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 July 31, 1997 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, 8,308,040 shares as of September 12, 1997
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
July 31, July 31,
Dollars in thousands, except per share amount 1997 January 31, 1996
(Unaudited) 1997 (Unaudited)
----------- ---- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 647 $10,873 $ 781
Accounts receivable, net of allowance for doubtful
accounts of $516, $505 and $539 4,770 5,915 4,155
Merchandise inventories 26,939 27,365 25,646
Deferred catalog costs 3,028 3,713 2,811
Deferred taxes, prepaid expenses and other 7,480 4,495 5,001
------- ------- -------
Total Current Assets 42,864 52,361 38,394
Property and equipment, net 20,263 23,012 21,702
Deferred taxes and other assets 3,626 3,431 1,999
------- ------- -------
Total Assets $66,753 $78,804 $62,095
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $28,076 $36,653 $19,902
Deferred revenue 5,954 5,045 4,870
Income taxes payable -- 307 --
Current portion of notes payable 937 927 250
Revolving loan -- -- 800
------- ------- -------
Total Current Liabilities 34,967 42,932 25,822
Notes payable 3,775 4,245 3,211
Other liabilities 3,248 3,178 3,553
------- ------- -------
Total Liabilities 41,990 50,355 32,586
------- ------- -------
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,
8,285,040, 8,266,940 and 8,260,480 shares 83 83 83
Additional paid-in capital 9,624 9,590 9,578
Retained earnings 15,056 18,776 19,848
------- ------- -------
Total Stockholders' Equity 24,763 28,449 29,509
------- ------- -------
Total Liabilities and Stockholders' Equity $66,753 $78,804 $62,095
======= ======= =======
<FN>
See notes to financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
Dollars in thousands, except per share amounts July 31, July 31,
------------------------------ ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 48,135 $ 49,133 $ 88,837 $ 89,863
Less: returns and allowances 5,711 5,877 10,931 10,981
----------- ----------- ----------- -----------
Net Sales 42,424 43,256 77,906 78,882
Other revenue 916 930 1,707 1,805
----------- ----------- ----------- -----------
43,340 44,186 79,613 80,687
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of products 23,472 22,872 43,035 42,118
Buying and occupancy 5,783 5,785 11,490 11,385
Advertising and promotion 4,715 5,806 8,261 10,533
General, selling, and administrative 11,739 11,370 22,760 22,021
----------- ----------- ----------- -----------
45,709 45,833 85,546 86,057
----------- ----------- ----------- -----------
OPERATING LOSS (2,369) (1,647) (5,933) (5,370)
OTHER INCOME (EXPENSE):
Interest expense, net (128) (102) (183) (94)
Other, net 10 (4) 19 9
----------- ----------- ----------- -----------
(118) (106) (164) (85)
----------- ----------- ----------- -----------
Loss Before Income Tax Benefit (2,487) (1,753) (6,097) (5,455)
Income Tax Benefit (995) (701) (2,439) (2,182)
----------- ----------- ----------- -----------
Net Loss $ (1,492) $ (1,052) $ (3,658) $ (3,273)
=========== =========== =========== ===========
Weighted Average Number of Shares 8,273,103 8,259,393 8,270,073 8,255,799
Net Loss Per Share $ (0.18) $ (0.13) $ (0.44) $ (0.40)
=========== =========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended
July 31,
-------------------
Dollars in thousands 1997 1996
---- ----
Cash was Provided by (Used for) Operating Activities:
Net loss $ (3,658) $ (3,273)
Adjustments to reconcile net loss to net cash
provided by (used for) operations:
Depreciation and amortization 3,408 1,992
Deferred rent expense 95 23
Deferred income taxes (2,439) (2,182)
Changes in:
Merchandise inventories 426 (1,333)
Accounts receivable 1,145 281
Deferred catalog costs, prepaid expenses and other (57) 876
Accounts payable and accrued expenses (8,576) (5,322)
Deferred revenue and other liabilities 577 (496)
-------- --------
Cash Used for Operating Activities (9,079) (9,434)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (716) (3,068)
Disposal of equipment 57 100
-------- --------
Cash Used for Investing Activities (659) (2,968)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loans 1,100 2,500
Payments on revolving loans (1,100) (1,700)
Issuance of common stock for stock options 34 24
Repurchase of common stock (62) 0
Principal payments on notes payable (460) (117)
-------- --------
Cash Provided by (Used for) Financing Activities (488) 707
-------- --------
Net Decrease in Cash and Equivalents (10,226) (11,695)
-------- --------
Cash and Equivalents at Beginning of Period 10,873 12,476
-------- --------
Cash and Equivalents at End of Period $ 647 $ 781
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 268 $ 239
Income Taxes $ 383 $ 459
See notes to financial statements.
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and six-month periods ended July 31, 1997 and 1996
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at July 31, 1997 and 1996, the condensed statements
of operations for the three-month and six-month periods ended July 31, 1997 and
1996, and the condensed statements of cash flows for the six-month periods ended
July 31, 1997 and 1996 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 July 31, 1997 and 1996, 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, 1997, presented herein, has been derived from
the audited balance sheet of the Company.
Certain information and 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 1996
Annual Report.
<TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No.
128 requires dual presentation of basic EPS and diluted EPS on the face of all
income statements issued after December 15, 1997 for all entities with complex
capital structures. Basic EPS is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur from common shares issuable through
stock options, warrants and other convertible securities. The pro forma effect
assuming adoption of SFAS No. 128 at the beginning of each period is presented
below:
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma Loss Per Share:
Basic $(0.18) $(0.13) $(0.44) $(0.40)
Diluted $(0.18) $(0.13) $(0.44) $(0.40)
</TABLE>
5
<PAGE>
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. 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 secured 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
secured 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.
Subsequent to January 31, 1997, two amendments to the credit facility were
completed with CIT to amend certain financial covenants and to provide
additional seasonal borrowings during 1997. The credit facility has been
increased to $29.5 million for the period from October 1, 1997 through December
31, 1997.
At July 31, 1997, the Company had no amounts outstanding on its revolving loan
credit facility. Letters of credit commitments outstanding under the credit
facility were $2,428,000. Borrowings of $1,500,000 were outstanding under the
CAPEX term loans which is included in notes payable.
Notes payable 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. Notes payable
also included a CAPEX Term Loan which bears interest at a variable rate equal to
the prime rate plus 1%, provides for monthly principal payments of $55,555 plus
the related interest payment, and matures in October 1999.
NOTE C - Accounts Payable and Accrued Expenses
The Company critically evaluates the results and long-term potential of its
current and test business concepts in order to determine which will generate the
greatest return on its investments. As part of
6
<PAGE>
this process, the Company decided to close in January 1997 the unprofitable SPA
Collection division. Related to the closure of the SPA Collection division, for
the fourth quarter of fiscal 1996, the Company incurred a one-time charge of
$8,000,000. Accordingly, the liability related to this one-time charge at
January 31, and July 31, 1997, in the amount of $8,000,000 and $5,459,000,
respectively, was included in Accounts payable and accrued expenses. No such
amount was included at July 31, 1996.
NOTE D - 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.
NOTE E - Reclassifications
Certain reclassifications have been made to prior periods financial statements
in order to conform with current period classifications.
NOTE F - New Accounting Policies
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise
and Related Information. SFAS 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoptions of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
INDEPENDENT ACCOUNTANTS REVIEW REPORT
The condensed balance sheets of the Company as of July 31, 1997 and 1996 and the
related condensed statements of operations for the three-month and six-month
periods then ended and cash flows for the six 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.
7
<PAGE>
Deloitte & Touche LLP
Independent Accountants' Report
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 July 31, 1997 and 1996 and the related condensed statements of
operations for the three-month and six-month periods then ended and cash flows
for the six-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 principals.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Sharper Image Corporation as of January 31,
1997, and the related statements of operations, stockholders' equity and cash
flows for the year ended (not presented herein); and in our report dated March
28, 1997, 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, 1997 is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
August 20, 1997
- ---------------
Deloitte Touche
Tonmatsu
International
- ---------------
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
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.
<CAPTION>
Percentage of Total Revenues
--------------------------------------------------------------
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- ------------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Net store sales 71.7% 73.0% 71.3% 72.3%
Net catalog sales 26.2 24.9 26.6 25.5
Other revenue 2.1 2.1 2.1 2.2
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 54.2 51.8 54.1 52.2
Buying and occupancy 13.3 13.1 14.4 14.1
Advertising and promotion 10.8 13.1 10.4 13.1
General, selling
and administrative 27.1 25.8 28.6 27.3
Other Expense 0.3 0.2 0.2 0.1
----- ----- ----- -----
Loss Before Income Tax Benefit (5.7) (4.0) (7.7) (6.8)
Income Tax Benefit (2.3) (1.6) (3.1) (2.7)
----- ----- ----- -----
Net Loss (3.4)% (2.4)% (4.6)% (4.1)%
===== ===== ===== =====
</TABLE>
9
<PAGE>
Revenues
Net sales for the three-month and six-month periods ended July 31, 1997,
decreased $832,000, or 1.9%, and $976,000, or 1.2%, from the comparable periods
of the prior year. Returns and allowances for the three-month and six-month
periods ended July 31, 1997, were 11.9% and 12.3% of sales, as compared with
12.0% and 12.2% of sales for the comparable prior year periods. For the
three-month and six-month periods ended July 31, 1997, as compared with the same
periods last year, net store sales decreased $1,170,000, or 3.6%, and
$1,619,000, or 2.8%, comparable store sales decreased by 4.2% and 4.0%, and net
catalog sales increased $500,000, or 4.0%, and $642,000, or 3.1%.
The decreases in net store sales for the three-month and six-month periods ended
July 31, 1997 as compared with the same prior year periods reflected a 9.5% and
2.9% increases in average revenue per transaction, which were offset by a 11.9%
and 5.5% decreases in total store transactions. The increases in net catalog
sales for the three-month and six-month periods ended July 31, 1997 reflected
increases in average revenue per order of 42.6% and 55.5%, partially offset by
decreases of 27.7% and 33.7% in total catalog orders as compared to the same
prior year periods. The Company believes that the decreases in net store sales,
and comparable store sales for the three-month and six month periods ended July
31, 1997 were partially due to certain popular products being in short supply
and lower than optimum overall inventory levels.
In August 1997, the Company saw an improvement in its sales performance as net
sales increased 7.7%, net store sales increased 7.3%, comparable store sales
increased 7.7% and net catalog sales increased 8.8% over the same month in the
prior year. On a pro-forma basis, excluding the 1996 sales from the SPA
Collection, which the Company made the decision to close in January 1997, net
sales increased 11.7%, net store sales increased 11.4% and net catalog sales
increased 12.7% in August 1997 compared to August 1996.
Cost of Products
Cost of products for the three-month and six-month periods ended July 31, 1997
increased $600,000, or 2.6%, and $917,000, or 2.2%, from the comparable prior
year periods. The increase in cost of products reflects the higher costs of
products attributable to the Company's merchandise mix, partially offset by the
lower product costs related to the decrease in sales.
Buying and Occupancy
Buying and occupancy costs for the three-month and six-month periods ended July
31, 1997 were about even with the comparable prior year periods. Occupancy costs
reflect the costs associated with the four new stores opened during the last six
months of the prior fiscal year, which were offset by the elimination of the
occupancy costs of the two Sharper Image stores closed during the six-month
period ended July 31, 1997, and the closure of the Sharper Image SPA division.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month and six-month periods
ended July 31, 1997 decreased $1,091,000, or 18.8%, and $2,272,000, or 21.6%
from the comparable prior year periods. The decrease in advertising and
promotion expenses for the three-month and six-month periods ended July 31, 1997
reflects primarily the elimination of the SPA Collection catalog, reduced
catalog costs for The Sharper Image catalog and lower other advertising costs.
These decreases in advertising and promotion expenses were partially offset by
the costs related to the Sharper Image Home Collection catalog.
10
<PAGE>
General, Selling and Administrative Expenses
General, selling and administrative expenses for the three-month and six-month
periods ended July 31, 1997 increased $369,000, or 3.2%, and $739,000, or 3.4%
from the comparable prior year periods. The increase was primarily due to the
increase in general and administrative costs related to the catalog operations,
additional corporate administrative costs, and an increase in net delivery
expense related to mail-order shipments, partially offset by the elimination of
costs related to the closure of the SPA division.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the six-month period ended July 31, 1997 with available cash, trade credit, and
borrowings under the credit facility. During the six-month period ended July 31,
1997, the Company's cash decreased by $10,226,000 to $647,000 primarily due to
the timing of inventory and expense payments.
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.
Subsequent to January 31, 1997, two amendments to the credit facility were
completed with CIT to amend certain financial covenants and to provide
additional seasonal borrowings during 1997. The credit facility has been
increased by $5.0 million to $29.5 million for the period from October 1, 1997
through December 31, 1997.
At July 31, 1997, the Company had no amounts outstanding on its revolving loan
credit facility. Letters of credit commitments outstanding under the credit
facility were $2,428,000. Borrowings of $1,500,000 were 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
11
<PAGE>
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.
Notes payable also included a CAPEX Term Loan which bears interest at a variable
rate equal to the prime rate plus 1%, provides for monthly principal payments of
$55,555 plus the related interest payment, and matures in October 1999.
The Company's merchandise inventory at July 31, 1997 was approximately 5% higher
than that of July 31, 1996 which the Company believes is lower than optimal. The
Company believes that the lower than optimal overall inventory level and the
short supply of certain popular products had an impact on the lower sales.
During the six-month period ended July 31, 1997, the Company closed two Sharper
Image stores located in Novato, California and Washington, D.C.. The Company
also converted two Sharper Image SPA Collection stores located in Walnut Creek,
California and Skokie, Illinois to Sharper Image stores. The Company is
currently evaluating its plan to open one to three new Sharper Image stores
during the fourth quarter. Total capital expenditures estimated for the new and
existing stores, corporate headquarters, and the distribution center for fiscal
1997 are between $4.0 million to $6.0 million.
The Company believes it can fund its cash needs through internally generated
cash, trade credit and the secured revolving loan credit facility. Excluding the
liability related to the one time charge for the closure of the SPA Collection
division in the amount of $5,459,000, which is included in Accounts payable and
accrued liabilities at July 31, 1997, the Company's working capital totaled
$13,356,000 compared to $12,572,000 as of July 31, 1996. Similarly, the current
ratio as of the end of the second quarter for both periods was 1.5.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. The secondary peak period for the Company is June, reflecting
the gifting for Father's Day and graduations. A substantial portion of the
Company's total revenues and all or most of the Company's net earnings occur in
the fourth quarter ending January 31. The Company generally experiences lower
revenues and earnings during the other quarters and, as is typical in the retail
industry, has incurred and may continue to incur losses in these quarters. The
results of operations for these interim periods are not necessarily indicative
of the results for the full fiscal year.
Uncertainties and Risk
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
12
<PAGE>
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.
13
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1997 Annual Meeting of Stockholders (the "annual
Meeting") was held on June 9, 1997. The following matters were voted on
by the stockholders:
1. Election of six Directors. Richard J. Thalheimer, Elyse Eng
Thalheimer, Alan Thalheimer, Gerald Napier, Maurice Gregg and J. Gary
Shansby were elected to the Company's Board of Directors. The results
of the voting was as follows: 7,254,360 votes in favor of Richard J.
Thalheimer, with 8,492 votes withheld, 7,249,409 votes in favor of
Elyse Eng Thalheimer, with 13,443 votes withheld, 7,247,259 votes in
favor of Alan Thalheimer, with 15,593 votes withheld, 7,246,469 votes
in favor of Gerald Napier, with 16,383 votes withheld, 7,252,469 votes
in favor of Maurice Gregg, with 10,383 votes withheld, 7,253,669 votes
in favor of J. Gary Shansby, with 9,183 votes withheld.
2. Ratification of selection of Deloitte & Touche LLP as independent
public accountants for the Company for the fiscal year ending January
31, 1998. The result of the vote was 7,259,345 shares in favor, 1,755
shares against, 1,752 shares abstaining and 1,004,088 broker non-
votes.
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).)
14
<PAGE>
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)
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))
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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).
10.18 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).
15
<PAGE>
10.19 CAPEX Term Loan Promissory note dated October 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10Q for the quarter ended
October 31, 1996.)
10.20 Employment Agreement between the Company and Mr. Barry Gilbert, its
Vice Chairman and Chief Operating Officer dated and effective December
2, 1996. (Incorporated by reference to Exhibit 10.20 to the Form 10-K
for the fiscal year ended January 31, 1997.)
10.21 Amendment to the Financing Agreement dated February 13, 1997 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10-K for the fiscal year ended
January 31, 1997.)
10.22 Warrant to Purchase Common Stock Agreement dated February 13, 1997
between the Company and The CIT Group/Business Credit Inc.
(Incorporated by reference to Exhibit 10.22 to the Form 10-K for the
fiscal year ended January 31, 1997.)
10.23 Amendment to the Financing Agreement dated March 24, 1997 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.23 to the Form 10-K for the fiscal year ended
January 31, 1997.)
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
July 31, 1997.
16
<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: September 12, 1997 by:/s/ Craig P. Womack
------------------ -----------------------------------
Craig P. Womack
President
Chief Administrative Officer
by:/s/ Tracy Y. Wan
-----------------------------------
Tracy Y. Wan
Senior Vice President
Chief Financial Officer
17
<TABLE>
Exhibit 11.1
SHARPER IMAGE CORPORATION
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------------------- -------------------------------
Dollars in thousands, except per share amounts 1997 1996 1997 1996
--------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
Net loss $ (1,492) $ (1,052) $ (3,658) $ (3,273)
Average shares of common stock
outstanding during the period 8,273,103 8,259,393 8,270,073 8,255,799
Add:
Incremental shares from assumed
exercise of stock options (Primary) * * * *
--------------- ---------------- -------------- -----------
8,273,103 8,259,393 8,270,073 8,255,799
=============== ================ ============== ===========
Primary loss per share $ (0.18) $ (0.13) $ (0.44) $ (0.40)
=============== ================ ============== ===========
Average shares of common stock
outstanding during the period 8,273,103 8,259,393 8,270,073 8,255,799
Add:
Incremental shares from assumed
exercise of stock options (Fully-diluted) * * * *
--------------- ---------------- -------------- -----------
8,273,103 8,259,393 8,270,073 8,255,799
=============== ================ ============== ===========
Fully-diluted loss per share $ (0.18) $ (0.13) $ (0.44) $ (0.40)
=============== ================ ============== ===========
<FN>
* Incremental shares from assumed exercise of stock options and warrants are
antidilutive for primary and fully diluted loss per share, and therefore
not presented.
</FN>
</TABLE>
18
Deloitte &
Touche LLP
- ----------- -----------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
September 12, 1997
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 July 31, 1997 and
1996, as indicated in our report August 20, 1997; 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 July 31, 1997, 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 meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
- -----------------
Deloitte & Touche
Tohmatsu
International
- -----------------
[COPY TO COME]
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000811696
<NAME> SHARPER IMAGE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 647
<SECURITIES> 0
<RECEIVABLES> 5,286
<ALLOWANCES> (516)
<INVENTORY> 26,939
<CURRENT-ASSETS> 42,864
<PP&E> 56,475
<DEPRECIATION> (36,212)
<TOTAL-ASSETS> 66,753
<CURRENT-LIABILITIES> 34,967
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 24,680
<TOTAL-LIABILITY-AND-EQUITY> 66,753
<SALES> 48,135
<TOTAL-REVENUES> 43,340
<CGS> 23,472
<TOTAL-COSTS> 45,709
<OTHER-EXPENSES> (10)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> (2,487)
<INCOME-TAX> (995)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,492)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
