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, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_____________________
Commission File Number: 0-15827
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State of Incorporation) (I.R.S. Employer Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 445-6000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $0.01 par value, 12,032,359 shares as of June 12, 2000
1
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PART I
FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
April 30, January 31, April 30,
2000 2000 1999
Dollars in thousands, except per share amounts (Unaudited) (Note A) (Unaudited)
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 39,248 $ 55,457 $ 539
Accounts receivable, net of allowance for doubtful
accounts of $711, $834 and $769 7,350 7,882 5,458
Merchandise inventories 44,171 39,652 34,870
Deferred catalog costs 4,050 3,079 3,354
Prepaid expenses and other 5,885 7,494 7,076
-------- -------- --------
Total Current Assets 100,704 113,564 51,297
Property and equipment, net 24,046 23,961 22,241
Deferred taxes and other assets 4,704 4,594 3,698
-------- -------- --------
Total Assets $129,454 $142,119 $ 77,236
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 35,895 $ 42,974 $ 29,158
Deferred revenue 9,470 8,605 7,020
Income taxes payable 488 7,194 --
Current portion of notes payable 150 147 471
-------- -------- --------
Total Current Liabilities 46,003 58,920 36,649
Notes payable 2,327 2,366 2,477
Other liabilities 3,821 3,710 3,018
-------- -------- --------
Total Liabilities 52,151 64,996 42,144
-------- -------- --------
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,
12,032,359; 12,016,827 and 8,964,048 shares 120 120 89
Additional paid-in capital 43,782 43,707 12,743
Retained earnings 33,401 33,296 22,260
-------- -------- --------
Total Stockholders' Equity 77,303 77,123 35,092
-------- -------- --------
Total Liabilities and Stockholders' Equity $129,454 $142,119 $ 77,236
======== ======== ========
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
Dollars in thousands, except per share amounts April 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Sales $ 66,681 $ 45,621
Less: returns and allowances 7,915 5,137
------------ ------------
Net Sales 58,766 40,484
Other revenue 359 375
------------ ------------
59,125 40,859
------------ ------------
COST AND EXPENSES:
Cost of products 28,777 20,280
Buying and occupancy 6,920 6,748
Advertising and promotion 7,342 4,234
General, selling and administrative 16,574 12,413
------------ ------------
59,613 43,675
------------ ------------
OPERATING LOSS (488) (2,816)
OTHER INCOME (EXPENSE):
Interest income (expense), net 658 (41)
Other income, net 5 5
------------ ------------
663 (36)
------------ ------------
Income (Loss) Before Income Tax (Benefit) 175 (2,852)
Income tax expense (benefit) 70 (1,141)
------------ ------------
Net Income (Loss) $ 105 $ (1,711)
============ ============
Net Income (Loss) Per Share, basic $ 0.01 $ (0.19)
============ ============
Net Income (Loss) Per Share, diluted $ 0.01 $ (0.19)
============ ============
Weighted Average Number of Shares - basic 12,024,362 8,944,669
Weighted Average Number of Shares - diluted 12,802,425 8,944,669
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
3
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<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
April 30,
----------------------
Dollars in thousands 2000 1999
-------- --------
<S> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net income (loss) $ 105 $ (1,711)
Adjustments to reconcile net loss to net cash used for operations:
Depreciation and amortization 1,644 1,488
Deferred rent expense 41 31
Deferred income taxes -- (1,141)
Changes in:
Merchandise inventories (4,519) (2,272)
Accounts receivable 532 1,329
Deferred catalog costs, prepaid expenses and other assets 528 (1,229)
Accounts payable and accrued expenses (7,079) 545
Deferred revenue, income taxes payable and other liabilities (5,771) (3,628)
-------- --------
Cash Used for Operating Activities (14,519) (6,588)
-------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (1,729) (1,216)
-------- --------
Cash Used for Investing Activities (1,729) (1,216)
-------- --------
Cash was Provided by (Used for) Financing Activities:
Issuance of common stock for stock options, net of repurchases 75 154
Principal payments on notes payable (36) (200)
-------- --------
Cash Provided by (Used for) Financing Activities 39 (46)
-------- --------
Net Decrease in Cash and Equivalents (16,209) (7,850)
-------- --------
Cash and Equivalents at Beginning of Period 55,457 8,389
-------- --------
Cash and Equivalents at End of Period $ 39,248 $ 539
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 69 $ 101
Income Taxes $ 6,167 $ 3,418
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month periods ended April 30, 2000 and 1999
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at April 30, 2000 and 1999, and the related
condensed statements of operations and cash flows for the three-month periods
ended April 30, 2000 and 1999 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, 2000 and 1999, and for the
three-month periods then ended. The balance sheet at January 31, 2000, 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 1999
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. The secondary peak period for the Company is June,
reflecting the gift buying 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
During the quarter ended April 30, 2000, the Company amended its revolving
secured credit facility agreement. This amended agreement extends the expiration
date to September 2004. As of April 30, 2000, the agreement as amended, allows
the Company borrowings and letters of credit up to a maximum of $31 million for
the period from October 1, 2000 through December 31, 2000, 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 the
prime rate per annum or at LIBOR plus 1.50% per annum, determined by 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, 2000, the Company was in compliance with all
covenants. The credit facility allows seasonal borrowings of up to $31 million
for the period from October 1, 2000 through December 31, 2000, increasing by $1
million
5
<PAGE>
for this period in each of the two subsequent years, and remaining at the $33
million for this period the following year. At April 30, 2000, the Company had
no amounts outstanding on its revolving credit facility. As of April 30, 2000,
letter of credit commitments outstanding under the credit facility were $8.7
million.
In addition, the credit facility provides for term loans for capital
expenditures ("Term Loans") up to an aggregate of $2.5 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 determined by financial performance.
Each Term Loan is to be repaid in 36 equal monthly principal installments. As of
April 30, 2000, there were no borrowings on this facility.
At April 30, 2000, notes payable included a 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. At April 30, 2000, the balance of this
note was $2.5 million.
NOTE C - Earnings (Loss) Per Share
Basic earnings per share is computed as net income available to common
stockholders 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 were excluded from the diluted earnings per
share for the three-month period ended April 30, 1999 because their inclusion in
net loss periods would be anti-dilutive to the earnings per share calculation.
For the three months ended April 30, 2000, the weighted average number of common
shares outstanding was adjusted for the incremental shares assumed issued on the
exercise of common stock:
Net income $ 105,000
Average shares of common stock
outstanding during the period 12,024,362
===========
Basic Earnings per Share $ 0.01
===========
Average shares of common stock
outstanding during the period 12,024,362
Add:
Incremental shares from assumed
exercise of stock options - diluted 778,063
-----------
12,802,425
===========
Diluted Earnings per Share $ 0.01
===========
Options for which the exercise price was greater than the average market price
of common stock of common stock for the three months ended April 30, 2000 were
not included in the computation of diluted earnings per share. The number of
such options for which the exercise price was greater than the average market
price of $11.03 was 16,000.
6
<PAGE>
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 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments." SFAS 137 extends the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. As
amended by SFAS 137, SFAS 133 is effective for fiscal years beginning after June
15, 2000 and is not to be applied retroactively. Management has not yet
determined the potential effects of SFAS No. 133 on the Company's financial
position or results of operations.
NOTE F - Segment Information
The Company classifies its business interests into three reportable segments:
retail stores, catalog and Internet. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies in
Note A of the 1999 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 2000 1999
-------- --------
Revenues:
Stores $ 38,191 $ 29,240
Catalog 11,110 8,373
Internet 8,406 2,329
Other 1,418 917
-------- --------
Total Revenues $ 59,125 $ 40,859
-------- --------
Operating Contributions:
Stores $ 3,470 $ 390
Catalog 1,498 1,646
Internet 397 85
Unallocated (5,190) (4,973)
-------- --------
Earnings (Loss) Before Income Tax Expense (Benefit) $ 175 $ (2,852)
-------- --------
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The condensed balance sheets of the Company as of April 30, 2000 and 1999 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, 2000 and 1999, 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Sharper Image
Corporation as of January 31, 2000, 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 24, 2000, 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, 2000 is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
-------------------------
San Francisco, CA
May 17, 2000
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 2000 1999
------ ------
Revenues:
Net store sales 64.6% 71.6%
Net catalog sales 18.8 20.5
Net Internet sales 14.2 5.7
Net wholesale sales 1.8 1.3
Other revenue 0.6 0.9
------ ------
Total Revenues 100.0% 100.0%
Costs and Expenses:
Cost of products 48.7 49.6
Buying and occupancy 11.7 16.5
Advertising and promotion 12.4 10.4
General, selling and administrative 28.0 30.4
Other (income) expense, net (1.1) 0.1
------ ------
Income (Loss) Before Income Tax Benefit 0.3 (7.0)
Income Tax Expense (Benefit) 0.1 (2.8)
------ ------
Net Income (Loss) 0.2% (4.2)%
====== ======
The following table sets forth the components of total revenues for the periods
indicated.
Three Months Ended
April 30,
-------------------
2000 1999
------- -------
Revenues (dollars in thousands)
Net store sales $38,191 $29,240
Net catalog sales 11,110 8,373
Net Internet sales 8,406 2,329
Net wholesale sales 1,059 542
------- -------
Total Net Sales 58,766 40,484
List rental 300 282
Licensing 59 93
------- -------
Total Revenues $59,125 $40,859
======= =======
10
<PAGE>
Revenues
Net sales for the three-month period ended April 30, 2000 increased $18,282,000,
or 45.2%, from the comparable three-month period of the prior year. Returns and
allowances for the three-month period ended April 30, 2000, were 11.9% of sales,
as compared with 11.3% of sales for the comparable prior year period. Net sales
increased in all three sales channels: stores, catalog and Internet. The
increase in Company net sales for the three-month periods ended April 30, 2000
compared to the same period last year was attributable to increases in net sales
from Sharper Image stores of $8,951,000; increases in net sales from the Sharper
Image catalog segment of $2,737,000; and increases in net sales from Internet
operations of $6,077,000. Continued increases in sales of Sharper Image Design
proprietary products, as well as the continued increases in the volume of
Internet transactions, and the effectiveness of the Company's direct marketing
activities in the catalog segment were primary factors in the achievement of the
overall increase in net sales.
Continued popularity of Sharper Image Design proprietary products, as well as
private label products, has been a key factor in the year over year increases in
net sales. Management believes that the continuing development and introduction
of these new and popular products is important to the Company's future success.
Sharper Image Design proprietary products increased from 25.4% of net sales in
1999 to 31.8% for the comparable three-month period ended April 30, 2000.
Private label products increased from 14.2% of net sales in 1999 to 21.9% for
the comparable three-month period ended April 30, 2000. Management believes the
effectiveness of its increased multimedia advertising initiatives in fiscal 1999
and the first quarter of 2000 was also a contributing factor in higher revenue
increases and will be an important factor in future revenue growth, although
there can be no assurances of the continued success of these and future
advertising initiatives. This advertising strategy contributed to improved sales
in all three sales channels: stores, catalog and Internet. Sales in the Internet
channel also benefited from the popularity of online shopping and continued
enhancements to the Company's e-commerce site sharperimage.com.
For the three-month period ended April 30, 2000, as compared with the same
period last year, net store sales increased $8,951,000, or 30.6% and comparable
store sales increased 31.8%. The increase in net store sales for the three-month
period ended April 30, 2000 as compared with the same prior year period reflects
a 14.2% increase in total store transactions and a 14.6% increase in average
revenue per transaction. The increase in net store sales for the three-month
period ended April 30, 2000 is also attributable to the opening of four new
stores since April 30, 1999, as well as fiscal 2000 having a full quarter of
sales from two stores opened late in the first quarter of 1999. These increases
were partially offset by the closing of three stores at their lease maturity
during the second and fourth quarters of fiscal 1999.
For the three-month period ended April 30, 2000, net catalog segment sales
increased $2,737,000 or 32.7%, as compared with the same period last year. This
increase in the first quarter of fiscal 2000 in catalog segment net sales
reflects a 23.0% increase in transactions, as well as an increase of 7.9% in
average revenue per order compared to the same prior year period. In addition to
the continued popularity of Sharper Image Design proprietary and private label
products, management believes the increase in Sharper Image catalog sales for
the three-month period ended April 30, 2000, as compared to the same period last
year, is partially attributable to a 24.9% increase in circulation, or 47.0%
increase in Sharper Image Catalog pages circulated. Management is continually
reviewing the pages and the number of catalogs circulated in its efforts to
optimize the revenues from catalog advertising, and is currently planning to
continue an increased circulation in fiscal 2000. Another basis for the
increased catalog segment sales in the first quarter of fiscal 2000 from the
same period last year is the increased
11
<PAGE>
single-product "solo-mailer" campaigns of Sharper Image Design proprietary
products conducted in fiscal 2000, and the revenue generated from infomercials
in 2000. The Company intends to continue its aggressive multimedia advertising
programs to attract new customers, while achieving an appropriate return on
investment.
For the three-month period ended April 30, 2000, the Company's Internet sales
from the sharperimage.com Web site, which includes the Sharper Image auction
site, increased $6,077,000, or 261% from the same period last year. This
increase is attributable to a 265.8% increase in Internet transactions,
partially offset by a decrease of 1.3% in average revenue per transaction
compared to the same quarter last year. The decrease in average revenue per
transaction is attributable to Internet auction activity, which began in the
quarter ended April 30, 1999, but had a full quarter of operations in fiscal
2000. Excluding auction site transactions, the average revenue per Internet
transaction increased 15.4% for the quarter ended April 30, 2000, compared to
the same quarter in the prior year. The auction site was launched to further the
Company's strategy of increasing its Internet business and broadening its
customer base. Management believes the auction site has brought on additional
customers as it has significantly increased the total visits and page views on
the Company's Web site. The auction site not only offers consumers the fun of
bidding and winning products at less than retail prices, it also allows the
Company the opportunity to effectively manage its closeout products. In fiscal
1999, there was continual improvement in the usability and entertainment value
of the Company's e-commerce site. In fiscal 2000, the Company plans additional
site enhancements with new features and ease-of-use technology, while continuing
its aggressive multimedia advertising programs impacting all three sales
channels. The increase in these sales channels, Sharper Image stores, catalog
and Internet also reflects the emphasis on increasing sales of the Sharper Image
Design proprietary and private label products.
Cost of Products
Cost of products for the three-month period ended April 30, 2000 increased
$8,497,000, or 41.9%, from the comparable prior year period. The increase in
cost of products is due to the higher sales volume compared to the same period
last year. The gross margin rate for the three-month period ended April 30, 2000
was 51.0%, which was 1.1 percentage points better than the comparable period of
the prior year. The higher gross margin rate in first quarter fiscal 2000
reflects an increase in sales of the Sharper Image Design proprietary and
private label products, which generally carry higher margins than branded
products. The Sharper Image Design proprietary products percentage of sales,
exclusive of wholesale, increase to 31.8% from 25.4% in first quarter of fiscal
2000 compared to first quarter of fiscal 1999. For the same comparable periods,
the private label products increased to 21.9% in fiscal 2000, from 14.2% in
fiscal 1999.
The Company's gross margin rate fluctuates with the changes in its merchandise
mix, which is affected by new items available in various categories. The
variation in merchandise mix from category to category from year to year
reflects the characteristic that the Company is driven by individual products,
as opposed to general lines of merchandise. Additionally, the Company's
expanding auction site and other promotional activities will tend to in part
offset the rate of increase in our gross margin performance. It is impossible to
predict future gross margin rates, although the Company's goal is to continue to
increase sales of Sharper Image Design proprietary products and other exclusive
private label products, as these products generally carry higher margins than
branded products. The popularity of these proprietary products contributed to
the 1.1 percentage point increase in the gross margin rate for fiscal 1999, and
should continue to have a positive impact on the Company's gross margin rate.
12
<PAGE>
Buying and Occupancy
Buying and occupancy costs for the three-month period ended April 30, 2000
increased $172,000, or 2.5%, from the comparable prior year period. The increase
primarily reflects the occupancy costs associated with the four new stores
opened since April 30, 1999, which was partially offset by the elimination of
the occupancy costs of the three Sharper Image stores closed at their lease
maturity during the second and fourth quarters of fiscal 1999. Buying and
occupancy costs as a percentage of net sales decreased from 16.7% for the
quarter ended April 30, 1999 to 11.8% for the quarter ended April 30, 2000.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month period ended April 30,
2000 increased $3,108,000, or 73.4%, from the comparable prior year period. The
increase in advertising and promotion expenses was partially attributable to the
47.0% increase in The Sharper Image catalog pages circulated in the first
quarter of fiscal 2000. The Company continued its multimedia advertising
initiatives to acquire new customers which management believes will increase
sales in the stores, catalog and Internet channels. These advertising campaigns
include radio advertising, single product "solo-mailers" and infomercials, among
others. Advertising and promotion expenses as a percentage of net sales
increased from 10.5% for the quarter ended April 30, 1999 to 12.5% for the
quarter ended April 30, 2000.
While the Sharper Image catalog serves as the primary source of advertising for
its retail stores, mail order and Internet businesses, the Company continually
reevaluates its advertising strategies and catalog circulation plans to maximize
the effectiveness of its advertising programs.
General, Selling and Administrative Expenses
General, selling and administrative (GS&A) expenses for the three-month period
ended April 30, 2000 increased $4,161,000, or 33.5%, from the comparable prior
year period. The increase was primarily due to increases in variable expenses
from increased net sales. The Company's continued development in proprietary
products and Internet operations have increased GS&A expenses for expanding and
improving the operational infrastructure, as well as attracting and retaining
key employees. The increase in GS&A expenses was also partially attributable to
overall selling expenses related to the opening of four new stores since April
30, 1999, partially offset by the reduced selling expenses of three stores
closed at lease maturity during this period. GS&A expenses as a percentage of
net sales decreased from 30.7% for the quarter ended April 30, 1999 to 28.2% for
the quarter ended April 30, 2000.
Other Income (Expense)
Other income, net, for the three-month period ended April 30, 2000, increased
$699,000 from the comparable prior year periods, primarily due to the interest
income earned in fiscal 2000 from higher investment balances generated from
improved operating results and the proceeds of the secondary offering completed
in July 1999.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the three-month period ended April 30, 2000 with cash generated by operations,
trade credit and funds retained from the secondary offering proceeds.
13
<PAGE>
During the quarter ended April 30, 2000, the Company amended its revolving
secured credit facility agreement. This amended agreement extends the expiration
date to September 2004. As of April 30, 2000, the agreement, as amended, allows
the Company borrowings and letters of credit up to a maximum of $31 million for
the period from October 1, 2000 through December 31, 2000, 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 the
prime rate per annum or at LIBOR plus 1.50% per annum, determined by 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, 2000, the Company was in compliance with all
covenants. The credit facility allows seasonal borrowings of up to $31 million
for the period from October 1, 2000 through December 31, 2000, increasing by $1
million for this period in each of the two subsequent years, and remaining at
the $33 million for this period the following year. At April 30, 2000, the
Company had no amounts outstanding on its revolving credit facility. As of April
30, 2000, letter of credit commitments outstanding under the credit facility
were $8.7 million.
In addition, the credit facility provides for term loans for capital
expenditures ("Term Loans") up to an aggregate of $2.5 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 determined by financial performance.
Each Term Loan is to be repaid in 36 equal monthly principal installments. As of
April 30, 2000, there were no borrowings on this facility.
At April 30, 2000, notes payable included a 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. At April 30, 2000, the balance of this
note was $2.5 million.
During the three-month period ended April 30, 2000, the Company opened one new
store in San Diego, California. In the remaining quarters of fiscal 2000, the
Company plans include expanding its fulfillment and distribution center
capacity; opening three to five new stores; and remodeling approximately eight
stores at lease maturity. These initiatives, combined with updating the
Company's e-commerce Web site sharperimage.com and a recurring level of capital
expenditures, will result in capital expenditures estimated to be between $15
million and $25 million in fiscal 2000.
The Company believes it will be able to fund its cash needs for the remainder of
fiscal 2000 through existing cash balances, cash generated from operations,
trade credit and the credit facility.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
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.
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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 0.9% (10% from the bank's
reference rate) as of April 30, 2000, the Company's results from 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. that 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.
Uncertainties and Risk
The foregoing discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included with this report. The
foregoing discussion contains certain forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market
conditions in the overall economy and the retail industry, consumer demand, the
opening of new stores, actual advertising expenditures by the Company, the
success of the Company's advertising and merchandising strategy, availability of
products, and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
Company undertakes no obligations to revise to these forward-looking statements
to reflect events or circumstances after the date hereof.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
to Registration Statement on Form S-1 (Registration No. 33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
3.3 Form of Certificate of Designation of Series A Junior participating
Preferred Stock. (Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
4.1 Form of Rights Certificate. (Incorporated by reference to Exhibit 4.01
to Amendment No. 2 to the Registration Statement on Form S-2.)
4.2 Form of Rights Agreement dated 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 (as amended through September
25,1998). (Incorporated by reference to Registration Statement on Form
S-8 filed on January 19, 1996 (Registration No. 33-3327) and Exhibit to
Definitive Proxy Statement on Schedule 14A filed April 29, 1999.)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994 (as
amended through September 25,1998). (Incorporated by reference to
Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327) and Exhibit to Definitive Proxy Statement on
Schedule 14A filed April 29, 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).)
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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))
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 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.)
10.14 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.)
10.15 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).
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
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10.20 Amendment to the Financing Agreement dated March 23, 2000 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.22 to Form 10-K for the fiscal year ended
January 31, 2000.)
10.21 Amendment to the Corporate Headquarters Office Lease Agreement dated
February 9, 2000 between the Company and its landlord, CarrAmerica
Realty Corporation. (Incorporated by reference to Exhibit 20.23 to Form
10-K for the fiscal year ended January 31, 2000.)
10.22 2000 Stock Incentive Plan. (Incorporated by reference to Exhibit to
Definitive Proxy Statement on Schedule 14A filed May 9, 2000.)
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, 2000.
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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 13, 2000 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
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