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, 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, 11,965,730 shares as of September 10, 1999
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
July 31, January 31, July 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 $ 25,894 $ 8,389 $ 593
Accounts receivable, net of allowance for doubtful
accounts of $1,008, $804 and $644 5,737 6,787 5,171
Merchandise inventories 34,844 32,598 25,243
Deferred catalog costs 2,482 2,454 4,837
Prepaid expenses and other 6,782 5,605 5,777
-------- -------- --------
Total Current Assets 75,739 55,833 41,621
Property and equipment, net 23,021 22,513 20,078
Deferred taxes and other assets 4,063 3,699 3,381
-------- -------- --------
Total Assets $102,823 $ 82,045 $ 65,080
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 24,500 $ 28,613 $ 23,851
Deferred revenue 6,996 7,268 6,220
Income taxes payable -- 3,314 --
Current portion of notes payable 308 635 958
-------- -------- --------
Total Current Liabilities 31,804 39,830 31,029
Revolving loan -- -- 1,975
Notes payable 2,441 2,513 2,818
Other liabilities 3,241 3,053 3,134
-------- -------- --------
Total Liabilities 37,486 45,396 38,956
-------- -------- --------
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,
11,965,730, 8,916,995 and 8,529,750 shares 119 89 85
Additional paid-in capital 43,060 12,589 10,043
Retained earnings 22,158 23,971 15,996
-------- -------- --------
Total Stockholders' Equity 65,337 36,649 26,124
-------- -------- --------
Total Liabilities and Stockholders' Equity $102,823 $ 82,045 $ 65,080
======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
Dollars in thousands, except per share amounts July 31, July 31,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 64,463 $ 55,367 $ 110,084 $ 100,476
Less: returns and allowances 7,028 6,155 12,165 12,025
----------- ----------- ----------- -----------
Net Sales 57,435 49,212 97,919 88,451
Other revenue 269 320 644 832
----------- ----------- ----------- -----------
57,704 49,532 98,563 89,283
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of products 28,355 25,780 48,635 46,522
Buying and occupancy 6,887 6,261 13,635 12,599
Advertising and promotion 8,193 6,904 12,427 11,416
General, selling, and administrative 14,332 12,383 26,745 24,030
----------- ----------- ----------- -----------
57,767 51,328 101,442 94,567
----------- ----------- ----------- -----------
OPERATING LOSS (63) (1,796) (2,879) (5,284)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense - net (101) (181) (142) (347)
Other - net (6) 5 (1) 9
----------- ----------- ----------- -----------
(107) (176) (143) (338)
----------- ----------- ----------- -----------
Loss Before Income Tax Benefit (170) (1,972) (3,022) (5,622)
Income Tax Benefit (68) (789) (1,209) (2,249)
----------- ----------- ----------- -----------
Net Loss $ (102) $ (1,183) $ (1,813) $ (3,373)
=========== =========== =========== ===========
Net Loss Per Share - basic and diluted $ (0.01) $ (0.14) $ (0.20) $ (0.40)
=========== =========== =========== ===========
Weighted Average Number of Shares -
basic and diluted 9,095,492 8,525,826 9,021,330 8,444,787
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
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<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited) Six Months Ended
July 31,
----------------------------
Dollars in thousands 1999 1998
-------- --------
<S> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net loss $ (1,813) $ (3,373)
Adjustments to reconcile net loss to net cash used for operations:
Depreciation and amortization 3,093 2,329
Deferred rent expense 73 39
Deferred income taxes (1,308) (2,249)
Changes in:
Merchandise inventories (2,246) 9,291
Accounts receivable 1,050 3,018
Deferred catalog costs, prepaid expenses and other (261) (150)
Accounts payable and accrued expenses (4,113) (11,396)
Deferred revenue, income taxes payable and other liabilities (3,471) (674)
-------- --------
Cash Used for Operating Activities (8,996) (3,165)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (3,612) (1,748)
Proceeds from disposal of equipment 11 159
-------- --------
Cash Used for Investing Activities (3,601) (1,589)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loan 11,955 21,152
Payments on revolving loan (11,955) (19,177)
Proceeds from issuance of common stock 30,501 341
Principal payments on notes payable (399) (470)
-------- --------
Cash Provided by Financing Activities 30,102 1,846
-------- --------
Net Increase (Decrease) in Cash and Equivalents 17,505 (2,908)
-------- --------
Cash and Equivalents at Beginning of Period 8,389 3,501
-------- --------
Cash and Equivalents at End of Period $ 25,894 $ 593
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 205 $ 351
Income Taxes $ 0 $ 0
<FN>
See notes to financial statements.
</FN>
</TABLE>
4
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SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and six-month periods ended July 31, 1999 and 1998
(Unaudited)
NOTE A - Financial Statements
The condensed balance sheets at July 31, 1999 and 1998, and the related
condensed statements of operations and cash flows for the three-month and
six-month periods ended July 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 July 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
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 July 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 six-month period ended July 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,
5
<PAGE>
1999, increasing by $1 million for this period in each of the three subsequent
years. At July 31, 1999, the Company had no amounts outstanding on its revolving
credit facility. As of July 31, 1999, letter of credit commitments outstanding
under the credit facility were $5.9 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. Notes payable included a Term Loan which bears interest at a
variable rate of prime plus 0.50%, provides for monthly principal payments of
$55,555 plus the related interest payment, and matures in October 1999. At July
31, 1999, the balance of the Term Loan was $0.2 million.
At July 31, 1999, notes payable also included a $2.6 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 six-month periods ended July 31, 1999 and 1998
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
primary shares of common stock on July 22, 1999. As the shares were not
outstanding during the entire second quarter, the effect of increasing the
weighted average number of shares outstanding for the three-month and six-months
ended July 31, 1999 was 130,435 and 66,298, respectively. The dilutive impact of
the 3.0 million secondary shares will be included in the weighted average number
of shares outstanding calculation for the Company's future quarters.
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. In the opinion of
6
<PAGE>
management, SFAS No. 133 will not have a material effect on the Company's
financial position or results of operations.
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.
<TABLE>
Financial information for the Company's business segments is as follows:
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
---------------------------- ----------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dollars in thousands
Revenues:
Stores $ 39,828 $ 34,067 $ 69,068 $ 60,570
Catalog 12,449 13,972 20,822 25,916
Other 5,427 1,493 8,673 2,797
-------- -------- -------- --------
Total Revenues $ 57,704 $ 49,532 $ 98,563 $ 89,283
-------- -------- -------- --------
Operating Contributions:
Stores $ 4,578 $ 2,554 $ 5,292 $ 2,109
Catalog 487 251 1,357 1,635
Unallocated (5,235) (4,777) (9,671) (9,366)
-------- -------- -------- --------
Loss Before Income Tax Benefit $ (170) $ (1,972) $ (3,022) $ (5,622)
-------- -------- -------- --------
</TABLE>
INDEPENDENT ACCOUNTANTS REVIEW REPORT
The condensed balance sheets of the Company as of July 31, 1999 and 1998 and the
related condensed statements of operations for the three-month and six-month
periods then ended and cash flows for the six-month periods then ended have been
reviewed by the Company's independent accountants, Deloitte & Touche LLP, whose
report covering their review of the financial statements is presented herein.
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Sharper Image Corporation
San Francisco, California
We have reviewed the accompanying condensed balance sheets of Sharper Image
Corporation as of July 31, 1999 and 1998, and the related condensed statements
of operations for the three-month and six-month periods then ended, and cash
flows for the six-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.
August 18, 1999
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
<TABLE>
The following table is derived from the Company's Statements of Operations and
shows the results of operations for the periods indicated as a percentage of
total revenues.
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------ ------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Net store sales 69.0% 68.8% 70.1% 67.9%
Net catalog sales 21.6 28.2 21.1 29.0
Net Internet sales 7.4 1.5 6.7 1.4
Net wholesale sales 1.5 0.9 1.5 0.8
Other revenue 0.5 0.6 0.6 0.9
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 49.1 52.1 49.3 52.1
Buying and occupancy 11.9 12.6 13.8 14.1
Advertising and promotion 14.2 13.9 12.6 12.8
General, selling
and administrative 24.9 25.0 27.1 26.9
Other Expense 0.2 0.4 0.2 0.4
----- ----- ----- -----
Loss Before Income Tax Benefit (0.3) (4.0) (3.0) (6.3)
Income Tax Benefit (0.1) (1.6) (1.2) (2.5)
----- ----- ----- -----
Net Loss (0.2)% (2.4)% (1.8)% (3.8)%
===== ===== ===== =====
</TABLE>
9
<PAGE>
<TABLE>
The following table sets forth the components of total revenues for the periods
indicated.
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues (dollars in thousands)
Net store sales $39,828 $34,067 $69,068 $60,570
Net catalog sales 12,449 13,972* 20,822 25,916*
Net Internet sales 4,258 715 6,587 1,235
Net wholesale sales 900 458 1,442 730
------- ------- ------- -------
Total Net Sales 57,435 49,212 97,919 88,451
List rental 220 202 502 523
Licensing 49 118 142 309
------- ------- ------- -------
Total Revenues $57,704 $49,532 $98,563 $89,283
======= ======= ======= =======
<FN>
* Includes net sales from the Home Collection Catalog of $3.6 million and $7.0
million for the three and six-months ended July 31, 1998 respectively. The
mailings of the Home Collection Catalog were terminated in late fiscal 1998 and
do not have sales included in the net catalog sales for the three and six-month
periods ended July 31, 1999.
</FN>
</TABLE>
Revenues
The Company's second quarter net sales increased $8,223,000, or 16.7%, from the
comparable three-month period last year. Net sales for the six-month period
ended July 31, 1999, increased $9,468,000, or 10.7%, from the comparable period
last year. Returns and allowances for the three-month and six-month periods
ended July 31, 1999, were 10.9% and 11.1% of sales, as compared with 11.1% and
12.0% of sales for the comparable prior year periods. The increase in Company
net sales for the three and six-month periods ended July 31, 1999 compared to
the same periods last year was attributable to increases in net sales from
Sharper Image stores of $5,761,000 and $8,498,000, respectively; increases in
net sales from the Sharper Image catalog (excluding Home Collection) of
$2,077,000 and $1,950,000, respectively; and increases in net sales from
Internet operations of $3,543,000 and $5,352,000, 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 six-month periods ended July 31, 1998 for comparative purposes,
Company net sales increased $11,823,000, or 25.9% and $16,512,000, or 20.3%,
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. Sharper Image Design proprietary products increased
from 12.9% of net sales in 1998 to 27.1% for the comparable three-month period
ended July 31, 1999. Private label products increased from 8.0% of net sales in
1998 to 16.1% for the comparable three-month period ended July 31, 1999.
Management believes the effectiveness of its advertising initiatives in the
second quarter was also a contributing factor in higher revenue growth.
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For the three-month and six-month periods ended July 31, 1999, as compared with
the same periods last year, net store sales increased $5,761,000, or 16.9%, and
$8,498,000, or 14.0%, and comparable store sales increased by 11.8% and 9.4%,
respectively. The increase in net store sales for the three-month period ended
July 31, 1999 reflects an 16.0% increase in total store transactions, with a
1.2% increase in average revenue per transaction, compared with the same prior
year period. Total store transactions increased 15.7% for the six-months ended
July 31, 1999, which was partially offset by a 1.2% decrease 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, 1999 is
also attributable to the opening of six new stores since July 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
late in the second fiscal quarter of 1999.
For the three-month and six-month periods ended July 31, 1999, net catalog sales
decreased $1,523,000 or 10.9%, and $5,094,000 or 19.7%, 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 fiscal 1998. For the
three and six-month periods ended July 31, 1999, as compared to the same periods
last year, the net catalog sales decrease attributable to the Home Collection
Catalog was $3,600,000 and $7,044,000, respectively. Excluding the operations of
the Home Collection Catalog in fiscal 1998, net catalog sales increased
$2,077,000, or 20.0% for the three-month period ended July 31, 1999 and
$1,950,000 or 10.3% for the six-month period ended July 31, 1999 compared to the
same prior year periods. The three-month increase in Sharper Image Catalog net
sales reflects an increase of 16.9% in transactions and 2.7% increase in average
revenue per transaction, compared to the same prior year period. The six-month
increase in Sharper Image Catalog net sales reflects an increase of 11.2% in
transactions, partially offset by a 0.9% decrease in average revenue per
transaction, compared to the same prior year period. Management believes the
increase in Sharper Image catalog sales is also attributable to a 9.1% increase
in Sharper Image Catalog pages circulated in the three-month period ended July
31, 1999, as compared to the same period last year. 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 six-month periods ended July 31, 1999, the Company's
Internet sales from sharperimage.com, which includes the Sharper Image auction
site, increased $3,543,000, or 495.5%, and $5,352,000, or 433.3%, respectively,
from the same periods last year. The three-month increase in Internet net sales
reflects an increase of 601.2% in transactions, partially offset by a 15.1%
decrease in average revenue per transaction, compared to the same prior year
period. The six-month increase in Internet net sales reflects an increase of
532.1% in transactions, partially offset by a 15.6% 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, and is
also partially attributable to Sharper Image Design products which are being
introduced at more popular price points. The auction site was launched to
further the Company's strategy of increasing its Internet business and
broadening its customer base, and has significantly increased total visits, page
views, and page views per visit on the Company's website. The Company launched
one-hour Saturday Flash Auctions during the quarter ended July 31, 1999, 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,
11
<PAGE>
catalog and Internet 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, 1999
increased $2,575,000, or 10.0%, and $2,113,000, or 4.5%, 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 July 31,
1999 was 50.6% which was 3.0 percentage points better than the comparable prior
period. The gross margin rate for the six-month period ended July 31, 1999 was
50.3% which was 2.9 percentage points better than the comparable prior 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. For the three months ended July 31, 1999, the Sharper Image Design
proprietary products percentage of net sales increased to 27.1% from 12.9%,
while the private label products increased to 16.1% from 8.0%, compared to the
same three-month period last year.
Buying and Occupancy
Buying and occupancy costs for the three-month and six-month periods ended July
31, 1999 increased $626,000, or 10.0%, and $1,036,000, or 8.2% from the
comparable prior year periods. The increase primarily reflects the occupancy
costs associated with the six new stores opened since July 31, 1998. The six
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 six-month periods
ended July 31, 1999 increased $1,289,000, or 18.7%, and $1,011,000, or 8.9% from
the comparable prior year periods. The increase in advertising and promotion
expenses was partially attributable to a 9.1% and 2.2% increase in pages
circulated for the three and six-month periods ended July 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,
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.
General, Selling and Administrative Expenses
General, selling and administrative expenses for the three-month and six-month
periods ended July 31, 1999 increased $1,949,000, or 15.7%, and $2,715,000, or
11.3% from the comparable prior year periods. The increase was primarily due to
increases in variable expenses from increased net sales, inflationary increases,
expenses in the Internet and proprietary product areas for improved operational
infrastructure and overall selling expenses related to the opening of six new
stores.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the six-month period ended July 31, 1999 with cash generated from operations,
trade credit, and proceeds from the secondary
12
<PAGE>
offering. During the six-month period ended July 31, 1999, the Company's cash
increased by $17,505,000 to $25,894,000 primarily due to the 3.0 million primary
shares of common stock sold through the Company's secondary offering.
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 July 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 six-month period ended July 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 July 31, 1999,
the Company had no amounts outstanding on its revolving credit facility. As of
July 31, 1999, letter of credit commitments outstanding under the credit
facility were $5.9 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. Notes payable included a Term Loan which bears interest at a
variable rate of prime plus 0.50%, provides for monthly principal payments of
$55,555 plus the related interest payment, and matures in October 1999. At July
31, 1999, the balance of the Term Loan was $0.2 million.
At July 31, 1999, notes payable also included a $2.6 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 six-month period ended July 31, 1999, the Company opened two stores
located in Tampa, Florida and Palm Desert, California, while closing one store
in Palm Springs, California at the maturity of the lease. Subsequent to July 31,
1999, the Company opened two new stores located in Buford, Georgia and
Providence, Rhode Island, and plans to open one additional Sharper Image store
during fiscal 1999. 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, totaled $30.8 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.
13
<PAGE>
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 July 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.
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
14
<PAGE>
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 is
currently in progress and will be completed by October 1999 to simulate the
rollover to January 1, 2000, to ensure 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 July 31, 1999, the Company has expensed approximately $375,000
on work related to year 2000 compliance. The estimated cost for this project is
between $400,000 and $425,000, 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.
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
15
<PAGE>
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 is presently
evaluating vendor and customer compliance and refining contingency plans, such
as alternate vendor opportunities, after obtaining compliance evaluations, and
expects to have these plans completed by the end of October 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.
16
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1999 Annual Meeting of Stockholders (the Annual Meeting)
was held on June 7, 1999. The following matters were voted on by the
stockholders:
1. Election of five Directors. Mssrs. Richard J. Thalheimer, Alan
Thalheimer, Gerald Napier, Morton David, and George James were elected
to the Company's Board of Directors. The results of the voting were as
follows: 7,912,752 votes in favor of Richard J. Thalheimer, with
423,607 votes withheld; 7,940,704 votes in favor of Alan Thalheimer,
with 395,655 votes withheld; 7,965,214 votes in favor of Gerald Napier,
with 371,145 votes withheld; 7,965,524 votes in favor of Morton David,
with 370,835 votes withheld; and 7,964,474 votes in favor of George
James, with 371,885 votes withheld.
2. Approval of the 1999 Amendment of the Company's Stock Option Plan in
order to (i) increase the number of shares of Common Stock reserved for
issuance thereunder by an additional 750,000 shares and (ii) to extend
the term of the Option Plan through September 30, 2004. The result of
the vote was 5,353,337 votes in favor, 548,653 against, 22,847
abstaining, and 2,411,522 broker non-votes.
3. Approval of the 1999 Amendment of the Company's Non-Employee
Directors Stock Option Plan in order to (i) increase the number of
shares of Common Stock reserved for issuance thereunder by an
additional 200,000 shares and (ii) grant the Non-Employee Directors and
automatic 2,000 share option each fiscal quarter for each Director wha
has served at least six months on the date of the grant and (iii)
delete the automatic 1,000 share grant to each eligible Non-Employee
Director on the date of the Annual Meeting. The result of the vote was
5,857,790 votes in favor, 135,340 against, 21,797 abstaining, and
2,321,432 broker non-votes.
4. Ratification of selection of Deloitte & Touche LLP as independent
public accountants for the Company for the fiscal year ending January
31, 2000. The result of the vote was 8,301,638 in favor, 19,701
against, and 15,650 abstaining.
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 Stocks (Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
17
<PAGE>
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).)
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))
18
<PAGE>
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.)
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.)
19
<PAGE>
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 July 31, 1999.
20
<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 10, 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
21
Exhibit 15.0
September 13, 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 July 31, 1999 and
1998, as indicated in our report dated August 18, 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 July 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
22
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