECEMBER 31,                           
                                                -------------------------------------------------------------------------- 
                                                   1997           1996            1995            1994            1993     
                                                -----------    -----------     -----------     -----------     ----------- 
                                                                                                                           
STATEMENT OF OPERATIONS DATA:                                                                                              

Merchandise sales, net                          $    42,844    $    30,978     $    26,883     $    22,062     $    24,507 
Placement fees and other                             17,974         12,707          16,198           8,241           2,560 
                                                -----------    -----------     -----------     -----------     ----------- 

     Total revenues                                  60,818         43,685          43,081          30,303          27,067 
Cost of goods sold                                   35,099         24,257          24,564          16,266          13,691 
                                                -----------    -----------     -----------     -----------     ----------- 

     Gross Margin                                    25,719         19,428          18,517          14,037          13,376 
                                                -----------    -----------     -----------     -----------     ----------- 
Catalog expenses                                      9,082          7,670           9,532           9,644           6,890 
Selling expenses                                      3,450          2,476           2,229           2,754           2,921 
Customer service and fulfillment expenses             4,438          2,823           2,136           2,919           4,514 
General and administrative expenses                   6,340          3,340           3,112           5,886           4,530 
Restructure charges                                      --             --              --           4,332              -- 
                                                -----------    -----------     -----------     -----------     ----------- 
     Total operating expenses                        23,310         16,309          17,009          25,535          18,855 
                                                -----------    -----------     -----------     -----------     ----------- 
Income (loss) from operations                         2,409          3,119           1,508         (11,498)         (5,479)
Interest and other income                                                                                                  
  (expense), net                                        462           (651)           (750)           (688)           (287)
                                                -----------    -----------     -----------     -----------     ----------- 
Income (loss) before income taxes                     2,871          2,468             758         (12,186)         (5,766)

Income taxes                                            300            280              --              --              -- 
                                                -----------    -----------     -----------     -----------     ----------- 
Net income (loss)                                     2,571          2,188             758         (12,186)         (5,766)
Preferred stock dividends                                --             77              --              --              -- 
                                                -----------    -----------     -----------     -----------     ----------- 
Net income (loss) available for                                                                                            
  common shares                                 $     2,571    $     2,111     $       758     $   (12,186)    $    (5,766)
                                                ===========    ===========     ===========     ===========     =========== 
Diluted net income (loss) per common share      $       .30    $       .38     $       .14     $     (3.43)    $     (1.69)

Diluted weighted average shares outstanding       8,675,803      5,599,443       5,431,337       3,557,787       3,413,073 

SELECTED OPERATING DATA (UNAUDITED):                                                                                       

Number of domestic enplanements (in 000's) (1)      579,822        530,661         498,611         481,755         448,647 
Domestic enplanement percentage (2)                      70%            63%             64%             72%             76%
Revenue per passenger enplanement (3)           $      0.11    $      0.09     $      0.08     $      0.06     $      0.07 
Number of airlines at end of period (4)                  16             15              20              21              15 
Number of catalogs produced (in 000's) (5)           16,933         15,729          17,162          15,747          15,661 
Average number of pages per catalog (6)                 168            148             137             133             102 
Revenue per catalog produced (7)                $      2.53    $      1.97     $      1.57     $      1.40     $      1.56 
Revenue per page printed (8)                    $     0.015    $     0.013     $     0.011     $     0.011     $     0.015 

-11-

10-K
15th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 15th

                                                        [Enlarge/Download Table]

                                                                 DECEMBER 31,                              
                                -------------------------------------------------------------------------- 
                                   1997           1996            1995            1994           1993      
                                -----------    -----------     -----------     -----------     ----------- 
                                                                                                           
BALANCE SHEET DATA:                                                                                        
Cash and cash equivalents       $     9,412    $    11,491     $       775     $       896     $       171 
Working capital (deficit)             6,050          6,692          (4,734)         (7,540)         (3,580)
Total assets                         26,634         19,721           4,726           5,913          10,394 
Long-term debt                           66            139          10,818           8,082           2,978 
Shareholders' equity (deficit)  $    10,307    $     8,601     $   (15,033)    $   (15,791)    $    (3,603)

----------                                                                      
(1)      Represents the total number of revenue passengers flown on scheduled   
domestic airlines in the given period.                        

(2)      Represents the passenger enplanements on domestic airlines that carried
         the SkyMall catalog during the period as a percentage of total domestic
passenger enplanements in the period by all scheduled domestic
airlines.                                                     

(3)      Revenue per passenger enplanement is net merchandise sales for the     
         period divided by the number of domestic enplanements during the period
      on all scheduled domestic airlines that carried the SkyMall catalog.

(4)      Represents the number of airlines at end of period with which the      
        Company had an agreement to carry the SkyMall catalog. During the year
ended December 31, 1996, the Company eliminated unprofitable  
     circulation of the SkyMall catalog by eliminating routes on certain
   airlines and terminating agreements with certain smaller regional
  airlines. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."                         

(5)      Represents the number of SkyMall catalogs produced by the Company      
during the period for distribution to airlines.               

(6)      Represents the average number of pages in the SkyMall catalog during   
the period.                                                   

(7)      Represents net merchandise sales for the period divided by the number  
of SkyMall catalogs produced by the Company during the period.

(8)      Represents net merchandise sales for the period divided by the number  
        of SkyMall catalogs produced multiplied by the average number of pages
per catalog during the period.                                

-12-

10-K
16th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 16th
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS                                                 

  The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the       
Company's results of operations and financial condition. The discussion should  
be read in conjunction with the Financial Statements and the related notes      
thereto, and the Selected Financial and Operating Data contained elsewhere      
herein.                                                                         

RESULTS OF OPERATIONS                                                           

The following table sets forth, for the periods indicated, the
percentage relationships that certain items bear in relation to total revenues  
of the Company.                                                                 

                                                                [Download Table]

                                                          YEAR ENDED              
                                                          DECEMBER 31,            
                                           -------------------------------------- 
                                              1997          1996          1995    
                                           ----------    ----------    ---------- 
                                                                                  
Net merchandise sales                              70%           71%           62%
Placement fees and other                           30%           29%           38%
                                           ----------    ----------    ---------- 
Total revenues                                    100%          100%          100%
                                           ----------    ----------    ---------- 
Gross margin                                       42%           44%           43%
                                           ----------    ----------    ---------- 
Catalog expenses                                   15%           17%           22%
Selling expenses                                    6%            6%            5%
Customer service and fulfillment expenses           7%            6%            5%
General and administrative expenses                10%            8%            7%
                                           ----------    ----------    ---------- 
Total operating expense                            38%           37%           39%
                                           ==========    ==========    ========== 
Income from operations                              4%            7%            4%
                                           ==========    ==========    ========== 

1997 COMPARED TO 1996                                                           

    Revenue and Gross Margin. Net merchandise sales increased to $42.8
million in 1997 from $31.0 million in 1996, or 38 percent. The increase is      
primarily due to increases over the prior year in catalog distribution of eight 
percent and in net merchandise revenue per page printed of 13 percent. Placement
fees and other revenues increased to $18.0 million in 1997 from $12.7 million in
1996, or 41 percent. Gross margin increased to $25.7 million in 1997 from $19.4 
million in 1996, or 32 percent; however, gross margin declined to 42 percent of 
total revenues in 1997 from 44 percent in 1996. The decrease in gross margin    
percentage was primarily due to a change in the mix of agreements with merchants
which resulted in higher placement fees but retention of a lower percentage of  
net merchandise sales in 1997.                                                  

         Operating Expenses. Total operating expenses increased to $23.3 million
or 38 percent of total revenues in 1997 from $16.3 million or 37 percent of     
total revenues in 1996. Catalog expenses, consisting of catalog production,     
paper, and printing costs, increased to $9.1 million in 1997 from $7.7 million  
in 1996, or 17 percent. The increase is due to increases in catalog distribution
of eight percent and 14 percent in average pages per catalog in 1997 compared to
1996, offset in part by a decrease in average paper cost per hundred weight to  
$41 in 1997 from $55 in 1996. The Company's paper costs are anticipated to be   
approximately $45 to $48 per hundred weight in 1998. Selling expenses, which    
represent commissions paid to airlines and marketing partners, remained constant
at six percent of total revenues. Customer service and fulfillment expenses,    
which include a full-service customer contact center and a drop-ship and        
order-coordination center increased to $4.4 million, or seven percent of total  
revenues, in 1997 compared to $2.8 million, or six percent of total revenues, in
1996. The increase in customer service and fulfillment expense in 1997 is due   
primarily to the addition of call center personnel. General and administrative  
expenses increased to $6.3 million in 1997 from $3.3 million in 1996. The       
increase is due primarily to addition of key management personnel and other     
infrastructure investments to support anticipated future business growth. During
fourth quarter of 1997, the Company launched several new business initiatives   
including an international catalog, an electronic commerce initiative, and a    
specialty catalog distributed in membership-oriented airport lounges.           

-13-

10-K
17th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 17th
         Income from Operations. Income from operations was $2.4 million or four
percent of total revenues in 1997, a decrease from $3.1 million or seven percent
of total revenues in 1996, as a result of the items discussed above.            

        Income Taxes. Income tax expense amounted to $300,000 in 1997 compared
to $280,000 in 1996. Income tax expense in 1997 was lower than the statutory    
rate due to a reduction in certain temporary differences, as well as the        
elimination of the valuation allowance for deferred tax asset items. Income tax 
expense in 1996 was lower than the statutory rate due to the conversion from an 
S corporation to a C corporation in October, 1996.                              

1996 COMPARED TO 1995                                                           

    Revenue and Gross Margin. Net merchandise sales increased to $31.0
million in 1996 from $26.9 million in 1995, or 15 percent. Placement fees and   
other revenues decreased to $12.7 million in 1996 from $16.2 million in 1995, or
22 percent. The increase in net merchandise sales and decrease in placement fees
is a result of changes in participating merchant agreements and the composition 
of the pages within the catalog year over year. The net result of these changes 
increased gross margins as a percentage of total revenues to 44 percent in 1996 
compared to 43 percent in 1995.                                                 

         Operating Expenses. Total operating expenses decreased to $16.3 million
in 1996 from $17.0 million in 1995, or four percent, due primarily to a $1.9    
million reduction in catalog expenses. This reduction resulted from elimination 
of unprofitable circulation of the SkyMall catalog by eliminating routes on     
certain airlines, terminating agreements with certain regional airlines, and    
lower pricing on the Company's printing contract. The reduction in catalog      
expense was offset in part by increases of $0.3 million, $0.7 million, and $0.2 
million in selling, customer service and fulfillment, and general and           
administrative expenses, respectively.                                          

  Income from Operations. Income from operations increased to $3.1
million or seven percent of total revenues in 1996 from $1.5 million or four    
percent of revenues in 1995, as a result of the items discussed above.          

    Income Taxes. Prior to October 21, 1996, the Company elected to be
taxed under Subchapter S of the Internal Revenue Code and corresponding         
provisions of Arizona tax laws. As a result of the election, federal and state  
income taxes on the net income of the Company were payable personally by        
shareholders; accordingly, statements of income for periods prior to 1996 do not
include a provision for federal and state income taxes. Had the Company been a C
corporation for these periods, no federal or state income taxes would have been 
due as a result of net operating loss carry-forwards from the earlier years. In 
the fourth quarter of 1996 and thereafter, the Company became subject to        
federal and state income taxes as a result of its conversion from an S          
corporation to a C corporation and no net operating losses incurred while the   
Company was an S corporation are available to the Company to offset future      
earnings. As a result of the change from an S corporation to a C corporation,   
the Company recorded a provision for income taxes of $280,000 in 1996.          

LIQUIDITY AND CAPITAL RESOURCES                                                 

         Cash provided by operating activities was $2.6 million in 1997 compared
to $2.2 million in 1996 and $1.1 million in 1995. The improvement year over year
is primarily due to increases in net income.                                    

       Cash used in investing activities was $2.8 million in 1997 consisting
primarily of building improvements, furniture and fixtures, and computer        
software and hardware relating to the Company's customer contact center and     
corporate offices. Cash used in investing activities for 1996 and 1995 amounted 
to $0.4 million and $0.2 million, respectively, relating to telecommunications  
and computer equipment and furniture and fixtures. During 1998, management      
anticipates that capital expenditures will amount to $1.5 million relating      
primarily to building improvements and computer software and hardware.          

-14-

10-K
18th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 18th
    Cash used in financing activities amounted to $1.9 million in 1997
relating to payments on notes payable of $1.0 million and the repurchase of     
137,400 shares of the Company's common stock for $0.9 million. In addition, on  
March 9, 1998, the Company repurchased an additional 27,000 shares of the       
Company's common stock for $0.1 million. In 1996, the Company was recapitalized 
resulting in net cash provided by financing activities of $9.0 million,         
including net proceeds of the Company's initial public offering of common stock 
of $14.0 million, proceeds from issuance of preferred stock of $2.5 million,    
offset by a use of cash of $7.5 million for payment of debt obligations. For    
1995, cash used in financing activities amounted to $1.0 million, including $2.2
million for payment on shareholder notes payable and $1.2 million from note     
proceeds from shareholders.                                                     

   At December 31, 1997, the Company had net working capital of $6.1
million, which included cash and cash equivalents of $9.4 million. Additionally,
the Company maintains a reducing revolving line of credit at a bank with a      
maximum available line of $4.0 million. As of March 12, 1998, the entire balance
of the revolving line of credit was unused. Typically, cash provided from       
operations is adequate to supply working capital and provide for investing      
activities.                                                                     

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 December 31, 1997, the Company used the net proceeds  
as follows: approximately (i) $1.0 million for building improvements to the     
corporate offices and the customer contact center, (ii) $1.7 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) $0.4 million for  
development of additional circulation media, (vi) $0.9 million for the          
repurchase of 137,400 of the Company's common shares, and (vii) $5.6 million for
temporary investments consisting primarily of money market funds. 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.                                                             

-15-

10-K
19th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 19th
FLUCTUATIONS IN QUARTERLY RESULTS                                               

        The Company's operating results may fluctuate from period to period as
a result of the seasonal nature of the retail industry. The Company recognizes  
its highest sales levels during the fourth quarter holiday season, and the      
fourth quarter typically accounts for approximately 40 percent of the Company's 
annual merchandise sales.                                                       

        The following table sets forth certain unaudited information about the
Company's revenue and results of operations on a quarterly basis for 1997 and   
1996.                                                                           

                                                        [Enlarge/Download Table]

                                       YEAR ENDED                             YEAR ENDED              
                                    DECEMBER 31, 1997                      DECEMBER 31, 1996          
                          -------------------------------------  -------------------------------------
                          1ST QTR   2ND QTR   3RD QTR   4TH QTR  1ST QTR   2ND QTR   3RD QTR   4TH QTR
                          -------   -------   -------   -------  -------   -------   -------   -------
                                                                                                      
Merchandise sales, net    $ 8,084   $ 8,596   $ 9,175   $16,989  $ 5,882   $ 6,550   $ 6,474   $12,072

Placement fees and other    3,507     3,703     3,793     6,971    3,073     2,720     2,838     4,076
                          -------   -------   -------   -------  -------   -------   -------   -------
Total revenues             11,591    12,299    12,968    23,960    8,955     9,270     9,312    16,148
                          -------   -------   -------   -------  -------   -------   -------   -------
Gross margin                4,981     5,346     5,261    10,131    4,259     4,414     4,139     6,616
                          -------   -------   -------   -------  -------   -------   -------   -------
Catalog expenses            1,889     2,033     2,004     3,156    2,151     1,828     1,726     1,965

Selling expenses              670       702       736     1,342      514       620       531       811

Customer service and                                                                                  
Fulfillment expenses          987       987       912     1,552      457       515       539     1,312

General and                                                                                           
Administrative                                                                                        
Expenses                    1,092     1,443     1,394     2,411      753       695       842     1,050
                          -------   -------   -------   -------  -------   -------   -------   -------
Total operating                                                                                       
expenses                    4,638     5,165     5,046     8,461    3,875     3,658     3,638     5,138
                          -------   -------   -------   -------  -------   -------   -------   -------
Income from operations    $   343   $   181   $   215   $ 1,670  $   384   $   756   $   501   $ 1,478
                          =======   =======   =======   =======  =======   =======   =======   =======

RECENTLY ISSUED ACCOUNTING STANDARDS                                            

        In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures     
about Segments of an Enterprise and Related Information" ("SFAS 131"),          
respectively (collectively, the "Statements"). The Statements are effective for 
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards  
for reporting of comprehensive income and its components in annual financial    
statements. SFAS 131 establishes standards for reporting financial and          
descriptive information about an enterprise's operating segments in its annual  
financial statements and selected segment information in interim financial      
reports. Reclassification or restatement of comparative financial statements or 
financial information for earlier periods is required upon adoption of SFAS 130 
and SFAS 131, respectively. Application of the Statements' 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.                 

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK                                  

      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", "may" and similar     
expressions identify forward-looking statements. These forward looking          
statements reflect the Company's current views with respect to future events and
financial performance, but are subject to many uncertainties and factors        
relating to the Company's operations and business environment which may cause   
the actual results of the Company to be materially different from any future    
results expressed or implied by such forward-looking statements. Examples of    
such uncertainties include, but are not limited to, the Company's dependence on 
its relationships with its airline partners, fluctuations in paper prices and   
airline fuel costs, customer credit risks, competition from other catalog       
companies and retailers, and the Company's reliance on information and          
telecommunications systems, all of which are discussed more fully below and in  
the Company's other filings with                                                

-16-

10-K
20th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 20th
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.                                   

RISK FACTORS                                                                    

Limited History of Profitable Operations; No Assurance of Continued   
Profitability. The Company commenced operations in late 1990, and prior to      
1995 the Company incurred substantial losses. There can be no assurance         
that the Company's operations will remain profitable.                           

    No Assurance of Continued Growth. Since its inception, SkyMall has rapidly
expanded its operations, growing from total revenues of $0.02 million in 1990 to
total revenues of $60.8 million in 1997. The Company's continued growth will    
depend to a significant degree on its ability to increase revenue per passenger,
broaden its customer base by entering into relationships with new domestic and  
foreign airlines, and implement other programs that increase the circulation of 
the SkyMall catalog. The Company's ability to implement its growth strategy will
also depend on a number of other factors, many of which are or may be beyond the
Company's control, including (i) the ability of the Company to select products  
for its catalog that appeal to its customer base, (ii) sustained or increased   
levels of airline travel, particularly in domestic airline markets, (iii) the   
continued perception by participating merchants that the Company offers an      
effective marketing channel for their products and services, (iv) the Company's 
ability to attract, train, and retain qualified employees and management, and   
(v) the continued profitability of existing operations. There can be no         
assurance that the Company will be able to successfully implement its growth    
strategy or that its planned expansion will be profitable.                      

Dependence on Airline Relationships. The Company's business depends   
significantly on its relationships with airlines and its ability to have its    
catalogs placed on a substantial portion of domestic airline flights. The       
Company's agreements with its airline partners typically have one-year terms,   
but generally permit the airline to terminate the relationship on 60 to 180     
days' advance notice. There can be no assurance that the Company's airline      
partners will continue their relationships with the Company and the loss of one 
or more of the Company's significant airline partners could have a material     
adverse affect on the Company's financial condition and results of operations.  

     Increases in Paper Costs and Airline Fuel Prices. The cost of paper used to
print the Company's catalogs and the fees paid to airlines to reimburse them for
the increased fuel costs associated with carrying the Company's catalogs are    
significant expenses of the Company's operations. Historically, paper and       
airline fuel prices have fluctuated significantly from time to time. Prices in  
the paper market remain volatile and the Company anticipates that its paper     
costs will increase in 1998 in comparison to 1997. Any significant increases in 
paper or airline fuel costs reimbursable by the Company could have a material   
adverse effect on the Company's financial condition and results of operations.  

   Credit Risk. Some participating merchants agree to pay a placement fee to
the Company for inclusion of their merchandise in the SkyMall catalog. The      
Company records an account receivable from the merchant for the placement fee   
ratably for each month of the catalog issue. In some cases, the Company collects
the placement fee either from the merchant or by withholding it from amounts due
to the merchant for merchandise sold. 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 the Company, the Company may       
experience credit losses which could have a material adverse effect on the      
Company's financial condition and results of operations.                        

Competition. From time to time, competitors, typically other catalog  
retailers, have attempted to secure contracts with airlines to offer merchandise
to their passengers. In 1997, Northwest Airlines began offering a merchandise   
catalog to its customers through a competitor of the Company. Various           
international airlines also offer merchandise catalogs to their passengers      
through competitors of the Company. The Company also faces 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 the Company. In addition,   
the Company competes for customers with other in-flight marketing media, such as
airline-sponsored in-flight magazines and airline video programming. All of the 
products and services offered by the Company can also be found in other retail  
stores and catalogs.                                                            

-17-

10-K
21st Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 21st
Reliance on Information and Telecommunications Systems. The Company   
processes a large volume of relatively small orders. Consequently, the Company's
success depends to a significant degree on the effective operation of its       
information and telecommunications systems. Any extended failure of the         
Company's information and telecommunications systems could have a material      
adverse effect on the Company's financial condition and results of operations.  

Year 2000 Compliance. Many software programs use only two digits to   
identify the year in the date field. If such programs are not corrected, date   
data concerning the Year 2000 could cause many computer applications to fail,   
lock-up or generate erroneous results. The Company has committed personnel and  
resources to resolve potential Year 2000 issues, and is in the process of       
identifying and assessing its mission-critical systems related to the Year 2000.
Although the Company plans to address Year 2000 issues with respect to its      
mission-critical internal systems in sufficient time prior to the century       
rollover, there can be no assurance that there will not be interruption of      
operations or other limitations of system functionality, or that the Company    
will not incur substantial costs to avoid such occurrences. There can also be no
assurance that there will not be interruption of operations as a result of      
potential limitations of systems of the parties with whom the Company has       
relationships for product fulfillment and distribution. The Company is currently
assessing the cost to remediate its Year 2000 issues. Although the actual cost  
to remediate these issues is not yet fully known, based upon information to     
date, it is not expected that the remediation will have a material impact on the
Company's financial condition or operating results.                             

   Seasonality. The Company's business is seasonal in nature, with its sales
peak typically occurring during the holiday selling season of the fourth        
quarter. During 1997, approximately 40 percent of the Company's 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 the Company's    
results of operations.                                                          

Product Liability. The Company's catalog typically features over 1,250
products and services from more than 60 participating merchants. Generally, the 
Company's agreements with its participating merchants require the merchants to  
indemnify the Company 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, the Company maintains product liability insurance in the aggregate    
amount of $2.0 million and $1.0 million per occurrence. To the extent that a    
merchant was unable or unwilling to indemnify the Company as required, and any  
such losses exceeded the Company's insurance coverage or were not covered by the
Company's insurer, the Company's financial condition and results of operations  
could be materially adversely affected.                                         

Reliance on Key Personnel. The Company is dependent on the services of
Robert M. Worsley, its chairman, president and chief executive officer, and on  
the services of certain other executive officers. The loss of Mr. Worsley's     
services or of the services of certain other executive officers could have a    
material adverse effect on the Company.                                         

     Control by Shareholder. As of March 12, 1998, Mr. Worsley and his wife (the
"Worsleys") own and have options to purchase approximately 63.2% of the         
Company's outstanding Common Stock. Accordingly, the Worsleys 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 may also discourage or prevent any proposed        
takeover of the Company pursuant to a tender offer.                             

Volatility of Stock Prices. The trading price of the Common Stock is  
subject to wide fluctuations in response to variations in the Company's         
operating results, announcements by the Company or others, developments         
affecting the Company or its competitors, and other events and factors. In      
addition, the stock market has experienced extreme price and volume fluctuations
in recent years. These fluctuations have had a substantial effect on the market 
prices for many companies, often unrelated to their performance, and may        
adversely affect the market price for the Company's Common Stock.               

    No Dividends. The Company has not paid dividends on its Common Stock since
its inception and does not expect to pay cash or stock dividends on its Common  
Stock in the foreseeable future.                                                

-18-

10-K
22nd Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 22nd
   Issuance of Preferred Stock; Barriers to Takeover. The Board of Directors
may issue one or more series of Preferred Stock, without any action on the part 
of the shareholders of the Company, the terms of which may adversely affect the 
rights of holders of Common Stock. Further, the issuance of Preferred Stock may 
be used as an "anti-takeover" device without further action on the part of the  
shareholders. Issuance of Preferred Stock, which may be accomplished through a  
public offering or a private placement to parties favorable to current          
management, may dilute the voting power of holders of Common Stock (such as by  
issuing Preferred Stock with super-voting rights) and may render more difficult 
the removal of current management, even if such removal may be in the           
shareholders' best interests. Any such issuance of Preferred Stock could prevent
the holders of Common Stock from realizing a premium on their shares. The       
Company's Articles of Incorporation and Bylaws also contain a certain number of 
provisions which could deter takeover attempts.                                 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.             

Not Applicable.                                               

-19-

10-K
23rd Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 23rd
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

 INDEX TO FINANCIAL STATEMENTS

                                                        [Enlarge/Download Table]
                                                                                                         
Report of Independent Public Accountants............................................................. F-2

Balance Sheets as of December 31, 1997 and 1996...................................................... F-3

Statements of Income for the Years Ended December 31, 1997, 1996 and 1995............................ F-4

Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1997, 1996 and 1995.... F-5

Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995........................ F-6

Notes to Financial Statements........................................................................ F-7

F-1 

10-K
24th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 24th
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of SkyMall, Inc.:                                           

    We have audited the accompanying balance sheets of SkyMall, Inc. (a Nevada
corporation) as of December 31, 1997 and 1996, and the related statements of    
income, shareholders' equity (deficit) and cash flows for each of the three     
years in the period ended December 31, 1997. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express an 
opinion on these financial statements based on our audits.                      

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SkyMall, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with    
generally accepted accounting principles.                                       

           ARTHUR ANDERSEN LLP

Phoenix, Arizona,                                                               
February 17, 1998.                                                    

F-2 

10-K
25th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 25th
 SKYMALL, INC.

BALANCE SHEETS
 (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PAR VALUE)

                                                        [Enlarge/Download Table]

                                                                          DECEMBER 31,     
                                                                        1997         1996  
                                                                     ---------     --------
                                                                                           
                                     ASSETS                                                
CURRENT ASSETS:                                                                            
   Cash and cash equivalents                                         $   9,412     $ 11,491
   Accounts receivable, net                                             10,427        4,150
   Prepaid catalog costs and other                                       1,863        1,914
   Deferred income taxes                                                   500           59
                                                                     ---------     --------
         Total current assets                                           22,202       17,614
PROPERTY AND EQUIPMENT, net                                              4,133        1,949
OTHER ASSETS, net                                                          299          158
                                                                     ---------     --------
         TOTAL ASSETS                                                $  26,634     $ 19,721
                                                                     =========     ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY                                 

CURRENT LIABILITIES:                                                                       
   Accounts payable                                                  $  13,669     $  8,623
   Accrued liabilities                                                   1,863          792
   Income taxes                                                            556          280
   Reserve for restructure charges                                          --          165
   Current portion of notes payable and capital leases                      64          942
   Notes payable to shareholders                                            --          120
                                                                     ---------     --------
         Total current liabilities                                      16,152       10,922

DEFERRED INCOME TAXES                                                      109           59
NOTES PAYABLE AND CAPITAL LEASES, net of                                                   
   current portion                                                          66          139
                                                                     ---------     --------
         Total liabilities                                              16,327       11,120
                                                                     ---------     --------

COMMITMENTS AND CONTINGENCIES (Note 6)                                                     

SHAREHOLDERS' EQUITY:                                                                      
   Preferred stock, $0.001 par value; 10,000,000 shares authorized;                        
      no shares issued and outstanding                                      --           --
   Common stock, $0.001 par value; 50,000,000 shares authorized;                           
     Issued and outstanding shares -                                                       
     8,516,600 in 1997 and 8,654,000 in 1996                                 9            9
   Additional paid-in capital                                            6,723        7,588
   Retained earnings                                                     3,575        1,004
                                                                     ---------     --------
         Total shareholders' equity                                     10,307        8,601
                                                                     ---------     --------
         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                  $  26,634     $ 19,721
                                                                     =========     ========

The accompanying notes are an integral part of these balance sheets.

F-3 

10-K
26th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 26th
 SKYMALL, INC.

STATEMENTS OF INCOME
 (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE)

                                                        [Enlarge/Download Table]

                                                          FOR THE YEAR ENDED            
                                                             DECEMBER 31,               
                                              ----------------------------------------- 
                                                  1997           1996           1995    
                                              -----------    -----------    ----------- 
                                                                                        
REVENUES:                                                                               
   Merchandise sales, net                     $    42,844    $    30,978    $    26,883 
   Placement fees and other                        17,974         12,707         16,198 
                                              -----------    -----------    ----------- 
         Total revenues                            60,818         43,685         43,081 
COST OF GOODS SOLD                                 35,099         24,257         24,564 
                                              -----------    -----------    ----------- 
         Gross margin                              25,719         19,428         18,517 
                                              -----------    -----------    ----------- 
OPERATING EXPENSES:                                                                     
   Catalog expenses                                 9,082          7,670          9,532 
   Selling expenses                                 3,450          2,476          2,229 
   Customer service and fulfillment expenses        4,438          2,823          2,136 
   General and administrative expenses              6,340          3,340          3,112 
                                              -----------    -----------    ----------- 
         Total operating expenses                  23,310         16,309         17,009 
                                              -----------    -----------    ----------- 

INCOME FROM OPERATIONS                              2,409          3,119          1,508 

   Interest expense                                   (71)           (60)           (92)
   Interest expense to shareholders                   (28)          (669)          (663)
   Interest and other income                          561             78              5 
                                              -----------    -----------    ----------- 
INCOME BEFORE INCOME TAXES                          2,871          2,468            758 

   Income taxes                                       300            280             -- 
                                              -----------    -----------    ----------- 
NET INCOME                                          2,571          2,188            758 

PREFERRED STOCK DIVIDENDS                              --             77             -- 
                                              -----------    -----------    ----------- 
NET INCOME AVAILABLE                                                                    
   TO COMMON SHAREHOLDERS                     $     2,571    $     2,111    $       758 
                                              ===========    ===========    =========== 
BASIC NET INCOME  PER                                                                   
   COMMON SHARE                               $       .30    $       .40    $       .15 
                                              ===========    ===========    =========== 
BASIC WEIGHTED AVERAGE                                                                  
   SHARES OUTSTANDING                           8,620,482      5,303,181      5,150,000 
                                              ===========    ===========    =========== 
DILUTED NET INCOME  PER                                                                 
   COMMON SHARE                               $       .30    $       .38    $       .14 
                                              ===========    ===========    =========== 
DILUTED WEIGHTED AVERAGE                                                                
   SHARES OUTSTANDING                           8,675,803      5,599,443      5,431,337 
                                              ===========    ===========    =========== 

The accompanying notes are an integral part of these financial statements.

F-4 

10-K
27th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 27th
 SKYMALL, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 (AMOUNTS IN THOUSANDS, EXCEPT SHARES)

                                                        [Enlarge/Download Table]

                                                                                                           RETAINED                
                                                                                              ADDITIONAL   EARNINGS/               
                                        CONVERTIBLE PREFERRED STOCK       COMMON STOCK         PAID-IN    (ACCUMULATED             
                                            SHARES       AMOUNT        SHARES       AMOUNT     CAPITAL      DEFICIT)      TOTAL    
                                          ----------   ----------    ----------   ----------  ----------   ----------   ---------- 
                                                                                                                                   
BALANCE, January 1, 1995                          --   $       --     5,150,000   $        5  $   18,438   $  (34,234)  $  (15,791)
   Net income                                     --           --            --           --          --          758          758 
                                          ----------   ----------    ----------   ----------  ----------   ----------   ---------- 
BALANCE, December 31, 1995                        --           --     5,150,000            5      18,438      (33,476)     (15,033)
   Issuance of preferred shares,                                                                                                   
     net of issuance costs                     3,000        2,555            --           --          --           --        2,555 
   Conversion of shareholder debt                                                                                                  
     to preferred shares                       5,000        5,000            --           --          --           --        5,000 
   Payment of dividend on preferred                                                                                                
     shares                                       --          (77)           --           --          --           --          (77)
   Issuance of common shares upon                                                                                                  
     conversion of preferred shares           (8,000)      (7,478)    1,504,000            2       7,476           --           -- 
   Issuance of shares pursuant to IPO,                                                                                             
     net of issuance costs                        --           --     2,000,000            2      13,966           --       13,968 
   Elimination of accumulated                                                                                                      
     deficit upon conversion from S                                                                                                
     to C corporation                             --           --            --           --     (32,292)      32,292           -- 
   Net income                                     --           --            --           --          --        2,188        2,188 
                                          ----------   ----------    ----------   ----------  ----------   ----------   ---------- 
BALANCE, December 31, 1996                        --           --     8,654,000            9       7,588        1,004        8,601 

   Repurchase of common                                                                                                            
     shares for cash                              --           --      (137,400)          --        (865)          --         (865)
   Net income                                     --           --            --           --          --        2,571        2,571 
                                          ----------   ----------    ----------   ----------  ----------   ----------   ---------- 
BALANCE, December 31, 1997                        --   $       --     8,516,600   $        9  $    6,723   $    3,575   $   10,307 
                                          ==========   ==========    ==========   ==========  ==========   ==========   ========== 

The accompanying notes are an integral part of these financial statements.

F-5 

10-K
28th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 28th
 SKYMALL, INC.

STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                           FOR THE YEAR ENDED       
                                                                               DECEMBER 31,         
                                                                     ------------------------------ 
                                                                       1997       1996       1995   
                                                                     --------   --------   -------- 
                                                                                                    
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:                                                        
   Net income                                                        $  2,571   $  2,188   $    758 
   Adjustments to reconcile net income to net cash                                                  
     provided by operating activities-                                                              
     Depreciation and amortization                                        609        344        244 
     Provision for doubtful accounts                                      343         --         -- 
     Deferred income taxes                                               (391)        --         -- 
     (Increase) decrease in:                                                                        
         Accounts receivable                                           (6,620)    (3,258)       174 
         Prepaid catalog costs and other                                   51       (652)       612 
         Other assets                                                    (174)        (2)        -- 
     (Decrease) increase in:                                                                        
         Accounts payable                                               5,046      3,928        341 
         Accrued liabilities                                            1,071        463       (283)
         Income taxes                                                     276        280         -- 
         Reserve for restructure charges                                 (165)    (1,111)      (768)
                                                                     --------   --------   -------- 
         Net cash provided by operating activities                      2,617      2,180      1,078 
                                                                     --------   --------   -------- 
CASH FLOWS USED IN INVESTING ACTIVITIES:                                                            
   Purchase of property and equipment                                  (2,760)      (448)      (164)
                                                                     --------   --------   -------- 
         Net cash used in investing activities                         (2,760)      (448)      (164)
                                                                     --------   --------   -------- 
CASH FLOWS PROVIDED BY (USED IN)                                                                    
FINANCING ACTIVITIES:                                                                               
   Payments on notes payable and capital leases                          (951)    (4,090)    (2,235)
   Proceeds from (payments on) notes payable to shareholders, net        (120)    (3,372)     1,200 
   Proceeds from issuance of preferred stock, net of issuance costs        --      2,555         -- 
   Payment of dividends on preferred stock                                 --        (77)        -- 
   Proceeds from issuance of common stock, net of issuance costs           --     13,968         -- 
   Repurchase of common shares                                           (865)        --         -- 
                                                                     --------   --------   -------- 
         Net cash provided by (used in) financing activities           (1,936)     8,984     (1,035)
                                                                     --------   --------   -------- 
INCREASE (DECREASE) IN CASH AND                                                                     
   CASH EQUIVALENTS                                                    (2,079)    10,716       (121)

CASH AND CASH EQUIVALENTS,                                                                          
   beginning of year                                                   11,491        775        896 
                                                                     --------   --------   -------- 
CASH AND CASH EQUIVALENTS,                                                                          
   end of year                                                       $  9,412   $ 11,491   $    775 
                                                                     ========   ========   ======== 
Income taxes paid                                                    $    415   $     --   $     -- 
                                                                     ========   ========   ======== 
Total interest paid                                                  $     99   $  1,217   $    356 
                                                                     ========   ========   ======== 
Interest paid to shareholders                                        $     28   $  1,157   $    272 
                                                                     ========   ========   ======== 
SUPPLEMENTAL DISCLOSURE OF                                                                          
   NONCASH ACTIVITY:                                                                                
   Notes payable converted to notes payable to shareholders          $     --   $     --   $  4,000 
                                                                     ========   ========   ======== 
   Capital leases incurred                                           $     --   $    204   $     -- 
                                                                     ========   ========   ======== 
   Notes payable to shareholders converted to preferred stock        $     --   $  5,000   $     -- 
                                                                     ========   ========   ======== 

The accompanying notes are an integral part of these financial statements.

F-6 

10-K
29th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 29th
 SKYMALL, INC.

 NOTES TO FINANCIAL STATEMENTS

(1)      THE COMPANY:                                                           

Nature of Organization                                                

SkyMall, Inc. ("the Company") was incorporated in 1989 as an Arizona  
corporation (and reincorporated in Nevada in October 1996). The Company provides
retail merchandise service through inflight catalogs placed on domestic and     
international airlines. The Company maintains substantially no inventories. All 
products displayed in the Company's catalogs are carried and fulfilled by       
participating merchants. The Company performs order taking and payment          
processing services for participating merchants. At December 31, 1997, the      
Company had agreements with 16 airlines to place its catalogs in aircraft seat  
pockets. The Company operates on a calendar year end of December 31.            

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                            

Use of Estimates in Preparation of Financial Statements               

The preparation of financial statements in conformity with generally  
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities,         
disclosure of contingent assets and liabilities at the date of the financial    
statements, and the reported amounts of revenues and expenses during the        
reporting period. Actual results could differ from those estimates. In          
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.                                                  

Reclassifications                                                     

Certain reclassifications have been made in prior period financial    
statements to conform to the current presentation.                              

Revenue Recognition                                                   

   The Company has two primary sources of revenue, net merchandise sales and
placement fees. Net merchandise sales represent catalog product sales at retail 
prices and are recognized as revenue upon shipment of product by participating  
merchants, net of estimated returns and allowances. Placement fees represent    
fees paid to the Company by participating merchants for inclusion of their      
products in the Company's catalogs. Placement fee revenue is recognized on a    
straight-line basis over the circulation period of a catalog, generally three   
months. Cost of goods sold represents amounts paid to participating merchants   
for products sold in the Company's catalogs. Usually, the higher the placement  
fee the higher the percentage of retail price of product sales remitted to      
participating merchants.                                                        

Shipping and Handling Charges                                         

 The Company charges its retail customers standard fees for shipping and
handling costs. The fees collected are offset against the amounts charged the   
Company by its merchants for provided fulfillment services. Any net amount      
remaining is included in placement fees and other revenue in the accompanying   
financial statements and is not significant for any of the periods presented.   

F-7 

10-K
30th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 30th
Impairment of Long-Lived Assets                                       

 The Company assesses the recoverability of long-lived assets, including
equipment, leasehold improvements, and purchased contracts, by determining      
whether the assets can be recovered from undiscounted future cash flows. The    
amount of impairment, if any, is measured based on projected future cash flows  
using a discount rate reflecting the Company's average cost of funds.           

    Recoverability of long-lived assets is dependent upon, among other things,
the Company's ability to continue to achieve profitability, in order to meet its
obligations when they become due. In the opinion of management, based upon      
current information, long-lived assets will be recovered over the period of     
benefit.                                                                        

Cash and Cash Equivalents                                             

     Cash equivalents include investments purchased with an original maturity of
three months or less.                                                           

Accounts Receivable                                                   

    Accounts receivable at December 31, 1997 and 1996 include amounts due from
credit card companies, items shipped but not billed, and merchant placement     
fees. The allowance for doubtful accounts as of December 31, 1997 and 1996 was  
approximately $222,000 and $175,000, respectively.                              

Prepaid Catalog Costs and Other                                       

     Prepaid catalog costs primarily include catalog production costs, which are
deferred and amortized on a straight-line basis over the period each catalog    
issue is in use, currently three months.                                        

Income Taxes                                                          

Through October 21, 1996, the stockholders of the Company elected to  
utilize the provisions of subchapter S of the Internal Revenue Code. In lieu of 
corporate income taxes, the shareholders of a subchapter S corporation are taxed
on their portion of the Company's taxable income. Therefore, no provision or    
liability for Federal income taxes was recorded through October 21, 1996.       
Effective October 22, 1996, the Company's S corporation status was terminated in
connection with its issuance of preferred stock, and the Company became a C     
corporation. Pursuant to the rules of the Securities and Exchange Commission,   
the accumulated deficit at October 22, 1996 of $32,292,000 has been reclassified
to additional paid-in capital. Concurrently with this change in tax status, the 
Company adopted the provisions of Statement of Financial Accounting Standards   
No. 109, "Accounting for Income Taxes" ("SFAS No. 109").                        

Stock-based Compensation                                              

The Company accounts for its stock-based compensation plans under     
Accounting Principles Board Opinion No. 25, ("APB No. 25"), under which no      
compensation cost is recognized. In October 1995, the Financial Accounting      
Standards Board issued Statement of Financial Accounting Standards No. 123,     
"Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123        
requires companies that account for stock-based compensation as prescribed by   
APB No. 25 to disclose the pro forma effects on earnings and earnings per share 
as if SFAS No. 123 had been adopted and certain other disclosures with respect  
to stock compensation and the assumptions used to determine the pro forma       
effects of SFAS No. 123. See Note 7 for these disclosures.                      

F-8 

10-K
31st Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 31st
Concentration of Credit Risk                                          

Financial instruments that potentially subject the Company to         
concentrations of credit risk consist of accounts receivable and accounts       
payable.                                                                        

Concentrations of credit risk with respect to accounts receivable and 
accounts payable may be limited due to the large number of participating        
merchants comprising the balances and the fact that certain receivable and      
payable balances may be offset. The Company performs ongoing credit evaluations 
of its merchants, but does not require collateral to support receivables. In    
addition, the Company has a right of offset using amounts payable to merchants  
on future purchases. The Company has established an allowance for doubtful      
accounts based on factors surrounding the credit risk of specific customers,    
historical trends, and other information.                                       

Net Income Per Common Share                                           

 The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share", resulting in the restatement of earnings per share   
for all periods presented. 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):                                            

                                                                [Download Table]

                                                       FOR THE YEAR ENDED          
                                                          DECEMBER 31,             
                                              -------------------------------------
                                                 1997         1996          1995   
                                              ----------   ----------    ----------
                                                                                   
Basic net income per common share:                                                 
     Income available to common shareholders  $    2,571   $    2,111    $      758
                                              ==========   ==========    ==========
     Weighted average common shares                8,621        5,303         5,150
                                              ==========   ==========    ==========
     Basic per share amount                   $      .30   $      .40    $      .15
                                              ==========   ==========    ==========


                                                        FOR THE YEAR ENDED         
                                                           DECEMBER 31,            
                                              -------------------------------------
                                                 1997         1996          1995   
                                              ----------   ----------    ----------
                                                                                   
Diluted net income per common share:                                               
     Income available to common shareholders  $    2,571   $    2,111    $      758
                                              ==========   ==========    ==========
     Weighted average common shares                8,621        5,303         5,150
     Options and warrants assumed converted           55          296           281
                                              ----------   ----------    ----------
     Total common shares plus assumed                                              
       conversions                                 8,676        5,599         5,431
                                              ==========   ==========    ==========
        Diluted per share amount              $      .30   $      .38    $      .14
                                              ==========   ==========    ==========

Financial Instruments                                                 

The Company's financial instruments include cash, accounts receivable,
accounts payable, notes payable, and capital leases. Due to the short-term      
nature of cash, accounts receivable, and accounts payable, the fair value of    
these instruments approximates their recorded value. In the opinion of          
management, based upon current information, the fair value of notes payable and 
capital leases approximates market value. The Company does not have material    
financial instruments with off-balance sheet risk.                              

F-9 

10-K
32nd Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 32nd
Recently Issued Accounting Standards                                  

    In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about   
Segments of an Enterprise and Related Information" ("SFAS 131"), respectively   
(collectively, the "Statements"). The Statements are effective for fiscal years 
beginning after December 15, 1997. SFAS 130 establishes standards for reporting 
of comprehensive income and its components in annual financial statements. SFAS 
131 establishes standards for reporting financial and descriptive information   
about an enterprise's operating segments in its annual financial statements and 
selected segment information in interim financial reports. Reclassification or  
restatement of comparative financial statements or financial information for    
earlier periods is required upon adoption of SFAS 130 and SFAS 131,             
respectively. Application of the Statements' 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.                    

(3)      PROPERTY AND EQUIPMENT:                                                

Property and equipment are stated at historical cost. Depreciation of 
property and equipment is provided over the estimated useful lives of the       
respective assets using the straight-line method. Leasehold improvements are    
amortized on a straight-line basis over their estimated useful lives or the     
terms of the respective leases, whichever is shorter. Assets leased under       
capital lease agreements are carried in property and equipment, and related     
lease amortization is included in accumulated depreciation. The following is a  
summary of property and equipment (amounts in thousands):                       

                                                                [Download Table]

                                       ESTIMATED          DECEMBER 31,     
                                         USEFUL     ---------------------- 
                                      LIFE (YEARS)     1997        1996    
                                      -----------   ---------    --------- 
                                                                           
Equipment and software                    3-10      $   4,051    $   2,342 
Buildings and leasehold improvements     15-31          2,022        1,320 
Furniture, fixtures and other             3-7             586          273 
                                                    ---------    --------- 
                                                        6,659        3,935 
Accumulated depreciation                               (2,526)      (1,986)
                                                    ---------    --------- 
                                                    $   4,133    $   1,949 
                                                    =========    ========= 

(4)     OTHER ASSETS:                                                         

  The following is a summary of other assets which are amortized using the
straight-line method over their estimated useful lives (amounts in thousands):  

                                                                [Download Table]

                                                ESTIMATED          DECEMBER 31,     
                                                  USEFUL     ---------------------- 
                                               LIFE (YEARS)    1997         1996    
                                               -----------   ---------    --------- 
                                                                                    
Purchased airline contracts                         10       $     323    $     326 
Other, primarily non-current prepaid expenses                      195           21 
                                                             ---------    --------- 
                                                                   518          347 
Accumulated amortization                                          (219)        (189)
                                                             ---------    --------- 
                                                             $     299    $     158 
                                                             =========    ========= 

F-10

10-K
33rd Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 33rd
(5)      NOTES PAYABLE AND CAPITAL LEASES:                                      

Notes payable consisted of the following (amounts in thousands):        

                                                        [Enlarge/Download Table]

                                                                             DECEMBER 31,     
                                                                         -------------------- 
                                                                           1997        1996   
                                                                         --------    -------- 
                                                                                              
Capital leases, interest at varying rates of 18% to 23%, due in monthly                       
    installments (including interest) of approximately $7,000                                 
    through May 2001, secured by equipment                               $    130    $    180 

Note payable, interest at 8%, satisfied June 1997                              --          20 

Notes payable to merchants, satisfied November 1997                            --         881 
                                                                         --------    -------- 
                                                                              130       1,081 
Less:  current portion                                                        (64)       (942)
                                                                         --------    -------- 
                                                                         $     66    $    139 
                                                                         ========    ======== 

     At December 31, 1997, aggregate annual maturities of capital leases were as
follows (amounts in thousands):                                                 

                                                                [Download Table]
                                           
1998                                $    64
1999                                     26
2000                                     28
2001                                     12
                                    -------
                                    $   130
                                    =======

     In January 1997, the Company obtained a $5 million reducing, revolving line
of credit ("the Line") from a bank. Available borrowings are reduced by $1      
million annually, until February 2002, when the Line expires. At the Company's  
option, advances made on the Line bear interest at either Prime to Prime plus   
1.5 percent, or LIBOR plus 2.25 to 3.25 percent, depending on certain financial 
ratios at the time of advance. The Line is collateralized by substantially all  
assets of the Company, and contains covenants that require maintenance of       
certain financial ratios. No balance was outstanding on the Line at December 31,
1997.                                                                           

     At December 31, 1996, the Company had current notes payable to shareholders
in the amount of $120,000 relating to royalties and accrued interest. These     
notes were satisfied in February 1997.                                          

(6)  COMMITMENTS AND CONTINGENCIES:                                             

Litigation                                                            

   The Company is from time-to-time subject to complaints and claims arising
in the ordinary course of business. Management believes that none of the claims 
and complaints of which it is currently aware will materially affect its        
business, financial position or future operating results, although no assurance 
can be given with respect to the ultimate outcome of any such claims or with    
respect to the occurrence of any future claims.                                 

F-11

10-K
34th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 34th
Leases                                                                

 The Company has entered into several operating leases for equipment and
facilities. As of December 31, 1997, the future minimum payments under these    
leases are as follows (amounts in thousands):                                   

                                                                [Download Table]
                                           
1998                                $    92
1999                                     54
2000                                     43
2001                                     43
2002                                     43
Thereafter                              554
                                    -------
                                    $   829
                                    =======

 Other equipment and property are leased on a monthly basis. Total lease
expense for the years ended December 31, 1997, 1996 and 1995 was approximately  
$106,000, $140,000, and $193,000, respectively.                                 

Lease Revenue                                                         

     The Company leases certain of its facilities to others under non-cancelable
leases and month-to-month agreements. Lease revenue of approximately $99,000,   
$118,000, and $110,000 for the years ended December 31, 1997, 1996 and 1995,    
respectively, is included in interest and other income in the accompanying      
financial statements. As of December 31, 1997, future minimum lease payments to 
be received under non-cancelable leases are as follows (amounts in thousands):  

                                                                [Download Table]
                                           
1998                                $   112
1999                                    103
2000                                     68
2001                                     68
2002                                     23
                                    -------
                                    $   374
                                    =======

401(k) Plan                                                           

Under the Company's 401(k) plan (the "Plan") adopted in 1992, eligible
employees may direct that a portion of their compensation, up to a legally      
established maximum, be withheld by the Company and contributed to their        
account. All contributions are placed in a trust fund which is invested by the  
Plan's trustee. The Plan permits participants to direct the investment of their 
account balances among mutual or investment funds and the Company provides a    
matching contribution of 50 percent of the first six percent a participant's    
contributions.                                                                  

     The total contributions made by the Company during the years ended December
31, 1997, 1996 and 1995 were approximately $33,000, $13,000 and $5,000,         
respectively.                                                                   

Employment contracts                                                  

In September 1996, the Company entered into an employment contract    
agreement with its president and chief executive officer, which expires         
September 30, 1999, at an annual compensation level of $190,000 and bonuses as  
the Board of Directors may specify. The contract may be renewed for a two-year  
period upon its initial expiration. The contract may be terminated earlier under
terms and circumstances described in the agreement. Under certain circumstances,
the president and chief executive officer may receive up to two years of base   
salary upon termination.                                                        

F-12

10-K
35th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 35th
(7)      STOCK-BASED COMPENSATION:                                              

Stock Option Plans                                                    

The Company has an incentive and nonqualified stock option plan, which
allows the Company to grant to officers and key employees, (the Officer and     
Employee Plan) options covering up to 650,000 shares of common stock at an      
exercise price of not less than fair market value at the date of grant.         

  Under the Officer and Employee Plan, the option exercise price equals or
exceeds the stock's fair market value on date of grant. The Plan options        
generally fully vest on varying schedules upon completion of three years of     
employment; options expire ten years after the date of grant or three months    
after grantee's employment termination.                                         

   In October 1996, the Company adopted a Non-Employee Director Stock Option
Plan (the Director Plan), which allows the Company to grant non-employee        
directors options covering up to 100,000 shares of common stock at an exercise  
price of not less than fair market value on the date of grant.                  

Under the Director Plan, each non-employee Board member is granted an 
option to purchase 5,000 common shares upon appointment to the Board and an     
option to purchase 3,000 shares annually, subject to certain limitations.       
Options are fully vested upon grant and expire ten years after the date of      
issuance.                                                                       

   A summary of the status of the Company's Plans at December 31, 1997, 1996
and 1995, and changes during the years ended December 31, 1997, 1996 and 1995,  
is presented in the table below:                                                

                                                        [Enlarge/Download Table]

                                                            DECEMBER 31,                        
                                    ----------------------------------------------------------- 
                                          1997                  1996                1995        
                                    -----------------    -----------------    ----------------- 
                                              Weighted             Weighted             Weighted
                                              Average              Average              Average 
                                     Shares   Exercise    Shares   Exercise    Shares   Exercise
                                     (000)     Price      (000)     Price      (000)     Price  
                                    -------   -------    -------   -------    -------   ------- 
                                                                                                
Outstanding at beginning of period      458   $  6.21        271   $  7.39        271   $  7.39 
Granted                                 319      6.52        187      5.82         --        -- 
Exercised                                --        --         --        --         --        -- 
Cancel shares repriced                   --        --       (135)     7.39         --        -- 
Shares repriced                          --        --        135      5.56         --        -- 
Forfeited                              (173)     6.13         --        --         --        -- 
Expired                                  --        --         --        --         --        -- 
                                    -------   -------    -------   -------    -------   ------- 
Outstanding at end of period            604   $  6.39        458   $  6.21        271   $  7.39 
                                    =======   =======    =======   =======    =======   ======= 
Exercisable at end of period            284                  314                  173           
                                    =======              =======              =======           

F-13

10-K
36th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 36th
   The Company accounts for its stock-based compensation plans under APB No.
25, under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to or in excess of the fair value of  
the Company's common stock on the date of grant. The Company estimated the fair 
value of each option grant as of the date of grant using the Black-Scholes      
option pricing model with the following weighted average assumptions: risk-free 
interest rate of 5.5 percent, expected life of 1 to 10 years, dividend rate of  
zero, and expected volatility of approximately 45, 50 and 50 percent for 1997,  
1996 and 1995, respectively. Using these assumptions, the fair value of the     
stock options granted in 1997, 1996, and 1995 is approximately $709,000,        
$461,000, and zero respectively, which would be amortized as compensation       
expense over the vesting period of the options. Options generally vest over     
three years. Had compensation costs been determined consistent with SFAS No.    
123, utilizing the assumptions detailed above, the Company's net income and net 
income per common share would have been reduced to the following pro forma      
amounts (amounts in thousands):                                                 

                                                                [Download Table]

                                                       FOR THE YEAR ENDED        
                                                          DECEMBER 31,           
                                              -----------------------------------
                                                1997         1996         1995   
                                              ---------    ---------    ---------
                                                                                 
Net income available to common shareholders:                                     
     As reported                              $   2,571    $   2,111    $     758
     Pro forma                                    2,378        1,866          758

Basic net income per common share                                                
     As reported                              $     .30    $     .40    $     .15
     Pro forma                                      .28          .35          .15

Diluted net income per common share                                              
     As reported                              $     .30    $     .38    $     .14
     Pro forma                                      .27          .33          .14

The SFAS No. 123 method of accounting has not been applied to options 
granted prior to January 1, 1995. The resulting pro forma compensation cost may 
not be representative of that expected in future years.                         

In January and February 1998, the Company granted 23,500 options at   
exercise prices ranging from $5.00 to $5.06 under the Officer and Employee plan.

Stock Warrants                                                        

In October 1996, the Company issued 200,000 warrants to underwriters, 
180,000 warrants to preferred shareholders, and 58,824 warrants to a merchant to
purchase common stock at exercise prices of $9.60, $8.00, and $8.00 per         
share, respectively. In October 1997, the Company issued 100,000 warrants to    
outside consultants to purchase common stock at an exercise price of $8.00 per  
share.                                                                          

(8)    INCOME TAXES:                                                            

   Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for future tax consequences attributable to      
differences between the financial statement carrying amounts of existing assets 
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted   
tax rates expected to apply to taxable income in years in which those temporary 
differences are expected to be recovered or settled. The effect on the deferred 
tax assets and liabilities of a change in tax rates is recognized in income in  
the period that includes the enactment date.                                    

   During 1997, the Company's valuation allowance was entirely eliminated in
light of sustained profitability since termination of the S Corporation status. 

    Pro forma income taxes have not been provided for 1995. As a result of the
losses recognized in the related period, any income tax benefit would have been 
fully offset by the establishment of a valuation allowance for deferred tax     
assets had the Company been taxed as a subchapter C corporation.                

F-14

10-K
37th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 37th
     Significant components of the Company's deferred tax assets and liabilities
are as follows (amounts in thousands):                                          

                                                                [Download Table]

                                                                 DECEMBER 31,   
                                                              ----------------- 
                                                               1997      1996   
                                                              -------   ------- 
                                                                                
Deferred tax liabilities:                                                       
     Tax depreciation in excess of  book depreciation         $   109   $    59 
                                                              -------   ------- 
Total deferred tax liabilities                                    109        59 
                                                              -------   ------- 

Deferred tax assets:                                                            
     Nondeductible reserves for bad debts and sales returns       252       787 
     Restructure reserve                                           --        86 
     Accrued liabilities                                          248        94 
                                                              -------   ------- 
Total deferred tax assets                                         500       967 
     Valuation allowance                                           --      (908)
                                                              -------   ------- 
Net deferred tax assets                                           500        59 
                                                              -------   ------- 
Net deferred taxes                                            $   391   $    -- 
                                                              =======   ======= 

   Significant components of the federal and state income tax expense are as
follows (amounts in thousands):                                                 

                                                                [Download Table]

                                                              FOR THE YEAR ENDED
                                                                 DECEMBER 31,   
                                                              ----------------- 
                                                               1997      1996   
                                                              -------   ------- 
                                                                                
Current:                                                                        
     Federal                                                  $   587   $   190 
     State                                                        104        90 
                                                              -------   ------- 
       Total current                                              691       280 
                                                              -------   ------- 
Deferred:                                                                       
     Federal                                                     (332)       -- 
     State                                                        (59)       -- 
                                                              -------   ------- 
       Total deferred                                            (391)       -- 
                                                              -------   ------- 

Income tax expense                                            $   300   $   280 
                                                              =======   ======= 

    A reconciliation of the Company's effective income tax rate to the federal
statutory rate is as follows:                                                   

                                                                [Download Table]

                                                              FOR THE YEAR ENDED
                                                                 DECEMBER 31,   
                                                              ----------------- 
                                                               1997      1996   
                                                              -------   ------- 
                                                                                
Federal statuory rate                                              34%       34%
State taxes, net of federal benefit                                 6         7 
Income attributable to S corporation                               --       (29)
Change in deferred tax asset valuation allowance                  (32)       -- 
Other                                                               2        (1)
                                                              -------   ------- 
Income tax expense                                                 10%       11%
                                                              =======   ======= 

Income earned prior to the termination of the S Corporation status is 
taxable to the individual shareholders.                                         

F-15

10-K
38th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 38th
(9)    MAJOR MERCHANTS AND AIRLINES:                                            

    The following table sets forth net merchandise sales and placement fees as
a percentage of the total of each category for the Company's largest            
participating merchant:                                                         

                                                                [Download Table]

                                                        FOR THE YEAR ENDED      
                                                            DECEMBER 31,        
                                                    --------------------------- 
                                                     1997      1996      1995   
                                                    -------   -------   ------- 
                                                                                
Net merchandise sales                                    16%       24%       49%
Placement fees                                           11%       12%       44%

In 1997, another participating merchant accounted for approximately 13
percent of net merchandise sales. No other merchants accounted for greater than 
10 percent of any category listed above.                                        

Net merchandise sales of the Company's products on the five largest   
airlines represent approximately 79 percent, 86 percent, and 80 percent of total
net merchandise sales for the years ended December 31, 1997, 1996 and 1995,     
respectively.                                                                   

(10)     TRANSACTIONS WITH RELATED PARTIES:                                     

During 1996, the Company converted $5 million of notes payable to     
shareholders to preferred stock and obtained a line of credit for $4 million to 
pay accrued interest due under shareholders' notes and the remaining principal  
balance due on notes payable to shareholders. The line of credit was repaid with
proceeds from the Company's Initial Public Offering of common stock, and the    
line of credit remained available to the Company through January 1997 when it   
was terminated and replaced by the Line.                                        

   The Company has an agreement with a company, which is owned by one of the
Company's directors, to provide order conveyance services commencing in January 
1997. The agreement provides for annual fees of approximately $200,000 and can  
be terminated at any time by either party.                                      

F-16

10-K
39th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 39th
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND        
FINANCIAL DISCLOSURES                                         

None.                                                         

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                     

         Information with respect to the directors and executive officers of the
Company is incorporated herein by reference to the Definitive Proxy Statement   
relating to the Company's Annual Meeting to be held on May 20, 1998.            

ITEM 11. EXECUTIVE COMPENSATION                                                 

    Information with respect to executive compensation is incorporated
herein by reference to the Definitive Proxy Statement relating to the Company's 
Annual Meeting to be held on May 20, 1998.                                      

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT         

Information with respect to the security ownership of certain 
beneficial owners and management is incorporated herein by reference to the     
Definitive Proxy Statement relating to the Company's Annual Meeting to be held  
on May 20, 1998.                                                                

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         

Information with respect to certain relationships and related 
transactions is incorporated herein by reference to the Definitive Proxy        
Statement relating to the Company's Annual Meeting to be held May 20, 1998.     

 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.      

(a)(1) Financial Statements.                                  

Balance Sheets as of December 31, 1997 and 1996               
  Statements of Income for the Years Ended December 31, 1997, 1996
and 1995                                                      
  Statements of Shareholders' Equity (Deficit) for the Years ended
December 31, 1997, 1996 and 1995                              
Statements of Cash Flows for the Years Ended December 31,     
1997, 1996 and 1995                                           
Notes to Financial Statements                                 

(a)(2) and (d)                                                

None.                                                         

(b)    Reports on Form 8-K.                                   

None.                                                         

(a)(3) and (c)  Exhibits.                                     

-20-

10-K
40th Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 40th
EXHIBITS

                                                        [Enlarge/Download Table]

EXHIBIT                                                                                PAGE NUMBER     
OR                                                                                                     
NUMBER                          DESCRIPTION                                            METHOD OF FILING
------                          -----------                                            ----------------
                                                                                                       
 3.1a    Articles of Incorporation of Registrant .....................................        **       
 3.1b    Certificate of Amendment to Articles of Incorporation .......................        **       
 3.2     Bylaws of Registrant ........................................................        **       
 4.1     Amended Certificate of Designation for Preferred Stock ......................        **       
 4.2     Form of Common Stock Certificate ............................................        **       
 4.3     Form of Representative's Warrant Agreement ..................................        **       
10.1     Employment Agreement between Robert M. Worsley and  SkyMall, Inc. ...........        **       
10.2     Form of Airline Customer Services Agreement .................................        **       
10.2a    Schedule of Omitted Material Terms from Material Airline                                      
         Customer Services Agreement .................................................        **       
10.2b    Airline Customer Services Agreement between SkyMall, Inc. and                                 
              Continental Airlines, Inc., dated January 1, 1992, as amended ..........        **       
10.2c    Airline Customer Services Agreement between SkyMall, Inc. and                                 
              United Airlines, Inc., dated May 1, 1992 ...............................        **       
10.5     Form of Tax Indemnification Agreement .......................................        **       
10.6     SkyMall, Inc. 1994 Stock Option Plan, as amended ............................        **       
10.7     Non-Employee Director Stock Option Plan .....................................        **       
10.8a    Lease Agreement between Pasqualetti Properties, Inc. and                                      
              Smitty's Super Valu, Inc. dated June 24, 1960 ..........................        **       
10.8b    Agreement between Rose Pasqualetti Perkins, Amos Pasqualetti,                                 
              Anthony Pasqualetti, Ben Pasqualetti and Smitty's Super Valu, Inc.                       
              dated March 2, 1961 ....................................................        **       
10.8c    Addendum to Lease between Amos Pasqualetti, Ben S. Pasqualetti,                               
              Rose Pasqualetti Jenkins, Estate of Anthony J. Pasqualetti and                           
              Smitty's Super Valu, Inc. dated May 11, 1966 ...........................        **       
10.8d    Sublease between Schwan Brothers Properties and Smitty's Super                                
              Valu, Inc. dated August 1, 1984 ........................................        **       
10.8e    Lease Amending Agreement between Smitty's Super Valu, Inc., Pasquo                            
              Investments, and Amos Pasqualetti and Victoria McFarland                                 
              dated October 1, 1984 ..................................................        **       
10.8f    Addendum to Sublease between Smitty's Super Valu, Inc. and Schwan Brothers                    
              Properties dated January 1, 1985 .......................................        **       
10.8g    Assignment of Sublease from Pima Partners to SkyMall, Inc. dated                              
              July 12, 1990 ..........................................................        **       
  11     Statement Re: Computation of per share earnings .............................       N/A       
  21     Subsidiaries of Registrant. .................................................       N/A       
23.1     Consent of Accountants.......................................................       N/A       
25.1     Powers of Attorney ..........................................................       S-1       
  27     Financial Data Schedule......................................................         *       

----------                                                                      
*     Filed herewith.                                                           
**    Incorporated by reference to Form S-1 Registration Statement (File No.    
333-14539).                                                         

-21-

10-K
Last Page of 41
TOC
1st
Previous
Next
↓Bottom
Just 41st
SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 30  
day of March, 1998.                                                             

     SkyMall, Inc.

                By /s/ Robert M. Worsley
                    ----------------------
                       Robert M. Worsley
                       President

 POWER OF ATTORNEY

  KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints ROBERT M. WORSLEY and ALLEN R.           
WESTERGARD, and each of them, his true and lawful attorneys-in-fact and agents, 
with full power of substitution and resubstitution for him and in his name,     
place and stead, in any and all capacities, to sign any and all amendments to   
this Form 10-K Annual Report, and to file the same, with all exhibits thereto,  
and other documents in connection therewith with the Securities and Exchange    
Commission, granting unto said attorneys-in-fact and agents, and each of them,  
full power and authority to do and perform each and every act and thing         
requisite and necessary to be done in and about the premises, as fully and to   
all intents and purposes as he might or could do in person hereby ratifying and 
confirming all that said attorneys-in-fact and agents, or his substitute or     
substitutes, may lawfully do or cause to be done by virtue hereof.              

      Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on      
behalf of the registrant and in the capacities and on the dates indicated:      

SIGNATURE                         TITLE                             DATE  
---------                         -----                             ----  

/s/ Robert M. Worsley      Chairman of the Board,                               
-----------------------    President (Chief Executive Officer)   March 30, 1998 
Robert M. Worsley                                                               

/s/ Allen R. Westergard    Vice President-Finance                               
-----------------------    (Chief Financial and Principal                       
Allen R. Westergard        Accounting Officer)                   March 30, 1998 

/s/ Alan C. Ashton         Director                              March 30, 1998 
-----------------------                                                         
Alan C. Ashton                                                                  

/s/ Lyle R. Knight         Director                              March 30, 1998 
-----------------------                                                         
Lyle R. Knight                                                                  

/s/ Thomas J. Litle IV     Director                              March 30, 1998 
-----------------------                                                         
Thomas J. Litle IV                                                              

/s/ Randy Petersen         Director                              March 30, 1998 
-----------------------                                                         
Randy Petersen                                                                  

 S-1

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		9/30/99		34					10-Q
		5/20/98		2		39			3,  DEF 14A
Filed on:		3/30/98		41
		3/12/98		2		21
		3/9/98		18
		2/17/98		24					SC 13G/A
For Period End:		12/31/97		1		39			10-K/A,  4
		12/15/97		19		32
		12/31/96		15		39			10-K,  4
		12/16/96		13		18			4
		12/11/96		18					S-1
		11/1/96		7
		10/22/96		30
		10/21/96		17		30			S-1
		7/1/96		7
		12/31/95		23		39
		1/1/95		27		36
		5/1/92		40
		1/1/92		40
									List all Filings