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, 1998 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, 8,529,750 shares as of September 11, 1998
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31, July 31,
1998 1998 1997
Dollars in thousands, except per share amounts (Unaudited) (Note A) (Unaudited)
----------- -------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 593 $ 3,501 $ 647
Accounts receivable, net of allowance for doubtful
accounts of $644, $508 and $516 5,171 8,189 4,770
Merchandise inventories 25,243 34,534 26,939
Deferred catalog costs 4,837 4,982 3,028
Prepaid expenses and other 5,777 3,429 7,480
------- ------- -------
Total Current Assets 41,621 54,635 42,864
Property and equipment, net 20,078 20,842 20,263
Deferred taxes and other assets 3,381 3,185 3,626
------- ------- -------
Total Assets $65,080 $78,662 $66,753
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $23,851 $35,271 $28,076
Deferred revenue 6,220 6,784 5,954
Current portion of notes payable 958 947 937
------- ------- -------
Total Current Liabilities 31,029 43,002 34,967
Revolving loan 1,975 -- --
Notes payable 2,818 3,299 3,775
Other liabilities 3,134 3,205 3,248
------- ------- -------
Total Liabilities 38,956 49,506 41,990
------- ------- -------
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,
8,529,750, 8,356,280 and 8,285,040 shares 85 83 83
Additional paid-in capital 10,043 9,704 9,624
Retained earnings 15,996 19,369 15,056
------- ------- -------
Total Stockholders' Equity 26,124 29,156 24,763
------- ------- -------
Total Liabilities and Stockholders' Equity $65,080 $78,662 $66,753
======= ======= =======
</TABLE>
See notes to financial statements.
2
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SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Dollars in thousands, except per share amounts July 31, July 31,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 55,367 $ 48,797 $ 100,476 $ 89,983
Less: returns and allowances 6,155 5,818 12,025 11,122
----------- ----------- ----------- -----------
Net Sales 49,212 42,979 88,451 78,861
Other revenue 320 361 832 752
----------- ----------- ----------- -----------
49,532 43,340 89,283 79,613
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of products 25,780 23,472 46,522 43,035
Buying and occupancy 6,261 5,783 12,599 11,490
Advertising and promotion 6,904 4,715 11,416 8,261
General, selling, and administrative 12,383 11,739 24,030 22,760
----------- ----------- ----------- -----------
51,328 45,709 94,567 85,546
----------- ----------- ----------- -----------
OPERATING LOSS (1,796) (2,369) (5,284) (5,933)
OTHER INCOME (EXPENSE):
Interest expense - net (181) (128) (347) (183)
Other - net 5 10 9 19
----------- ----------- ----------- -----------
(176) (118) (338) (164)
----------- ----------- ----------- -----------
Loss Before Income Tax Benefit (1,972) (2,487) (5,622) (6,097)
Income Tax Benefit (789) (995) (2,249) (2,439)
----------- ----------- ----------- -----------
Net Loss $ (1,183) $ (1,492) $ (3,373) $ (3,658)
=========== =========== =========== ===========
Net Loss Per Share - basic and diluted $ (0.14) $ (0.18) $ (0.40) $ (0.44)
=========== =========== =========== ===========
Weighted Average Number of Shares -
basic and diluted 8,525,826 8,273,103 8,444,787 8,270,073
</TABLE>
See notes to financial statements.
3
<PAGE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended
July 31,
Dollars in thousands 1998 1997
---- ----
Cash was Provided by (Used for) Operating Activities:
Net loss $ (3,373) $ (3,658)
Adjustments to reconcile net loss to net cash
used for operations:
Depreciation and amortization 2,329 3,408
Deferred rent expense 39 95
Deferred income taxes (2,249) (2,439)
Changes in:
Merchandise inventories 9,291 426
Accounts receivable 3,018 1,145
Deferred catalog costs, prepaid expenses and other (150) (57)
Accounts payable and accrued expenses (11,396) (8,576)
Deferred revenue and other liabilities (674) 577
-------- --------
Cash Used for Operating Activities (3,165) (9,079)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (1,748) (716)
Disposal of equipment 159 57
Cash Used for Investing Activities (1,589) (659)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loan 21,152 1,100
Payments on revolving loan (19,177) (1,100)
Issuance of common stock for stock options 341 34
Repurchase of common stock 0 (62)
Principal payments on notes payable (470) (460)
-------- --------
Cash Provided by (Used for) Financing Activities 1,846 (488)
-------- --------
Net Decrease in Cash and Equivalents (2,908) (10,226)
-------- --------
Cash and Equivalents at Beginning of Period 3,501 10,873
-------- --------
Cash and Equivalents at End of Period $ 593 $ 647
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 351 $ 268
Income Taxes $ 0 $ 383
See notes to financial statements.
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and six-month periods ended July 31, 1998 and 1997
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at July 31, 1998 and 1997, and the related
condensed statements of operations and cash flows for the three-month and
six-month periods ended July 31, 1998 and 1997 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, 1998 and
1997, 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, 1998, 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.
Accordingly, these interim financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's 1997
Annual Report.
NOTE B- Revolving Loan and Notes Payable
The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc. (CIT) which expires September 2003. The credit facility has been
amended on several occasions and, as of July 31, 1998, the agreement allows the
Company borrowings and letters of credit up to a maximum of $28 million for the
period from October 1, 1998 through December 31, 1998, and $20 million for other
times of the year based on inventory levels. The credit facility is secured by
the Company's inventory, accounts receivable, general intangibles and certain
other assets. Borrowings under this facility bear interest at either prime plus
0.50% per annum or at LIBOR plus 2.50% per annum. The credit facility contains
certain financial covenants pertaining to interest coverage ratio and net worth
and contains limitations on operating leases, other borrowings, dividend
payments and stock repurchases. For the period ended July 31, 1998, the Company
was in compliance with all covenants. At July 31, 1998, the Company had $2.0
million outstanding on its revolving credit facility. Letter of credit
commitments outstanding under the credit facility were $3.7 million. Based on
financial performance, effective September 1, 1998, interest on borrowings under
the credit facility will be lowered to either prime plus 0.25% per annum or
LIBOR plus 2.25% per annum. Future interest rates may stay at this lower level
if certain financial performance criteria are met.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.75%
per annum or at LIBOR plus 2.75% per annum. Each Term Loan is to be repaid in 36
equal monthly principal installments. Notes payable included a Term loan which
bears interest at a variable rate of prime plus 0.75%, provides for monthly
principal payments of $55,555 plus
5
<PAGE>
the related interest payment, and matures in October 1999. At July 31, 1998, the
balance of the Term Loan was $0.8 million. Based on financial performance,
effective September 1, 1998, interest on borrowings under the credit facility
will be lowered to either prime plus 0.50% per annum or LIBOR plus 2.50% per
annum. Future interest rates may stay at this lower level if certain financial
performance criteria are met.
Notes payable also included two mortgage loans collateralized by certain
property and equipment. In connection with the expansion of the Company's
distribution center in 1995, the Company refinanced the mortgage loan. This $3.0
million note 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 respective balance of each note payable at July 31, 1998 is $2.7 million and
$0.2 million.
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 position or results of
operations.
NOTE D - New Accounting Standards
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities, which
requires costs of start-up activities and organization costs to be expensed as
incurred. The SOP requires entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. The
SOP will be effective for fiscal years beginning after December 15, 1998. The
Company's adoption of the new accounting standard will involve the recognition
of the cumulative effect of the change in accounting principle required by the
SOP as a one-time charge against earnings, net of any related income tax effect,
retroactive to the beginning of the fiscal year of adoption. The Company is in
the process of assessing the effect, if any, of this statement.
NOTE E - 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 July 31, 1998 and 1997 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.
6
<PAGE>
INDEPENDENT ACCOUNTANT'S 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, 1998 and 1997, 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 reviews, 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,
1998, and the related statement of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
March 25, 1998, 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, 1998 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
September 11, 1998
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 Six Months Ended
July 31, July 31,
-------- ---------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Net store sales 68.8% 71.7% 67.9% 71.3%
Net catalog sales 29.7 26.2 30.4 26.6
Net wholesale sales 0.9 1.3 0.8 1.2
Other revenue 0.6 0.8 0.9 0.9
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 52.1 54.2 52.1 54.1
Buying and occupancy 12.6 13.3 14.1 14.4
Advertising and promotion 13.9 10.8 12.8 10.4
General, selling
and administrative 25.0 27.1 26.9 28.6
Other Expense 0.4 0.3 0.4 0.2
----- ----- ----- -----
Loss Before Income Tax Benefit (4.0) (5.7) (6.3) (7.7)
Income Tax Benefit (1.6) (2.3) (2.5) (3.1)
----- ----- ----- -----
Net Loss (2.4)% (3.4)% (3.8)% (4.6)%
===== ===== ===== =====
8
<PAGE>
REVENUES
Net sales for the three-month and six-month periods ended July 31, 1998,
increased $6,233,000, or 14.5%, and $9,590,000, or 12.2%, from the comparable
periods of the prior year. Returns and allowances for the three-month and
six-month periods ended July 31, 1998, were 11.1% and 12.0% of sales, as
compared with 11.9% and 12.4% of sales for the comparable prior year periods.
For the three-month and six-month periods ended July 31, 1998, as compared with
the same periods last year, net store sales increased $2,981,000, or 9.6%, and
$3,845,000, or 6.8%, comparable store sales increased by 7.2% and 4.3%, and net
catalog sales increased $3,349,000 or 29.5%, and $5,970,000 or 28.2%. The
increase in net store sales for the three-month period ended July 31, 1998 as
compared with the same prior year period reflects an 11.8% increase in total
store transactions, which was partially offset by a 2.2% decrease in average
revenue per transaction. Total store transactions increased 3.9% for the
six-months ended July 31, 1998, with a 2.7% increase in average revenue per
transaction, compared with the same prior year period. The increase in net store
sales for the three-month and six-month periods ended July 31, 1998 is also
attributable to the opening of five new stores since July 31, 1997, partially
offset by three stores that closed during that same period. The increase in net
catalog sales for the three-month and six-month periods ended July 31, 1998
reflects an increase of 55.9% and 45.0% in total catalog orders, partially
offset by a 16.9% and 11.6% decrease in average revenue per order, compared to
the same prior year periods. The increase in net catalog sales is due to
increases in sales for both The Sharper Image and The Sharper Image Home
Collection catalogs, reflecting increased circulation and improved productivity.
In addition, the increase in net catalog sales reflects an increase in sales
from the Company's Internet site, sharperimage.com. The increase in The Sharper
Image store and catalog sales also reflects the emphasis and the increase in
sales of the Company's Sharper Image Design proprietary products.
COST OF PRODUCTS
Cost of products for the three-month and six-month periods ended July 31, 1998
increased $2,308,000, or 9.8%, and $3,487,000, or 8.1%, from the comparable
prior year periods. The increase in cost of products is due to the higher sales
volume compared to the same periods last year. The gross margin rate for the
three-month period ended July 31, 1998 was 47.6% which was 2.2 percentage points
better than the comparable prior period. The gross margin rate for the six-month
period ended July 31, 1998 was 47.4% which was 2.0 percentage points better than
the comparable prior period. The higher gross margin rates reflect an increase
in sales of the Sharper Image Design proprietary products, which generally carry
higher margins.
BUYING AND OCCUPANCY
Buying and occupancy costs for the three-month and six-month periods ended July
31, 1998 increased $478,000, or 8.3%, and $1,109,000, or 9.7% from the
comparable prior year periods. The increase primarily reflects the occupancy
costs associated with the five new stores opened since July 31, 1997, which was
partially offset by the elimination of the occupancy costs of the three Sharper
Image stores closed during that same period.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses for the three-month and six-month periods
ended July 31, 1998 increased $2,189,000, or 46.4%, and $3,155,000, or 38.2%
from the comparable prior year periods. The increase in advertising and
promotion expenses for the three-month period ended July 31, 1998 reflects a
21.2% increase in pages circulated, including an 8.0% increase in circulation,
for The Sharper Image catalog, an increase in catalog paper prices as compared
with the prior year, and higher other advertising costs. The increase in
advertising and promotion expenses for the six-month period ended July 31, 1998
reflects a 16.3% increase in pages
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circulated, including a 6.7% increase in circulation, for The Sharper Image
catalog, increased circulation of the Sharper Image Home Collection catalog, an
increase in catalog paper prices as compared with the prior year, and higher
other advertising costs associated with the introduction of new products.
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES
General, selling and administrative expenses for the three-month and six-month
periods ended July 31, 1998 increased $644,000, or 5.5%, and $1,270,000, or 5.6%
from the comparable prior year periods. The increase was primarily due to
increases in overall selling expenses related to the increase in net sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company met its short-term liquidity needs and its capital requirements in
the six-month period ended July 31, 1998 with available cash, trade credit, and
borrowings under the credit facility. During the six-month period ended July 31,
1998, the Company's cash decreased by $2,908,000 to $593,000 primarily due to
the funding of working capital during the period.
The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc. (CIT) which expires September 2003. The credit facility has been
amended on several occasions and, as of July 31, 1998, the agreement allows the
Company borrowings and letters of credit up to a maximum of $28 million for the
period from October 1, 1998 through December 31, 1998, and $20 million for other
times of the year based on inventory levels. The credit facility is secured by
the Company's inventory, accounts receivable, general intangibles and certain
other assets. Borrowings under this facility bear interest at either prime plus
0.50% per annum or at LIBOR plus 2.50% per annum. The credit facility contains
certain financial covenants pertaining to interest coverage ratio and net worth
and contains limitations on operating leases, other borrowings, dividend
payments and stock repurchases. For the period ended July 31, 1998, the Company
was in compliance with all covenants. At July 31, 1998, the Company had $2.0
million outstanding on its revolving credit facility. Letter of credit
commitments outstanding under the credit facility were $3.7 million. Based on
financial performance, effective September 1, 1998, interest on borrowings under
the credit facility will be lowered to either prime plus 0.25% per annum or
LIBOR plus 2.25% per annum. Future interest rates may stay at this lower level
if certain financial performance criteria are met.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.75%
per annum or at LIBOR plus 2.75% per annum. Each Term Loan is to be repaid in 36
equal monthly principal installments. Notes payable included a Term Loan which
bears interest at a variable rate of prime plus 0.75%, provides for monthly
principal payments of $55,555 plus the related interest payment, and matures in
October 1999. At July 31, 1998, the balance of the Term Loan was $0.8 million.
Based on financial performance, effective September 1, 1998, interest on
borrowings under the credit facility will be lowered to either prime plus 0.50%
per annum or LIBOR plus 2.50% per annum. Future interest rates may stay at this
lower level if certain financial performance criteria are met.
Notes payable also included two mortgage loans collateralized by certain
property and equipment. In connection with the expansion of the Company's
distribution center in 1995, the Company refinanced the mortgage loan. This $3.0
million note 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
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for monthly payments of principal and interest in the amount of $14,320, and
matures in January 2000. The respective balance of each note payable at July 31,
1998 is $2.7 million and $0.2 million. During the six-month period ended July
31, 1998, the Company closed two stores located in Escondido, California and
Gurnee Mills, Illinois. The Company is currently evaluating its plan to open
four to eight new Sharper Image stores during fiscal 1998. Total capital
expenditures estimated for the new and existing stores, including the remodel of
a number of existing stores, corporate headquarters, and the distribution center
for fiscal 1998 are between $6 million to $8 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 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.
YEAR 2000 MATTERS
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000. The year 2000 issue could result, at
the Company and elsewhere, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities. The
company has assessed its computer and business processes and is reprogramming
its computer applications to provide for their continued functionality. An
assessment of the readiness of the external entities with which it interfaces is
ongoing.
In 1996, the Company developed a detailed year 2000 Conversion Project Plan
("Plan") to address the methods to correct possible disruptions of operations
due to the year 2000 issue. The Plan took into consideration the following
items: (i) identification and inventorying of hardware, application software,
and equipment utilizing programmable logic chips to control aspects of their
operation, with potential year 2000 problems; (ii) assessment of scope of year
2000 issues for, and assigning priorities to, each item based on its importance
to the Company's operations; (iii) remediation of year 2000 issues in accordance
with assigned priorities, by correction, upgrade, replacement or retirement;
(iv) testing for and validation of year 2000 compliance; (v) determination of
key vendor and customers and their year 2000 compliance. Because the Company
uses a variety of information technology systems, internally-developed and
third-party provided software and embedded chip equipment, depending upon
business function and location, various aspects of the Company's year 2000
efforts are in different phases and are proceeding in parallel. At this time,
the difficult and time consuming task of identifying and inventorying hardware
and application software with year 2000 issues and developing specific
strategies for compliance has been completed. The assessment process of internal
operating systems is complete, with critical applications being determined,
planned for, and outlined. The Company's main operating system and hardware have
been upgraded
11
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for year 2000 compliance, with all critical application conversion work having
begun. This critical conversion work is scheduled to be tested and installed by
January 1999. Non-critical system conversions have been identified and scheduled
for completion in June 1999. This conversion process encompasses all areas of
operations of the Company, from verification of the year 2000 compliance of the
software accounting packages, to email systems, to telephone systems. Based upon
a detailed review and update of the Plan performed in June 1998, conversion of
all critical and non-critical Company programs are expected to be completed with
full implementation by June 1999.
The Company's operations are also dependent on the year 2000 readiness of third
parties who do business with the Company. In particular, the Company's
information technology systems interact with commercial electronic transaction
processing systems to handle customer credit card purchases and other point of
sale transactions, and the Company is dependent on third-party suppliers of such
infrastructure elements as telephone services, electric power, water, and
banking facilities. The Company does not depend to any significant degree on any
single merchandise vendor or upon electronic transaction processing with
individual vendors for merchandise purchases. The Plan includes identifying and
initiating formal communications with key third parties and suppliers and with
significant merchandise vendors to determine the extent to which the Company
will be vulnerable to such parties' failure to resolve their own year 2000
issues. Although the Company has not been put on notice that any known third
party problem will not be resolved, the Company has limited information and no
assurance of additional information concerning the year 2000 readiness of third
parties. The resulting risks to the Company's business are very difficult to
assess.
The estimated cost for this project is between $500,000 and $1,000,000, and is
being funded through operating cash flows. Operating costs related to year 2000
compliance projects will be incurred over several quarters and will be expensed
as incurred.
Based upon the planning and conversions completed to date, the Company believes
that, with modifications to existing software, conversions to new software, and
appropriate remediation of embedded chip equipment, the year 2000 issue is not
reasonably likely to pose significant operational problems for the Company's
information technology systems and embedded chip equipment as so modified and
converted.
The Company is presently unable to assess the likelihood that the Company will
experience operational problems due to unresolved year 2000 problems of third
parties who do business with the Company. There can be no assurance that other
entities will achieve timely year 2000 compliance; if they do not, year 2000
problems could have a material impact on the Company's operations. Where
commercially reasonable to do so, the Company intends to assess its risks with
respect to failure by third parties to be year 2000 compliant and to seek to
mitigate those risks. If such mitigation is not achievable, year 2000 problems
could have a material impact on the Company's operations.
The Company's estimates of the costs of achieving year 2000 compliance and the
date by which year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the
12
<PAGE>
availability and cost of personnel trained in year 2000 remediation work, the
ability to locate and correct all computer codes, the success achieved by the
Company's suppliers in reaching year 2000 readiness, the timely availability of
necessary replacement items and similar uncertainties.
The Company presently believes that the most reasonably likely worst-case
scenarios that the Company might confront with respect to year 2000 issues have
to do with third parties not being year 2000 compliant. The Company is presently
evaluating vendor and customer compliance and will develop contingency plans,
such as alternate vendor opportunities, after obtaining compliance evaluations.
The Company timeline is to develop contingency plans by September 1999.
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, transportation of products, unforeseen difficulties arising from the
Company or its vendors, suppliers or customers modifying their information
technology systems, software systems and embedded chip equipment to become year
2000 compliant, 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 1998 Annual Meeting of Stockholders (the "annual
Meeting") was held on June 8, 1998. The following matters were voted
on by the stockholders:
1. Election of five Directors. Richard J. Thalheimer, Alan Thalheimer,
Gerald Napier, Maurice Gregg and Morton David were elected to the
Company's Board of Directors. The results of the voting was as
follows: 7,296,405 votes in favor of Richard J. Thalheimer, with
51,060 votes withheld and 1,014,355 broker non-votes, 7,296,405 votes
in favor of Alan Thalheimer, with 51,060 votes withheld and 1,014,355
broker non-votes, 7,342,105 votes in favor of Gerald Napier, with
5,360 votes withheld and 1,014,355 broker non-votes, 7,342,105 votes
in favor of Maurice Gregg, with 5,360 votes withheld and 1,014,355
broker non-votes, 7,342,105 votes in favor of Morton David, with 5,360
votes withheld and 1,014,355 broker non-votes.
2. Ratification of selection of Deloitte & Touche LLP as independent
public accountants for the Company for the fiscal year ending January
31, 1999. The result of the vote was 7,339,984 shares in favor, 2,806
shares against, 4,675 shares abstaining and 1,014,355 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 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).)
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).
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.)
15
<PAGE>
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.)
10.24 Warrant to Purchase Common Stock Agreement dated April 6, 1998 between the
Company and the CIT Group/Business Credit Inc. (Incorporated by reference
to Exhibit 10.24 to the Form 10-K for the fiscal year ended January 31,
1998.)
10.25 Amendment to the Financing Agreement dated April 6, 1998 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by reference
to Exhibit 10.25 to the Form 10-K for the fiscal year ended January 31,
1998.)
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, 1998.
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 11, 1998 by:/s/ Barry Gilbert
-------------------- -----------------------------
Barry Gilbert
Vice Chairman
Chief Operating Officer
by:/s/ Tracy Y. Wan
-----------------------------
Tracy Y. Wan
Executive Vice President
Chief Financial Officer
17
Exhibit 11.1
SHARPER IMAGE CORPORATION
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------- --------
Dollars in thousands, except 1998 1997 1998 1997
per share amounts ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (1,183) $ (1,492) $ (3,373) $ (3,658)
Average shares of common stock
outstanding during the period 8,525,826 8,273,103 8,444,787 8,270,073
========== ========== ========== ==========
Basic Loss per Share $ (0.14) $ (0.18) $ (0.40) $ (0.44)
========== ========== ========== ==========
Average shares of common stock
outstanding during the period 8,525,826 8,273,103 8,444,787 8,270,073
Add:
Incremental shares from assumed
exercise of stock options - diluted * * * *
---------- ---------- ---------- ----------
8,525,826 8,273,103 8,444,787 8,270,073
========== ========== ========== ==========
Diluted Loss per Share $ (0.14) $ (0.18) $ (0.40) $ (0.44)
========== ========== ========== ==========
</TABLE>
* Incremental shares from assumed exercise of stock options are antidilutive
for diluted loss per share, and therefore are not presented.
Audit Letter
Exhibit 15.0
September 11, 1998
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, 1998 and
1997, as indicated in our report dated September 11, 1998; 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, 1998 is
incorporated by reference in Registration Statement No. 33-12755, No. 33-80504,
and No. 33-3327 on Forms S-8 of Sharper Image Corporation.
We are also 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,
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 593
<SECURITIES> 0
<RECEIVABLES> 5,815
<ALLOWANCES> (644)
<INVENTORY> 25,243
<CURRENT-ASSETS> 41,621
<PP&E> 60,155
<DEPRECIATION> 40,077
<TOTAL-ASSETS> 65,080
<CURRENT-LIABILITIES> 31,029
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 26,039
<TOTAL-LIABILITY-AND-EQUITY> 65,080
<SALES> 100,476
<TOTAL-REVENUES> 89,283
<CGS> 46,522
<TOTAL-COSTS> 94,567
<OTHER-EXPENSES> (9)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347
<INCOME-PRETAX> (5,622)
<INCOME-TAX> (2,249)
<INCOME-CONTINUING> (3,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,373)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
