UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number: 0-15827
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State of Incorporation) (I.R.S. Employer Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 445-6000
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $0.01 par value, 8,266,940 shares as of December 12, 1996
1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
October 31, October 31,
1996 January 31, 1995
Dollars in thousands, except per share amount (Unaudited) 1996 (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalent $ 573 $12,476 $ 803
Accounts receivable, net of allowance for doubtful
accounts of $506, $461 and $368 5,758 4,436 4,856
Merchandise inventories 36,403 24,313 38,403
Deferred catalog costs 5,353 4,135 9,560
Prepaid expenses and other 7,291 2,576 5,796
------- ------- -------
Total Current Assets 55,378 47,936 59,418
Property and equipment, net 22,574 20,726 18,647
Deferred taxes and other assets 1,998 1,794 1,177
------- ------- -------
Total Assets $79,950 $70,456 $79,242
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $30,044 $25,224 $33,969
Deferred revenue 4,968 4,893 4,840
Income taxes payable -- 363 --
Current portion of notes payable 921 223 158
------- ------- -------
Total Current Liabilities 35,933 30,703 38,967
Revolving loan 8,085 -- 6,800
Notes payable 4,479 3,355 719
Other liabilities 3,613 3,640 3,336
------- ------- -------
Total Liabilities 52,110 37,698 49,822
------- ------- -------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized 3,000,000 shares: Issued and outstanding, none -- -- --
Common stock, $0.01 par value:
Authorized 25,000,000 shares: Issued and outstanding,
8,265,140, 8,250,980 and 8,246,900 shares 83 82 82
Additional paid-in capital 9,586 9,555 9,587
Retained earnings 18,171 23,121 19,751
------- ------- -------
Total Stockholders' Equity 27,840 32,758 29,420
------- ------- -------
Total Liabilities and Stockholders' Equity $79,950 $70,456 $79,242
======= ======= =======
<FN>
See notes to financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Dollars in thousands, except per share amounts October 31, October 31,
----------- -----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 41,326 $ 44,745 $ 131,189 $ 138,162
Less: returns and allowances 5,057 5,254 16,038 16,876
----------- ----------- ----------- -----------
Net Sales 36,269 39,491 115,151 121,286
Other revenue 3,099 1,844 4,904 3,508
----------- ----------- ----------- -----------
39,368 41,335 120,055 124,794
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of products 20,282 20,582 62,400 62,361
Buying and occupancy 6,071 5,370 17,456 15,472
Advertising and promotion 4,562 5,860 15,095 20,222
General, selling, and administrative 11,064 10,847 33,085 31,976
----------- ----------- ----------- -----------
41,979 42,659 128,036 130,031
----------- ----------- ----------- -----------
OPERATING LOSS (2,611) (1,324) (7,981) (5,237)
OTHER INCOME (EXPENSE):
Interest income (expense)-net (199) (75) (293) 233
Other-net 15 8 24 127
----------- ----------- ----------- -----------
(184) (67) (269) 360
----------- ----------- ----------- -----------
Loss Before Income Tax Benefit (2,795) (1,391) (8,250) (4,877)
Income Tax Benefit (1,118) (556) (3,300) (1,951)
----------- ----------- ----------- -----------
Net Loss $ (1,677) $ (835) $ (4,950) $ (2,926)
=========== =========== =========== ===========
Weighted Average Number of Shares 8,262,709 8,247,492 8,258,119 8,242,853
Net Loss Per Share $ (0.20) $ (0.10) $ (0.60) $ (0.36)
=========== =========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months Ended
October 31,
-----------
Dollars in thousands 1996 1995
---- ----
Cash was Provided by (Used for) Operating Activities:
Net loss $ (4,950) $ (2,926)
Adjustments to reconcile net loss to net cash
provided by (used for) operations:
Depreciation and amortization 3,044 2,532
Deferred rent expense 96 66
Deferred income taxes (3,300) (1,951)
Changes in:
Merchandise inventories (12,090) (14,848)
Accounts receivable (1,322) (1,622)
Deferred catalog costs, prepaid expenses and other (2,837) (8,222)
Accounts payable and accrued expenses 4,820 12,886
Deferred revenue and other liabilities (411) (1,065)
-------- --------
Cash Used for Operating Activities (16,950) (15,150)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (5,000) (8,490)
Disposal of equipment 108 5
-------- --------
Cash Used for Investing Activities (4,892) (8,485)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loans 16,635 6,800
Payments on revolving loans (8,550) --
Proceeds from notes payable 2,000 --
Issuance of common stock for stock options 32 109
Repurchase of common stock -- (554)
Principal payments on notes payable (178) (110)
-------- --------
Cash Provided by Financing Activities 9,939 6,245
-------- --------
Net Decrease in Cash and Equivalents (11,903) (17,390)
-------- --------
Cash and Equivalents at Beginning of Period 12,476 18,193
-------- --------
Cash and Equivalents at End of Period $ 573 $ 803
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 419 $ 158
Income Taxes $ 459 $ 1,972
See notes to financial statements.
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and nine-month periods ended October 31, 1996 and 1995
(Unaudited)
NOTE A - Financial Statements
The condensed balance sheets at October 31, 1996 and 1995, the condensed
statements of operations for the three-month and nine-month periods ended
October 31, 1996 and 1995, and the statements of cash flows for the nine-month
periods ended October 31, 1996 and 1995 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at October 31, 1996 and 1995, and
for all periods presented, have been made. The Company's business is seasonal in
nature and the results of operations for the interim periods presented are not
necessarily indicative of the results for the full fiscal year.
The balance sheet at January 31, 1996, presented herein, has been derived from
the audited balance sheet of the Company.
Certain information and footnote disclosures normally included in the footnotes
to the annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted from these interim financial
statements. It is suggested that these interim financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's 1995 Annual Report.
NOTE B - Revolving Loan and Notes Payable
In September 1994, the Company entered into a five-year revolving secured credit
facility ("credit facility") with The CIT Group/Business Credit, Inc. ("CIT").
The credit facility allows the Company to borrow funds and issue letters of
credit up to $20.0 million based upon inventory levels. The credit facility is
secured by the Company's inventory, accounts receivable, general intangibles and
certain other assets. Except as described below, borrowings under the credit
facility bear interest at either prime plus 0.75% per annum, or at LIBOR plus
2.75% per annum. The credit facility contains certain financial covenants
pertaining to fixed charge coverage ratio, leverage ratio, working capital and
net worth. The credit facility has limitations on operating leases, other
borrowings, dividend payments and stock repurchases.
In May 1996, an amendment to the credit facility was completed with CIT to
provide for term loans for capital expenditures ("CAPEX Term Loans") up to an
aggregate amount of $4.5 million. As a result of the amendment, the total credit
facility was increased from $20.0 million to $24.5 million and the expiration
has been extended for an additional two years to September 2001. The CAPEX Term
Loans allow the Company to borrow amounts for the acquisition of capital
improvements. Amounts borrowed under the CAPEX Term Loans bear interest at
either prime plus 1% per annum, or at LIBOR plus 3% per annum. Each CAPEX Term
Loan is to be repaid in 36 equal monthly principal installments. Certain
5
<PAGE>
NOTE B - Revolving Loan and Notes Payable (continued)
financial covenants of the credit facility were revised in the amendment. CIT
received warrants for 25,000 shares of the Company's common stock exercisable at
any time within five years at an exercise price of $6.00 per share.
At October 31, 1996, the Company had borrowings outstanding under the credit
facility of $8,085,000, letters of credit commitments outstanding under the
credit facility of $1,784,000, and a borrowing of $2,000,000 outstanding under
the CAPEX term loans which is included in notes payable.
Notes payable also included two mortgage loans collateralized by certain
property and equipment. In connection with the expansion of the Company's
distribution center which was completed in October 1995, the Company refinanced
the mortgage loan collateralized by the distribution center and paid off the
existing mortgage. The new note in the amount of $3 million was funded in
December 1995, bears interest at a fixed rate of 8.40%, provides for monthly
payments of principal and interest in the amount of $29,367, and matures in
January 2011. The other note bears interest at a variable rate equal to the rate
on 30-day commercial paper plus 3.82%, provides for monthly payments of
principal and interest in the amount of $14,320, and matures in January 2000.
NOTE C - Commitments and Contingencies
The Company is party to various legal proceedings arising from normal business
activities. Management believes that the resolution of these matters will not
have a material effect on the Company's financial condition or the results of
its operations.
NOTE D - Reclassifications
Certain reclassifications have been made to prior periods financial statements
in order to conform with current period classifications.
INDEPENDENT ACCOUNTANTS REVIEW REPORT
The condensed balance sheets of the Company as of October 31, 1996 and 1995, and
the related condensed statements of operations for the three-month and
nine-month periods then ended and cash flows for the nine month periods then
ended have been reviewed by the Company's independent accountants, Deloitte &
Touche LLP, whose report covering their review of the financial statements is
presented herein.
6
<PAGE>
Deloitte &
Touche LLP
- ----------- -----------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Sharper Image Corporation
San Francisco, California
We have reviewed the accompanying condensed balance sheets of Sharper Image
Corporation as of October 31, 1996 and 1995, and the related condensed
statements of operations for the three-month and nine-month periods then ended
and cash flows for the nine-month periods then ended. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Sharper Image Corporation as of January 31,
1996, and the related statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
March 22, 1996, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of January 31, 1996 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
November 20, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of Operations and
shows the results of operations for the periods indicated as a percentage of
total revenues.
Percentage of Total Revenues
-------------------------------------
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Net store sales 68.3% 70.7% 71.0% 71.2%
Net catalog sales 23.8 24.8 24.9 26.0
Other revenue 7.9 4.5 4.1 2.8
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 51.5 49.8 52.0 50.0
Buying and occupancy 15.4 13.0 14.5 12.4
Advertising and promotion 11.6 14.2 12.6 16.2
General, selling
and administrative 28.1 26.2 27.6 25.6
Other Income (Expense) (0.5) (0.2) (0.2) 0.3
----- ----- ----- -----
Loss Before Income Tax Benefit (7.1) (3.4) (6.9) (3.9)
Income Tax Benefit (2.8) (1.4) (2.8) (1.6)
----- ----- ----- -----
Net Loss (4.3)% (2.0)% (4.1)% (2.3)%
===== ===== ===== =====
8
<PAGE>
Revenues
Net sales for the three-month and nine-month periods ended October 31, 1996,
decreased $3,222,000, or 8.2%, and $6,135,000, or 5.1%, from the comparable
periods of the prior year. Returns and allowances for both the three-month and
nine-month periods ended October 31, 1996, were 12.2% of sales, as compared with
11.7% and 12.2% of sales for the comparable prior year periods. For the
three-month and nine-month periods ended October 31, 1996, as compared with the
same periods last year, net store sales decreased $2,336,000, or 8.0%, and
$3,538,000, or 4.0%, comparable store sales decreased by 11.5% and 7.0%, and net
catalog sales decreased $886,000 or 8.6% and $2,597,000, or 8.0%.
The decrease in net store sales for the three-month and nine-month periods ended
October 31, 1996 as compared with the same prior year periods reflects a
decrease in average revenue per transaction from $106 to $92, and from $106 to
$95, partially offset by a 5.0% and 6.6% increase in total store transactions.
The decrease in net catalog sales for the three-month and nine-month periods
ended October 31, 1996 reflects a decrease of 16.9% and 15.7% respectively in
total catalog orders as compared to the same prior year periods, partially
offset by an increase in average revenue per order from $122 to $134 and $122 to
$133 for the three-month and nine-month periods. The Company believes that the
decrease in net store sales, comparable store sales and net catalog sales for
the three-month and nine-month periods ended October 31, 1996 is partially due
to the planned decrease in the number of catalogs mailed and pages circulated
for The Sharper Image catalog and Sharper Image SPA Collection catalog in the
effort to partially offset high paper costs. Management believes that the
decreases in sales were also partly attributable to the Company's merchandise
mix, as well as the unavailability of certain key products due to manufacturers'
delivery constraints. The decrease in net catalog sales was partially offset by
the increase in sales from the test mailings of The Sharper Image Home
Collection catalog.
Cost of Products
Cost of products for the three-month and nine-month periods ended October 31,
1996 decreased $300,000, or 1.5%, and increased $39,000 or 0.1%, from the
comparable prior year periods. The gross margin rate for the three-month and
nine-month periods ended October 31, 1996 was 46.8% and 47.0%, or 2.5 and 2.3
percentage points lower than the gross margin rate of 49.3% for both the same
periods of the prior year. The decrease in the gross margin rate is partially
attributable to the changes in the Company's merchandise mix, which reflects an
increase in sales of lower margin products, such as certain state-of-the-art
electronic items and home furnishings and a decrease in sales of certain higher
margin products, such as the Company's Sharper Image Design proprietary
products, fitness equipment, and automotive and security items.
Buying and Occupancy
Store occupancy expense for the three-month and nine-month periods ended October
31, 1996 increased $593,000 and $1,789,000 respectively, or 11.6% and 12.1%,
from the comparable prior year periods. The increase primarily reflects the
occupancy costs associated with the three new stores opened during the last
quarter of the prior fiscal year and the seven new stores that opened during the
nine-month period ended October 31, 1996, which was partially offset by the
elimination of the occupancy costs of the two stores closed during fiscal 1995
and the two stores closed during the nine-month period ended October 31, 1996.
9
<PAGE>
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month and nine-month periods
ended October 31, 1996 decreased $1,298,000, or 22.2%, and $5,127,000, or 25.4%,
from the comparable prior year periods. The decrease in advertising and
promotion expenses for the three-month and nine-month periods ended October 31,
1996 reflects primarily the Company's planned program to reduce advertising and
promotion expenses by reducing the number of catalogs and catalog pages mailed
for The Sharper Image catalog and the Sharper Image SPA Collection catalog. The
planned reduction in advertising and promotion expense, which was primarily
catalog costs, was made in the Company's efforts to partially offset escalating
paper prices. Paper prices were sharply higher during the first quarter of this
year as compared with last year's same period. Management also believed that the
reduced number of catalogs and catalog pages would generate higher productivity
and that the planned decrease in advertising and promotion expenses would more
than offset the effect of the possible decrease in revenues caused by the
reduced advertising on a full fiscal year basis. The decrease in catalog
advertising costs for the three and nine month period was partially offset by
the test mailings of the Sharper Image Home Collection Catalog.
Based on actual sales and statistical data collected from the first quarter, the
Company believes that the planned reductions in catalog circulation for The
Sharper Image catalog and the Sharper Image SPA Collection catalog was excessive
and that certain profitable sales were missed. During the second quarter, the
Company adjusted the circulation upward for the balance of the year. This
resulted in a 6% increase for the three month period ended October 31, 1996 and
a 1% increase for the nine-month period ended October 31, 1996 in the
circulation of The Sharper Image catalog. As part of the Company's planned
program, the number of pages circulated of The Sharper Image catalog was
decreased by 20% and 31% for the three-month and nine-month periods ended
October 31, 1996. For the Sharper Image SPA Collection catalog, the number of
catalogs circulated decreased by 45% and 32%, while the number of pages
circulated decreased by 61% and 51% for the three-month and nine-month periods
ended October 31, 1996.
The decrease in costs was partially offset by the rate increases in paper costs
which have had a significant adverse effect on the Company. The Company began to
receive rate decreases in paper costs during the second quarter of fiscal 1996;
which has had a favorable impact on costs for the nine months ended October 31,
1996 as compared to the prior years same period. In an effort to partially
offset the impact of the rate increases in paper and postage costs, the Company
has implemented measures which includes reducing the catalog dimensions,
reducing the number of pages per catalog, as well as using a lighter weight of
paper. The current decrease in paper prices will allow the Company to more
aggressively prospect for new customers during the fourth quarter by reducing
catalog costs. The Company plans to continue to increase the circulation of The
Sharper Image catalog and the Sharper Image SPA Collection catalog for the
remainder of the year.
In October 1996, the Company launched a redesigned The Sharper Image catalog
which has a new and updated graphic look and copy approach. In conjunction with
the new catalog look, the Company also launched a major advertising campaign in
leading consumer magazines. The campaign is designed to attract a new generation
of customers, as well as attract existing customers to the Company's stores and
catalogs.
10
<PAGE>
General, Selling and Administrative Expenses
General, selling and administrative expenses for the three-month and nine-month
periods ended October 31, 1996 increased $217,000, or 2.0%, and $1,109,000, or
3.5% from the comparable prior year periods. For the three-month period, the
increase was primarily due to increases in store expenses, which was partially
offset by reductions in contracted services for telemarketing, customer service
and distribution facilities. For the nine-month period, the increase was
primarily attributable to the increase in store expenses associated with the ten
new stores opened during the past twelve months and an increase in corporate
personnel expenses to support the additional stores, the new Sharper Image SPA
Collection catalog, and The Sharper Image Home Collection catalog concepts. Also
contributing to the increase in general, selling, and administrative expenses
was an increase in net delivery expense related to mail-order shipments.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the nine-month period ended October 31, 1996 with available cash, trade credit,
and borrowings under the credit facility. During the nine-month period ended
October 31, 1996, the Company's cash decreased by $11,903,000 to $573,000
primarily due to the increases in merchandise inventory, property and equipment
expenditures and funding of operating expenses for the period.
In September 1994, the Company entered into a five-year revolving secured credit
facility ("credit facility") with The CIT Group/Business Credit, Inc., ("CIT").
The credit facility allows the Company to borrow funds and issue letters of
credit up to $20.0 million based upon inventory levels. The credit facility is
secured by the Company's inventory, accounts receivable, general intangibles and
certain other assets. Except as described below, borrowings under the credit
facility bear interest at either prime plus 0.75% per annum, or LIBOR plus 2.75%
per annum. The credit facility contains certain financial covenants pertaining
to fixed charge coverage ratio, leverage ratio, working capital and net worth.
The credit facility has limitations on operating leases, other borrowings,
dividend payments and stock repurchases.
In May 1996, an amendment to the credit facility was completed with CIT to
provide for term loans for capital expenditures ("CAPEX Term Loans") up to an
aggregate amount of $4.5 million. As a result of the amendment, the total credit
facility was increased from $20.0 million to $24.5 million and the expiration
has been extended for an additional two years to September 2001. The CAPEX Term
Loans allow the Company to borrow amounts for the acquisition of capital
improvements. Amounts borrowed under the CAPEX Term Loans bear interest at
either prime plus 1% per annum, or at LIBOR plus 3% per annum. Each CAPEX Term
Loan is to be repaid in 36 equal monthly principal installments. Certain
financial covenants of the credit facility were revised in the amendment. CIT
received warrants for 25,000 shares of the Company's common stock exercisable at
any time within five years at an exercise price of $6.00 per share.
At October 31, 1996, there were borrowings of $8,085,000 outstanding under the
credit facility, letters of credit commitments outstanding under the credit
facility of $1,784,000, and a borrowing of $2,000,000 outstanding under the
CAPEX term loans which is included in notes payable.
Notes payable also included two mortgage loans collateralized by certain
property and equipment. In connection with the expansion of the Company's
distribution center which was completed in October 1995, the Company refinanced
the mortgage loan collateralized by the distribution center and paid off
11
<PAGE>
the existing mortgage. The new note in the amount of $3 million was funded in
December 1995, bears interest at a fixed rate of 8.40%, provides for monthly
payments of principal and interest in the amount of $29,367, and matures in
January 2011. The other note bears interest at a variable rate equal to the rate
on 30-day commercial paper plus 3.82%, provides for monthly payments of
principal and interest in the amount of $14,320, and matures in January 2000.
The Company's merchandise inventory at October 31, 1996 was approximately 5%
lower than that of October 31, 1995 while supporting the additional number of
stores, new retail concepts and the expanding wholesale business. Management
believes that the lower than optimal inventory levels during the three-month
period ended October 31, 1996 had an adverse impact on sales.
During the nine-month period ended October 31, 1996, the Company opened five The
Sharper Image stores located in Chestnut Hill, Massachusetts; Edina, Minnesota;
Raleigh, North Carolina; Garden City, New York; and Paramus, New Jersey. Two
Sharper Image SPA Collection stores located in Beverly Hills, California, and
Troy, Michigan were also opened during the nine-month period ended October 31,
1996. The Company remodeled four The Sharper Image stores located in Redondo
Beach, California; Chicago, Illinois; Boca Raton, Florida; and San Antonio,
Texas and closed two stores located in Minneapolis, Minnesota and Lahaina, Maui,
Hawaii. The Company expects to have a net of six stores added during fiscal
1996. Total capital expenditures estimated for the new and existing stores,
including the remodel and the relocation of a number of existing stores,
corporate headquarters, and the distribution center for fiscal 1996 are between
$6.0 million to $8.0 million.
The Company believes it will be able to fund its cash needs for the remainder of
the fiscal year through internally generated cash, trade credit and the credit
facility.
Seasonality
The Company's business is subject to substantial seasonal variations in demand.
Historically, a significant portion of the Company's sales and net income have
been realized during the Company's fourth fiscal quarter and levels of sales and
net income have generally been significantly lower during the other fiscal
quarters. The Company believes this is the general pattern associated with the
mail order and retail industries. In anticipation of its peak season, the
Company hires a substantial number of additional employees in its retail stores
and mail order processing and distribution areas and incurs significant catalog
production and mailing costs.
General
The foregoing discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included with this report. The
foregoing discussion contains certain forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market
conditions in the overall economy and the retail industry, consumer demand, the
opening of new stores, actual advertising expenditures by the Company, the
success of the Company's advertising and merchandising strategy, availability of
products, and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date thereof. The Company undertakes no obligations to
publicly release any revisions to these forward-looking statements or reflect
events or circumstances after the date hereof.
12
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended and Restated Stock Option Plan. (Incorporated by reference to
Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327).)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994.
(Incorporated by reference to Registration Statement on Form S-8 filed
on January 19, 1996 (Registration No. 33-3327).)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by
reference to Exhibit 10.15 to Form 10-K for fiscal year ended January
31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended January
31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.9 Form of Director Indemnification Agreement. (Incorporated by reference
to Exhibit 10.42 to Registration Statement on Form S-1 (Registration
No. 33-12755).)
10.10 Real Estate Installment Note and Mortgage dated October 4, 1993 among
the Company and Lee Thalheimer, Trustee for the Alan Thalheimer Trust.
(Incorporated by reference to Exhibit 10.20 to Form 10-K for fiscal
year ended January 31, 1994)
13
<PAGE>
10.11 Financing Agreement dated September 21, 1994 between the Company and
CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit
10.12 to Form 10-Q for the quarter ended October 31, 1994)
10.12 The Sharper Image 401(K)Savings Plan (Incorporated by reference to
Exhibit 10.21 to Registration Statement of Form S-8 (Registration No.
33-80504) dated June 21, 1994))
10.15 Form of Chief Executive Officer Compensation Plan dated February 3,
1995. (Incorporated by reference to Exhibit 10.24 to the Form 10-K for
the fiscal year ended January 31, 1995.)
10.16 Form of Annual Report for the Sharper Image 401(K) Savings Plan
(incorporated by reference to Form 11-K (Registration No. 33-80504) for
the plan year ended December 31, 1995.)
10.17 Form of Split-Dollar Agreement between the Company and Mr. R.
Thalheimer, its Chief Executive Officer dated October 13, 1995,
effective as of May 17, 1995. (Incorporated by reference to Exhibit
10.17 to the Form 10-K for the fiscal year ended January 31, 1996.)
10.18 Form of Assignments of Life Insurance Policy as Collateral, both dated
October 13, 1995, effective May 17, 1995. (Incorporated by reference to
Exhibit 10.18 to the Form 10-K for the fiscal year ended January 31,
1996.)
10.19 Form of Amendment to the Financing Agreement dated May 15, 1996 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.19 to the Form 10Q for the quarter ended April
30, 1996).
10.20 Form of Warrant to Purchase Common Stock Agreement dated May 15, 1996
between the Company and The CIT Group/Business Credit Inc.
(Incorporated by reference to Exhibit 10.20 to the Form 10Q for the
quarter ended April 30, 1996).
10.21 Form of CAPEX Term Loan Promissory note dated October 15, 1996 between
the Company and The CIT Group/Business Credit Inc.
11.1 Statement Re: Computation of Earnings per Share.
15.0 Letter Re: Unaudited Interim Financial Information.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the three months
ended October 31, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SHARPER IMAGE CORPORATION
Date: December 12, 1996 by:/s/ Craig P. Womack
----------------- --------------------
Craig P. Womack
President
Chief Operating Officer
by:/s/ Tracy Y. Wan
-------------------
Tracy Y. Wan
Senior Vice President
Chief Financial Officer
15
Exhibit A
CAPEX Term Loan Promissory Note
October 15, 1996
$2,000,000.00
FOR VALUE RECEIVED, the undersigned, Sharper Image Corporation, a Delaware
corporation (the "Company"), promises to pay to the order of THE CIT
GROUP/BUSINESS CREDIT, INC. (herein "CITBC") at is office located at 300 South
Grand Avenue, Los Angeles, CA 90071, in lawful money of the United States of
America and in immediately available funds, the principal amount of two million
($2,000,000.00) in thirty-six (36) equal consecutive monthly installments,
whereof the first such installment shall be due and payable on November 1, 1996
and subsequent installments shall be due and payable on the first Business Day
of each month thereafter until this Note is paid in full.
The Company further agrees to pay interest at said office, in like money, on the
unpaid principal amount owing hereunder from time to time from the date hereof
on the date and at the rate specified in Section 7, Paragraph 1(b) of the
Financing Agreement dated September 21, 1994, as amended between the Company and
CITBC (the "Financing Agreement"). Capitalized terms used herein and defined in
the Financing Agreement shall have the same meanings as set forth therein unless
otherwise specifically defined herein.
If any payment on this Note becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
This Note is one of the CAPEX Term Loan Promissory Notes referred to in the
Financing Agreement, evidences a CAPEX Term Loan thereunder, and is subject to,
and entitled to, all provisions and benefits thereof and is subject to optional
and mandatory prepayment, in whole or in part, as provided
<PAGE>
therein.
Upon the occurrence of any one or more of the Events of Default specified in the
Financing Agreement or upon termination of the Financing Agreement, all amounts
then remaining unpaid on this Note may become, or be declared to be, at the sole
election of CITBC, immediately due and payable as provided in the Financing
Agreement.
SHARPER IMAGE CORPORATION
/s/ Tracy Y. Wan
By: Tracy Y. Wan
----------------------------------
Title: Sr. V.P., Chief Financial Officer
/s/ Vince Barriero
By: Vince Barriero
----------------------------------
Title: Sr. V.P., Chief Information Officer
Exhibit 11.1
<TABLE>
SHARPER IMAGE CORPORATION
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
Dollars in thousands, except per share amounts 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss $ (1,677) $ (835) $ (4,950) $ (2,926)
Average shares of common stock
outstanding during the period 8,262,709 8,247,492 8,258,119 8,242,853
Add:
Incremental shares from assumed
exercise of stock options (Primary) * * * *
----------- ----------- ----------- -----------
8,262,709 8,247,492 8,258,119 8,242,853
=========== =========== =========== ===========
Primary loss per share $ (0.20) $ (0.10) $ (0.60) $ (0.36)
----------- ----------- ----------- -----------
Average shares of common stock
outstanding during the period 8,262,709 8,247,492 8,258,119 8,242,853
Add:
Incremental shares from assumed
exercise of stock options (Fully-diluted) * * * *
----------- ----------- ----------- -----------
8,262,709 8,247,492 8,258,119 8,242,853
=========== =========== =========== ===========
Fully-diluted loss per share $ (0.20) $ (0.10) $ (0.60) $ (0.36)
=========== =========== =========== ===========
<FN>
* Incremental shares from assumed exercise of stock options are antidilutive
for primary and fully diluted loss per share, and therefore not presented.
</FN>
</TABLE>
16
Deloitte &
Touche LLP
- ----------- -----------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
November 20, 1996
Board of Directors
Sharper Image Corporation
San Francisco, California
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Sharper Image Corporation for the periods ended October 31, 1996
and 1995, as indicated in our report November 20, 1996; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended October 31, 1996, is
incorporated by reference in Registration Statement No. 33-12755 and
Registration Statement No. 33-80504 on Forms S-8 of Sharper Image Corporation.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaining of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000811696
<NAME> SHARPER IMAGE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<CASH> 573
<SECURITIES> 0
<RECEIVABLES> 6264
<ALLOWANCES> (506)
<INVENTORY> 36403
<CURRENT-ASSETS> 55378
<PP&E> 54949
<DEPRECIATION> (32375)
<TOTAL-ASSETS> 79950
<CURRENT-LIABILITIES> 35933
<BONDS> 0
<COMMON> 83
0
0
<OTHER-SE> 27757
<TOTAL-LIABILITY-AND-EQUITY> 79950
<SALES> 41326
<TOTAL-REVENUES> 39368
<CGS> 20282
<TOTAL-COSTS> 41979
<OTHER-EXPENSES> (15)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> (2795)
<INCOME-TAX> (1118)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1677)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
