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, 2005
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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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, 15,033,610 shares as of June 6, 2005
SHARPER IMAGE CORPORATION
FORM 10-Q
For the Quarter Ended April 30, 2005
| Page | ||||
| PART I. |
FINANCIAL INFORMATION | |||
| ITEM 1. |
Financial Statements (Unaudited) |
|||
| Condensed Balance Sheets as of April 30, 2005, January 31, 2005 and April 30, 2004 (Restated) |
1 | |||
| Condensed Statements of Operations for the three-months ended April 30, 2005 and 2004 (Restated) |
2 | |||
| Condensed Statements of Cash Flows for the three-months ended April 30, 2005 and 2004 (Restated) |
3 | |||
| 4 - 9 | ||||
| ITEM 2. |
Management’s Discussion and Analysis of Results of Operations and Financial Condition |
10 - 26 | ||
| ITEM 3. |
27 | |||
| ITEM 4. |
27 | |||
| PART II. |
OTHER INFORMATION | |||
| ITEM 1. |
28 | |||
| ITEM 2. |
28 | |||
| ITEM 5. |
29 | |||
| ITEM 6. |
29 | |||
| SIGNATURE PAGE | 30 | |||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Sharper Image Corporation
Condensed Balance Sheet
(In thousands, except share amounts)
| April 30, 2005 |
January 31, (See Note A) |
April 30, 2004 (As Restated, see Note B) | |||||||||
| ASSETS |
|||||||||||
| Current Assets: |
|||||||||||
| Cash and cash equivalents |
$ | 28,623 | $ | 27,149 | $ | 41,328 | |||||
| Short-term investments |
30,800 | 66,900 | 33,350 | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $1,733, $1,578 and $1,376 |
21,896 | 25,638 | 20,728 | ||||||||
| Merchandise inventories |
123,054 | 124,038 | 101,793 | ||||||||
| Prepaid expenses, deferred taxes and other |
28,913 | 25,507 | 26,804 | ||||||||
| Total Current Assets |
233,286 | 269,232 | 224,003 | ||||||||
| Property and equipment, net |
103,968 | 100,509 | 79,780 | ||||||||
| Deferred taxes and other assets |
6,733 | 6,359 | 4,524 | ||||||||
| Total Assets |
$ | 343,987 | $ | 376,100 | $ | 308,307 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
| Current Liabilities: |
|||||||||||
| Accounts payable |
$ | 37,432 | $ | 51,424 | $ | 26,767 | |||||
| Accrued expenses |
21,909 | 23,737 | 17,833 | ||||||||
| Accrued compensation |
6,270 | 7,364 | 5,790 | ||||||||
| Reserve for refunds |
18,989 | 19,609 | 17,561 | ||||||||
| Deferred revenue |
31,809 | 32,061 | 25,357 | ||||||||
| Income taxes payable |
— | 1,649 | — | ||||||||
| Total Current Liabilities |
116,409 | 135,844 | 93,308 | ||||||||
| Other liabilities |
35,289 | 34,249 | 22,853 | ||||||||
| Commitments and contingencies |
— | — | — | ||||||||
| Total Liabilities |
151,698 | 170,093 | 116,161 | ||||||||
| 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 15,743,610, 15,737,260 and 15,563,036 shares. Outstanding 15,033,610, 15,637,260 and 15,563,036 |
157 | 157 | 156 | ||||||||
| Additional paid-in capital |
105,227 | 105,090 | 102,184 | ||||||||
| Retained earnings |
97,964 | 102,540 | 89,806 | ||||||||
| Treasury stock |
(11,059 | ) | (1,780 | ) | — | ||||||
| Total Stockholders’ Equity |
192,289 | 206,007 | 192,146 | ||||||||
| Total Liabilities and Stockholders’ Equity |
$ | 343,987 | $ | 376,100 | $ | 308,307 | |||||
See Notes to Condensed Financial Statements
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Sharper Image Corporation
Condensed Statements of Operations
(In thousands, except share and per-share amounts)
| Three Months Ended April 30, |
||||||||
| 2005 |
2004 (As Restated, |
|||||||
| REVENUES: |
||||||||
| Net sales |
$ | 141,192 | $ | 152,711 | ||||
| Delivery |
3,479 | 3,598 | ||||||
| List rental and licensing |
211 | 96 | ||||||
| 144,882 | 156,405 | |||||||
| COSTS AND EXPENSES: |
||||||||
| Cost of products |
66,337 | 62,760 | ||||||
| Buying and occupancy |
18,827 | 16,049 | ||||||
| Advertising |
32,484 | 37,072 | ||||||
| General, selling, and administrative |
34,970 | 37,393 | ||||||
| 152,618 | 153,274 | |||||||
| OTHER INCOME: |
||||||||
| Interest income |
329 | 164 | ||||||
| Interest expense |
(32 | ) | (38 | ) | ||||
| Other expense |
(188 | ) | (10 | ) | ||||
| 109 | 116 | |||||||
| Earnings (Loss) Before Income Tax Expense (Benefit) |
(7,627 | ) | 3,247 | |||||
| Income tax expense (benefit) |
(3,051 | ) | 1,332 | |||||
| Net Earnings (Loss) |
$ | (4,576 | ) | $ | 1,915 | |||
| Net Earnings (Loss) per Share |
||||||||
| Basic |
$ | (0.30 | ) | $ | 0.12 | |||
| Diluted |
$ | (0.30 | ) | $ | 0.12 | |||
| Weighted Average Number of Shares |
||||||||
| Basic |
15,325,800 | 15,496,000 | ||||||
| Diluted |
15,325,800 | 16,404,000 | ||||||
See Notes to Condensed Financial Statements
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Sharper Image Corporation
Condensed Statements of Cash Flows
(In thousands)
| Three Months Ended April 30, |
||||||||
| 2005 |
2004 (As Restated, see Note B) |
|||||||
| Cash provided by (used for) operating activities: |
||||||||
| Net earnings (loss) |
$ | (4,576 | ) | $ | 1,915 | |||
| Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities: |
||||||||
| Depreciation and amortization |
6,197 | 4,428 | ||||||
| Tax benefit from stock option exercises |
18 | 2,390 | ||||||
| Deferred rent expenses and landlord allowances |
(307 | ) | 413 | |||||
| Loss on disposal of equipment |
403 | 11 | ||||||
| Change in operating assets and liabilities: |
||||||||
| Accounts receivable |
3,742 | 330 | ||||||
| Merchandise inventories |
984 | 7,631 | ||||||
| Prepaid expenses and other |
(3,780 | ) | (2,610 | ) | ||||
| Accounts payable, reserve for refunds, accrued expenses and taxes payable |
(19,183 | ) | (15,841 | ) | ||||
| Deferred revenueand other liabilities |
1,095 | (1,510 | ) | |||||
| Cash provided by (used for) operating activities |
(15,407 | ) | 177 | |||||
| Cash provided by (used for) investing activities: |
||||||||
| Property and equipment expenditures |
(10,059 | ) | (11,563 | ) | ||||
| Proceeds on sale of equipment |
— | 7 | ||||||
| Purchases of short-term investments |
(13,000 | ) | (12,000 | ) | ||||
| Sale of short-term investments |
49,100 | 27,250 | ||||||
| Cash provided by investing activities |
26,041 | 3,694 | ||||||
| Cash provided by (used for) by financing activities: |
||||||||
| Repurchase of common stock |
(9,279 | ) | — | |||||
| Proceeds from issuance of common stock resulting from stock options exercised |
119 | 2,586 | ||||||
| Cash provided by (used for) financing activities |
(9,160 | ) | 2,586 | |||||
| Net increase in cash and cash equivalents |
1,474 | 6,457 | ||||||
| Cash and cash equivalents at beginning of period |
27,149 | 34,871 | ||||||
| Cash and cash equivalents at end of period |
$ | 28,623 | $ | 41,328 | ||||
| Supplemental disclosure of cash paid for: |
||||||||
| Interest expense |
$ | 36 | $ | 39 | ||||
| Income taxes |
$ | 2,121 | $ | 6,855 | ||||
See Notes to Condensed Financial Statements
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Sharper Image Corporation
Notes to Condensed Financial Statements
Three-month periods ended April 30, 2005 and 2004
NOTE A- Interim Financial Statements
Basis of Presentation
The condensed balance sheets at April 30, 2005 and 2004, the related condensed statements of operations and cash flows for the three-month periods ended April 30, 2005 and 2004 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, 2005 and 2004, and for the three-month period then ended. The balance sheet at January 31, 2005, presented herein, has been derived from the audited balance sheet of the Company.
Certain information and footnote disclosures normally included in the notes to annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 31, 2005, which includes additional disclosures, including the Company’s significant accounting policies.
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 lower 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.
Reclassifications
The April 30, 2004 investments in auction rate securities of $33.4 million have been reclassified from cash and cash equivalents to short-term investments on the Company’s Condensed Balance Sheet and Statement of Cash Flows. The reclassification was effected as the securities had stated maturities beyond three months but were priced and traded as short-term investments due to the liquidity provided through the interest rate reset mechanism of approximately every 35 days. The purchase and sale of short-term investments previously presented as cash and cash equivalents have been reclassified to investing activities in the Company’s condensed Statements of Cash Flows. The effect of this reclassification resulted in an increase in net cash provided by investing activities of $15.3million for the three months ended April 30, 2004.
Use of Estimates
The preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ materially from estimates and assumptions made.
4
New Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which replaces SFAS No. 123, supercedes Accounting Principles Board (APB) No. 25 and related interpretations and amends SFAS No. 95, “Statement of Cash Flows.” The provisions of SFAS No. 123R are similar to those of SFAS No. 123; however, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statement as compensation cost based on their fair value on the date of the grant. The fair value of the share-based awards will be determined using an option-pricing model on the grant date. SFAS No. 123R is effective at the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS No. 123R no later than the first quarter of fiscal 2006.
In November 2004, the FASB issued SFAS No.151, “Inventory Costs—An Amendment of Accounting Research Bulletin No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. The provisions in SFAS No. 151 must be applied prospectively to the Company’s inventory costs incurred after January 1, 2006. The adoption of SFAS No. 151 is not expected to have an impact on the Company’s financial statements.
Note B—Restatement of Condensed Financial Statements
On February 7, 2005, the Office of the Chief Accountant of the SEC issued a letter in which it expressed its views regarding certain operating lease accounting issues and their application under GAAP. The Company’s management subsequently reviewed its lease-related accounting practices and determined that a correction was required to the way it accounted for its leases, specifically the accounting for rent holidays. Before this correction, the Company recognized the straight-line expense for leases beginning on the commencement date of the lease, generally the store opening date; this had the effect of excluding the stores’ construction and pre-opening periods from the total time over which the Company expensed rent. As a result, the Company corrected its a