|
ITEM 1.
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Financial Statements
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Sharper Image Corporation
Condensed Balance Sheets
(Unaudited)
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(Dollars in thousands, except shares and per share amounts)
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October 31,
2007
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January 31,
2007
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October 31,
2006
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|
ASSETS
|
|
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|
|
|
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Current Assets:
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
804
|
|
|
$
|
18,014
|
|
$
|
834
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,566, $1,377 and $1,666
|
|
|
12,646
|
|
|
|
13,076
|
|
|
28,035
|
|
Merchandise inventories
|
|
|
101,433
|
|
|
|
76,772
|
|
|
122,299
|
|
Deferred income taxes
|
|
|
16,940
|
|
|
|
16,720
|
|
|
15,809
|
|
Prepaid income taxes
|
|
|
2,118
|
|
|
|
2,314
|
|
|
2,544
|
|
Prepaid expenses and other
|
|
|
5,965
|
|
|
|
5,186
|
|
|
16,366
|
|
|
|
|
|
|
|
|
|
|
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Total Current Assets
|
|
|
139,906
|
|
|
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132,082
|
|
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185,887
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Property and equipment, net
|
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70,650
|
|
|
|
86,140
|
|
|
97,212
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Deferred income taxes and other deferred assets
|
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|
73,168
|
|
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35,339
|
|
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13,863
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Other assets
|
|
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12,358
|
|
|
|
10,433
|
|
|
—
|
|
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|
|
|
|
|
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Total Assets
|
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$
|
296,082
|
|
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$
|
263,994
|
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$
|
296,962
|
|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities:
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|
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|
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Accounts payable
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$
|
65,287
|
|
|
$
|
35,711
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$
|
60,941
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|
Accrued expenses
|
|
|
13,344
|
|
|
|
20,152
|
|
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17,827
|
|
Accrued compensation
|
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6,952
|
|
|
|
5,014
|
|
|
5,335
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Reserve for refunds
|
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15,651
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17,877
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17,300
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Revolving credit facility and term-loan
|
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62,092
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|
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—
|
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22,342
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Deferred revenue
|
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34,808
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31,997
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38,242
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|
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|
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Total Current Liabilities
|
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198,134
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|
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110,751
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161,987
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Deferred rent and other deferred liabilities
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27,824
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28,046
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1,590
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Long term borrowings
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6,339
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|
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|
2,031
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—
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|
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|
|
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Total Liabilities
|
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232,297
|
|
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140,828
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163,577
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Commitments and contingencies
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Stockholders’ Equity:
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Preferred stock, $0.01 par value:
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Authorized 3,000,000 shares: Issued and outstanding, none
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—
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—
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—
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Common stock, $0.01 par value:
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Authorized 50,000,000 shares: Issued and outstanding 15,154,249, 14,973,397 and 14,973,397 shares
|
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|
152
|
|
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|
150
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|
150
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Additional paid-in capital
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116,406
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114,839
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114,543
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Retained earnings (accumulated deficit)
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(52,773
|
)
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8,177
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18,692
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|
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Total Stockholders’ Equity
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63,785
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123,166
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133,385
|
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Total Liabilities and Stockholders’ Equity
|
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$
|
296,082
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$
|
263,994
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$
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296,962
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See Notes to Condensed Financial Statements
1
Sharper Image Corporation
Condensed Statements of Operations
(Unaudited)
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Three Months Ended
October 31,
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Nine Months Ended
October 31,
|
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(Dollars in thousands, except shares and per share amounts)
|
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2007
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2006
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2007
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2006
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REVENUES:
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Net sales
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$
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67,389
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$
|
103,295
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$
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210,795
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$
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311,481
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Delivery
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1,747
|
|
|
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2,640
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5,480
|
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|
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8,061
|
|
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Licensing and list rental
|
|
|
315
|
|
|
|
271
|
|
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1,097
|
|
|
|
668
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
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|
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69,451
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|
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106,206
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217,372
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320,210
|
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COSTS AND EXPENSES:
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Cost of products
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42,065
|
|
|
|
63,009
|
|
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|
126,642
|
|
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173,623
|
|
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Buying and occupancy
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20,086
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|
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20,621
|
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59,499
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61,242
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|
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Advertising
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8,914
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18,549
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24,341
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60,260
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|
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Selling, general and administrative
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35,437
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40,693
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103,740
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107,370
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|
|
|
|
|
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|
|
|
|
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106,502
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142,872
|
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314,222
|
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402,495
|
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|
|
|
|
|
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OTHER INCOME (EXPENSE):
|
|
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|
|
|
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|
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Interest income
|
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|
129
|
|
|
|
130
|
|
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|
277
|
|
|
|
674
|
|
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Interest expense
|
|
|
(1,108
|
)
|
|
|
(97
|
)
|
|
|
(2,026
|
)
|
|
|
(333
|
)
|
|
Other income (expense)
|
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4
|
|
|
|
(124
|
)
|
|
|
(260
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(975
|
)
|
|
|
(91
|
)
|
|
|
(2,009
|
)
|
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|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Loss Before Income Tax Benefit
|
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(38,026
|
)
|
|
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(36,757
|
)
|
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(98,859
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)
|
|
|
(82,161
|
)
|
|
Income tax benefit
|
|
|
(15,288
|
)
|
|
|
(14,666
|
)
|
|
|
(38,709
|
)
|
|
|
(32,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Loss
|
|
$
|
(22,738
|
)
|
|
$
|
(22,091
|
)
|
|
$
|
(60,150
|
)
|
|
$
|
(49,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Loss Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic and Diluted
|
|
$
|
(1.50
|
)
|
|
$
|
(1.48
|
)
|
|
$
|
(3.98
|
)
|
|
$
|
(3.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted Average Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and Diluted
|
|
|
15,154,195
|
|
|
|
14,971,496
|
|
|
|
15,098,210
|
|
|
|
14,962,544
|
|
See Notes to Condensed Financial Statements
2
Sharper Image Corporation
Condensed Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
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Nine Months Ended
October 31,
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
Cash used for operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(60,150
|
)
|
|
$
|
(49,379
|
)
|
|
Adjustments to reconcile net loss to net cash used for operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,053
|
|
|
|
20,128
|
|
|
Impairment of property and equipment
|
|
|
2,463
|
|
|
|
—
|
|
|
Stock based compensation
|
|
|
1,557
|
|
|
|
665
|
|
|
Deferred rent expenses and landlord allowances
|
|
|
(2,086
|
)
|
|
|
(1,193
|
)
|
|
Loss on disposal of property and equipment
|
|
|
303
|
|
|
|
226
|
|
|
Deferred income taxes
|
|
|
(40,408
|
)
|
|
|
(31,809
|
)
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
430
|
|
|
|
(10,688
|
)
|
|
Merchandise inventories
|
|
|
(24,661
|
)
|
|
|
(18,001
|
)
|
|
Prepaid expenses and other
|
|
|
(2,650
|
)
|
|
|
(4,037
|
)
|
|
Accounts payable, accrued expenses and compensation, reserve for refunds
|
|
|
22,480
|
|
|
|
24,819
|
|
|
Deferred revenue and other liabilities
|
|
|
4,675
|
|
|
|
5,301
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(80,994
|
)
|
|
|
(63,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(4,190
|
)
|
|
|
(10,694
|
)
|
|
Purchases of short-term investments
|
|
|
—
|
|
|
|
(1,500
|
)
|
|
Sale of short-term investments
|
|
|
—
|
|
|
|
11,850
|
|
|
Proceeds from sale of assets
|
|
|
2
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(4,188
|
)
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
4,308
|
|
|
|
—
|
|
|
Proceeds from issuance of common stock
|
|
|
1,567
|
|
|
|
211
|
|
|
Excess tax benefits from stock based compensation
|
|
|
5
|
|
|
|
—
|
|
|
Principal borrowings on revolving credit facility and term loan
|
|
|
204,285
|
|
|
|
25,842
|
|
|
Principal payments on revolving credit facility
|
|
|
(142,193
|
)
|
|
|
(3,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
67,972
|
|
|
|
22,316
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(17,210
|
)
|
|
|
(41,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
18,014
|
|
|
|
42,808
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
804
|
|
|
$
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,049
|
|
|
$
|
195
|
|
|
Income taxes
|
|
$
|
253
|
|
|
$
|
906
|
|
See Notes to Condensed Financial Statements
3
Sharper Image Corporation
Notes to Condensed Financial Statements
Note A—Nature of Business and Basis of Presentation
The
Sharper Image – Nature of Business
Sharper Image Corporation (the “Company”) is a multi-channel specialty retailer with
three principal selling channels—The Sharper Image specialty stores (“stores”) throughout the United States of America (“U.S.”), The Sharper Image catalog (“catalog”) and the Internet (“internet”),
primarily through its website, www.sharperimage.com. The Company also has business-to-business sales teams for marketing its exclusive and proprietary products for corporate incentive and reward programs and wholesale to selected U.S. and
international retailers. The Company also has a brand licensing division which establishes relationships with third parties that license The Sharper Image trademark for their high-end products for sales through other retailers or through the
Company’s sales channels. As of October 31, 2007, the Company operated 186 stores in 38 states and the District of Columbia.
Basis of
Presentation
The interim condensed balance sheets at October 31, 2007 and 2006, and the related interim condensed statements of
operations for the three-month and nine-month periods ended October 31, 2007 and 2006 and statements of cash flows for the nine-month periods ended October 31, 2007 and 2006 have been prepared by the Company without audit. In the opinion
of management, the interim condensed financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at October 31, 2007 and 2006, the results of operations for
the three-month and nine-month periods then ended, and cash flow for the nine-month periods then ended. The balance sheet as of January 31, 2007, presented herein, has been derived from the audited financial statements of the Company for the
fiscal year then ended.
Certain information and 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 condensed financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Accordingly, these interim condensed 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, 2007, 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
and positive cash flows, if any, from operating activities usually occur during the fourth quarter ending January 31. The Company, as is typical in the retail industry, generally experiences lower revenues, lower operating results and negative
cash flows from operating activities during the other quarters and has incurred and may continue to incur losses and negative cash flows from operating activities. The results of operations for these interim periods are not necessarily indicative of
the results for the full fiscal year.
Use of Estimates
The preparation of interim condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures; these include income tax
benefits, receivable, inventory and other reserves and asset impairments. Actual results could differ materially from estimates and assumptions made.
Impairment of Long-Lived Assets
In accordance with Statements of Financial Accounting Standards (“SFAS”) SFAS
144, the Company reviews the carrying value of long-lived assets for potential impairment. This review is performed when events or changes in circumstances indicate that the assets could be impaired and that their carrying values may not be
recoverable. Such events include, but are not limited to, decisions to close a store, headquarter facility or distribution center, or a significant decrease in the operating performance of the long-lived asset. For those assets that are identified
as potentially being impaired, if the undiscounted future cash flows from such assets are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the asset’s fair value. The fair value
of the assets is estimated using the discounted future cash flows of the assets.
The Company estimates future cash flows based on
store-level historical results, current trends and operating and cash flow projections. These estimates are subject to uncertainty and may be affected by a number of factors outside of our control, including general economic conditions, the
competitive environment and regulatory changes. If actual results differ from the Company’s estimates of future cash flows, it may record significant additional impairment charges in the future.
4
During the three-month and nine-month periods ended October 31, 2007 the Company recorded non-cash
charge for the impairment of long-lived assets for underperforming stores in the amounts of $1.8 million and $2.5 million, respectively.
New Accounting
Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require
or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not
believe it will have a material impact on its financial statements and disclosures.
In February 2007, the FASB issued, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. SFAS 159 permits entities to choose
to measure many financial instruments and certain other items at their fair value. If the fair value option is adopted, unrealized gains and losses will have to be recognized at the end of each of the subsequent reporting periods. The Company does
not believe it will have a material impact on its operating results or its financial position.
Note B—Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events then known to management that have been recognized in our financial statements or tax returns. In estimating future tax consequences, all expected future events then known to management are considered other than
changes in the tax law or rates.
The Company maintains valuation allowances when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account such
factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
As of October 31, 2007, the net deferred tax assets (related primarily to net operating loss carry forwards) were approximately $90.1 million, an
increase of approximately $38.0 million from the fiscal 2006 year end. If the Company continues to incur operating losses and negative cash flows from operations through the end of fiscal 2007, substantial increases to the valuation allowance may be
required. During the next twelve months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior tax returns, however the Company does not believe this will have a material effect on
the Company’s tax provision or deferred income tax assets and liabilities.
In July 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS 109” (“FIN 48”), which clarifies the accounting for uncertainty in taxes recognized in an entity’s financial statements in accordance with SFAS
109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company adopted FIN 48 on
February 1, 2007, and as a result of the implementation of FIN 48, recognized a $1.4 million increase in the liability for unrecognized tax benefits, offset by an increase in the deferred tax asset of $1.3 million; the adoption resulted in
a reduction of $0.8 million to the beginning balance of retained earnings. Of the $1.4 million of unrecognized tax benefits, $0.1 million (net of tax benefit), if recognized, would effect the Company’s effective tax rate. The Company recognizes
interest and penalties related to unrecognized tax benefits in the provision for income taxes. Upon adoption, the Company recorded a liability of $0.8 million for interest and no liability for penalties. No adjustments were made during the third
fiscal quarter, therefore, as of October 31, 2007, the total amount of unrecognized tax benefit was approximately $1.4 million.
The
Company is currently open to audit under the statute of limitations by the Internal Revenue Services (“IRS”) for the years ended January 31, 2005 through 2007. The Company’s state income tax returns are open to audit under the
statute of limitations for the years ending January 31, 2004 through 2007.
5
NOTE C—Employee Stock Compensation
The Company recognized total equity-based compensation expense of $688,000 and $304,000 for the three-month periods ended October 31, 2007 and 2006,
respectively. For the nine-month periods ended October 31, 2007 and 2006, the Company recognized total equity-based compensation of $1,557,000 and $665,000, respectively. These expenses were recorded under buying and occupancy and selling,
general and administrative expenses.
A summary of the activity under the Company’s stock option plans for the nine months ended October 31, 2007
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted average
exercise price
|
|
Balance at January 31, 2007
|
|
3,129,398
|
|
|
$
|
17.97
|
|
Granted
|
|
145,110
|
|
|
$
|
9.88
|
|
Exercised
|
|
(147,800
|
)
|
|
$
|
8.92
|
|
Canceled
|
|
(540,789
|
)
|
|
$
|
13.34
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
2,585,919
|
|
|
$
|
17.73
|
|
Granted
|
|
855,000
|
|
|
$
|
12.44
|
|
Exercised
|
|
(28,050
|
)
|
|
$
|
8.90
|
|
Canceled
|
|
(270,672
|
)
|
|
$
|
21.19
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007
|
|
3,142,197
|
|
|
$
|
14.58
|
|
Granted
|
|
163,000
|
|
|
$
|
3.88
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
Canceled
|
|
(146,760
|
)
|
|
$
|
15.69
|
|
Balance at October 31, 2007
|
|
3,158,437
|
|
|
$
|
13.97
|
The aggregate intrinsic value of options exercised during the nine-month periods ended October 31, 2007 and
2006 was $567,000 and $82,000, respectively. There were no options exercised during the three-month period ended October 31, 2007, the aggregate intrinsic value of options exercised during the same period in 2006 was $5,000.
The weighted-average fair value of stock options granted during the three-month periods ended October 31, 2007 and 2006 was $1.91 and $4.51 per
share, respectively. As of October 31, 2007, there was approximately $5.0 million (before any related tax benefit) of unrecognized compensation cost, related to non-vested share-based compensation, that is expected to be recognized over
approximately 3.5 years.
The table below presents the weighted-average assumptions used in the calculation of fair value model for the
nine-month periods ended October 31, 2007 and 2006. The expected life of the options represents the period of time the options are expected to be outstanding and is based on the guidance provided in SEC Staff Accounting Bulletin No. 107
“Share-Based Payment.” Expected stock price volatility is based on consideration of historical and implied volatilities. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and that has a
term equal to the expected life.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 31,
|
|
|
Weighted-average assumptions
|
|
2007
|
|
|
2006
|
|
|
Expected life of options (years)
|
|
5.3
|
|
|
4
|
|
|
Expected stock price volatility
|
|
48.32
|
%
|
|
52.62
|
%
|
|
Risk-free interest rate
|
|
4.85
|
%
|
|
4.67
|
%
|
|
Expected dividend yield
|
|
0
|
%
|
|
0
|
%
|
NOTE D—Loss per Share
Basic loss per share of common stock is computed as loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per share of common stock is computed as loss divided by the
weighted average number of common shares and potentially dilutive common stock equivalents outstanding during the period. Diluted loss per share reflects the potential dilution that could occur from common stock issuances as a result of stock option
exercises.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
|
Nine Months Ended October 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net loss
|
|
$
|
(22,738,000
|
)
|
|
$
|
(22,091,000
|
)
|
|
$
|
(60,150,000
|
)
|
|
$
|
(49,379,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common stock outstanding during the period
|
|
|
15,154,195
|
|
|
|
14,971,496
|
|
|
|
15,098,210
|
|
|
|
14,962,544
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed dilutive effect of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
15,154,195
|
|
|
|
14,971,496
|
|
|
|
15,098,210
|
|
|
|
14,962,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted loss per share
|
|
$
|
(1.50
|
)
|
|
$
|
(1.48
|
)
|
|
$
|
(3.98
|
)
|
|
$
|
(3.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The potential effects of stock options to purchase 3,003,203 and 3,130,212 shares for the three-month periods
ended October 31, 2007 and 2006, respectively, and the potential effects of stock options to purchase 2,816,613, and 1,973,690 shares for the nine-month periods ended October 31, 2007 and 2006, respectively, were excluded from the diluted
loss per share, because their inclusion in net loss periods would be anti-dilutive.
NOTE E—Revolving Credit Facility, Term Loan and Long-Term Debt
The Company has a revolving credit facility that allows borrowings against a “borrowing base” determined by inventory levels
and specified accounts receivable. The revolving credit facility is secured by the Company’s inventory, accounts receivable and other assets.
On May 25, 2007, the Company amended its revolving credit facility agreement, to, among other things, increase the amount available during specified times of the year to $120.0 million and to increase the amounts that can be borrowed
against its assets. The amended revolving credit facility expires on May 25, 2012.
On August 20, 2007, the revolving credit
facility was amended and restated to provide the Company with a term loan in an amount up to $20.0 million. Of this term loan, $10.0 million was made available immediately, with the balance of $10.0 million available upon completion of syndication
for the revolving credit facility and term loan. The Company cannot provide assurance that the remaining portion of the term loan will become available. The term loan margin is set at LIBOR plus 4.5% and the revolving credit facility currently bears
interest at 8.0%. The term loan is repayable over a period of five years in monthly installments subject to mandatory pre-payment in certain circumstances. Mandatory and voluntary prepayments of the term loan are subject to a 1.0% early termination
fee on any pre-payment amount.
As of October 31, 2007, outstanding borrowings on the revolving credit facility and term loan were
$62.1 million and letter of credit commitments issued under the revolving credit facility were $21.9 million. The amount available for borrowing under the Company’s revolving credit facility and term loan was approximately $12.4 million, not
including the additional $10.0 million of the term loan to be made available upon completion of syndication.
The Company has borrowed $6.3
million at October 31, 2007 against life insurance policies for executives. The Company can only borrow using the life insurance policies as collateral if the borrowings are to be used for payments due under the Company’s deferred
compensation plan or for certain other payments. These borrowings bear interest at 0.75% and do not require cash interest payments as the growth in the underlying cash values funds the interest payments.
If the Company requires additional funding to meet its cash flow needs, it may seek to obtain such funding through, among other things, additional loans
or the issuance of debt or equity securities. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to meet its liquidity needs, its business and operating results would be adversely
affected.
NOTE F—Commitments and Contingencies
The Company is party to various legal proceedings arising from normal business activities; except as noted below, the Company believes that the resolution of these matters will not have a material adverse effect on
the Company’s interim condensed financial statements taken as a whole.
(a) On or before April 15, 2006, there were five class
action lawsuits filed against the Company related to claims made with respect to the performance, effectiveness and safety of its Ionic Breeze product. The actions are filed on behalf of purchasers of the Ionic Breeze in the State Courts of
California (San Francisco) and Florida (Jacksonville), as well as the U.S. District Courts of Maryland, Florida (Miami) and the Central District of California. Only the San Francisco action has been certified for class representation. The Florida
State Court action was stayed pending resolution of the ongoing San Francisco case. The Maryland and Central District of California cases have been dismissed.
7
On January 16, 2007, the Company entered into a Settlement Agreement and Release (as amended, the
“Agreement”) in the case pending in the United States District Court for the Southern District of Florida-Miami Division, which if approved by the court would have covered all persons who purchased an Ionic Breeze branded product between
May 6, 1999 and the effective date of the Agreement who do not opt out of the Agreement. The proposed settlement would have required the Company to (i) pay up to $1.9 million to the plaintiff’s attorneys for fees and expenses,
(ii) make available free Ozone Guard attachments, (iii) issue $19 merchandise credits, subject to certain terms and conditions, to members of the Settlement class and (iv) agree to certain other measures. Following a fairness hearing,
on October 11, 2007, the Court rejected the Agreement. A trial date for the action filed in the United States District Court for the Southern District of Florida-Miami Division has been set for May 12, 2008 and June 10, 2008 for the
action filed in the State Court in California (San Francisco). The Company believes that it has meritorious defenses to the claims and plans to vigorously defend against the actions. No determination can be made by the Company at this time as to the
final resolution of this matter.
Based on the terms of the Agreement, the Company had accrued $2.5 million (consisting primarily of
payments to be made to the plaintiff’s attorneys for fees and expenses). The Company is not able to determine what additional amounts, if any, should be accrued. Accordingly, as of October 31, 2007, the accrual for this matter remained
unchanged at $2.5 million.
(b) In November 2006, a plaintiff commenced a purported stockholders’ derivative action relating to the
Company’s historical option grant practices in the State Court of California (San Francisco), naming as defendants certain of the Company’s current and former officers and directors. The Company is also named as a nominal defendant. The
plaintiff alleges that she is one of the Company’s stockholders and seeks to recover, on the Company’s behalf, damages the Company incurred by, among other things, improper option grants. The plaintiff also seeks equitable relief,
including corporate governance reforms. The case is in the initial stages of procedure and on June 1, 2007, the Company as well as the named officers and directors, made motions seeking to have the case dismissed. A hearing on such response is
currently scheduled for February 1, 2008. On October 13, 2006, the Company’s board of directors received a letter from another alleged stockholder who asserted that he would commence a stockholders’ derivative action if the
Company’s board of directors failed to cause the Company to commence action against current and former directors and members of management relating to the Company’s historical options practices. The Company believes it has responded, and
continues to respond, appropriately to concerns regarding the conduct related to the Company’s historical option grant practices.
NOTE G –
Segment Information
The Company classifies its business interests into three reportable segments: stores, catalog and direct marketing
and Internet. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies of the Annual Report for the fiscal ended January 31, 2007 (Note A of the Notes to Financial
Statements). The Company evaluates performance and allocates resources based on operating contribution, excluding unallocated corporate selling, general and administrative costs and income taxes. The Company’s reportable segments are strategic
business units that offer the same products and services and utilize common merchandising, distribution and marketing functions, and common information systems and corporate administration. The Company does not have inter-segment sales, but the
segments are managed separately because each segment has different channels for selling the products.
Financial information for the Company’s
business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
|
Nine Months Ended October 31,
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
|
|
$
|
46,036
|
|
|
$
|
55,153
|
|
|
$
|
147,551
|
|
|
$
|
176,569
|
|
|
Catalog and direct marketing
|
|
|
4,585
|
|
|
|
18,031
|
|
|
|
15,222
|
|
|
|
59,847
|
|
|
Internet
|
|
|
7,981
|
|
|
|
15,017
|
|
|
|
27,847
|
|
|
|
47,310
|
|
|
Other
|
|
|
10,849
|
|
|
|
18,005
|
|
|
|
26,753
|
|
|
|
36,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
69,451
|
|
|
$
|
106,206
|
|
|
$
|
217,372
|
|
|
$
|
320,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
|
|
$
|
(16,398
|
)
|
|
$
|
(12,132
|
)
|
|
$
|
(40,710
|
)
|
|
$
|
(28,115
|
)
|
|
Catalog and direct marketing
|
|
|
(2,508
|
)
|
|
|
542
|
|
|
|
(5,848
|
)
|
|
|
(2,931
|
)
|
|
Internet
|
|
|
(2,822
|
)
|
|
|
100
|
|
|
|
(2,749
|
)
|
|
|
(63
|
)
|
|
Unallocated selling, general and administrative expenses
|
|
|
(16,299
|
)
|
|
|
(25,267
|
)
|
|
|
(49,552
|
)
|
|
|
(51,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss before income tax benefit
|
|
$
|
(38,026
|
)
|
|
$
|
(36,757
|
)
|
|
$
|
(98,859
|
)
|
|
$
|
(82,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
PART I—FINANCIAL INFORMATION
|
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Cautionary Statement Regarding Forward-Looking Statements
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 Results of Operations and Financial Condition and the
historical financial information and notes thereto contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The SEC encourages companies to disclose forward-looking information so that investors can better
understand a company’s future prospects and make informed investment decisions. In this Quarterly Report on Form 10-Q, we state our beliefs of future events and of our future financial performance and statements that are not purely historical
are “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). In some cases, you can identify these so-called “forward-looking
statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue,” or the negative of these words, and other comparable words. You should be aware that those statements are only our expectations, and actual results may significantly vary from such expectations. In evaluating those statements,
you should specifically consider various factors, including the risks and uncertainties listed in “Risk Factors” in our Annual Report on Form 10-K and, wherever applicable, as updated in this Quarterly Report on Form 10-Q, in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other reports we file with the SEC. Although forward-looking statements in this report reflect the good faith judgment of our management,
such statements can only be based on facts and factors we currently know about. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. These risks and uncertainties include, among other factors, the success of our new business strategy, our ability to continue to find, develop and offer attractive merchandise to customers, the
outcome of pending litigation, changes in business and economic conditions, and changes in the competitive environment in which we operate. Our actual results could differ materially from management’s expectations because of changes in these
factors. Other factors and risks could adversely affect our operations, business or financial results of our businesses in the future and could also cause actual results to differ materially from those contained in our forward-looking statements.
Unless required by law, we undertake no obligation to update publicly any forward-looking statements.
Overview
We are a multi-channel specialty retailer. Our mission is to project quality, excitement and innovation. Our three principal selling channels include The
Sharper Image specialty stores throughout the U.S., The Sharper Image catalog and the Internet, primarily through our website, www.sharperimage.com. We also have business-to-business sales teams for marketing our exclusive and proprietary products
for corporate incentive and reward programs and wholesale to selected U.S. and international retailers. In addition, our brand licensing division establishes relationships with third parties that license The Sharper Image trademark for their high
end products for sales through other retailers and through the Company’s sales channels.
As of October 31, 2007, we operated 186
stores in 38 states and the District of Columbia. In addition to our stores, we operate catalog and direct marketing, and Internet sales channels.
We have been experiencing declining sales and profitability since fiscal 2005. The continued declines in sales and profitability, significant changes both in senior management and in our Board of Directors, and the investigation into our
historical stock option grant practices have been extraordinarily challenging. We have revised many aspects of our business decisions by including a multi-channel marketing strategy that will deliver consistent value to our customers. We believe
these changes and future implementation of other new strategies related to quality products, inventory management, logistic improvements and cost effectiveness will result in a reinvigorated Sharper Image brand and further our goal of providing
consistent profitability and growth for our stockholders.
During the first nine months of fiscal 2007, cash used in operations was
approximately $81.0 million compared to $64.0 million for the same period of fiscal 2006. On August 20, 2007, we amended our revolving credit facility to increase the amount available during specified times of the year to $120.0 million, and to
include a term loan in an amount up to $20.0 million. Of this $20.0 million term loan, $10.0 million was made available immediately and the remaining $10.0 million will become available upon completion of a syndication. We cannot provide assurance
that the remaining portion of the term loan will become available.
9
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 and positive cash flows if any, from operating activities usually
occur during the fourth quarter ending January 31 of each fiscal year. The Company, as is typical in the retail industry, generally experiences lower revenues, lower operating results and negative cash flows from operating activities during the
other quarters and has incurred and may continue to incur losses and negative cash flows from operating activities. The results of operations for these interim periods are not necessarily indicative of the results for the full fiscal year.
Results of Operations
Our
comparable store sales declined 1.1% in fiscal 2004, 16.0% in fiscal 2005 and 25.4% in fiscal 2006, our comparable store sales declined 15.7% and 14.9% for the nine-month and three-month periods ended October 31, 2007, respectively. Although we
expect our new business strategies will ultimately reverse this trend, we do not expect implemented strategies to produce significant changes until fiscal 2008. There can be no assurance that our new business strategies will be successful. In recent
years, our success has substantially depended on a few products; for example, our air-purification line of products generated 27.7%, 23.4% and 12.9% of our revenues for fiscal 2005, fiscal 2006, and the nine months ended October 31, 2007,
respectively; and our massage chair line of products generated 9.1%, 6.3% and 5.5% of our revenues for fiscal 2005, fiscal 2006, and the nine months ended October 31, 2007, respectively.
Comparable store sales, is not a measure that has been defined under GAAP. We define comparable
store sales as sales from stores where selling square feet did not change by more than 15% in the previous 12 months and which have been open for at least 12 months. A store opened on or prior to the 15
th
of a month is treated as open for the entire month. Stores generally become comparable once they have a full year of comparable sales for the annual calculation. We believe that
comparable store sales, which excludes the effect of a change in the number of stores open, provides a more useful measure of the performance of our store sales channel than does the absolute change in aggregate net store sales.
The decrease in our total revenues for the three and nine-month periods ended October 31, 2007 compared to the same period in fiscal 2006 was
primarily due to a decrease in the sales of our proprietary designed and Sharper Image branded products, in particular our air purification product line, and sales of massage chairs from third parties. For the three and nine-month periods ended
October 31, 2007, approximately $17.8 million and $70.9 million of the decrease in total revenues, respectively, was due to decreased sales of our air purification product line, or 48% and 69% of the decrease in total revenues, respectively.
This is a result of increased competition, slowing market growth; decreased product refurbishing, decreased advertising specifically designed for this product line, such as discontinued infomercials and decreased single product mailers, as well as
decreased catalog circulation. Approximately $2.5 million and $9.1 million of the decrease in total revenues for the three and nine-month periods ended October 31, 2007, respectively, was due to decreased sales of our massage chair product
line, including a 42.1% decline in units sold for the three-month period and 45.4% for the nine-month period. This is a result of increased competition and decreased advertising, including decreased catalog circulation. Further decrease in
total revenue was a result of discontinuance of the lines that were not a strategic fit with the Company. In the third quarter of fiscal 2007 we decreased advertising spending by 51.9% including the elimination of infomercials and decreased catalog
circulation by 26.8%, compared to the third quarter of fiscal 2006, which affected each of our sales channels. Total advertising decreased by 59.6% for the nine months ended October 31, 2007 compared to the same period last year.
Sales of The Sharper Image branded products decreased to approximately 36% of total revenues in the third quarter of fiscal 2007 from approximately 63%
in the same period in fiscal 2006; sales of The Sharper Image branded products for the nine-month period ended October 31 decreased to approximately 39% of total revenues in fiscal 2007 from approximately 64% in 2006. Returns and allowances
remained relatively consistent at 10.4% of sales for the third quarter of fiscal 2007 compared to 10.7% in the same period in fiscal 2006. Returns and allowances for the nine-month periods ended October 31, 2007 and 2006 were also consistent at
10.7% and 10.6%, respectively.
During the three-month period ended October 31, 2007, we experienced a 20.5% decrease in store
transactions mainly attributed to decreased advertising and generally declining retail trends: and a 7.4% increase in average revenue per store transaction, when compared to the same period in fiscal 2006, when we had lower price points on products
that we have since discontinued. For the nine-month period ended October 31, 2007; we experienced an 11.8% decrease in average revenue per store transaction, and a 5.8% decrease in total store transactions. The decrease in average revenue
per transaction is a reflection of the general trends in our product mix and decline in sales of air purification products and massage chairs. Average revenue per transaction in our store channel is calculated by dividing the amount of sales,
exclusive of delivery revenue and sales taxes, by the number of transactions.
10
In our catalog and direct marketing segment, which includes sales generated by catalog mailings, single
product mailers, print advertising and infomercials, we experienced a 62.8% decrease in transactions and an 18.6% increase in average net revenue per transaction in the three-month period ended October 31, 2007 compared to the same period in
fiscal 2006, when we had lower price points on products that we have since discontinued. For the nine-month period ended October 31, 2007, there was a 52.5% decrease in transactions and an 8.4% decrease in average net revenue per
transaction compared to the same period in fiscal 2006. The decrease in net catalog and direct marketing revenues was due to the general trends in revenues described above and in particular our discontinuation of infomercial advertising of our air
purification products and the decrease in catalog circulation. We believe that our catalog and direct marketing activities have a positive indirect impact to stores and internet sales
In our Internet segment, which includes our
www.sharperimage.com
website, we experienced a 46.5% decrease in transactions and a 7.7% increase in
average revenue per transaction in the three-month period ended October 31, 2007 compared to the same period in fiscal 2006. For the nine-month period ended October 31, 2007, there was a 35.4% decrease in transactions and a 6.8%
decrease in average net revenue per transaction compared to the same period in fiscal 2006. The decrease in Internet revenues was due to the general trends in revenues described above as well as discontinuing our sales category of refurbished
products.
Cost of Products
Cost of
products decreased $20.9 million, or 33.2%, and $47.0 million, or 27.1%, for the three-month and nine-month periods ended October 31, 2007, respectively, when compared to the same prior year periods. The gross margin rate for the three-month
period ended October 31, 2007 decreased to 39.2% from 40.5% for the same period in fiscal 2006, and the gross margin rate for the nine-month period ended October 31, 2007 decreased to 41.4% from 45.7% for the same period in fiscal 2006.
These decreases were a result of product mix, specifically due to a decrease in sales of proprietary designed and Sharper Image branded products, which generally have higher gross margin rates, but higher associated development, refurbishing and
returns costs.
Our gross margin rate fluctuates with the changes in our merchandise mix, primarily with respect to the proportion of sales
due to our proprietary designed and Sharper Image branded products. Additionally, on-line stores, other selected promotional activities and free shipping offers, will, in part, tend to reduce our gross margin rate. Our gross margins may not be
comparable to those of other retailers, since some retailers include the costs related to their distribution network in cost of products while we, and other retailers, exclude them from gross margin and include them instead in selling, general and
administrative expenses.
Buying and Occupancy
Buying and occupancy costs decreased $0.5 million, or 2.6%, and $1.7 million, or 2.8%, for the three-month and nine-month periods ended October 31, 2007, respectively, compared to the same period in fiscal 2006, reflecting the decrease
in number of stores offset in part by rent increases associated with lease renewals or contracted rent increases. Buying and occupancy costs as a percentage of total revenues increased to 28.9% for the three-month period ended October 31, 2007
from 19.4% for the same period in fiscal 2006; and increased to 27.4% for the nine-month period ended October 31, 2007 from 19.1% for the same period in fiscal 2006, primarily due to decrease in sales.
Advertising
We decreased our marketing efforts in
the nine-month period ended October 31, 2007 as compared to the prior year period in order to implement multi-channel marketing strategies and new products and improve quality of service needed to support the business model. We expect
advertising expense (without television infomercial spending) for fiscal 2007 to be at a level consistent with the same period of fiscal 2006.
Advertising expense for the three-month period ended October 31, 2007 decreased $9.6 million or 51.9%, from the comparable prior year period. The decrease in advertising expense was primarily attributable to a $6.9 million, or
100% decrease in television infomercial spending and a $1.8 million, or 100% decrease in solo mailer spending.
11
Advertising expense for the nine-month period ended October 31, 2007 decreased $35.9 million, or
59.6% from the comparable prior year period. The decrease in advertising expense was primarily attributable to a $26.6 million, or 100% decrease in television infomercial spending and a $4.8 million, or 100% decrease in solo mailer spending.
Also contributing to the advertising expense reductions was a $2.5 million, or 13.7% reduction in catalog advertising, resulting from a 23.5% decrease in the number of The Sharper Image catalogs circulated and a 23.5% decrease in the number of The
Sharper Image catalog pages circulated.
Advertising expense as a percentage of total revenues decreased to 12.8% in the three-month period
ended October 31, 2007 compared to 17.5% in the three-month period ended October 31, 2006, and decreased to 11.2% for the nine-month period ended October 31, 2007, compared to 18.8% in the same period last year.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses (“SG&A” expenses) for the three-month period ended October 31, 2007 decreased $5.3 million, or 12.9% from $40.7 million in 2006 to $35.4 million; and decreased by $3.6 million,
or 3.4% from $107.4 million in 2006 to $103.7 million for the nine-month period ended October 31, 2007.
The decrease during the three
months ended October 31, 2007, when compared to the same period in fiscal 2006 is a result of a decrease of $4.7 million in severance pay ($2.1 million) and Supplemental Executive Retirement Plan contribution ($2.6 million) for our former
executives as part of their severance agreements, a $1.3 million decrease in credit card and other fees due to decreased revenues, a $1.7 million decrease in legal and professional fees and a $0.6 million decrease in rents due to closure of our
Novato office and vacating part of the corporate office space. These decreases were partially offset by a $0.8 million increase in bonus accrual under the new Management Incentive Plan, increase of $0.5 million in relocation expenses as we hired
several new executives, an increase in stock option expenses of $0.4 million and increased commissions of $0.3 million as store associate commissions were re-implemented during fiscal 2007.
The decrease during the first nine months of fiscal 2007, when compared to the same period in fiscal 2006 is primarily attributable to a $5.0 million
decrease in accruals related to our former executives as part of their severance agreements, decrease in credit card and other fees by $4.0 million and a $1.2 million decrease in charge backs due to decreased revenues, and a $1.1 million decrease in
rents as we closed our Novato office and vacated part of the corporate office space. These decreases were partially offset by increased commissions of $1.3 million as store associate commissions were re-implemented during fiscal 2007, a $1.1 million
increase in bonus accrual under the Management Incentive Plan, increase of $1.0 million in relocation expenses as we hired several new executives and an increase in stock option expenses of $0.9 million.
SG&A expenses as a percentage of total revenues increased to 51.0% from 38.3% for the three-month period ended October 31, 2007 and increased to
47.7% from 33.5% for the nine-month period ended October 31, 2007 from the comparable periods in fiscal 2006.
Other Income and Expense
Other expense (net) increased $0.9 million and $2.1 million for the three-month period and nine-month period ended October 31,
2007, respectively, from the comparable periods in fiscal 2006. The increase is largely attributable to interest expense due to an increase in borrowings.
Financial Condition
Liquidity and Capital Resources
We met our short-term liquidity needs and our capital requirements in the nine-month period ended October 31, 2007 with existing cash and cash
equivalents, and from our financing activities.
Approximately, $81.0 million of net cash was used for operating activities for the
nine-month period ended October 31, 2007, which was $17.0 million more compared to $64.0 million used during the same period of fiscal 2006, this increase is primarily due to a $16.7 million incremental increase in loss before income tax
benefit.
Approximately $4.2 million of net cash was used for investing activities for the first nine months of fiscal 2007, primarily for
capital expenditures relating to four remodeled stores and systems enhancements.
Net cash provided by financing activities increased by
$45.7 million to $68.0 million from $22.3 million in the previous year, this increase is attributable to a $39.9 million incremental borrowing on our revolving credit facility and term loan, a $ 4.3 million increase on long-term borrowings and
$1.5 million from stock options exercises.
12
For fiscal 2007, we do not plan any new store unit growth. During the nine months ended October 31,
2007, we closed one store and remodeled four existing stores. We plan to invest capital in information technology including the support for a proprietary credit card program and for store remodeling. We believe that our total capital expenditure for
the fourth fiscal quarter of 2007 will be approximately $3 million. We believe we will be able to fund our working capital expenditures for the remodeling of stores and systems enhancements through existing cash balances, cash generated from
operations, our revolving credit facility and term loan and as necessary, other funding sources, including future debt or equity offerings.
On May 25, 2007, we amended our revolving credit facility agreement, to, among other things, increase the amount available during specified times of the year to $120.0 million and to increase the amounts that can be borrowed against
our assets. The amended revolving credit facility expires on May 25, 2012.
On August 20, 2007, the revolving credit facility was
amended and restated to provide a term loan of $20.0 million. Of this term loan, $10.0 million was made available immediately, with the balance of $10.0 million available upon completion of syndication for the revolving credit facility and term
loan. We cannot provide assurance that the remaining portion of the term loan will become available. The term loan margin is set at LIBOR plus 4.5% and the revolving credit facility currently bears interest at 8.75%. The term loan is repayable
within a period of five years in monthly installments subject to mandatory pre-payment in certain circumstances. Mandatory and voluntary prepayments of the term loan are subject to a 1.0% early termination fee on any pre-payment amount.
As of October 31, 2007, outstanding borrowings on the revolving credit facility and term loan were $62.1 million and letter of credit commitments
issued under the revolving credit facility were $21.9 million. The amount available for borrowing under our revolving credit facility and term loan was approximately $12.4 million, not including the additional $10.0 million of the term loan to be
made available upon completion of syndication.
Summary Disclosure about Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments increased from the amount disclosed as of January 31, 2007, as follows :
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commercial Commitments – (Dollars in
millions)
|
|
January 31,
2007
|
|
October 31,
2007
|
|
Increase
|
|
Revolving Credit Facility and Term Loan (1)
|
|
$
|
—
|
|
$
|
62.1
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|
$
|
62.1
|
|
Borrowings on Deferred Compensation Plan (2)
|
|
|
2.0
|
|
|
6.3
|
|
|
4.3
|
|
Purchase Obligations
|
|
|
37.5
|
|
|
71.9
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations and Commercial Commitments (3)
|
|
$
|
39.5
|
|
$
|
140.3
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|
$
|
90.8
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|
(1)
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Borrowings on our revolving line of credit facility are considered to be due in less than one year and the term-loan is due within five years.
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|
(2)
|
Borrowings on the Company’s deferred compensation plan are due after five years.
|
|
(3)
|
Total contractual obligations and commercial commitments table above excludes the potential impact of FIN48 commitments as the timing of payments cannot be reasonably estimated.
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Critical Accounting Judgments and Estimates
The preparation of our interim condensed financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and contingent liabilities. We base our judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events then known to management
that have been recognized in our financial statements or tax returns. In estimating future tax consequences, all expected future events then known to management are considered other than changes in the tax law or rates.
The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in
valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company takes into account such factors as prior earnings history, expected future
earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset (see Note B to the condensed financial statements).
13
As of October 31, 2007, the net deferred tax assets (related primarily to net operating loss carry
forwards) were approximately $90.1 million, an increase of approximately $38.0 million from the fiscal 2006 year end. If the Company continues to incur operating losses and negative cash flows from operations through the end of fiscal 2007,
substantial increases to the valuation allowance may be required. During the next twelve months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior tax returns, however the
Company does not believe this will have a material effect on the Company’s tax provision or deferred income tax assets and liabilities.
The Company reviews the carrying value of long-lived assets for potential impairment. This review is performed when events or changes in circumstances indicate that the assets could be impaired and that their carrying values may not be
recoverable. Such events include, but are not limited to, decisions to close a store, headquarter facility or distribution center, or a significant decrease in the operating performance of the long-lived asset. For those assets that are identified
as potentially being impaired, if the undiscounted future cash flows from such assets are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the asset’s fair value. The fair value
of the assets is estimated using the discounted future cash flows of the assets.
The Company estimates future cash flows based on
store-level historical results, current trends and operating and cash flow projections. These estimates are subject to uncertainty and may be affected by a number of factors outside of our control, including general economic conditions, the
competitive environment and regulatory changes. If actual results differ from the Company’s estimates of future cash flows, it may record significant additional impairment charges in the future.
During the three-month and nine-month periods ended October 31, 2007 the Company recorded non-cash charge for the impairment of long-lived assets for
underperforming stores in the amounts of $1.8 million and $2.5 million, respectively.
For a discussion of other accounting judgments and
estimates that we have identified as critical in the preparation of our financial statements, refer to our 2007 Annual Report on Form 10-K and Note F to these interim condensed financial statements.
Seasonality
Our business is highly seasonal,
reflecting the general pattern associated with the retail industry of peak sales and earnings during the holiday shopping season. In recent past years, a substantial portion of our total revenues approximately 39% and all or most of our net
earnings, if any, have occurred in the fourth fiscal quarter ending January 31. The results of operations for these interim periods are not necessarily indicative of the results for the full fiscal year.
Off-Balance Sheet Arrangements
We do not have any
significant off-balance sheet arrangements that may have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
14
PART I—FINANCIAL INFORMATION