UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 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 12,067,911 shares as of December 12, 2000
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
October 31, January 31, October 31,
2000 2000 1999
Dollars in thousands, except per share amounts (Unaudited) (Note A) (Unaudited)
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 17,124 $ 55,457 $ 7,325
Accounts receivable, net of allowance for doubtful
accounts of $710, $834 and $812 13,261 7,882 10,498
Merchandise inventories 74,950 39,652 52,166
Deferred catalog costs 7,691 3,079 9,459
Prepaid expenses and other 7,179 7,494 6,290
-------- -------- --------
Total Current Assets 120,205 113,564 85,738
Property and equipment, net 34,161 23,961 23,605
Deferred taxes and other assets 4,957 4,594 4,262
-------- -------- --------
Total Assets $159,323 $142,119 $113,605
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 57,868 $ 42,974 $ 35,327
Deferred revenue 10,464 8,605 6,959
Income taxes payable 2,209 7,194 --
Current portion of notes payable 156 147 144
-------- -------- --------
Total Current Liabilities 70,697 58,920 42,430
Notes payable 2,248 2,366 2,404
Other liabilities 4,650 3,710 3,260
-------- -------- --------
Total Liabilities 77,595 64,996 48,094
-------- -------- --------
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,
12,067,911, 12,016,827 and 11,972,730 shares 121 120 119
Additional paid-in capital 43,917 43,707 43,086
Retained earnings 37,690 33,296 22,306
-------- -------- --------
Total Stockholders' Equity 81,728 77,123 65,511
-------- -------- --------
Total Liabilities and Stockholders' Equity $159,323 $142,119 $113,605
======== ======== ========
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Dollars in thousands, except per share amounts October 31, October 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 108,784 $ 65,075 $ 264,429 $ 175,159
Less: returns and allowances 11,408 7,230 28,777 19,395
------------ ------------ ------------ ------------
Net Sales 97,376 57,845 235,652 155,764
Other revenue 606 435 1,326 1,079
------------ ------------ ------------ ------------
97,982 58,280 236,978 156,843
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products 48,074 29,384 115,031 78,019
Buying and occupancy 7,778 6,934 21,947 20,569
Advertising and promotion 12,600 6,619 32,498 19,046
General, selling, and administrative 24,705 15,286 61,580 42,031
------------ ------------ ------------ ------------
93,157 58,223 231,056 159,665
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 4,825 57 5,922 (2,822)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income - net 418 192 1,668 50
Other - net (68) (2) (266) (3)
------------ ------------ ------------ ------------
350 190 1,402 47
------------ ------------ ------------ ------------
Income (Loss) Before Income Tax
Expense (Benefit) 5,175 247 7,324 (2,775)
Income Tax Expense (Benefit) 2,070 99 2,930 (1,110)
------------ ------------ ------------ ------------
Net Income (Loss) $ 3,105 $ 148 $ 4,394 $ (1,665)
============ ============ ============ ============
Net Income (Loss) Per Share
Basic $ 0.26 $ 0.01 $ 0.37 $ (0.17)
============ ============ ============ ============
Diluted $ 0.23 $ 0.01 $ 0.34 $ (0.17)
============ ============ ============ ============
Weighted Average Number of Shares
Basic 12,060,187 11,969,132 12,039,997 10,014,729
Diluted 13,340,345 12,706,524 13,068,305 10,014,729
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
October 31,
----------
Dollars in thousands 2000 1999
-------- --------
<S> <C> <C>
Cash Provided by (Used for) Operating Activities:
Net Income (Loss) $ 4,394 $ (1,665)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operations:
Depreciation and amortization 5,501 4,810
Deferred rent expense (136) (115)
Deferred income taxes -- (1,209)
Loss on disposal of equipment 288 --
Changes in operating assets and liabilities:
Merchandise inventories (35,298) (19,568)
Accounts receivable (5,379) (3,711)
Deferred catalog costs, prepaid expenses and other assets (4,660) (7,043)
Accounts payable and accrued expenses 14,894 6,714
Deferred revenue, income taxes payable and other liabilities (2,050) (3,301)
-------- --------
Cash Used for Operating Activities (22,446) (25,088)
-------- --------
Cash Used for Investing Activities:
Property and equipment expenditures (15,989) (5,903)
-------- --------
Cash Used for Investing Activities (15,989) (5,903)
-------- --------
Cash Provided by (Used for) Financing Activities:
Proceeds from revolving borrowings -- 11,955
Payments on revolving borrowings -- (11,955)
Proceeds from issuance of common stock 211 30,527
Principal payments on notes payable (109) (600)
-------- --------
Cash Provided by Financing Activities 102 29,927
-------- --------
Net Decrease in Cash and Equivalents (38,333) (1,064)
-------- --------
Cash and Equivalents at Beginning of Period 55,457 8,389
-------- --------
Cash and Equivalents at End of Period $ 17,124 $ 7,325
======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 214 $ 323
Income Taxes $ 7,750 $ 0
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and nine-month periods ended October 31, 2000 and 1999
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at October 31, 2000 and 1999, and the related
condensed statements of operations for the three-month and nine-month periods,
and condensed statements of cash flows for the nine-month periods then ended
have been prepared by the Sharper Image Corporation ("the Company"), without
audit. In the opinion of management, the condensed financial statements include
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
October 31, 2000 and 1999, and for all 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 accounting principles generally
accepted in the United States of America 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 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. A substantial portion of the Company's total revenues
and all or most of the Company's net earnings, usually 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
On September 29, 2000 the Company amended it's revolving secured credit facility
agreement to temporarily increase the limit on documentary letters of credit
from $15 million to $23 million and to temporarily increase the limit on the
aggregate amount of eligible ordered inventory from $6.5 million to $15 million
in order to accommodate vendor terms for purchases of top selling products. On
July 18, 2000, the Company amended this agreement to allow the Company
borrowings and letters of credit up to a maximum of $31 million for the period
from July 18, 2000 through December 31, 2000, and $20 million for other times of
the year based on inventory levels. On March 23, 2000 the Company amended the
agreement to extend the expiration date to September 2004. 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 nine-month period ended October 31, 2000, the Company was in compliance with
all covenants. The credit
5
<PAGE>
facility allows seasonal borrowings of up to $31 million for the period from
July 18, 2000 through December 31, 2000, increasing by $1 million for the period
October 1 through December 31, in each of the two subsequent years, and
remaining at the $33 million for this period the following year. At October 31,
2000, the Company had no amounts outstanding on its revolving credit facility.
As of October 31, 2000, letter of credit commitments outstanding under the
credit facility were $11.5 million.
At October 31, 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 October 31, 2000, the balance of this
note was $2.4 million.
NOTE C - Earnings (Loss) Per Share
<TABLE>
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 reflect the potential dilution that
could occur from common shares to be issued through stock options. For the three
and nine-months ended October 31, 2000 and 1999, the weighted average number of
common shares outstanding was adjusted for the incremental shares assumed issued
on the exercise of stock options:
<CAPTION>
Three months Nine months
ended ended
October 31, October 31,
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 3,105,525 $ 147,720 $ 4,394,503 $ (1,665,419)
Average shares of common stock
outstanding during the period 12,060,187 11,969,132 12,039,997 10,014,729
Basic Earnings (Loss) per Share $ 0.26 $ 0.01 $ 0.37 $ (0.17)
============ ============ ============ ============
Average shares of common stock
outstanding during the period 12,060,187 11,969,132 12,039,997 10,014,729
Add:
Incremental shares from assumed
exercise of stock options 1,280,158 737,392 1,028,308 0
------------ ------------ ------------ ------------
13,340,345 12,706,524 13,068,305 10,014,729
Diluted Earnings (Loss) per Share $ 0.23 $ 0.01 $ 0.34 $ (0.17)
============ ============ ============ ============
</TABLE>
For the three-month periods ended 10/31/00 and 10/31/99, 13,800 and 14,000
options were excluded as the average market price was in excess of the exercise
price. For the nine-month period ended 10/31/00, 41,300 options were excluded as
the average market price was in excess of the exercise price. For the nine-month
period ended 10/31/99, all options were excluded, as they would have been
antidilutive given the loss for the period.
6
<PAGE>
NOTE D - Commitments and Contingencies
The Company is party to various legal proceedings arising from normal business
activities. Management believes, after review with corporate counsel, 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-Deferral of the Effective Date of
SFAS No. 133." SFAS 133, as amended in July 2000 by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 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. The Company does not believe
the adoption of SFAS No. 133 will have a material adverse impact 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 is a different channel for selling products.
7
<PAGE>
Financial information for the Company's business segments is as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
----------- ------------
2000 1999 2000 1999
---- ---- ---- ----
Dollars in thousands
Revenues:
Stores $ 58,162 $ 34,622 $149,669$ 103,689
Catalog 19,379 12,255 44,976 33,077
Internet 13,694 5,318 32,734 11,905
Other 6,747 6,085 9,599 8,172
--------- --------- --------- ---------
Total Revenues $ 97,982 $ 58,280 $ 236,978 $ 156,843
--------- --------- --------- ---------
Operating Contributions:
Stores $ 7,897 $ 2,290 $ 18,329 $ 7,582
Catalog 3,003 1,273 6,014 2,757
Internet 939 954 1,890 1,575
Unallocated (6,664) (4,270) (18,909) (14,689)
--------- --------- --------- ---------
Income (Loss) Before
Income Tax Benefit $ 5,175 $ 247 $ 7,324 $ (2,775)
--------- --------- --------- ---------
NOTE G - Subsequent Event
On December 6, 2000, the Company's board of directors authorized a common stock
repurchase program. The program allows for the repurchase of up to 800,000
shares and expires on January 31, 2002. Through December 12, 2000 the Company
has repurchased 20,000 shares of common stock at a total cost of approximately
$274,000.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The condensed balance sheets of the Company as of October 31, 2000 and 1999, and
the related condensed statements of operations for the three-month and
nine-month periods, and statement of condensed cash flows for the nine-month
periods then ended have been reviewed by the Company's independent accountants,
Deloitte & Touche LLP, whose report covering their review of the financial
statements is presented herein.
8
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Sharper Image Corporation
San Francisco, California
We have reviewed the accompanying condensed balance sheets of Sharper Image
Corporation as of October 31, 2000 and 1999, and the related condensed
statements of operations for the three-month and nine-month periods, and
condensed statements of cash flows for the nine-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
November 16, 2000
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following information should be read in conjunction with the historical
financial information and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's report on Form
10-K as filed with the Securities and Exchange Commission. The statements
contained in this Form 10-Q that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Such forward-looking statements include statements regarding the Company
and its business, financial condition, results of operations and prospects.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Form 10-Q. Additionally,
statements concerning future matters such as the development of new products or
enhancements, possible changes in legislation and other statements regarding
matters that are not historical are forward-looking statements. All
forward-looking statements in this Form 10-Q are based upon information
available to the Company as of the date hereof, and the Company assumes no
obligation to revise or update any such forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Form
10-Q. Actual results could differ materially from our current expectations.
Factors that could cause or contribute to such differences include, but are not
limited to those set forth under "Factors Affecting Future Operating Results"
below in this Quarterly Report, and elsewhere in this Quarterly Report.
10
<PAGE>
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of Operations and
shows the results of operations for the periods indicated as a percentage of
total revenues.
Three Months Ended Nine Months Ended
October 31, October 31,
----------- ------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Net store sales 59.3% 59.4% 63.2% 66.1%
Net catalog sales 19.8 21.0 19.0 21.1
Net internet sales 14.0 9.1 13.8 7.6
Net wholesale sales 6.3 9.7 3.5 4.5
Other revenue 0.6 0.8 0.5 0.7
----- ----- ----- -----
Total Revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 49.1 50.4 48.5 49.7
Buying and occupancy 7.9 11.9 9.3 13.1
Advertising and promotion 12.9 11.4 13.7 12.2
General, selling
and administrative 25.2 26.2 26.0 26.8
Other (Income) Expense (0.4) (0.3) (0.6) 0.0
----- ----- ----- -----
Income (Loss) Before Income Tax
Expense (Benefit) 5.3 0.4 3.1 (1.8)
Income Tax Expense (Benefit) 2.1 0.1 1.2 (0.7)
----- ----- ----- -----
Net Income (Loss) 3.2% 0.3% 1.9% (1.1)%
===== ===== ===== =====
11
<PAGE>
The following table sets forth the components of total revenues for the periods
indicated.
Three Months Ended Nine Months Ended
October 31, October 31,
----------- ------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues (dollars in thousands)
Net store sales $ 58,162 $ 34,622 $149,669 $103,689
Net catalog sales 19,379 12,255 44,976 33,077
Net internet sales 13,694 5,318 32,734 11,905
Net wholesale sales 6,141 5,650 8,273 7,093
-------- -------- -------- --------
Total Net Sales 97,376 57,845 235,652 155,764
List rental 548 391 1,144 893
Licensing 58 44 182 186
-------- -------- -------- --------
Total Revenues $ 97,982 $ 58,280 $236,978 $156,843
======== ======== ======== ========
Revenues
The Company's third quarter net sales increased $39,531,000, or 68.3%, from the
comparable three-month period last year. Net sales for the nine-month period
ended October 31, 2000 increased $79,888,000 or 51.3%, from the comparable
period last year. Returns and allowances for the three-month and nine-month
periods ended October 31, 2000, were 10.5% and 10.9% of sales, as compared with
11.1% of sales for both comparable prior year periods. The increase in Company
net sales for the three and nine-month periods ended October 31, 2000 compared
to the same periods last year was attributable to increases in net sales from
Sharper Image stores of $23,540,000 and $45,980,000, respectively; increases in
net sales from the Sharper Image catalog of $7,124,000 and $11,899,000,
respectively; increases in net sales from Internet operations of $8,376,000 and
$20,829,000, respectively; and increases in net wholesale business of $491,000
and $1,180,000, respectively.
The 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 and private label
products increased from 49.5% of net sales in 1999 to 70.5% for the comparable
three-month period ended October 31, 2000. Also, the Company introduced in 1999
a private label product, the Razor Rollerboard scooters, which have contributed
substantially to the net sales increases in 2000. Management believes that the
popularity of this product will continue through the 2000 holiday season. On a
forward-looking basis, there can be no assurance that the sales of this product
can be maintained at current levels or that growth in sales from this product
will continue at its present trend.
Management believes the effectiveness of its increased multimedia advertising
initiatives in fiscal 1999 and the first three quarters of 2000 was also a
contributing factor in higher revenue increases. Management believes the
multimedia advertising initiatives 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. Management also believes this advertising
strategy contributed to improved sales in all three sales channels: stores,
catalog
12
<PAGE>
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 and nine-month periods ended October 31, 2000, as compared
with the same periods last year, net store sales increased $23,540,000, or
68.0%, and $45,980,000, or 44.3%, and comparable store sales increased by 66.4%
and 43.0%, respectively. The increase in net store sales for the three-month
period ended October 31, 2000 reflects a 47.2% increase in total store
transactions, with a 15.1% increase in average revenue per transaction, compared
with the same prior year period. Total store transactions increased 28.2% for
the nine-months ended October 31, 2000, with a 13.2% increase in average revenue
per transaction, compared with the same prior year period.
The increase in net store sales and comparable stores sales reflect, in large
part the continued popularity of Sharper Image Design products and private label
products, including the Razor Rollerboard scooters. Management believes the
increase in multimedia advertising programs of catalog, television and radio,
during the three and nine-month period ended October 31, 2000 also contributed
to the store sales increases. Comparable store sales for the three-month and
nine-month periods attributable to the core non-scooter business increased 10%
and 11% respectively, further highlighting the popularity of the Sharper Image
Design products and private label products. On a forward looking basis, there
can be no assurance that net store sales and comparable store sales will
continue to increase at their current levels; or that the current level of sales
can be maintained.
For the three and nine-month periods ended October 31, 2000, as compared with
the same period of the prior year, net catalog segment sales increased
$7,124,000 or 58.1%, and $11,899,000 or 36.0%, respectively. For the three-month
period ended October 31, 2000, the increase in net catalog sales represents a
49.5% increase in the number of transactions and a 5.8% increase in the average
revenue per order for the three-month period ended October 31, 2000. For the
nine-month period ended October 31, 2000, the increase in net catalog sales
represents a 29.2% increase in the number of transactions and a 5.7% increase in
the average revenue per order.
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 and nine-month periods ended October 31, 2000, as
compared to the same period last year, is partially attributable to a 43% and
34% increase in circulation, or 39% and 43% increase in Sharper Image catalog
pages circulated. Management also believes that the increased catalog and page
circulation has positively impacted the revenue growth in store and internet
sales. 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 to increase circulation through the current
Holiday season. Another contributing factor to the increase in net catalog sales
in fiscal 2000 from the same period last year, is the increased single-product
"solo-mailer" campaigns of Sharper Image Design proprietary products conducted
in fiscal 2000, and increased revenue generated from infomercials and print ads
in 2000. The Company intends to continue its aggressive multimedia advertising
programs through the fourth quarter to attract new customers, while achieving an
appropriate return on investment, although there can be no assurances of the
continued success of these advertising initiatives.
For the three and nine-month periods ended October 31, 2000, the Company's
Internet sales from the sharperimage.com website, which includes the Sharper
Image auction site, increased $8,376,000, or 158.0% and $20,829,000 or 175.0%,
respectively, from the same periods last year. The three-month increase is
attributable to a 129.6% increase in Internet transactions and an increase of
12.2% in average revenue per transaction, as compared to the same period of the
prior year. The nine-month increase is attributable to a 157.8% increase in
Internet transactions and an increase of 6.7% in average revenue per
transaction, as compared to the same period of the prior year. During the third
quarter, the Company
13
<PAGE>
launched its enhanced and redesigned website that incorporates much of the look
and feel of the new Sharper Image store design. This will allow the Internet
customer to experience similar shopping fun and excitement that a customer would
enjoy in our retail stores. The redesigned website also includes new features,
including dynamic browsing, inventory status, tracking capabilities, flash
technology and 3-D technology.
The Sharper Image auction site was launched in April 1999, to further the
Company's strategy of increasing its Internet business, broadening its customer
base and managing inventories. 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 website. The auction site 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, refurbished and
repackaged products. Management reviews the Company's website on a regular basis
and is continually developing new and enhanced features.
Cost of Products
Cost of products for the three-month and nine-month periods ended October 31,
2000 increased $18,690,000, or 63.6%, and $37,012,000, or 47.4%, from the
comparable prior year periods. The increase in cost of products is due to the
higher sales volume compared to the same periods last year. The gross margin
rate for the three and nine-month periods ended October 31, 2000 was 50.6% and
51.2%, respectively, which was 1.4 and 1.3 percentage points better than the
comparable prior year periods. The higher gross margin rates reflect an increase
in sales of the Sharper Image Design proprietary and private label products,
which generally carry higher margins. The Sharper Image Design proprietary
products and private label products percentage of sales, exclusive of wholesale,
increased to 65.7% from 44.5% in first nine months of fiscal 2000 compared to
the same period of 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 marketing activities will, in part, tend to
partially offset or dilute 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 and may be less susceptible to price
comparisons by customers. The popularity of the Sharper Image proprietary and
private label products contributed to the 1.3 percentage point increase in the
gross margin rate for fiscal 2000, and management believes these products will
continue to have a positive impact on the Company's gross margin rate in the
fourth quarter.
Buying and Occupancy
Buying and occupancy costs for the three-month and nine-month periods ended
October 31, 2000 increased $844,000, or 12.2%, and $1,378,000, or 6.7% from the
comparable prior year periods. The increase primarily reflects the occupancy
costs associated with the three new stores opened since October 31, 1999, which
was partially offset by the elimination of the occupancy costs of the four
Sharper Image stores closed at their lease maturity during the fiscal 1999 and
the first nine months of fiscal 2000. Buying and occupancy costs as a percentage
of net sales decreased from 11.9% for the three months ended October 31, 1999 to
7.9% for the three months ended October 31, 2000. Buying and occupancy costs as
a percentage of net sales decreased from 13.1% for the nine months ended October
31, 1999 to 9.3% for the nine months ended October 31, 2000. Although
"percentage rent" terms in most of the Company's lease agreements will
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increase lease costs during the fourth quarter of 2000, management believes the
Company will continue to experience buying and occupancy leverage as a
percentage of sales when compared to the same period of 1999.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month and nine-month periods
ended October 31, 2000 increased $5,981,000, or 90.4%, and $13,452,000, or 70.6%
from the comparable prior year periods. The increase in advertising and
promotion expenses was partially attributable to the 43% increase in The Sharper
Image catalog pages circulated in the first nine months of fiscal 2000. Also,
the Company continued its multimedia advertising initiatives to acquire new
customers which management believes will increase sales in the stores, catalog
and Internet channels, although there can be no assurance of the continued
success of these advertising initiatives. These advertising campaigns include
radio advertising, single product "solo-mailers", print advertising and
television infomercials, among others.
Management believes the expansion of these programs contributed to the
substantial increases in sales experienced for the three and nine-month periods
ended October 31, 2000. Advertising and promotion expenses as a percentage of
net sales increased from 11.4% for the quarter ended October 31, 1999 to 12.9%
for the quarter ended October 31, 2000. Advertising and promotion expenses as a
percentage of net sales increased from 12.2% for the nine months ended October
31, 1999 to 13.7% for the nine months ended October 31, 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 overall effectiveness of its advertising programs.
General, Selling and Administrative Expenses
General, selling and administrative (GS&A) expenses for the three-month and
nine-month periods ended October 31, 2000 increased $9,419,000, or 61.6%, and
$19,549,000, or 46.5% from the comparable prior year periods. The increase was
primarily due to increases in variable expenses from increased net sales. Also,
the Company's continued development of proprietary products and increasing
Internet operations have increased GS&A expenses for expanding and improving the
operational infrastructure, as well as attracting and retaining key employees.
The Company also added to its administrative infrastructure by adding payroll,
facilities and related costs in the areas of Internet site development,
distribution centers, proprietary product development and corporate office,
among other areas. GS&A expenses as a percentage of net sales decreased from
26.2% for the quarter ended October 31, 1999 to 25.2% for the quarter ended
October 31, 2000. GS&A expenses as a percentage of net sales decreased from
26.8% for the nine months ended October 31, 1999 to 26.0% for the nine months
ended October 31, 2000.
Other Income (Expense)
Other income, net, for the three and nine-month periods ended October 31, 2000,
increased $160,000 and $1,355,000 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 nine-month period ended October 31, 2000 with cash generated by operations,
trade credit and existing cash balances.
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On September 29, 2000 the Company amended it's revolving secured credit facility
agreement to temporarily increase the limit on documentary letters of credit
from $15 million to $23 million and to temporarily increase the limit on the
aggregate amount of eligible ordered inventory from $6.5 million to $15 million
in order to accommodate vendor terms for purchases of top selling products. On
July 18, 2000, the Company amended this agreement to allow the Company
borrowings and letters of credit up to a maximum of $31 million for the period
from July 18, 2000 through December 31, 2000, and $20 million for other times of
the year based on inventory levels. On March 23, 2000 the Company amended the
agreement to extend the expiration date to September 2004. 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 nine-month period ended October 31, 2000, the Company was in compliance with
all covenants. The credit facility allows seasonal borrowings of up to $31
million for the period from July 18, 2000 through December 31, 2000, increasing
by $1 million for the period October 1 through December 31, in each of the two
subsequent years, and remaining at the $33 million for this period the following
year. At October 31, 2000, the Company had no amounts outstanding on its
revolving credit facility. As of October 31, 2000, letter of credit commitments
outstanding under the credit facility were $11.5 million.
At October 31, 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 October 31, 2000, the balance of this
note was $2.4 million.
During the nine-month period ended October 31, 2000, the Company opened three
new stores located at Horton Plaza in San Diego, California, at Desert Passage
in Las Vegas, Nevada and a flagship store location at Union Square in San
Francisco, California. The Company closed one store located at Tabor Center in
Denver, Colorado. The Company has also remodeled six stores during the first
nine months of fiscal 2000 and started the operations of a second primary
distribution center totaling approximately 60,000 square feet in Ontario,
California. This facility is being operated for the Company by a third party
vendor along with the Company's own on-site manager to provide for performance
standards. In the remaining quarter of fiscal 2000, the Company plans to open
six additional new stores. 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 $18
million and $20 million in fiscal 2000.
On December 6, 2000 the Company's board of directors authorized a common stock
repurchase program. Under the program, which expires on January 31, 2002,
management has the authority to purchase up to 800,000 shares of Sharper Image
common stock in public market transactions. Through December 12, 2000, the
Company repurchased 20,000 shares of common stock of a total cost of
approximately $274,000. The number of shares of stock that will be repurchased
and the price that will be paid is the result of many factors, several of which
are outside of the control of the Company. The primary factors, however, are the
number of shares available in the market from sellers at any given time and the
price of the stock within the market as determined by the market.
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
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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. In past years, a substantial portion of the
Company's total revenues and all, or most of the Company's net earnings have
occurred 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. For the first time in the Company's history, net earnings will be
generated during the first three quarters of the current fiscal year. The
results of operations for these interim periods are not necessarily indicative
of the results for the full fiscal year.
Factors Affecting Future Operating Results
If we fail to offer merchandise that our customers find attractive, our business
and operating results will be harmed
In order to meet our strategic goals, we must successfully offer to our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other retailers. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
If other retailers, especially department stores or discount retailers, offer
the same products or products similar to those we sell or if our products become
less popular with our customers, our sales may decline or we may decide to offer
our products at lower prices. If customers buy fewer of our products or if we
have to reduce our prices, our revenues and earnings will decline.
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In addition, we must be able to deliver our merchandise in sufficient quantities
to meet the demands of our customers and deliver this merchandise to customers
in a timely manner. We must be able to maintain sufficient inventory levels,
particularly during peak selling seasons. Our future results would be adversely
affected if we are not successful in achieving these goals.
Our success depends on our ability to anticipate and respond to changing product
trends and consumer demands in a timely manner. Our products must appeal to a
broad range of consumers whose preferences we cannot predict with certainty and
may change between sales seasons. If we misjudge either the market for our
products or our customers' purchasing habits, our sales may decline, our
inventories may increase or we may be required to sell our products at lower
prices. This would result in a negative effect on our business.
If we fail to grow our sales in fiscal 2001 comparable to our growth rate in
fiscal 2000, our stock pice may be adversely affected
In 1999, we introduced the Razor Rollerboard scooter at a time when similar
scooters were not widely available from other retailers. This product has since
become one of the most popular in the history of our Company. Sales of Razor
Rollerboard scooters contributed substantially to the net sales increases during
the first three quarters of fiscal 2000.
Other retailers are currently offering versions of the Razor Rollerboard scooter
and other scooters. We cannot predict with certainty as to the level of future
sales of the Razor Rollerboard scooter. We also cannot predict whether we will
introduce another product that will be as successful as the Razor Rollerboard
scooter or our other top selling products.
Although we experienced significant overall growth in our store, Internet and
catalog sales channels in the first nine months of fiscal 2000, our future
growth will be substantially dependent on continued increases in sales of
popular existing and new core products such as our Razor Rollerboard scooter. We
cannot assure that we will be able to maintain our current levels of sales or
continue in future periods the rate of growth we experienced in the first nine
months of fiscal 2000. Our stock price may be adversely affected if we do not
maintain current levels of sales or achieve sales growth in line with recent
performance or with that expected by analysts or other stock market
professionals.
Our quarterly operating results are subject to significant fluctuations and
seasonality
Our business is highly seasonal, reflecting the general pattern of peak sales
and earnings for the retail industry during the Holiday shopping season.
Typically, a substantial portion of our total revenues and all or most of our
net earnings occur during our fourth quarter ending January 31. During our 1999
and 1998 fiscal years, our total revenues for the fourth quarter ending January
31 accounted for more than 45% of total revenues for the full fiscal year. We
cannot predict with certainty whether the fourth quarter of 2000 will account
for such a large percentage of our total revenues. In anticipation of increased
sales activity during the fourth quarter, we incur significant additional
expenses, including significantly higher inventory costs and the costs of hiring
a substantial number of temporary employees to supplement our regular store
staff. If for any reason our sales were to be substantially below those normally
expected during the fourth quarter, our annual results would be adversely
affected. Due to this seasonality, our operating results for any one period may
not be indicative of our operating results for the full fiscal year.
Typically our operating results during the other quarters of the year are
generally lower and we have historically experienced losses in these periods.
While in fiscal 2000, for the first time in our operating history, we were
profitable in the first three quarters of 2000, in the future it is possible
that we will experience losses similar to those of fiscal 1998 and 1999 in the
first three quarters of the fiscal year. Our quarterly results of operations may
fluctuate significantly as a result of a variety of factors, including among
other things, the timing of new store openings, net sales contributed by new
stores, increases or decreases in comparable store sales, changes in our
merchandise mix and net catalog sales.
In addition, like other retailers we typically make merchandising and purchasing
decisions well in advance of the Holiday shopping season. As a result, poor
economic conditions or differences from projected customer demand for our
products during the fourth quarter could result in lower revenues and earnings.
Our success depends in part on our ability to design, develop, obtain and timely
deliver our proprietary products
We are increasingly dependent on the success of the proprietary products that we
design and develop for our customers. We must design and develop products that
meet the demands of our customers and manufacture these products
cost-effectively. We rely solely on our contract manufacturers, most of who are
located in Asia, to produce these products in sufficient quantities to meet
customer demand and to obtain and deliver these products to our customers in a
timely manner. These arrangements are subject to the risks of relying on
products manufactured outside the United States, including political unrest and
trade restrictions, currency fluctuations, work stoppages, and economic
uncertainties including inflation and foreign government regulations. If we are
unable to successfully design and develop or to obtain and timely deliver
sufficient quantities of these products, our operating results may be adversely
affected.
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Our vital computer and communications hardware and software systems are
vulnerable to damage and interruption which could harm our Internet business
Our success, in particular our ability to successfully receive and fulfill
Internet orders and provide high-quality customer service, largely depends upon
the efficient and uninterrupted operation of our computer and communications
hardware and software systems. We use internally managed systems for our website
and some aspects of transaction procession, including customer profiling and
order verifications. Our systems and operations are vulnerable to damage or
interruption from: earthquake, fire, flood and other natural disasters; power
loss, computer systems failures, Internet and telecommunications or data network
failure, operator negligence, improper operation by or supervision of employees,
physical and electronic loss of data or security breaches, misappropriation and
similar events; and computer viruses.
In addition, we maintain our servers at the site of a third party located in
Santa Clara, California. We cannot control the maintenance and operation of this
site, which is also susceptible to similar disasters and problems. Because our
strategies depend in part on maintaining our reputation for superior levels of
customer service, any system failure that causes an interruption in our service
or a decrease in responsiveness could harm our relationships with our customers
and result in reduced revenues.
We face risks associated with expansion of our store operations
We plan to continue to increase the number of The Sharper Image stores in the
future in order to grow our revenues. Our ability to expand will depend in part
on the following factors:
o the availability of attractive store locations;
o our ability to negotiate favorable lease terms;
o our ability to identify customer demand in different geographic areas;
o general economic conditions; and
o the availability of sufficient funds for expansion.
As we continue to expand, we have started to and may continue to become
concentrated in limited geographic areas. This could increase our exposure to
customer demand, weather, competition, distribution problems, and poor economic
conditions in these regions. In addition, our catalog sales, including Internet
sales, or existing store sales in a specific region may decrease as a result of
new store openings.
In order to continue our expansion, we will need to hire additional management
and staff for our corporate offices and employees for each new store. We must
also expand our management information systems and distribution systems to serve
these new stores. If we are unable to hire necessary personnel or grow our
existing systems, our expansion efforts may not succeed and our operations may
suffer.
Some of our expenses will increase with the opening of new stores. If store
sales are inadequate to support these new costs, our profitability will
decrease. For example, inventory costs will increase as we increase inventory
levels to supply additional stores. We may not be able to manage this increased
inventory without decreasing our profitability. We may need additional financing
in excess of our current credit facility to be used for new store openings.
Furthermore, our current credit facility has various loan covenants we must
comply with in order to maintain the credit facility. We cannot predict with
certainty that we will be successful in obtaining additional funds or new credit
facilities on favorable terms or at all.
We are dependent on the success of our advertising and marketing efforts
Our revenues depend in part on our ability to effectively market and advertise
our products through The Sharper Image catalog and other advertising vehicles.
Increases in advertising, paper costs or postage may
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limit our ability to advertise without reducing our profitability. If we
decrease our advertising efforts due to increased advertising costs,
restrictions placed by regulatory agencies, or for any other reason, our future
operating results may be materially adversely affected. We are also testing
other advertising media, such as television infomercials, radio, and single
product mailings, and significantly increased our advertising expenditures in
fiscal 2000. While we believe that increased expenditures on these and other
media have resulted in increased revenues in the first three quarters of fiscal
2000, we cannot assure you that this trend will continue in the future. We
expect to continue to spend at increased levels in the future but may not
continue to produce a sufficient level of sales to cover such expenditures,
which would reduce our profitability.
We rely on our catalog operations
Our success depends in part on the success of our catalog operations. We believe
that the success of our catalog operations depends on the following factors:
o our ability to achieve adequate response rates to our mailings;
o our ability to continue to offer a merchandise mix that is attractive to
our mail order customers;
o our ability to cost-effectively add new customers; and
o our ability to cost-effectively design and produce appealing catalogs.
Catalog production and mailings entail substantial paper, postage, merchandise
acquisition and human resource costs, including costs associated with catalog
development and increased inventories. We incur nearly all of these costs prior
to the mailing of each catalog. As a result, we are not able to adjust the costs
being incurred in connection with a particular mailing to reflect the actual
performance of the catalog. If we were to experience a significant shortfall in
anticipated revenue from a particular mailing, and thereby not recover the costs
associated with that mailing, our future results would be adversely affected. In
addition, response rates to our mailings and, as a result, revenues generated by
each mailing are affected by factors such as consumer preferences, economic
conditions, the timing and mix of catalog mailings and changes in our
merchandise mix, several of which may be outside our control. Further, we have
historically experienced fluctuations in the response rates to our catalog
mailings. If we are unable to accurately target the appropriate segment of the
consumer catalog market or to achieve adequate response rates, we could
experience lower sales, significant markdowns or write-offs of inventory and
lower margins, which would adversely affect our future results.
Our catalog costs are unpredictable
Historically, a significant portion of our revenues have been from purchases
made by customers from The Sharper Image catalog. Increases in the costs of
producing and distributing the catalog may reduce the
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profitability of our catalog sales. Specifically, we may experience increases in
postage, paper or shipping costs due to factors beyond our control. As a result,
our future results may be adversely affected.
We depend on our vendors' ability to timely deliver sufficient quantities of
products
Our performance depends on our ability to purchase our products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, production capacities and limited operating
histories. We have no long-term purchase contracts or other contracts that
provide continued supply, pricing or access to new products and any vendor or
distributor could discontinue selling to us at any time. We cannot assure you
that we will be able to acquire the products we desire in sufficient quantities
or on terms that are acceptable to us in the future. In addition, we cannot
assure you that our vendors will make and deliver high quality products in a
cost-effective, timely manner. We may also be unable to develop relationships
with new vendors. All products we purchase from vendors in Asia must be shipped
to our distribution centers by freight carriers and we cannot assure you that we
will be able to obtain sufficient freight capacity at favorable rates. Our
inability to acquire suitable products in a cost-effective, timely manner or the
loss of one or more key vendors or freight carriers could have a negative effect
on our business.
Additionally, our relationships with our vendors are also subject to the risks
of relying on products manufactured outside the United States, including
political unrest and trade restrictions, work stoppages, economic uncertainties
including inflation, foreign government regulation and currency fluctuations.
Because the majority of our products were manufactured in various countries in
Asia, primarily China, during the first nine months of fiscal 2000 and during
fiscal 1999, any significant disruption in any of these countries could impair
our ability to obtain sufficient quantities of products in a timely manner.
We face certain risks relating to customer service
Our ability to provide customer service depends, to a large degree, on the
efficient and uninterrupted operation of our call centers, our contracting
services with third party call centers and our sharperimage.com Web site. Any
material disruption or slowdown in our order processing systems resulting from
labor disputes, telephone or Internet down times, electrical outages, mechanical
problems, human error or accidents, fire, earthquakes, natural disasters, or
comparable events could cause delays in our ability to receive orders by
telephone or over the Internet and distribute orders, and may cause orders to be
lost or to be shipped or delivered late. As a result, customers may be unable to
place orders, cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs. We cannot assure you that telephone
call volumes will not exceed our present telephone system capacity. If this
occurs, we could experience telephone answer delays and delays in placing
orders. Because our strategies depend in part on maintaining our reputation for
superior levels of customer service, any impairment of our customer service
reputation could have an adverse effect on our business.
We face risks associated with our distribution and fulfillment operations
We conduct the majority of our distribution operations and all of our catalog
and Internet order processing fulfillment functions from our owned facility in
Little Rock, Arkansas, and we use an additional leased facility in Little Rock.
We added a new third party operated distribution center in Ontario, California
in the second quarter of 2000. We also use contract fulfillment and warehouse
facilities for additional volume and seasonal requirements. Any failure to
integrate our new distribution center into our operations or any
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disruption in the operations at any distribution center, particularly during the
Holiday shopping season, could have a negative effect on our business.
In addition, we rely upon third party carriers for our product shipments,
including shipments to and from all of our stores. As a result, we are subject
to certain risks, including employee strikes and inclement weather, associated
with such carriers' ability to provide delivery services to meet our shipping
needs. We are also dependent on temporary employees to adequately staff our
distribution facility, particularly during busy periods such as the Holiday
shopping season. We cannot assure you that we will continue to receive adequate
assistance from our temporary employees, or that we will continue to have access
to sufficient sources of temporary employees.
Results for our comparable store sales may fluctuate
Our comparable store sales are affected by a variety of factors, including,
among others:
o customer demand in different geographic regions;
o our ability to efficiently source and distribute products;
o changes in our product mix;
o effects of competition; and
o general economic conditions.
Our comparable store sales have fluctuated significantly in the past and we
believe that such fluctuations may continue. Our historic comparable store net
sales changes were as follows:
Percentage
Fiscal Year Increase
----------- -----------
1997 1.1
1998 5.3
1999 12.3
2000 (first nine months) 43.0
These historic results are not necessarily indicative of future results, and we
cannot assure you that our comparable store sales results will not decrease in
the future. Any changes in our comparable store sales results could impact our
future operating performance and cause the price of the common stock to
fluctuate.
We experience intense competition in the rapidly changing retail markets
We operate in a highly competitive environment. We principally compete with a
variety of department stores, sporting goods stores, discount stores, specialty
retailers and other catalogs that offer products similar to or the same as our
products. We may increasingly compete with major Internet retailers. Many of our
competitors are larger companies with greater financial resources, a wider
selection of merchandise and a greater inventory availability. If we experience
increased competition, our business and operating results could be adversely
affected.
The United States retail industry (the specialty retail industry in particular)
and e-commerce sector are dynamic in nature and have undergone significant
changes over the past several years. Our ability to anticipate and successfully
respond to continuing challenges is critical to our long-term growth.
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We may be subject to regulations regarding state sales and use tax on catalog
and Internet sales and other Internet regulation
Our business may be affected by the adoption of regulations or rules governing
the sale of our products, with regard to state sales and use taxes and the
regulation of the Internet. Because we have broad store presence, we are
currently required to collect taxes for the majority of our catalog and Internet
transactions. However, any unfavorable change in the state sales and use taxes
which affects our catalog and Internet sales could adversely affect our business
and results of operations. In addition, the Internet at present is largely
unregulated and we are unable to predict whether significant regulations or
taxes will be imposed on Internet commerce in the near future. We are unable to
predict how such regulations could affect the further development of our
Internet business.
Poor economic conditions may hurt our business
Certain economic conditions that affect the level of consumer spending on our
products include the following:
o general business conditions;
o interest rates;
o taxation; and
o consumer confidence in future economic conditions.
Our business could be negatively affected by a recession or poor economic
conditions and any related decline in consumer demand for discretionary items
such as our products. Because we purchase merchandise from foreign entities and
use foreign manufacturers on a contract basis for Sharper Image Design products
and other private label products, we are subject to risks resulting from
fluctuations in the economic conditions in foreign countries. The majority of
our vendors and manufacturers are located in various countries in Asia, and as a
result, our business may be particularly impacted by changes in the political,
social, legal, and economic conditions in these countries. Additionally, weather
and product transportation problems could affect our ability to maintain
adequate inventory levels and adversely affect our future results.
Excessive merchandise returns could harm our business
As part of our customer service commitment, we maintain a liberal merchandise
return policy, which allows customers to return most merchandise. We make
allowances for returns of catalog and Internet sales in our financial statements
based on historical return rates. We cannot assure you that actual merchandise
returns will not exceed our allowances. In addition, because our allowances are
based on historical return rates, we cannot assure you that the introduction of
new merchandise in our stores or catalogs, the opening of new stores, the
introduction of new catalogs, increased sales over the Internet, changes in the
merchandise mix or other factors will not cause actual returns to exceed return
allowances. Any significant increase in merchandise returns that exceed our
allowances could adversely affect our future results.
We may be subject to risks associated with our products, including product
liability or patent and trademark infringement claims
Our current and future products may contain defects, which could subject us to
product liability claims. Although we maintain limited products liability
insurance, if any successful products liability claim is not covered by or
exceeds our insurance, our business, results of operation and financial
condition would be
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harmed. Additionally, third parties may assert claims against us alleging
infringement, misappropriation or other violations of patent, trademark or other
proprietary rights, whether or not such claims have merit. Such claims can be
time consuming and expensive to defend and could require us to cease using and
selling the allegedly infringing products and to incur significant litigation
costs and expenses.
We depend on our key personnel
Our success depends to a significant extent upon the abilities of our senior
management, particularly Richard Thalheimer, our founder, Chairman and Chief
Executive Officer. The loss of the services of any of the members of our senior
management or of certain other key employees could have a significant adverse
effect on our business. We maintain key man life insurance on Mr. Thalheimer in
the amount of $30 million. In addition, our performance will depend upon our
ability to attract and retain qualified management, merchandising and sales
personnel. There can be no assurance that Mr. Thalheimer and the other members
of our existing management team will be able to manage our company or our growth
or that we will be able to attract and hire additional qualified personnel as
needed in the future.
We are controlled by a single stockholder
As of December 12, 2000, Richard Thalheimer beneficially owned approximately 40%
of all of the outstanding shares of the common stock of our company. As a
result, Mr. Thalheimer will continue to exert substantial influence over the
election of directors and over our corporate actions.
Our common stock price is volatile
Our common stock is quoted on the Nasdaq National Market, which has experienced
and is likely to experience in the future significant price and volume
fluctuations, which could reduce the market price of our common stock without
regard to our operating performance. Additionally, as our Internet business
grows, we may become increasingly subject to stock price fluctuations associated
with companies operating in the Internet sector. We believe that among other
factors, any of the following factors could cause the price of the common stock
to fluctuate substantially:
o quarterly fluctuations in our comparable store sales;
o announcements by other accessory and gift item retailers;
o the trading volume of our common stock in the public market;
o general economic conditions; and
o financial market conditions.
Our charter documents, our stockholders rights agreement and Delaware law may
make a takeover more difficult
We are a Delaware corporation. The Delaware General Corporation Law contains
certain provisions that may make a change in control of our company more
difficult or prevent the removal of incumbent directors. In addition, our
Certificate of Incorporation and Bylaws and our recently adopted stockholders
rights agreement contain provisions that have the same effect. These provisions
may have a negative impact on the price of our common stock, may discourage
third-party bidders from making a bid for our company or may reduce any premiums
paid to stockholders for their common stock.
ITEM 3. 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) during the period ending- October 31, 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.
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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.)
10.23 Amendment to the Financing Agreement dated July 18, 2000 between the
Company and The CIT Group/Business Credit, Inc.
10.24 Amendment to the Financing Agreement dated September 29, 2000 between
the Company and The CIT Group/Business Credit, Inc.
15.0 Letter Re: Unaudited Interim Financial Information.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the three
months ended October 31, 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: December 15, 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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