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, 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 (I.R.S. Employer
(State of Incorporation) 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, 8,354,640 shares as of December 12, 1997
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
October 31, October 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 $547 $10,873 $573
Accounts receivable, net of allowance for doubtful
accounts of $493, $505, and $506 6,957 5,915 5,758
Merchandise inventories 38,496 27,365 36,403
Deferred catalog costs 6,794 3,713 5,353
Deferred taxes, prepaid expenses and other 9,014 4,495 7,291
-------------- -------------- --------------
Total Current Assets 61,808 52,361 55,378
Property and equipment, net 19,786 23,012 22,574
Other assets 3,626 3,431 1,998
============== ============== ==============
Total Assets $85,220 $78,804 $79,950
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $36,471 $36,653 $30,044
Deferred revenue 6,469 5,045 4,968
Income taxes payable -- 307 --
Current portion of notes payable 942 927 921
-------------- -------------- --------------
Total Current Liabilities 43,882 42,932 35,933
Revolving loan 11,247 -- 8,085
Notes payable 3,538 4,245 4,479
Other liabilities 3,267 3,178 3,613
-------------- -------------- --------------
Total Liabilities 61,934 50,355 52,110
-------------- -------------- --------------
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,
8,342,640, 8,266,940 and 8,265,140 shares 83 83 83
Additional paid-in capital 9,718 9,590 9,586
Retained earnings 13,485 18,776 18,171
-------------- -------------- --------------
Total Stockholders' Equity 23,286 28,449 27,840
-------------- -------------- --------------
Total Liabilities and Stockholders' Equity $85,220 $78,804 $79,950
============== ============== ==============
<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,
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 44,584 $ 41,326 $ 133,421 $ 131,189
Less: returns and allowances 5,446 5,057 16,377 16,038
----------- ----------- ----------- -----------
Net Sales 39,138 36,269 117,044 115,151
Other revenue 1,968 3,099 3,675 4,904
----------- ----------- ----------- -----------
41,106 39,368 120,719 120,055
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of products 22,115 20,282 65,150 62,400
Buying and occupancy 5,946 6,071 17,436 17,456
Advertising and promotion 4,036 4,562 12,297 15,095
General, selling, and administrative 11,429 11,064 34,189 33,085
----------- ----------- ----------- -----------
43,526 41,979 129,072 128,036
----------- ----------- ----------- -----------
OPERATING LOSS (2,420) (2,611) (8,353) (7,981)
OTHER INCOME (EXPENSE):
Interest expense, net (228) (199) (412) (293)
Other, net 30 15 50 24
----------- ----------- ----------- -----------
(198) (184) (362) (269)
----------- ----------- ----------- -----------
Loss Before Income Tax Benefit (2,618) (2,795) (8,715) (8,250)
Income Tax Benefit (1,047) (1,118) (3,486) (3,300)
----------- ----------- ----------- -----------
Net Loss (1,571) (1,677) (5,229) (4,950)
=========== =========== =========== ===========
Weighted Average Number of Shares 8,319,688 8,262,709 8,286,854 8,258,119
Net Loss Per Share ($0.19) ($0.20) ($0.63) ($0.60)
=========== =========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months Ended
October 31,
---------------------
Dollars in thousands 1997 1996
-------- --------
Cash was Provided by (Used for) Operating Activities:
Net loss ($ 5,229) ($ 4,950)
Adjustments to reconcile net loss to net cash
provided by (used for) operations:
Depreciation and amortization 5,104 3,044
Deferred rent expense 128 96
Deferred income taxes (3,486) (3,300)
Changes in:
Merchandise inventories (11,131) (12,090)
Accounts receivable (1,042) (1,322)
Deferred catalog costs, prepaid expenses and other (4,309) (2,837)
Accounts payable and accrued expenses (182) 4,820
Deferred revenue and other liabilities 1,078 (411)
-------- --------
Cash Used for Operating Activities (19,069) (16,950)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (1,935) (5,000)
Disposal of equipment 57 108
-------- --------
Cash Used for Investing Activities (1,878) (4,892)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loans 19,497 16,635
Payments on revolving loans (8,250) (8,550)
Proceeds from notes payable -- 2,000
Issuance of common stock for stock options 128 32
Repurchase of common stock (62) --
Principal payments on notes payable (692) (178)
-------- --------
Cash Provided by Financing Activities 10,621 9,939
-------- --------
Net Decrease in Cash and Equivalents (10,326) (11,903)
-------- --------
Cash and Equivalents at Beginning of Period 10,873 12,476
-------- --------
Cash and Equivalents at End of Period $ 547 $ 573
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 463 $ 419
Income Taxes $ 409 $ 459
See notes to financial statements.
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and nine-month periods ended October 31, 1997 and 1996
(Unaudited)
NOTE A - Financial Statements
The condensed balance sheets at October 31, 1997 and 1996, the condensed
statements of operations for the three-month and nine-month periods ended
October 31, 1997 and 1996, and the condensed statements of cash flows for the
nine-month periods ended October 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 October 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 notes 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 October 31, Nine Months Ended October 31,
----------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
Pro forma Loss Per Share:
<S> <C> <C> <C> <C>
Basic $(0.19) $(0.20) $(0.63) $(0.60)
Diluted $(0.19) $(0.20) $(0.63) $(0.60)
</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 October 31, 1997, the Company had $11.2 million outstanding on its revolving
loan credit facility. Letters of credit commitments outstanding under the credit
facility were $3.7 million. Borrowings of $1.3 million 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.
6
<PAGE>
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 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 $8.0 million. Accordingly, the
liability related to this one-time charge at January 31, and October 31, 1997,
in the amount of $8.0 million and $4.5 million, respectively, was included in
Accounts payable and accrued expenses. No such amount was included at October
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 October 31, 1997 and 1996 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.
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 October 31, 1997 and 1996 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,
1997, 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 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
November 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 Nine Months Ended
October 31, October 31,
---------- -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net store sales 69.4 % 68.3 % 70.7 % 71.0 %
Net catalog sales 25.8 23.8 26.3 24.9
Other revenue 4.8 7.9 3.0 4.1
------------- -------------- ------------ -------------
Total Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Costs and Expenses:
Cost of products 53.8 51.5 54.0 52.0
Buying and occupancy 14.5 15.4 14.4 14.5
Advertising and promotion 9.8 11.6 10.2 12.6
General, selling
and administrative 27.8 28.1 28.3 27.6
Other Expenses 0.5 0.5 0.3 0.2
------------- -------------- ------------ -------------
Loss Before Income Tax Benefit (6.4) (7.1) (7.2) (6.9)
Income Tax Benefit (2.6) (2.8) (2.9) (2.8)
------------- -------------- ------------ -------------
Net Loss (3.8) % (4.3) % (4.3) % (4.1) %
============= ============== ============ =============
</TABLE>
9
<PAGE>
Revenues
Net sales for the three-month and nine-month periods ended October 31, 1997,
increased $2,869,000, or 8%, and $1,893,000, or 2%, from the comparable periods
of the prior year. Returns and allowances for the three-month and nine-month
periods ended October 31, 1997, were the same as last year at 12% of sales. For
the three-month period ended October 31, 1997, as compared with the same period
last year, net store sales increased $1,619,000, or 6%. For the nine-month
period ended October 31, 1997, net store sales were even with the prior year.
For the three-month period ended October 31, 1997, comparable store sales
increased by 7%. For the nine month-period ended October 31, 1997, comparable
store sales were even with the prior year. Net catalog sales for the three-month
and nine-month periods ended October 31, 1997 increased $702,000, or 6%, and
$1,382,000, or 4%.
The increase in net store sales for the three-month period ended October 31,
1997 as compared with the same prior year period reflected a 13% increase in
average revenue per transaction, offset by a 5% decrease in total store
transactions. For the nine-month period ended October 31, 1997 as compared with
the same prior year period, net store sales reflected a 6% increase in average
revenue per transaction, offset by 5% decrease in total store transactions. The
increase in net catalog sales for the three-month and nine-month periods ended
October 31, 1997 reflected an increase in average revenue per order of 39% and
49%, partially offset by a decrease of 18% and 29% in total catalog orders as
compared to the same prior year periods. The increases in net store sales and
comp store sales for the three month-period have brought year-to-date sales to a
level comparable to the prior year. The Company believes that the increase in
net sales for the three-month period ended October 31, 1997 benefited from new
product introductions, including Sharper Image Design proprietary products.
Cost of Products
Cost of products for the three-month and nine-month periods ended October 31,
1997, increased $1,833,000, or 9%, and $2,750,000, or 4%, 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.
Buying and Occupancy
Buying and occupancy costs for the three-month and nine-month periods ended
October 31, 1997, decreased 2% and were even with the prior year's comparable
periods. Occupancy costs reflect the costs associated with one new store opened
during the last three months of the prior fiscal year, the elimination of the
costs of two Sharper Image stores closed during the nine-month period ended
October 31, 1997, and the closure of the Sharper Image SPA division.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month and nine-month periods
ended October 31, 1997, decreased $526,000, or 12%, and $2,798,000, or 19% from
the comparable prior year periods. The decrease in advertising and promotion
expenses for the three-month and nine-month periods ended October 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 nine-month
periods ended October 31, 1997, increased $365,000, or 3%, and $1,104,000, or 3%
from the comparable prior year periods. The increase was primarily due to higher
net delivery expense related to mail-order shipments and certain additional
administrative support, 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 nine-month period ended October 31, 1997 with available cash, trade credit,
and borrowings under the credit facility. During the nine-month period ended
October 31, 1997, the Company's cash decreased by $10,326,000 to $547,000
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 October 31, 1997, the Company had $11.2 million outstanding on its revolving
loan credit facility. Letters of credit commitments outstanding under the credit
facility were $3.7 million. Borrowings of $1.3 million were outstanding under
the CAPEX term loans which is included in notes payable.
11
<PAGE>
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 8.4%, 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 inventories at October 31, 1997 were 6% higher than at
October 31, 1996. The Company's inventories reflect incremental amounts for the
support of four new Sharper Image stores opened during November.
During the nine-month period ended October 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. Subsequent to
the quarter ended October 31, 1997, the Company opened four new Sharper Image
stores located in Aventura, Florida, Denver, Colorado, Bloomington, Minnesota,
and Danbury, Connecticut. Total capital expenditures estimated for the new and
existing stores, corporate headquarters, and the distribution center for fiscal
1997 are approximately $4.0 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 $4.5 million, which is included in Accounts payable
and accrued liabilities at October 31, 1997, the Company's working capital
totaled $22.5 million compared to $19.4 million as of October 31, 1996.
Similarly, the current ratio as of October 31, 1997 was 1.6 compared to 1.5 as
of October 31, 1996.
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.
12
<PAGE>
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 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 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 Exhibit 10.2 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)
14
<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))
10.13 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).
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.)
15
<PAGE>
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
October 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: December 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 Nine Months Ended
October 31, October 31,
---------- -----------
Dollars in thousands, except per share amounts 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (1,571) $ (1,677) $ (5,229) $ (4,950)
Average shares of common stock
outstanding during the period 8,319,688 8,262,709 8,286,854 8,258,119
Add:
Incremental shares from assumed
exercise of stock options (Primary) * * * *
------------ -------------- ----------- -----------
8,319,688 8,262,709 8,286,854 8,258,119
============ ============== =========== ===========
Primary loss per share $ (0.19) $ (0.20) $ (0.63) $ (0.60)
============ ============== =========== ===========
Average shares of common stock
outstanding during the period 8,319,688 8,262,709 8,286,854 8,258,119
Add:
Incremental shares from assumed
exercise of stock options (Fully-diluted) * * * *
------------ -------------- ----------- -----------
8,319,688 8,262,709 8,286,854 8,258,119
============ ============== =========== ===========
Fully-diluted loss per share $ (0.19) $ (0.20) $ (0.63) $ (0.60)
============ ============== =========== ===========
<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
November 20, 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 October 31, 1997
and 1996, as indicated in our report dated November 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 October 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.
yours truly,
/s/ Deloitte & Touche LLP
- -----------------
Deloitte & Touche
Tohmatsu
International
- -----------------
<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> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 547
<SECURITIES> 0
<RECEIVABLES> 7,450
<ALLOWANCES> (493)
<INVENTORY> 38,496
<CURRENT-ASSETS> 61,808
<PP&E> 57,690
<DEPRECIATION> (37,904)
<TOTAL-ASSETS> 85,220
<CURRENT-LIABILITIES> 43,882
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 23,203
<TOTAL-LIABILITY-AND-EQUITY> 85,220
<SALES> 44,584
<TOTAL-REVENUES> 41,106
<CGS> 22,115
<TOTAL-COSTS> 43,526
<OTHER-EXPENSES> (30)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> (2,618)
<INCOME-TAX> (1,047)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,571)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
