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 April 30, 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, 8,964,831 shares as of June 9, 1999
1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
April 30, January 31, April 30,
1999 1999 1998
Dollars in thousands, except per share amounts (Unaudited) (Note A) (Unaudited)
----------- -------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 539 $ 8,389 $ 483
Accounts receivable, net of allowance for doubtful
accounts of $769, $804 and $799 5,458 6,787 6,872
Merchandise inventories 34,870 32,598 31,043
Deferred catalog costs 3,354 2,454 5,523
Prepaid expenses and other 7,076 5,605 5,274
------- ------- -------
Total Current Assets 51,297 55,833 49,195
Property and equipment, net 22,241 22,513 20,129
Deferred taxes and other assets 3,698 3,699 3,185
------- ------- -------
Total Assets $77,236 $82,045 $72,509
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $29,158 $28,613 $24,241
Deferred revenue 7,020 7,268 6,481
Income taxes payable -- 3,314 1
Current portion of notes payable 471 635 952
------- ------- -------
Total Current Liabilities 36,649 39,830 31,675
Revolving loan -- -- 7,616
Notes payable 2,477 2,513 3,059
Other liabilities 3,018 3,053 3,171
------- ------- -------
Total Liabilities 42,144 45,396 45,521
------- ------- -------
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,
8,964,048; 8,916,995 and 8,365,100 shares 89 89 83
Additional paid-in capital 12,743 12,589 9,726
Retained earnings 22,260 23,971 17,179
------- ------- -------
Total Stockholders' Equity 35,092 36,649 26,988
------- ------- -------
Total Liabilities and Stockholders' Equity $77,236 $82,045 $72,509
======= ======= =======
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
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SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
Dollars in thousands, except per share amounts April 30,
---------
1999 1998
----------- -----------
REVENUES:
Sales $ 45,621 $ 45,108
Less: returns and allowances 5,137 5,870
----------- -----------
Net Sales 40,484 39,238
Other revenue 375 513
----------- -----------
40,859 39,751
----------- -----------
COST AND EXPENSES:
Cost of products 20,280 20,743
Buying and occupancy 6,748 6,337
Advertising and promotion 4,234 4,512
General, selling and administrative 12,413 11,646
----------- -----------
43,675 43,238
----------- -----------
OPERATING LOSS (2,816) (3,487)
OTHER INCOME (EXPENSE):
Interest expense, net (41) (165)
Other income, net 5 2
----------- -----------
(36) (163)
----------- -----------
Loss Before Income Tax Benefit (2,852) (3,650)
Income tax benefit (1,141) (1,460)
----------- -----------
Net Loss $ (1,711) $ (2,190)
=========== ===========
Net Loss Per Share, basic and diluted $ (0.19) $ (0.26)
=========== ===========
Weighted Average Number of Shares,
basic and diluted 8,944,669 8,361,017
See notes to condensed financial statements.
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<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited) Three Months Ended
April 30,
---------
Dollars in thousands 1999 1998
-------- --------
<S> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net loss $ (1,711) $ (2,190)
Adjustments to reconcile net loss to net cash used for operations:
Depreciation and amortization 1,488 1,148
Deferred rent expense 31 18
Deferred income taxes (1,141) (1,460)
Changes in:
Merchandise inventories (2,272) 3,491
Accounts receivable 1,329 1,317
Deferred catalog costs, prepaid expenses and other assets (1,229) (926)
Accounts payable and accrued expenses 545 (10,862)
Deferred revenue, income taxes payable and other liabilities (3,628) (354)
-------- --------
Cash Used for Operating Activities (6,588) (9,818)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (1,216) (603)
-------- --------
Cash Used for Investing Activities (1,216) (603)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Proceeds from revolving loan -- 12,166
Payments on revolving loan -- (4,550)
Issuance of common stock for stock options, net of repurchases 154 22
Principal payments on notes payable (200) (235)
-------- --------
Cash Provided by (Used for) Financing Activities (46) 7,403
-------- --------
Net Decrease in Cash and Equivalents (7,850) (3,018)
-------- --------
Cash and Equivalents at Beginning of Period 8,389 3,501
-------- --------
Cash and Equivalents at End of Period $ 539 $ 483
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 101 $ 162
Income Taxes $ 3,418 $ --
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
4
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SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month periods ended April 30, 1999 and 1998
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at April 30, 1999 and 1998, and the related
condensed statements of operations and cash flows for the three-month periods
ended April 30, 1999 and 1998 have been prepared by 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 as of April 30, 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 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
earnings 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 September 2003. The credit facility has been
amended on several occasions and, as of April 30, 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 three-month period ended April 30, 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
5
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period in each of the three subsequent years. At April 30, 1999, the Company had
no amounts outstanding on its revolving credit facility. As of April 30, 1999,
letter of credit commitments outstanding under the credit facility were $2.1
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 April
30, 1999, the balance of the Term Loan was $0.3 million.
At April 30, 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 quarters ended April 30, 1999 and 1998 because their inclusion in
net loss periods would be anti-dilutive to earnings per share.
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 Standard
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure these instruments at fair value. The FASB has
recently issued an exposure draft that would extend the required implementation
to fiscal years beginning after June 15, 2000. The Company believes that this
statement will not have a material effect on its financial statements.
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 has different channels for selling the product.
Financial information for the Company's business segments is as follows:
Three Months Ended
April 30,
---------
Dollars in thousands 1999 1998
-------- --------
Revenues:
Stores $ 29,240 $ 26,502
Catalog 8,373 11,944
Other 3,246 1,305
-------- --------
Total Revenues $ 40,859 $ 39,751
-------- --------
Operating Contributions:
Stores $ 714 $ (445)
Catalog 870 1,351
Unallocated (4,436) (4,556)
-------- --------
Loss Before Income Tax Benefit $ (2,852) $ (3,650)
-------- --------
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The condensed balance sheets of the Company as of April 30, 1999 and 1998 and
the related condensed statements of operations and cash flows for the
three-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.
8
<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 April 30, 1999 and 1998, and the related condensed statements
of operations and cash flows for the three-month periods then ended. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Sharper Image Corporation as of January 31,
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.
/s/ Deloitte & Touche LLP
June 7, 1999
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as a
percentage of total revenues for the periods indicated.
Three Months Ended
April 30,
---------
Percentage of Total Revenues 1999 1998
-------- --------
Revenues:
Net store sales 71.6% 66.7%
Net catalog sales 20.5 30.0
Net Internet sales 5.7 1.3
Net wholesale sales 1.3 0.7
Other revenue 0.9 1.3
-------- --------
Total Revenues 100.0% 100.0%
Costs and Expenses:
Cost of products 49.6 52.2
Buying and occupancy 16.5 15.9
Advertising and promotion 10.4 11.4
General, selling and administrative 30.4 29.3
Other expense, net 0.1 0.4
-------- --------
Loss Before Income Tax Benefit (7.0) (9.2)
Income Tax Benefit (2.8) (3.7)
-------- --------
Net Loss (4.2)% (5.5)%
======== ========
The following table sets forth the components of total revenues for the periods
indicated.
Three Months Ended
April 30,
---------
1999 1998
-------- -------
Revenues (dollars in thousands)
Net store sales $29,240 $26,502
Net catalog sales 8,373 11,944
Net Internet sales 2,329 520
Net wholesale sales 542 272
-------- -------
Total Net Sales 40,484 39,238
List rental 282 322
Licensing 93 191
-------- -------
Total Revenues $40,859 $39,751
======== =======
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Revenues
Net sales for the three-month period ended April 30, 1999, increased $1,246,000,
or 3.2% from the comparable period of the prior year. The increase in net sales
reflects an increase of approximately 13% in net sales derived from Sharper
Image stores, The Sharper Image catalog and Internet operations, partially
offset by the decrease in net sales attributable to the Sharper Image Home
Collection catalog due to the discontinuance of the test mailing of the Sharper
Image Home Collection catalog in fiscal 1998. Returns and allowances for the
three-month period ended April 30, 1999, were 11.3% of sales, as compared with
13.0% of sales for the comparable prior year period. Continued increases in
sales of Sharper Image Design proprietary products and Internet transactions
were key to the achievement of the overall increase in net sales.
For the three-month period ended April 30, 1999 as compared with the same period
last year, net store sales increased $2,738,000, or 10.3% and comparable store
sales increased 6.2%. The increase in net store sales for the three-month period
ended April 30, 1999 as compared with the same prior year period reflects a
15.3% increase in total store transactions, which was partially offset by a 4.3%
decrease in average revenue per transaction. The increase in net store sales for
the three-month period ended April 30, 1999 is also attributable to the opening
of six new stores since April 30, 1998, partially offset by the effects of
closing two stores, each of which closed at its lease maturity during the
quarter ended April 30, 1998.
For the three-month period ended April 30, 1999, net catalog sales decreased
$3,571,000 or 29.9%, as compared with the same period last year. The primary
reason for the decrease in net catalog sales for the three-month period ended
April 30, 1999 compared to the same period in 1998 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. The net catalog sales decrease
attributable to the Home Collection catalog was $3,444,000 for the quarter ended
April 30, 1999 compared to the same period last year. Excluding the operations
of Home Collection Catalog, net catalog sales decreased $127,000, or 1.5% for
the three-month period ended April 30, 1999 compared to the same prior year
period. This decrease in Sharper Image Catalog net sales reflects a 3.8%
decrease in average revenue per order, which was partially offset by an increase
of 2.4% in orders compared to the same prior year period. Management believes
the slight decrease in Sharper Image catalog sales is also attributable to a
7.4% decrease in Sharper Image Catalog pages circulated in the three-month
period ended April 30, 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 period ended April 30, 1999, the Company's Internet sales,
primarily through the sharperimage.com website, increased to $2,329,000, a 348%
increase from the $520,000 for the same period last year. This increase is
attributable to a 422% increase in Internet orders, partially offset by a
decrease of 14.1% in average revenue per transaction, compared to the same
quarter last year. The decrease in average revenue per transaction is partially
attributable to the Internet auction activity which began in the quarter ended
April 30, 1999. The auction site was launched to further the Company's strategy
of increasing its Internet business and attracted additional Internet customers.
Through the auction site, customers can bid for and win brand new products and
close out items, as well as certain repackaged and refurbished products.
11
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Cost of Products
Cost of products for the three-month period ended April 30, 1999 decreased
$463,000, or 2.2%, from the comparable prior year period. The decrease in cost
of products is primarily due to the reduced sales of The Sharper Image Home
Collection catalog, which carried products with higher costs. Such costs were
partially offset by the higher sales volume of the other marketing channels
compared to the same period last year. The gross margin rate for the three-month
period ended April 30, 1999 was 49.9%, which was 2.8 percentage points better
than the comparable period of the prior year. The decrease in cost of products
is a result of the improved gross margin rate in 1999 that more than compensated
for the increase in cost of products generated from the higher net sales in
1999. The higher gross margin rate reflects an increase in sales of the Sharper
Image Design proprietary products to 25.4% of net sales from 12.2% for the
comparable prior year period. These proprietary products generally carry higher
margins than the Company's other products.
Buying and Occupancy
Buying and occupancy costs for the three-month period ended April 30, 1999
increased $411,000, or 6.5%, from the comparable prior year period. The increase
primarily reflects the occupancy costs associated with the six new stores opened
since April 30, 1998, which was partially offset by the elimination of the
occupancy costs of the two Sharper Image stores closed at their lease maturity
during the first quarter of 1998.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month period ended April 30,
1999 decreased $278,000, or 6.2%, from the comparable prior year period. The
decrease in advertising and promotion was primarily attributable to the
discontinuance of The Sharper Image Home Collection Catalog in fiscal 1998. The
decrease in advertising and promotion expenses for the three-month period ended
April 30, 1999 reflects an 7.4% decrease in pages circulated for The Sharper
Image catalog, which was partially offset by other advertising costs, such as
infomercials and other direct response mailings.
General, Selling and Administrative Expenses
General, selling and administrative expenses for the three-month period ended
April 30, 1999 increased $767,000, or 6.6%, from the comparable prior year
period. The increase was primarily due to increases in overall selling expenses
related to the increase in net sales.
Other Income (Expense)
Other expense, net, for the three-month period ended April 30, 1999, decreased
$127,000 from the comparable prior year periods, reflecting the decrease in
interest expense due to decreased borrowings under the Company's revolving
credit loan facility resulting from the Company's improved cash and cash
equivalents position created from improved operating results for the quarters
ended January 31, 1999 and April 30, 1999.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the three-month period ended April 30, 1999 with available cash and trade
credit. During the three-month period ended April 30, 1999, the Company's used
cash primarily for working capital purposes resulting in a decrease in cash by
$7,850,000 to $539,000.
12
<PAGE>
The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc. (CIT) which expires September 2003. The credit facility has been
amended on several occasions and, as of April 30, 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 three-month period ended April 30, 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 April 30,
1999, the Company had no amounts outstanding on its revolving credit facility.
As of April 30, 1999, letter of credit commitments outstanding under the credit
facility were $2.1 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 April
30, 1999, the balance of the Term Loan was $0.3 million.
At April 30, 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 three-month period ended April 30, 1999, the Company opened two new
stores in Tampa, Florida and Palm Desert, California. The total capital
expenditures estimated for new and existing stores, corporate headquarters, and
the existing distribution center for fiscal 1999 are between $7.0 million and
$8.0 million.
The Company believes it will be able to fund its cash needs for the remainder of
fiscal 1999 through internally generated cash, trade credit and the credit
facility.
On May 25, 1999 the Company filed a registration statement with the Securities
and Exchange Commission relating to a proposed offering of 3.0 million shares of
its common stock, all of which shares are being offered by the Company. The
Company will also grant the underwriters an option to purchase an additional
450,000 shares of common stock for the purposes of covering over-allotments, if
any. J.P. Morgan & Co. and U.S. Bancorp Piper Jaffray are the underwriters of
this offering. The Company intends to use the proceeds from this offering for
general corporate purposes, including investments in the Company's Internet
business and for expansion of its distribution and fulfillment capacity.
13
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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
earnings 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 therefore 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 April 30, 1999, the Company's results from operation 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 is
immaterial
Year 2000 Matters
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000. The year 2000 issue could result, at
the Company and elsewhere, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities. The
company has assessed its computer and business processes and is reprogramming
its computer applications to provide for their continued functionality. An
assessment of the readiness of the external entities with which it interfaces is
ongoing.
In 1996, the Company developed a detailed year 2000 Conversion Project Plan
(Plan) to address the methods to correct possible disruptions of operations due
to the year 2000 issue. The Plan took into consideration the following items:
(i) identification and inventorying of hardware, application software, and
equipment utilizing programmable logic chips to control aspects of their
operation, with potential year 2000 problems; (ii) assessment of scope of year
2000 issues for, and assigning priorities to, each item based on its importance
to the Company's operations; (iii) remediation of
14
<PAGE>
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 is expected to be completed
with full implementation by the end of June 1999. In addition, a systemwide test
will be completed by September 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 April 30, 1999, the Company has expensed approximately $315,000 on work
related to year 2000 compliance. The estimated cost for this project is between
$400,000 and $600,000, and is being funded through operating cash flows. The
total estimated cost for this project includes a provision 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.
15
<PAGE>
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 is presently
evaluating vendor and customer compliance and developing contingency plans, such
as alternate vendor opportunities, after obtaining compliance evaluations. The
Company timeline is to develop contingency plans by September 1999.
Uncertainties and Risk
The foregoing discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included with this report. The
foregoing discussion contains certain forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market
conditions in the overall economy and the retail industry, consumer demand, the
opening of new stores, actual advertising expenditures by the Company, the
success of the Company's advertising and merchandising strategy, availability of
products, transportation of products, unforeseen difficulties arising from the
Company or its vendors, suppliers or customers modifying their information
technology systems, software systems and embedded chip equipment to become year
2000 compliant, and other factors detailed from time to time in the Company's
annual and other reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date thereof. The Company undertakes no
obligations to publicly release any revisions to these forward-looking
statements or reflect events or circumstances after the date hereof.
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).)
10.1 Amended and Restated Stock Option Plan. (Incorporated by reference to
Form 14A for the fiscal year ended January 31, 1999).
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994, as
amended (Incorporated by reference to appendix to Form 14A for the fiscal
year ended January 31, 1999).
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).)
17
<PAGE>
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.)
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.)
18
<PAGE>
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 April 30, 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: June 7, 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
June 9, 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 April 30, 1999
and 1998, as indicated in our report dated June 7,1999; 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 April 30, 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
21
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FINANCIAL DATA SCHEDULE FOR QUARTER 1 FOR YEAR ENDED 1/31/00
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0
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<INCOME-PRETAX> (2,852)
<INCOME-TAX> (1,141)
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