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, 1999 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, 12,008,995 shares as of December 13, 1999
1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
October 31, January 31, October 31,
1999 1999 1998
Dollars in thousands, except per share amounts (Unaudited) (Note A) (Unaudited)
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 7,325 $ 8,389 $ 711
Accounts receivable, net of allowance for doubtful
accounts of $812, $804 and $902 10,498 6,787 7,673
Merchandise inventories 52,166 32,598 35,670
Deferred catalog costs 9,459 2,454 7,000
Prepaid expenses and other 6,290 5,605 7,099
-------- -------- --------
Total Current Assets 85,738 55,833 58,153
Property and equipment, net 23,605 22,513 20,947
Deferred taxes and other assets 4,262 3,699 3,380
-------- -------- --------
Total Assets $113,605 $ 82,045 $ 82,480
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 35,327 $ 28,613 $ 32,611
Deferred revenue 6,959 7,268 6,170
Income taxes payable -- 3,314 --
Current portion of notes payable 144 635 799
-------- -------- --------
Total Current Liabilities 42,430 39,830 39,580
Revolving loan -- -- 12,587
Notes payable 2,404 2,513 2,548
Other liabilities 3,260 3,053 3,101
-------- -------- --------
Total Liabilities 48,094 45,396 57,816
-------- -------- --------
Commitments and contingencies -- -- --
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,
11,972,730, 8,916,995 and 8,529,750 shares 119 89 85
Additional paid-in capital 43,086 12,589 10,043
Retained earnings 22,306 23,971 14,536
-------- -------- --------
Total Stockholders' Equity 65,511 36,649 24,664
-------- -------- --------
Total Liabilities and Stockholders' Equity $113,605 $ 82,045 $ 82,480
======== ======== ========
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
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<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,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 65,075 $ 48,500 $ 175,159 $ 148,976
Less: returns and allowances 7,230 5,946 19,395 17,971
------------ ------------ ------------ ------------
Net Sales 57,845 42,554 155,764 131,005
Other revenue 435 401 1,079 1,233
------------ ------------ ------------ ------------
58,280 42,955 156,843 132,238
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of products 29,384 22,404 78,019 68,927
Buying and occupancy 6,934 6,397 20,569 18,995
Advertising and promotion 6,619 4,906 19,046 16,322
General, selling, and administrative 15,286 12,285 42,031 36,314
------------ ------------ ------------ ------------
58,223 45,992 159,665 140,558
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 57 (3,037) (2,822) (8,320)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense) - net 192 (242) 50 (589)
Other - net (2) 845 (3) 854
------------ ------------ ------------ ------------
190 603 47 265
------------ ------------ ------------ ------------
Earnings (Loss) Before Income Tax (Benefit) 247 (2,434) (2,775) (8,055)
Income Tax (Benefit) 99 (974) (1,110) (3,222)
------------ ------------ ------------ ------------
Net Earnings (Loss) $ 148 $ (1,460) $ (1,665) $ (4,833)
============ ============ ============ ============
Net Earnings (Loss) Per Share - Basic $ 0.01 $ (0.17) $ (0.17) $ (0.57)
============ ============ ============ ============
Net Earnings (Loss) Per Share - Diluted $ 0.01 $ (0.17) $ (0.17) $ (0.57)
============ ============ ============ ============
Weighted Avg. Number of Shares - Basic 11,969,132 8,529,750 10,014,729 8,473,419
Weighted Avg. Number of Shares - Diluted 12,706,524 8,529,750 10,014,729 8,473,419
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
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<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION> Nine Months Ended
October 31,
-----------
Dollars in thousands 1999 1998
-------- --------
<S> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net loss $ (1,665) $ (4,833)
Adjustments to reconcile net loss to net cash used for operations:
Depreciation and amortization 4,810 3,528
Deferred rent expense 115 57
Deferred income taxes (1,209) (3,222)
Gain on sale of equipment -- (840)
Changes in:
Merchandise inventories (19,568) (1,136)
Accounts receivable (3,711) 516
Deferred catalog costs, prepaid expenses and other (7,043) (2,661)
Accounts payable and accrued expenses 6,714 (2,629)
Deferred revenue, income taxes payable and other liabilities (3,531) (775)
-------- --------
Cash Used for Operating Activities (25,088) (11,995)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (5,928) (5,115)
Proceeds from disposal of equipment 25 2,291
-------- --------
Cash Used for Investing Activities (5,903) (2,824)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loan 11,955 42,614
Payments on revolving loan (11,955) (30,027)
Proceeds from issuance of common stock 30,527 341
Principal payments on notes payable (600) (899)
-------- --------
Cash Provided by Financing Activities 29,927 12,029
-------- --------
Net Decrease in Cash and Equivalents (1,064) (2,790)
-------- --------
Cash and Equivalents at Beginning of Period 8,389 3,501
-------- --------
Cash and Equivalents at End of Period $ 7,325 $ 711
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 323 $ 557
Income Taxes $ 0 $ 0
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
4
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SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and nine-month periods ended October 31, 1999 and 1998
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at October 31, 1999 and 1998, and the related
condensed statements of operations and cash flows for the three-month and
nine-month periods ended October 31, 1999 and 1998 have been prepared by the
Sharper Image Corporation ("the Company"), without audit. In the opinion of
management, the condensed financial statements include all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at October 31, 1999 and
1998, and for all periods then ended. The balance sheet at January 31, 1999,
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
condensed financial statements prepared in accordance with generally accepted
accounting principles have been omitted from these interim financial statements.
Accordingly, these interim condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1998 Annual Report.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Holiday shopping season. A secondary peak period for the Company is June,
reflecting the gift giving 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, as is
typical in the retail industry, generally experiences lower revenues and net
operating results during the other quarters and 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.
Certain reclassifications have been made to prior periods' financial statements
in order to conform with current period presentations.
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 in September 2003. The credit facility has been
amended on several occasions and, as of October 31, 1999, the agreement allows
Company borrowings and letters of credit up to a maximum of $30 million for the
period from October 1, 1999 through December 31, 1999, 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
0.25% per annum or at LIBOR plus 2.25% per annum, but may change based on
financial performance. 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 nine-month period ended October 31, 1999, the Company was in compliance with
all covenants. The credit facility allows for seasonal borrowings of up to $30
million for the period October 1 through
5
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December 31, 1999, increasing by $1 million for this period in each of the three
subsequent years. At October 31, 1999, the Company had no amounts outstanding on
its revolving credit facility. As of October 31, 1999, letter of credit
commitments outstanding under the credit facility were $4.6 million.
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 0.50%
per annum or at LIBOR plus 2.50% per annum, but may change based on financial
performance. Each Term Loan is to be repaid in 36 equal monthly principal
installments. No amounts were outstanding on the Term Loan facility at October
31, 1999.
At October 31, 1999, notes payable also included a $2.5 million mortgage loan
collateralized by the Company's distribution center. This 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.
NOTE C - Earnings (Loss) Per Share
Basic earnings per share is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur from common shares to be issued through stock options. The potential
dilutive effects of stock options are excluded from the diluted earnings per
share for the three-month and nine-month periods ended October 31, 1998 and the
nine-month period ended October 31, 1999 because their inclusion in net loss
periods would be anti-dilutive to earnings per share. The Company completed a
secondary offering and issued 3.0 million shares of common stock on July 22,
1999. As the shares were not outstanding during the entire nine months, the
effect of increasing the weighted average number of shares outstanding for the
nine-months ended October 31, 1999 was 1.1 million shares. The full dilutive
impact of the 3.0 million shares was included in the weighted average number of
shares outstanding calculation for the three months ended October 31, 1999.
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 position or results of
operations.
NOTE E - New Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No.137, "Accounting for Derivative Instruments." SFAS 137 extends the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. As
amended by SFAS 137, SFAS 133 is effective for fiscal years beginning after June
15, 2000 and is not to be applied retroactively. Management has not yet
determined the potential effects of SFAS No. 133 on the Company's financial
position or results of operations.
6
<PAGE>
NOTE F - Segment Information
The Company classifies its business interests into two reportable segments:
retail stores and catalog. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in Note A
of the 1998 Annual Report. The Company evaluates performance and allocates
resources based on operating contribution, which excludes unallocated corporate
general and administrative costs and income tax expense or benefit. The
Company's reportable segments are strategic business units that offer the same
products and utilize common merchandising, distribution, and marketing
functions, as well as common information systems and corporate administration.
The Company does not have intersegment sales, but the segments are managed
separately because each segment is a different channel for selling the Company's
products.
Financial information for the Company's business segments is as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1999 1998 1999 1998
--------- --------- --------- ---------
Dollars in thousands
Revenues:
Stores $ 34,622 $ 28,144 $ 103,689 $ 88,713
Catalog 12,255 11,931 33,077 37,848
Other 11,403 2,880 20,077 5,677
--------- --------- --------- ---------
Total Revenues $ 58,280 $ 42,955 $ 156,843 $ 132,238
--------- --------- --------- ---------
Operating Contributions:
Stores $ 2,290 $ 504 $ 7,582 $ 2,613
Catalog 1,273 716 2,757 2,318
Unallocated (3,316) (3,654) (13,114) (12,986)
--------- --------- --------- ---------
Income (Loss) Before
Income Tax (Benefit) $ 247 $ (2,434) $ (2,775) $ (8,055)
--------- --------- --------- ---------
INDEPENDENT ACCOUNTANTS REVIEW REPORT
The condensed balance sheets of the Company as of October 31, 1999 and 1998 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>
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, 1999 and 1998, and the related condensed
statements of operations for the three-month and nine-month periods then ended,
and cash flows for the nine-month period 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,
1999, 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 26, 1999, 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, 1999 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
November 17, 1999
8
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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.
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1999 1998 1999 1998
----- ----- ----- -----
Revenues:
Net store sales 59.4% 65.5% 66.1% 67.1%
Net catalog sales 21.0 27.8 21.1 28.6
Net Internet sales 9.1 1.6 7.6 1.5
Net wholesale sales 9.7 4.2 4.5 1.9
Other revenue 0.8 0.9 0.7 0.9
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and Expenses:
Cost of products 50.4 52.2 49.7 52.1
Buying and occupancy 11.9 14.9 13.1 14.4
Advertising and promotion 11.4 11.4 12.2 12.3
General, selling
and administrative 26.2 28.6 26.8 27.5
Other Income (0.3) (1.4) 0.0 (0.2)
----- ----- ----- -----
Earnings (Loss) Before
Income Tax (Benefit) 0.4 (5.7) (1.8) (6.1)
Income Tax (Benefit) 0.1 (2.3) (0.7) (2.4)
----- ----- ----- -----
Net Earnings (Loss) 0.3% (3.4)% (1.1)% (3.7)%
===== ===== ===== =====
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The following table sets forth the components of total revenues for the periods
indicated.
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues (dollars in thousands)
Net store sales $ 34,622 $ 28,144 $103,689 $ 88,713
Net catalog sales 12,255 11,931* 33,077 37,848*
Net Internet sales 5,318 701 11,905 1,936
Net wholesale sales 5,650 1,778 7,093 2,508
-------- -------- -------- --------
Total Net Sales 57,845 42,554 155,764 131,005
List rental 391 328 893 851
Licensing 44 73 186 382
-------- -------- -------- --------
Total Revenues $ 58,280 $ 42,955 $156,843 $132,238
======== ======== ======== ========
* Includes net sales from the Home Collection Catalog of $3.4 million and $10.5
million for the three and nine-months ended October 31, 1998, respectively. The
test mailings of the Home Collection Catalog were terminated in late fiscal 1998
and accordingly those sales are not recurring in the net catalog sales for the
three and nine-month periods ended October 31, 1999.
Revenues
The Company's third quarter net sales increased $15,291,000, or 35.9%, from the
comparable three-month period last year. Net sales for the nine-month period
ended October 31, 1999, increased $24,759,000, or 18.9%, from the comparable
period last year. Returns and allowances for both the three-month and nine-month
periods ended October 31, 1999, were 11.1% of sales, as compared with 12.3% and
12.1% of sales for the comparable prior year periods. The increase in Company
net sales for the three and nine-month periods ended October 31, 1999 compared
to the same periods last year was attributable to increases in net sales from
Sharper Image stores of $6,478,000 and $14,976,000, respectively; increases in
net sales from the Sharper Image catalog (excluding Home Collection) of
$3,763,000 and $5,712,000, respectively; increases in net sales from Internet
operations of $4,617,000 and $9,969,000, respectively; and increases in
wholesale net sales of $3,872,000 and $4,585,000, respectively. The total
Company increase in net sales was partially offset by the decrease in net sales
attributable to the discontinuance of the test mailings of the Sharper Image
Home Collection catalog in fiscal 1998.
Excluding the net sales of the Sharper Image Home Collection catalog for the
three and nine-month periods ended October 31, 1998 for comparative purposes,
Company net sales increased $18,730,000, or 47.9% and $35,242,000, or 29.2%,
respectively. Continued popularity of Sharper Image Design proprietary products,
as well as private label products, has been a primary factor in the year over
year increases in net sales. The continuing development and introduction of
these new and popular products is an important factor to the Company's future
success. Sharper Image Design proprietary products increased from 14.9% of net
sales in 1998 to 28.7% for the comparable three-month period ended October 31,
1999. Private label products increased from 8.1% of net sales in 1998 to 20.8%
for the comparable three-month period ended October 31, 1999. Management
believes the effectiveness of its increased advertising initiatives in the
second and third quarters was also a contributing factor in higher
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revenue increases and will be an important factor in future revenue growth,
although there can be no assurances of the continued success of these and future
advertising initiatives.
For the three-month and nine-month periods ended October 31, 1999, as compared
with the same periods last year, net store sales increased $6,478,000, or 23.0%,
and $14,976,000, or 16.9%, and comparable store sales increased by 14.9% and
11.5%, respectively. The increase in net store sales for the three-month period
ended October 31, 1999 reflects an 20.9% increase in total store transactions,
with a 1.8% increase in average revenue per transaction, compared with the same
prior year period. Total store transactions increased 17.4% for the nine-months
ended October 31, 1999, with the average revenue per transaction remaining even
with the same prior year period. Partially contributing to the increased
transactions is that several key stores were remodeled in 1998. Although during
the remodeling only a portion of the remodeled stores was open for business, the
new store format increased store traffic in subsequent months by reaching an
expanded customer base with broad appeal products and additional advertising.
The increase in net store sales for the three-month and nine-month periods ended
October 31, 1999 is also attributable to the opening of eight new stores since
October 31, 1998, partially offset by two stores that closed at their lease
maturity during the first fiscal quarter of 1998 and one store that closed at
its lease maturity in the second fiscal quarter of 1999. The Company expects two
additional store closures at their lease maturity during the fourth fiscal
quarter of 1999.
For the three-month and nine-month periods ended October 31, 1999, net catalog
sales increased $324,000 or 2.7%, while decreasing $4,771,000 or 12.6% for the
nine-month period, as compared with the same periods last year. The primary
reason for the decrease in net catalog sales was the decrease in the Sharper
Image Home Collection Catalog sales due to the discontinuation of the test
mailings of that catalog in late fiscal 1998. For the three and nine-month
periods ended October 31, 1999, as compared to the same periods last year, the
net catalog sales decrease attributable to the Home Collection Catalog was
$3,439,000 and $10,483,000, respectively. Excluding the sales of the Home
Collection Catalog in fiscal 1998, net catalog sales increased $3,763,000, or
44.3% for the three-month period ended October 31, 1999 and $5,712,000 or 20.9%
for the nine-month period ended October 31, 1999 compared to the same prior year
periods. Excluding Home Collection Catalog operations, the three-month increase
in Sharper Image Catalog net sales reflects an increase of 41.8% in transactions
and 1.8% increase in average revenue per transaction, compared to the same prior
year period. The nine-month increase in Sharper Image Catalog net sales reflects
an increase of 21.2% in transactions with average revenue per transaction being
even, as compared to the same prior year period. Management believes the
increase in Sharper Image catalog sales is partially attributable to a 16.3% and
7.0% increase in Sharper Image Catalog pages circulated in the three-month and
nine-month periods ended October 31, 1999, respectively, as compared to the same
periods last year, as well as the continued popularity of Sharper Image Design
proprietary and private label products. Management is continually reviewing the
pages and the number of catalogs circulated in its efforts to optimize the
revenues from catalog advertising.
For the three-month and nine-month periods ended October 31, 1999, the Company's
Internet sales from sharperimage.com, which includes the Sharper Image auction
site, increased $4,617,000, or 658.6%, and $9,969,000, or 514.9%, respectively,
from the same periods last year. The three-month increase in Internet net sales
reflects an increase of 891.2% in transactions, partially offset by a 23.5%
decrease in average revenue per transaction, compared to the same prior year
period. The nine-month increase in Internet net sales reflects an increase of
656.3% in transactions, partially offset by a 18.7% decrease in average revenue
per transaction, compared to the same prior year period. The decrease in average
revenue per transaction is primarily attributable to the Internet auction
activity which began in the Company's first quarter ended April 30, 1999. The
auction site was launched to further the
11
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Company's strategy of increasing its Internet business and broadening its
customer base, and has significantly increased total visits and page views on
the Company's website. The Company launched one-hour Flash Auctions and is
continuing to expand the one-hour auction format due to strong customer
response. Through the auction site, the Company offers brand new products and
close out items, certain repackaged and refurbished products, as well as certain
one-of-a-kind items, and offers the fun to consumers to bid and win products, at
less than retail prices. The increase in The Sharper Image store, catalog and
Internet sales also reflects the emphasis and the increase in sales of the
Company's Sharper Image Design proprietary products.
Net wholesale sales increased $3,872,000, or 217.8% for the three months ended
October 31, 1999 compared to the same prior year period, primarily due to
acquiring new customers in the Company's 1999 third quarter. The majority of the
wholesale business is recorded in the third quarter of the Company's fiscal
year.
Cost of Products
Cost of products for the three-month and nine-month periods ended October 31,
1999 increased $6,980,000, or 31.2%, and $9,092,000, or 13.2%, 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, partially offset by
the reduced sales of The Sharper Image Home Catalog Collection which carried
products with higher costs. The gross margin rate for the three-month period
ended October 31, 1999 was 49.2% which was 1.9 percentage points better than the
comparable prior year period. The gross margin rate for the nine-month period
ended October 31, 1999 was 49.9% which was 2.5 percentage points better than the
comparable prior year period. The higher gross margin rates reflect an increase
in sales of the Sharper Image Design proprietary and private label products,
which generally carry higher margins. The Sharper Image Design proprietary
products percentage of net sales, exclusive of wholesale, increased to 28.7%
from 14.9% for the three months ended October 31, 1999 and to 27.3% from 14.2%
for the nine months ended October 31, 1999, compared to the same periods last
year. The private label products increased to 20.8% from 8.1% and to 17.2% from
7.6%, for the three-month and nine-month periods ended October 31, 1999,
respectively, compared to the same three and nine-month periods last year.
Buying and Occupancy
Buying and occupancy costs for the three-month and nine-month periods ended
October 31, 1999 increased $537,000, or 8.4%, and $1,574,000, or 8.3% from the
comparable prior year periods. The increase primarily reflects the occupancy
costs associated with the eight new stores opened since October 31, 1998. The
nine month increase was partially offset by the two stores that closed at their
lease maturity during the first three months of 1998, and one store that closed
at its lease maturity during the three months ended July 31, 1999.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month and nine-month periods
ended October 31, 1999 increased $1,713,000, or 34.9%, and $2,724,000, or 16.7%
from the comparable prior year periods. The increase in advertising and
promotion expenses was partially attributable to a 16.3% and 7.0% increase in
Sharper Image catalog pages circulated for the three and nine-month periods
ended October 31, 1999, respectively, compared to the same prior year periods.
The increased cost related to increased circulation was partially offset by the
reduction in costs attributable to the discontinuance of The Sharper Image Home
Collection Catalog in fiscal 1998. In addition, the Company deployed several
advertising initiatives to broaden its customer base, including radio
advertising, television commercials, infomercials, direct response mailings, and
others. These increased advertising initiatives were launched with the Company
goal to acquire new customers which the Company believes will produce additional
sales in the stores, catalog and Internet channels in future periods.
12
<PAGE>
General, Selling and Administrative Expenses
General, selling and administrative expenses for the three-month and nine-month
periods ended October 31, 1999 increased $3,001,000, or 24.4%, and $5,717,000,
or 15.7% from the comparable prior year periods. The increase was primarily due
to increases in variable expenses from increased net sales, expenses in the
Internet and proprietary product areas for improved and expanded operational
infrastructure, increased costs associated with attracting and retaining key
employees, and overall selling expenses related to the opening of eight new
stores.
Other Income
Other income, net, for the three-month and nine-month periods ended October 31,
1999 decreased $413,000 and $218,000 from the comparable prior year periods due
to the sale of certain collateralized equipment during the third quarter of
1998. This was partially offset by the interest income earned during the third
quarter of 1999 from higher investment balances generated from the proceeds of
the secondary offering completed in July 1999.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the nine-month period ended October 31, 1999 with cash generated from
operations, trade credit, and proceeds from the secondary offering. During the
nine-month period ended October 31, 1999, the Company's cash decreased by
$1,064,000 to $7,325,000 primarily due to working capital needs, specifically
related to increased inventory levels to support the increased sales in the
third quarter and anticipated sales in the fourth quarter Holiday season.
The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc. (CIT) which expires in September 2003. The credit facility has been
amended on several occasions and, as of October 31, 1999, the agreement allows
Company borrowings and letters of credit up to a maximum of $30 million for the
period from October 1, 1999 through December 31, 1999, 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
0.25% per annum or at LIBOR plus 2.25% per annum, but may change based on
financial performance. 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 nine-month period ended October 31, 1999, the Company was in compliance with
all covenants. The credit facility allows for seasonal borrowings of up to $30
million for the period October 1 through December 31, 1999, increasing by $1
million for this period in each of the three subsequent years. At October 31,
1999, the Company had no amounts outstanding on its revolving credit facility.
As of October 31, 1999, letter of credit commitments outstanding under the
credit facility were $4.6 million.
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 0.50%
per annum or at LIBOR plus 2.50% per annum, but may change based on financial
performance. Each Term Loan is to be repaid in 36 equal monthly principal
installments. No amounts were outstanding on the Term Loan facility at October
31, 1999.
13
<PAGE>
At October 31, 1999, notes payable also included a $2.5 million mortgage loan
collateralized by the Company's distribution center. This 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.
During the nine-month period ended October 31, 1999, the Company opened five
stores located in Palm Desert, California; Tampa, Florida; Buford, Georgia;
Providence, Rhode Island; and Mission Viejo; California, while closing one store
in Palm Springs, California at the maturity of the lease. Total capital
expenditures estimated for the new and existing stores, corporate headquarters,
and the distribution center for fiscal 1999 is 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, credit
facility, and existing cash and cash equivalents.
On July 22, 1999 the Company completed an offering of 3.0 million shares of its
common stock, all of which shares were offered by the Company. The proceeds from
the offering, net of underwriters discount and offering expenses, totaled $30.2
million. The Company intends to use the proceeds from this offering for general
corporate purposes, including investments in the Company's Internet business,
expansion of its distribution and fulfillment capacity, and working capital
purposes.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Holiday shopping season. A secondary peak period for the Company is June,
reflecting the gift giving 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, as is
typical in the retail industry, generally experiences lower revenues and net
operating results during the other quarters and 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.
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risks, which include changes in interest rates
and, to a lesser extent, foreign exchange rates. The Company does not engage in
financial transactions for trading or speculative purposes.
The interest payable on the Company's credit facility is based on variable
interest rates and could therefore be affected by changes in market interest
rates. If interest rates on existing variable debt rose 0.8% (10% from the
bank's reference rate) as of October 31, 1999, the Company's results of
operations and cash flows would not be materially affected. In addition, the
Company has fixed and variable income investments consisting of cash equivalents
and short-term investments, which are also affected by changes in market
interest rates. The Company does not use derivative financial instruments in its
investment portfolio.
The Company enters into a significant amount of purchase obligations outside of
the U.S. which are settled in U. S. dollars, and therefore, has only minimal
exposure to foreign currency exchange risks. The Company does not hedge against
foreign currency risks and believes that foreign currency exchange risk not
significant.
14
<PAGE>
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, as necessary, 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; and, (v) determination
of key vendors 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. The Company's
main operating system and hardware have been upgraded for year 2000 compliance.
The application 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 April 1999, conversion of
all Company systems and programs was completed with full implementation at the
end of June 1999. In addition, a systemwide test has been completed to simulate
the rollover to January 1, 2000, ensuring all critical systems supporting the
business will remain operational.
The Company's operations are also dependent on the year 2000 readiness of third
parties that 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.
Through November 30, 1999, the Company has expensed approximately $435,000 on
work related to year 2000 compliance. The estimated cost for this project is
between $400,000 and $450,000, and is being funded through operating cash flows.
The total estimated cost for this project includes an estimate for the potential
costs associated with third party vendor or supplier failures.
15
<PAGE>
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 that 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 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 has
evaluated vendor and customer compliance and created contingency plans,
including alternate vendor opportunities.
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.
16
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-1 (Registration No.
33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
3.3 Form of Certificate of Designation of Series A Junior participating
Preferred Stock.(Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
4.1 Form of Rights Certificate. (Incorporated by reference to Exhibit
4.01 to Amendment No. 2 to the Registration Statement on Form S-2.)
4.2 Form of Rights Agreement dated as of June 7, 1999. (Incorporated by
reference to Exhibit 4.02 to Amendment No. 2 to the Registration
Statement on Form S-2.)
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).)
17
<PAGE>
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 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)
10.11 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))
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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).
10.17 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).
10.18 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.)
10.19 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.)
10.20 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.)
18
<PAGE>
10.21 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.)
10.22 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.)
10.23 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.)
10.24 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.)
10.25 Amendment to Employment Agreement between the Company and Mr. Barry
Gilbert, its Vice Chairman and Chief Operating Officer dated and
effective November 30, 1998.
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, 1999.
19
<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 13, 1999 by:/s/ Tracy Y. Wan
------------------------------
Tracy Y. Wan
President
Chief Operating Officer
by:/s/ Jeffrey P. Forgan
------------------------------
Jeffrey P. Forgan
Senior Vice President
Chief Financial Officer
20
Exhibit 15.0
December 14, 1999
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, 1999
and 1998, as indicated in our report dated November 17, 1999; 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, 1999 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,
/s/_____________________
Deloitte & Touche LLP
San Francisco, CA
21
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