SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1997
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 33-12755
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
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 XX No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 14,1997 was $10,057,621
The number of shares of Common Stock, with $.01 par value, outstanding on
April 14, 1997 was 8,266,940 shares.
Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January 31, 1997 are incorporated by reference into Parts II and IV of this
Report. Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 9, 1997 are incorporated by reference into Part III
of this report.
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PART 1
This Annual Report on Form 10-K and the documents incorporated herein
by reference of Sharper Image Corporation (referred to as the "Company" or "The
Sharper Image") contain forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors Affecting Future
Operating Results" on pages 12 through 14, as well as those noted in the
documents incorporated herein by reference. Unless required by law, the Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. However,
readers should carefully review the statements set forth in other reports or
documents the Company files from time to time with the Securities and Exchange
Commission, particularly the Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
Item 1. Business
Overview
Sharper Image Corporation is a specialty retailer which introduces and
sells quality, innovative and entertaining products through The Sharper Image
stores and monthly mail-order catalog, and other marketing channels. In the past
year, the Company also marketed through two new concepts. The Sharper Image Home
Collection had its initial mail-order test in January 1996, and the Sharper
Image SPA Collection concept was marketed through mail-order and stores. As
discussed below, after critical evaluation of the operating results and future
prospects of the SPA Collection division, management made the decision to close
the SPA Collection division.
The Company was founded in 1977 by Richard Thalheimer, who continues as
Chairman and Chief Executive Officer. First mailed in 1981, The Sharper Image
Catalog found success in the growing field of mail-order shopping. Expansion of
The Sharper Image concept to retail stores began in 1984, and as of January 31,
1997, the Company operated 82 The Sharper Image stores in the United States and
licensees operate 5 stores internationally and 2 airport stores in the United
States. The Company's aggregate sales from its stores have grown substantially
since the beginning of fiscal 1984 and have increased from 3% of total revenues
in fiscal 1983 to 71% of total revenues for the fiscal year ended January 31,
1997 (fiscal 1996). The typical Sharper Image stores range from approximately
2,200 to 2,500 selling square feet in size, with several larger size stores that
have 3,000 to 5,000 selling square feet. The Company also has two additional
retail formats, Sharper Image Design stores and airport shops. These formats are
discussed under "Store Operations" and "Licensed Operations".
During fiscal 1996, the Company opened 3 new stores of The Sharper
Image concept and format and 3 new Sharper Image Design stores. Two
under-performing Sharper Image stores were closed. The Company is planning to
open one to three new stores during the fiscal year ending January 31, 1998
(fiscal 1997). Management's goal is to grow the number of stores by 10% to 15%
during the next two fiscal years. However, there can be no assurances that the
Company will meet this goal. See "Factors Affecting Future Operating Results."
Lease terms for certain of the existing The Sharper Image store locations will
be maturing during
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fiscal 1997 and such locations may be relocated or closed. The Company employs
over 1,200 employees in twenty-eight states.
In addition to serving as the primary advertising vehicle for the
Company's stores, The Sharper Image Catalog generated about 80% of its total
mail-order sales (approximately 26% of total revenues) in fiscal 1996. The
monthly color catalog which ranged from 68 to 124 pages in fiscal 1996, is
recognized for creative excellence within the catalog industry. Worldwide, the
Company mailed approximately 35 million of The Sharper Image Catalogs in fiscal
1996. The Company launched the test mailing of the Sharper Image Home Collection
catalog in January 1996. Management plans to focus its efforts in growing this
concept in fiscal 1997 and will continue to evaluate the operating results and
potential of this concept.
The Company is known for its varied product mix and a merchandising
philosophy focusing on quality products which are unique, innovative,
entertaining, and useful that are developed by The Sharper Image, exclusive to
The Sharper Image, or in limited distribution. In product lines where the
Company competes directly with other retailers, it chooses to sell the best
version of the product--maximizing features, uniqueness, and value. The Company
is frequently sought after by manufacturers and inventors to launch
technologically-advanced and fun products.
The Company's business is highly seasonal, with sales peaks at the
holiday periods of Father's Day and Christmas. See "Seasonality". Historically,
the typical Sharper Image demographic mix has been upper income, approximately
65% male, 35% female.
In addition to its primary businesses, The Sharper Image leverages its
name and reputation through a corporate marketing program, wholesale sales of
Sharper Image brand products, which included Sharper Image Design proprietary
products and private-labeled products, and a product licensing program with
selected businesses. Wholesale sales are made primarily to fine department
stores and to international retailers. The most leading-edge marketing
opportunity for the Company is the Internet. The Company's The Sharper Image
Catalog is on the World Wide Web at http://www.sharperimage.com. Other
electronic medium include America Online's Marketplace and Time-Warner's
Dreamshop at http://www.dreamshop.com. Although it is too early to predict the
potential of this sales medium and there is no guarantee of the possibility of
success, the Company is at the forefront of this electronic marketplace and
hopes to be a leader when this market begins to reach full acceptance. See
"Factors Affecting Future Operating Results".
During fiscal 1996, the Company continued the development of an
in-house new product development function along with a wholesale sales group to
market its proprietary Sharper Image Design and other Sharper Image brand
products to fine department stores nationwide and internationally. While this
sales channel is still in its early stage and a small part of total revenues,
the wholesale sales group made sales gains in fiscal 1996. The development of
the proprietary and private-labeled products, and wholesales sales opportunities
will continue to be an integral part of the Company's growth.
The Company launched the test mailings of the Sharper Image SPA
Collection (SPA) catalog in February 1995. During the second half of fiscal
1995, the Company also opened four SPA stores to test this retail concept.
During fiscal 1996, in its second year of operations, the Company mailed more
than 7 million SPA catalogs and opened two additional SPA stores. In late fiscal
1996, management reviewed the operating results for the two-year period, and the
future potential of this concept, and determined that it would be prudent for
the Company to re-direct resources to the higher growth opportunities of the
core business of The Sharper Image. As a result, the decision was made to close
the operations of the SPA catalog and the six SPA stores. See "Factors Affecting
Future Operating Results".
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The Sharper Image Catalog/Retail Advertising
The Sharper Image Catalog is a full-color catalog that is mailed to an
average of approximately 2.5 million individuals each month. The catalog is also
the primary source of advertising for the Company's retail stores. During fiscal
1996, the Company mailed approximately 35 million of The Sharper Image Catalogs
to over 5 million different individuals. Circulation and number of pages of The
Sharper Image Catalog is under continual review to balance the costs of mailing
the catalogs with the revenues generated. The mailings increase at Father's Day
and Christmas reflecting the seasonal nature of the Company's business.
In fiscal 1995, the Company experienced a significant increase in
advertising and promotion expenses due to the increased cost of paper and
postage resulting from the industry-wide rate increases in paper and a one-time
postal rate increase in January 1995. Although paper costs have started to level
off from the highest point experienced during fiscal 1995, the rate increases in
paper that took place in fiscal 1995 continued to have an upward impact on
advertising expense for the first half of fiscal 1996. The Company has
experienced lower paper prices since July 1996. The Company has implemented
certain actions designed to lower the costs of producing the catalog to lessen
the impact of the paper and postage increases, including reducing the number of
pages per catalog, trimming the dimensions of the catalogs and using a lighter
weight of paper. As a result of these changes, advertising and promotion
expenses for fiscal 1996 were substantially lower than for fiscal 1995. There
have been two moderate paper price increases since the beginning of fiscal 1997.
The Company continually reviews the cost and effectiveness of its advertising
efforts. See "Factors Affecting Future Operating Results".
The Sharper Image Catalog is created and produced by the Company's
in-house staff of writers and production artists. The Company utilizes
free-lance photographers on an as needed basis. The catalog is electronically
produced in-house on a network of computers using the latest desktop publishing
software. This enables the Company to maintain quality control and shorten the
lead time needed to produce the catalog. The monthly production and distribution
schedule permits frequent changes in the product selection. During fiscal 1996,
The Sharper Image Catalog typically contained from 68 to 76 pages for non-peak
months and between 84 and 124 pages for the peak seasons of Father's Day and
Christmas. The catalogs typically feature between 300 and 700 products, of which
approximately 10% to 25% are new each month. In October 1996, the Company
re-designed The Sharper Image catalog to update the look of the catalog to
distinguish the Company from other specialty retailers. The new catalog design
uses dramatic visuals and humorous and clever product descriptions. The new
catalog design features products more prominently, but includes a fewer number
of products, which ranged between 200 to 350 products in the fourth quarter of
fiscal 1996.
During fiscal 1996, the Company also utilized newspaper and airline
magazine inserts to advertise specific products. The Company believes these
advertisements generate store sales as well as mail-order sales. The Company
plans to continue them in fiscal 1997. In addition, from time to time, the
Company has also produced certain specialty catalogs to test new catalog
concepts. To enhance the effectiveness of the catalog, the Company's in-house
staff utilizes statistical evaluation and selection techniques to determine
which segments of the in-house mailing list are likely to contribute the
greatest revenue per mailing. This evaluation has provided the Company with the
ability to quickly increase circulation to responsive segments and to scale back
circulation to non-responsive segments thus reducing the effective cost of
advertising.
In January 1996, the Company mailed its initial test catalog for The
Sharper Image Home Collection concept. This catalog features high quality,
luxury home furnishings and accessories. The responses to this mailing during
its first year is encouraging and the Company plans to continue to invest in the
development of this concept.
The Company collects customer names through the electronic
point-of-sale registers in its retail stores. The names and associated sales
information are merged daily into the Company's customer master file. This
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daily merge process provides a constant source of current information useful to
assess the effectiveness of the catalog as a form of retail advertising,
identify what new customers can be added to the in-house mailing list without
the traditional list rental "prospecting" costs, and identify the "best
customers." The Company's addition of names to the in-house mailing list
enhances its value for list rental purposes. Periodically, the Company mails
promotional material to these best customers which is designed to produce
incremental sales.
Store Operations
The Sharper Image stores are located throughout the United States
generally in downtown financial districts and business centers, upscale shopping
malls or drive-up suburban locations, all of which are areas that typically have
a high population density.
Each store is generally staffed with approximately 6 to 8 employees,
including a manager, an assistant manager, a senior sales associate, sales
associates, and other support staff. A few of the Company's high volume stores
are staffed with 11 to 15 associates. The Company's President and Chief
Administrative Officer currently oversees store operations. Store personnel
compensation structure is based largely on commission and is closely monitored
in relation to sales. The Company expends considerable effort to train its sales
associates on the many new and frequently technically oriented items in order to
maintain a high customer service level.
The Sharper Image stores are designed by the Company's design staff at
the Company's headquarters in San Francisco to standardize, where possible,
layout so as to simplify their operations. The stores are operated according to
standardized procedures for customer relations, merchandise display and pricing,
product demonstration, inventory maintenance, personnel training, administration
and security. The Company's original Sharper Image stores typically have 2,200
to 2,500 square feet of selling space and approximately 1,300 to 2,200 square
feet of storage and administrative space. The cost of leasehold improvements,
fixtures and other equipment associated with the opening of a new Sharper Image
store has averaged approximately $300,000 to $500,000. Initial inventory for a
new Sharper Image store has generally cost approximately $250,000. Outlet stores
are approximately half the cost of the original Sharper Image stores. The
Company also operates a second retail format of Sharper Image Design stores
which are approximately half the size of the original store with between 1,000
to 1,200 of selling square feet, and features higher margin proprietary products
in addition to other top selling merchandise. At the end of fiscal 1996, the
Company had 70 The Sharper Image stores, 8 Sharper Image Design stores, and 4
outlet locations.
The Company's retail stores' product presentation includes bold
eye-catching displays designed to draw customers to new or top-selling products.
Product presentations are organized into distinct categories such as health and
massage, travel, home and safety, recreation and fitness, and the newest in
electronics.
Merchandising, Product Selection and Development
The Company's merchandise mix emphasizes innovative products that are
new to market, and unique products which are proprietary, available exclusively
through The Sharper Image, or are not available in broad distribution. The
Company's sales are driven by individual products, focusing on offering
pre-selected items which represent quality, innovation, and entertainment, as
distinguished from offering broad assortments of categories of merchandise. As
individual items come to market or are developed internally by the Company which
fit the criteria for new products, the Company's buying and merchandise mix will
change to emphasize those products. As a result of such shifting emphasis among
individual items, the mix of sales by category changes from time to time. The
effect, from year to year, can be to increase or decrease the merchandise gross
margin rates since some categories of merchandise sustain traditionally higher
margins and some traditionally sustain lower margin rates.
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The Company's current merchandise strategy is to offer a narrower
assortment in its stores and catalogs. The Company offers products at price
levels ranging from $10 to over $5,000. The Company intends to keep expanding
the offering of products in the $50 to $500 price range to appeal to the
Company's customer base. The Company also intends to continue to develop Sharper
Image Design proprietary and private-labeled products to utilize its marketing
knowledge built from 20 years of retailing experience. While these proprietary
and private-labeled products offer important sales and gross margin growth
opportunities for all the revenue generating areas of the Company, there are
certain risks associated with these internally developed products, such as
possible manufacturing constraints, delays in bringing these products to market
and cost increases. Products may also be subject to other imitations. See
"Factors Affecting Future Operating Results".
The process of finding new products involves the Company's buyers
reviewing voluminous product literature, traveling extensively throughout the
United States, Europe and the Far East to attend trade shows and exhibitions,
and meeting with manufacturers. The Company enjoys relationships with many major
manufacturers who use The Sharper Image regularly to introduce their newest
products in the United States. See "Factors Affecting Future Operating Results".
In addition to finding new products from outside sources, the Company's
new product development group develops and produces Sharper Image Design
proprietary products. The new product development group meets regularly with the
merchandising staff to review new product opportunities, product quality , and
customer feedback. From these creative sessions product ideas are put into
development, design and productivity. Successful product introductions during
the past two years include the Memo Manager Executive, KeySeeker, Shower
Companion, Keycorder, and the Heart & Sound Soother.
The Company believes that this new product development function, in
addition to increasing its sales and gross margins and adding incremental
wholesale sales, will favorably impact the Company by increasing the flow of
unique and exclusive products in The Sharper Image stores and catalog and
enhancing its brand name extension. However, there is no assurance that the
Company will be able to continue the growth of gross margin and the
proportionate sales related to these proprietary products. See "Factors
Affecting Future Operating Results".
The Company purchases merchandise from numerous foreign and domestic
manufacturers and importers. None of the suppliers accounted for more than 10%
of the dollar amount of the Company's purchases during fiscal 1996. Of the
products offered by the Company in recent catalogs, approximately 69% were
manufactured in the Far East, approximately 18% were manufactured within the
United States, approximately 10% were manufactured in Europe, and approximately
3% were manufactured in Mexico and Canada. The Company expects these percentages
to vary as new products are introduced. See "Factors Affecting Future Operating
Results".
Sharper Image Design proprietary products are produced for the Company
on a contract basis by manufacturers in the Far East. The Company provides all
product specifications to the contract manufacturers. Delivery lead time is
generally in the range of 6 to 12 months. However, certain products
introductions may require longer lead time.
The Company generates information on merchandise orders and inventory,
which is reviewed daily by the Company's buyers, its senior merchandising staff
and top management. Each month, the Company generally replaces approximately 10%
to 25% of its product offerings each month. The Company carefully considers
which products will not be offered in future months based upon numerous factors,
including revenues generated, gross margins, the cost of catalog and store space
devoted to each product, product availability and quality.
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The Company has developed a proprietary automatic replenishment system
(ARS) which is based on the "just-in-time" inventory management concept. Under
ARS, information on merchandise inventory and sales by each store location are
generated and reviewed daily. Sales information by product and location are
systematically compared daily to each product's "model stock" to determine store
shipment quantities and frequency. The ARS computes any adjustments to the model
stock level based on factors such as sales history by location in relation to
total Company sales of each product. Under this system, the model stock is
continually revised based on this analysis. Recommended adjustments to model
stock levels and recommended shipment amounts are reviewed daily by the
Company's group of store planners and merchandising managers who are responsible
for allocating inventory to stores.
Corporate Marketing
During fiscal 1996, the Company's Corporate Marketing continued to
grow. The incentive and gifting programs are designed by the Corporate Marketing
unit to be used by client companies to increase their sales, or to motivate and
reward their high achievers and customers utilizing The Sharper Image stores and
catalog as the primary means of offering and delivering the incentives and
gifts. The Company sells the incentive and gift merchandise certificates to the
client companies who in turn distribute them under their programs. The
certificates are redeemable for Sharper Image merchandise through its retail
stores, by mail, or over the telephone through the catalog telemarketing group.
The Company will continue to grow this area of its business.
Wholesale Operations
The Company's Business Development department is the primary group
responsible for marketing to other retailers, including fine department stores
domestically as well as retailers in other countries. This group's sales grew
from about $3.1 million in fiscal 1995 to about $4.0 million in fiscal 1996.
Plans for this group are to continue to increase the number of wholesale
customers in the U.S. and abroad, and the number of Sharper Image brand products
offered to these customers. Negotiations to add other major department stores
are on-going. By choosing to feature Sharper Image brand products, these fine
department stores can sell proven products with positive sales appeal.
Licensed Operations
The Company has exclusive licensing agreements in Japan, Switzerland,
South Korea, Australia and Saudi Arabia, as well as in the United States for
non-duty free airport locations. In fiscal 1996, the Company entered into a
licensing agreement with its Saudi Arabia licensee. The new Saudi Arabia
licensee opened its first The Sharper Image store in Riyadh in December 1996.
Under the international license agreements, the licensee is granted the right to
use the trademarked name, "The Sharper Image," in their country in connection
with The Sharper Image retail store and catalog operations. The Company will
assist the licensee by producing a foreign language edition of The Sharper Image
catalog, typically quarterly, with economies of scale but at the expense of the
licensees who then print and distribute locally. There are currently five
Sharper Image retail stores operated by the foreign licensees, one each in
Japan, Switzerland, Australia, Korea and Saudi Arabia. The Company receives
royalties on sales by the licensees. Licensees purchase products from the
Company or directly from manufacturers, maintain their own supply of inventory,
and establish their own product prices The airport licensee is entitled to
utilize The Sharper Image trademark and trade dress in designated airport
locations, the design of which is subject to the approval of the Company. There
are two locations -- one at Dallas-Fort Worth which opened in July 1994, and a
second location at Detroit Metropolitan which opened in May 1995. The Company
continues to pursue additional licensing and wholesale opportunities in foreign
countries.
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Product Licensing/The Sharper Image Trademark
The Company also has product license agreements with various
businesses. The Company controls the selection of the licensees and retail
distribution channels for the products in order to maintain the quality
associated with The Sharper Image name. Under each of these agreements, the
licensee is granted the right to use the trademarked name, "The Sharper Image,"
in connection with the manufacture and sale of certain products. In
consideration for the rights granted to the licensee, the Company receives
royalties on the licensees' net sales, subject, in certain cases, to a periodic
minimum royalty. The Company believes that product licensing presents
opportunities to further leverage the value of The Sharper Image as a brand
name.
Customer Service
The Company seeks to hire and retain qualified sales and customer
service representatives in both its mail-order catalog and store operations and
to train them thoroughly. Each new store manager undergoes an intensive program
during which the manager is trained in all aspects of the Company's business.
Sales personnel are trained during the first two weeks of employment, or during
the weeks before a new store opens. Training focuses primarily on acquiring a
working knowledge of the Company's products and on developing selling skills and
an understanding of the Company's high customer service standards. Each sales
associate is trained to adhere to the Company's philosophy of "taking ownership"
of every customer service issue that may arise. The Company has also developed
ongoing programs conducted at each store that are designed to keep each
salesperson up to date on each new product offered.
The Company's Customer Service group at the corporate headquarters
provides personal attention to customers who call toll free to request a catalog
subscription, place an order, or inquire about a product. The Company's Customer
Service group is also responsible for resolving customer problems promptly and
to the customer's complete satisfaction. The Company is committed to provide
courteous, knowledgeable, and prompt service to its customers.
Catalog Order Fulfillment and Distribution
The Company has a single distribution facility in Little Rock,
Arkansas. This facility was expanded during fiscal 1995, increasing the space
from approximately 50,000 square feet to about 110,000 square feet. The
Company's merchandise generally is delivered to the catalog customer and to The
Sharper Image stores directly from the Company's distribution facility. A number
of products are shipped directly from the vendor to the customer or to the
stores. The shipment of products directly from vendors to the stores and
customers reduces the level of inventory required to be carried at the
distribution center, freight costs, and the lead time required to receive the
products. Each catalog order is received via remote terminal at the distribution
facility after the order has been approved for shipment. The Company's goal is
to ship catalog orders within 48 hours after the order is received. The Company
generally delivers products by second day air service to its customers. Store
customers take their purchase with them. In fiscal 1996, the Company established
a telemarketing center located at the Littler Rock distribution facility to
augment the telemarketing team at the corporate offices.
Sales and inventory information about catalog and store operations is
provided on an ongoing basis to the Company's merchandising staff and to top
management for review. The Company's stores are equipped with electronic
point-of-sale registers that communicate daily with the main computer system at
corporate headquarters, transmitting sales, inventory and customer data as well
as receiving data from the Company's headquarters. The sales, inventory, and
customer data enables sales and corporate personnel to monitor sales by item on
a daily basis, provides the information utilized by the ARS for inventory
allocations, provides management with current inventory and merchandise
information, and enables our in-house mailing list to be updated regularly with
customer names and activity.
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The Company continually evaluates its computer systems and information
technology in connection with providing additional and improved management and
financial information.
Competition
The Company operates in a highly competitive environment. The Company
principally competes 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 some of those offered by the Company. Many of the
Company's competitors are larger companies with greater financial resources, a
wider selection of merchandise and a greater inventory availability. Although
the Company attempts to market products not generally available elsewhere and
has emphasized exclusive products in its merchandising strategy, many of its
products or similar products can also be found in other retail stores or through
other catalogs. The Company offers competitive pricing where other retailers
market certain products similar to the Company's at lower prices. In addition, a
number of other companies have attempted to imitate the presentation and method
of operation of the Company's catalog and stores, and the Company's proprietary
designed products. The Company competes principally on the basis of product
exclusivity, selection, quality and price of its products, merchandise
presentation in both the catalog and stores, its customer list, name
recognition, and the quality of its customer service. The Company is committing
additional resources to its internal product development group to create and
produce proprietary products exclusively available from the Company. The Company
is also testing additional retail concepts in it's efforts to grow revenues and
net earnings in the long-term.
Trademark Licenses
In the opinion of management, the Company's registered service mark
and trademark, "The Sharper Image," and the name recognition that it has
developed, is of significant value. The Company currently licenses the use of
its trademarked name in connection with the production and circulation of
foreign language editions of The Sharper Image catalog in Japan and Switzerland
and in connection with The Sharper Image stores in Japan, Switzerland,
Australia, Korea and Saudi Arabia in consideration for royalties and other fees.
In addition to these international licensees, the Company has also entered into
a license for the right to operate Sharper Image stores in domestic non-duty
free airport locations as well as various product license agreements which grant
the right to licensees to manufacture and sell products bearing the Company's
trademark.
Seasonality
The Company's business is highly seasonal, reflecting the general
pattern associated with the retail industry of peak sales and earnings during
the Christmas season. In addition, as the proportion of the Company's revenues
derived from store sales has grown, the impact of seasonal fluctuations on the
Company's sales and earnings has increased. As a result, a substantial
percentage of the Company's total revenues and all or most of the Company's net
earnings occur in its fourth fiscal quarter ending January 31. The Company
generally experiences lower revenues during the other quarters and, as is
typical in the retail industry, has incurred and may continue to incur losses in
these quarters. The results of these interim quarters may not be representative
of the results for the full fiscal year. In addition, like many retailers, the
Company makes merchandising and inventory decisions for the Christmas season
well in advance of the Holiday selling season. Accordingly, unfavorable economic
conditions and/or deviations from projected demand for products during the
fourth quarter could have a material adverse affect on the Company results of
operations for the entire fiscal year. During the fiscal years 1996 and 1995,
the Company's total revenues for the fourth quarter accounted for more than 40%
of total revenues.
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Employees
As of January 31, 1997, the Company employed more than 1,200
associates, approximately 62% of whom were full-time. The Company considers its
employee relations to be good.
Executive Officers
Set forth below is a list of the executive officers of the Company,
together with brief biographical descriptions.
Name Position Age
- ---- -------- ---
Richard Thalheimer Founder, 49
Chairman of the Board, and
Chief Executive Officer
Barry Gilbert Vice Chairman, 46
Chief Operating Officer
Craig Womack President, 46
Chief Administrative Officer
Vincent Barriero Senior Vice President, 48
Chief Information Officer, and
Assistant Corporate Secretary
Shannon King Senior Vice President, 41
Merchandising
Sydney Klevatt Senior Vice President, 61
Marketing
Tracy Wan Senior Vice President, 37
Chief Financial Officer,
and Corporate Secretary
Richard Thalheimer is the founder of the Company and has served as the
Chief Executive Officer and as a Director of the Company since 1978 and as
Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the
Company's President from 1977 through July 1993.
Barry Gilbert has been the Company's Vice Chairman and Chief Operating
Officer since December 1996. Prior to joining the Company, Mr. Gilbert was with
Warner Bros. Studio Stores, where he served as Senior Vice President of
International Franchise Operations from 1994 to 1996, and as Senior Vice
President of Stores from 1990 to 1994.
Craig Womack has been the Company's President and Chief Administrative
Officer since December 1996. Mr. Womack served as the Company's President and
Chief Operating Officer from July 1993 to December 1996, and as the Company's
Executive Vice President and Chief Operating Officer from December 1989 to July
1993.
10
<PAGE>
Vincent Barriero has been the Company's Senior Vice President, Chief
Information Officer since February 1995. Mr. Barriero served as the Company's
Senior Vice President, Management Information Systems from August 1992 through
February 1995 and as Vice President, Management Information Systems from August
1989 through August 1992.
Shannon King has been the Company's Senior Vice President,
Merchandising, since February 1995. Ms. King served as the Company's Vice
President, Merchandising from March 1993 through February 1995, and as Director
of Merchandising from July 1988 through March 1993.
Sydney Klevatt has been the Company's Senior Vice President, Marketing
since January 1991. From April 1982 through September 1990, Mr. Klevatt was the
Executive Vice President of Hanover Direct, Inc., with responsibilities in the
general corporate management and direction of the company including catalog
merchandising, marketing, creative and public and legal relations.
Tracy Wan has been the Company's Senior Vice President, Chief Financial
Officer since February 1995. Ms. Wan served as Vice President, Chief Financial
Officer from September 1994 through February 1995, as Vice President, Controller
from November 1991 through September 1994, and as Controller from July 1989
through November 1991. Ms. Wan is a certified public accountant.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995
(the "Act"), which became law in late December 1995, provide companies with a
"safe harbor" when making forward-looking statements. This "safe harbor"
encourages companies to provide prospective information about their companies
without fear of litigation. The Company wishes to take advantage of the new
"safe harbor" provisions of the Act and is including this section in its Annual
Report on Form 10-K in order to do so. Statements that are not historical facts,
including statements about management's expectations for fiscal year 1997 and
beyond, are forward-looking statements and involve various risks and
uncertainties. Factors that could cause the Company's actual results to differ
materially from management's projections, forecasts, estimates and expectations
include, but are not limited to, the following:
(a) The ability to offer an attractive selection of merchandise, including
the ability to locate and offer new, innovative, and high quality
products that satisfy its customers' demands and to acquire merchandise
in sufficient quantities and on a timely basis.
(b) The ability to design and develop proprietary products that satisfy its
customers' demands and to have such products manufactured
cost-effectively and in sufficient quantities and delivered to the
Company on a timely basis.
(c) The ability to successfully open new stores, which depends on a variety
of factors, including, without limitation, the identification of new
markets with sufficient customer demand, the selection and availability
of suitable locations, the negotiation of acceptable store leases, the
ability to hire and train additional store management and sales
associates, and the availability of adequate capital resources on
acceptable terms.
(d) The ability to successfully and cost-effectively advertise and market
its products through The Sharper Image catalog and other advertising
vehicles, including new media such as television shopping services and
the Internet.
11
<PAGE>
(e) Future increases in postage, paper or shipping costs that increase the
cost of producing and distributing the Company's catalogs or
merchandise.
(f) The success of new businesses that the Company may either develop or
acquire from time to time. In late fiscal 1996, the Company made the
decision to close its SPA Collection division as a result of its lack
of profitability and anticipated future performance.
(g) The highly seasonal nature of the Company's business - See
"Seasonality".
(h) Changes in merchandise mix.
(i) The ability to maintain sufficient inventory levels of its products,
particularly during peak selling seasons.
(j) The ability to compete effectively in the Company's highly competitive
industry with existing and potential competitors, many of which have
substantially greater financial and other resources than the Company.
(k) Changes in consumer preferences and customer demand for the Company's
products, which fluctuates based on a variety of factors, including,
without limitation, general or local economic conditions, buying
trends, and the retail sales environment.
(l) Changes in general or local economic conditions, including conditions
affecting the level of consumer spending on merchandise offered by the
Company and the general demand for products of stores located adjacent
to the Company's stores, particularly in malls.
(m) The political, social, legal and economic risks in foreign countries
where the Company purchases a significant amount of merchandise from
foreign vendors.
(n) Fluctuations in comparable store sales results, which have fluctuated
significantly and have decreased in the past from period to period.
(o) The ability to hire and retain the services of management and other key
employees, particularly its senior management, including, without
limitation, Richard Thalheimer, the Company's Founder, Chairman and
Chief Executive Officer.
(p) Any significant increase in merchandise returns.
(q) The quality of merchandise purchased by the Company.
(r) The ability of the Company's single distribution facility located in
Little Rock, Arkansas to distribute the Company's inventory merchandise
to its stores and customers on a cost-effective and timely basis, and
the ability to provide superior customer service and efficiently
fulfill customer orders. A disruption in operations of the distribution
facility may significantly increase the Company's distribution costs.
(s) The ability to have its merchandise manufactured and delivered by the
Company's vendors and manufacturers in sufficient quantities and on a
cost-effective and timely basis.
(t) Changes in the availability of capital expenditure and working capital
financing, including the availability of long-term financing to support
development of retail stores.
12
<PAGE>
(u) The imposition of new restrictions or regulations regarding the sale of
the Company's products or changes in tax rules and regulations
applicable to the Company, particularly with regard to state sales and
use taxes.
(v) Adverse results in significant litigation matters.
The United States retail industry, and the specialty retail industry in
particular, are dynamic by nature and have undergone significant changes over
the past several years. The Company's ability to anticipate and successfully
respond to continuing challenges is critical to achieving its expectations.
Item 2. Properties
The Company occupies approximately 50,000 square feet of office space
for its corporate headquarters in San Francisco, CA, under a lease scheduled to
expire on January 31, 2001, with an option to extend for two additional
five-year periods.
The Company currently operates 82 The Sharper Image stores under leases
covering a total of approximately 185,000 square feet of net selling space.
The Company's distribution facility is located in Little Rock,
Arkansas. The Company completed the addition of the 60,000-square-foot phase one
expansion of the distribution center in October 1995. The expanded distribution
center now has about 110,000 square feet of space. The costs for phase one
expansion were approximately $3.2 million. During fiscal 1996, the Company
completed phase two of the expansion which involve the installation of pallet
racking and the mail-order conveying system. All of the Company's distribution
functions are through this facility and other seasonally occupied space rented
by the Company in close proximity thereto. With the expanded building, the
Company reduced its usage of seasonal overflow storage facility.
Item 3. Legal Proceedings
The Company is party to various legal proceeding arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under "Note D -- Revolving Loan and Notes
Payable" in the Notes to Financial Statements on page 22 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
27 of the Sharper Image Corporation 1996 Annual Report to Stockholders is
incorporated herein by reference. As of April 14, 1997 there were 530 holders of
record of the Registrant's Common Stock.
13
<PAGE>
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
page 3 of the Sharper Image Corporation 1996 Annual Report to Stockholders is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information set forth under the caption "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 11 to 15
of the Sharper Image Corporation 1996 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 8. Financial Statements and Supplementary Data
The financial statements and independent auditors' report set forth on
pages 16 through 26 of the Sharper Image Corporation 1996 Annual Report to
Stockholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Registrant is
incorporated herein by reference to the Registrant's 1997 Proxy Statement to
Stockholders, pages 2 through 3. Information with respect to the executive
officers of the Registrant is contained in Part I of this Annual Report on Form
10-K.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated
herein by reference to the Registrant's 1997 Proxy Statement, pages 6 to 7.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of beneficial owners and
management is incorporated herein by reference to the Registrant's 1997 Proxy
Statement, pages 4 to 5.
Item 13. Certain Relationships and Related Transactions
None.
14
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)1. List of Financial Statements.
The following Financial Statements and Notes thereto set forth on pages 17
through 27 of the Sharper Image Corporation 1996 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:
Statements of Operations for the years ended January 31, 1997, 1996 and 1995.
Balance sheets at January 31, 1997 and 1996.
Statements of Stockholders' Equity for the years ended January 31, 1997, 1996
and 1995.
Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995.
Notes to Financial Statements.
(a)2. List of Financial Statement Schedule.
The following are filed as part of this Report:
Independent Auditors' Report on Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts
Financial Data Schedule
Schedules other than those listed are omitted for the reason that they
are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto, contained in, or
incorporated by reference into, this Report.
(a)3. List of Exhibits.
Incorporated herein by reference is a list of the Exhibits contained in the
Exhibit Index which begins on page 21 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the last quarter of the period covered by this Report.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other
15
<PAGE>
than the payment by the registrant of the expenses incurred or paid by
a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered on the Form S-8 identified below, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
The preceding undertaking shall be incorporated by reference into registrant's
Registration Statement on Form S-8 (Registration No. 33-12755).
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 SHARPER IMAGE CORPORATION
By: /s/ Richard J. Thalheimer By: /s/ Tracy Y. Wan
--------------------------- ----------------------
Richard J. Thalheimer Tracy Y. Wan
Chief Executive Senior Vice President,
Officer, Chairman Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Thalheimer and Tracy Wan, and each of
them, as such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for such person and in such person's
name, place, and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard J. Thalheimer Chief Executive April 30, 1997
- --------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Tracy Y. Wan Senior Vice President, April 30, 1997
- --------------------------- Chief Financial Officer
Tracy Y. Wan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Elyse Eng Thalheimer Director April 30, 1997
- ---------------------------
Elyse Eng Thalheimer
17
<PAGE>
/s/ Alan Thalheimer Director April 30, 1997
- ---------------------------
Alan Thalheimer
/s/ Lawrence Feldman Director April 30, 1997
- ---------------------------
Lawrence Feldman
/s/ Maurice Gregg Director April 30, 1997
- ---------------------------
Maurice Gregg
/s/ Gerald Napier Director April 30, 1997
- ---------------------------
Gerald Napier
/s/ J. Gary Shansby Director April 30, 1997
- ---------------------------
J. Gary Shansby
18
<PAGE>
SHARPER IMAGE CORPORATION
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------
($000)
<CAPTION>
COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E
- -------------------------------------------------------------------------------------------------------------------------
Balance at Additions Balance
Beginning Charged to at End of
DESCRIPTION of Period Costs & Exp. Deductions Period
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVENTORY
YEAR ENDED JANUARY 31, 1997:
Inventory Obsolescence $1,449 $1,681 $1,621 $1,509
YEAR ENDED JANUARY 31, 1996:
Inventory Obsolescence $ 891 $2,109 $1,551 $1,449
YEAR ENDED JANUARY 31, 1995:
Inventory Obsolescence $1,140 $1,630 $1,879 $ 891
OTHER
YEAR ENDED JANUARY 31, 1997:
Other $ 461 $ 351 $ 307 $ 505
YEAR ENDED JANUARY 31, 1996:
Other $ 291 $ 462 $ 292 $ 461
YEAR ENDED JANUARY 31, 1995:
Other $ 196 $ 371 $ 276 $ 291
</TABLE>
19
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
to Registration Statement on Form S-1 (Registration No. 33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.1 Amended and Restated Stock Option Plan. (Incorporated by reference to
Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327).)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994.
(Incorporated by reference to Registration Statement on Form S-8 filed
on January 19, 1996 (Registration No. 33-3327).)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by
reference to Exhibit 10.15 to Form 10-K for fiscal year ended January
31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended January
31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.9 Form of Director Indemnification Agreement. (Incorporated by reference
to Exhibit 10.42 to Registration Statement on Form S-1 (Registration
No. 33-12755).)
10.10 Real Estate Installment Note and Mortgage dated October 4, 1993 among
the Company and Lee Thalheimer, Trustee for the Alan Thalheimer Trust.
(Incorporated by reference to Exhibit 10.20 to Form 10-K for fiscal
year ended January 31, 1994)
10.11 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)
10.12 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))
10.13 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.)
20
<PAGE>
10.14 Annual Report for the Sharper Image 401(K) Savings Plan (Incorporated
by reference to Form 11-K (Registration No. 33-80504) for the plan year
ended December 31, 1995.)
10.15 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 Form 10-K for the
fiscal year ended January 31, 1996).
10.16 Assignments of Life Insurance Policy as Collateral, both dated October
13, 1995, effective May 17, 1995 (Incorporated by reference to Exhibit
10.18 to Form 10-K for the fiscal year ended January 31, 1996).
10.17 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 10-Q for the quarter ended April
30, 1996).
10.18 Warrant to Purchase Common Stock Agreement dated May 15, 1996 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.20 to the Form 10Q for the quarter ended April
30, 1996).
10.19 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 10-Q for the quarter ended
October 31, 1996).
10.20 Employment Agreement between the Company and Mr. Barry Gilbert, its
Vice Chairman and Chief Operating Officer dated and effective December
2, 1996.
10.21 Amendment to the Financing Agreement dated February 13, 1997 between
the Company and The CIT Group/Business Credit Inc.
10.22 Warrant to Purchase Common Stock Agreement dated February 13, 1997
between the Company and The CIT Group/Business Credit Inc.
10.23 Amendment to the Financing Agreement dated March 24, 1997 between the
Company and The CIT Group/Business Credit Inc.
11.1 Statement Re: Computation of Earnings per Share.
13.1 1996 Annual Report to Stockholders.
23.1 Independent Auditor's Report.
23.2 Independent Auditor's Consent.
27.0 Financial Data Schedule.
21
BARRY GILBERT EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") has been entered
into, effective as of the second day of December 1996, between SHARPER IMAGE
CORPORATION, a Delaware corporation (the "Company"), and BARRY GILBERT
("Executive") to provide for the employment of Executive on the terms and
conditions set forth herein.
WHEREAS, the Company wishes to employ Executive as the Company's Vice
Chairman and to assure itself of the continued employment efforts of Executive
for the period provided in this Agreement, and Executive is willing to continue
to serve in the employ of the Company on a full-time basis in such position for
such period upon the terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, intending to be legally bound, the Company and Executive agree as
follows:
1. Employment. The Company hereby employs Executive, and Executive hereby
accepts such employment by the Company, upon the terms and conditions herein
provided.
2. Term of Employment. Executive's employment with the Company pursuant
to this Agreement shall commence on December 2, 1996 and shall continue through
January 31, 1999, unless such employment is sooner terminated or subsequently
extended as hereinafter provided. Unless earlier terminated, this Agreement
shall continue in effect after January 31, 1999, unless either the Company or
Executive elects to terminate this Agreement by providing not less than thirty
(30) days prior written notice to the other party. The period during which this
Agreement continues in effect shall constitute the "Employment Period". In the
event of a termination of this Agreement, Executive shall be entitled to receive
severance benefits in accordance with Section 7 hereof.
3. Positions and Responsibilities.
(a) Position. During the Employment Period, Executive shall serve
as the Company's Vice Chairman and shall be responsible for the general
management of the business and affairs of the Company, reporting directly to the
Chairman of the Board and Chief Executive Officer ("CEO") and the Board of
Directors of the Company (the "Board").
(b) Duties. During the Employment Period, and subject to the
control of the Board, Executive shall oversee all functional heads of the
organization, and will lead and motivate the management team. Executive shall
work with the CEO to develop overall strategy and ensure that sales and profit
goals are achieved. Executive shall have full profit and loss responsibility for
the Company, including all sales, operations, merchandising, marketing, human
resources, systems, finance, stores and administration. In addition,
<PAGE>
Executive shall perform such other executive and/or administrative duties
consistent with the office of Vice Chairman as from time to time may be assigned
to Executive by the Board, but subject to the conditions in this Agreement.
Executive shall devote Executive's full business time and attention to, and
exert Executive's best efforts in, the performance of Executive's duties
hereunder, so as to promote the business of the Company. Executive's principal
place of business shall be at the Company's corporate offices in San Francisco,
California.
(c) Death or Incapacity of Chief Executive Officer. In the event
of the death or incapacity of the CEO during the Employment Period, Executive
shall be automatically promoted to serve as the Company's CEO, subject to the
review and discretion of the Board.
4. Compensation. For all services rendered by Executive pursuant to this
Agreement, the Company shall pay Executive, and Executive agrees to accept, the
salary, bonuses and other benefits described below in this Section 4.
(a) Salary. The Company shall pay Executive an annual base salary
("Base Salary") as determined by the Board in accordance with this Section 4,
payable at periodic intervals in accordance with the Company's payroll practices
for salaried employees. Executive's Base Salary shall be Three Hundred
Twenty-Five Thousand Dollars ($325,000.00) for the period from the commencement
of Executive's employment through the last day of the pay period ending after
December 6, 1998. Commencing on the first day of the first pay period of the
Company following December 6, 1998, Executive's Base Salary shall be increased
to Three Hundred Fifty Thousand Dollars ($350,000). In accordance with Section
4(c) hereof, the amount of the Base Salary shall be reviewed by the Board on at
least an annual basis for the fiscal year ending January 31, 2000 and all future
years, and any modifications will be effective as of the date determined
appropriate by the Board.
(b) Bonuses. In addition to Base Salary, Executive shall be
entitled to receive a bonus payment of Fifty Thousand Dollars ($50,000.00) on
December 5, 1998 in the event Executive is employed by the Company on that date.
In addition Executive shall be entitled to receive an annual bonus ("Bonus") for
each fiscal year of the Company ending with or within the Employment Period in
which the earnings per share for that fiscal year have increased fifteen percent
(15%) over the prior fiscal year. For these purposes, earnings per share shall
be calculated after deducting all management bonuses. The amount of the Bonus
shall be calculated at the end of each fiscal year according to the following
formula: the Bonus shall equal the earnings per share for such fiscal year
multiplied by Two Hundred Thousand (200,000).
(c) Annual Compensation Review. Notwithstanding anything herein
to the contrary, Executive's compensation, consisting of salary, bonus and stock
option grants, shall be reviewed not less than annually by the Board of
Directors.
2.
<PAGE>
(d) Health Care. During the Employment Period, Executive shall be
eligible to participate in any health insurance programs and medical plans
available to officers or employees of the Company.
(e) Participation in Benefit and Equity Compensation Plans.
During the Employment Period, Executive shall be eligible to receive all
benefits, including those under equity participation and bonus programs, to
which key employees are or become eligible under such plans or programs as may
be established by the Board.
(f) Stock Option Grants. In addition to the other benefits to
which the Executive shall be entitled to under this Agreement, upon commencement
of the Employment Period, the Company shall grant to Executive two stock options
under the Company's Stock Option Plan (the "Plan"). Both options shall be
governed under the terms of the Plan.
The first option grant (the "First Option") shall be for One
Hundred Fifty Thousand (150,000) shares of the Company's common stock that will
vest according to the following schedule: Fifty Thousand (50,000) shares on
February 1, 1997, Fifty Thousand (50,000) shares on February 1, 1998, and Fifty
Thousand (50,000) shares on February 1, 1999. Such shares will vest only if
Executive is employed by the Company on such dates and shall vest in accordance
with the terms of the Plan and the First Option.
The second option grant (the "Second Option") shall be for One
Hundred Fifty Thousand (150,000) shares of the Company's common stock. The
Second Option shall vest entirely upon the Executive's completion of seven (7)
years of continuous employment with the Company. However, the vesting of the
Second Option shall accelerate by the following specified amounts in the event
that any of the following conditions are satisfied: (i) in the event that the
Company's earnings per share for the fiscal year ending January 31, 2000 equals
or exceeds $.89 or the closing price of the Company's common stock has equalled
or exceeded Eight Dollars ($8.00) per share for each of the twenty (20) trading
days immediately preceding January 31, 2000, then Fifty Thousand (50,000) shares
of the Second Option shall vest on January 31, 2000; (ii) in the event that the
Company's earnings per share for the fiscal year ending January 31, 2001 equals
or exceeds $1.05 or the closing price of the Company's stock has exceeded Ten
Dollars ($10.00) per share for each of the twenty (20) trading days immediately
preceding January 31, 2001, then Fifty Thousand (50,000) shares of the Second
Option shall vest on January 31, 2001; (iii) in the event that the Company's
earnings per share for the fiscal year ending January 31, 2002 equals or exceeds
$1.25 or the closing price of the Company's common stock has equalled or
exceeded Twelve Dollars ($12.00) per share for each of the twenty (20) trading
days immediately preceding January 31, 2002, then Fifty Thousand (50,000) shares
of the Second Option shall vest on February 1, 2002. The shares subject to the
Second Option shall vest only if Executive is employed by the Company on said
dates. The vesting of the First Option and the Second Option shall be
accelerated in accordance with the terms of the Plan; provided, however, that
the vesting of the Second Option shall be accelerated only if the change of
control
3.
<PAGE>
event causing such acceleration has occurred following June 2, 1997. The First
Option and the Second Option shall be ten year grants and shall contain and be
subject to all other standard terms applicable to the other stock option grants
under the Plan. Promptly following the commencement of the Employment Period,
the Company will prepare and execute the appropriate stock option agreements for
the Executive to reflect the two option grants described in this Section 4(f).
(g) 401(k) Plan Benefits. In addition to the other benefits to
which Executive shall be entitled to under this Agreement, Executive shall be
entitled to participate in the Company's 401(k) Plan and shall be entitled to
receive the full benefit of contributions to be made by the Company for the
benefit of Executive under the terms of the 401(k) Plan.
5. Vacation. During the Employment Period, Executive shall be entitled to
vacation in accordance with the Company policy in effect for executive officers.
6. Indemnification. The Company shall maintain indemnification of
Executive pursuant to the provisions of the Company's Certificate of
Incorporation and Bylaws to the fullest extent of Delaware law and all other
applicable law, and shall provide Executive with indemnification pursuant to the
Company's standard indemnification agreement and any director's and officer's
liability insurance policy maintained by the Company.
7. Severance Benefits.
(a) Termination of Employment. In the event Executive's
employment terminates for any reason then Executive shall be entitled to receive
severance benefits as follows:
(i) Voluntary Resignation. If Executive's employment
terminates by reason of Executive's voluntary resignation (and such termination
is not an Involuntary Termination or a termination for Cause), then Executive
shall not be entitled to receive severance benefits under this Agreement.
(ii) Involuntary Termination Other Than For Cause. If
Executive's employment is terminated as a result of an Involuntary Termination
other than for Cause, then the following severance benefits shall be paid or
otherwise provided to Executive: (A) if such termination occurs during the first
two years of the Employment Period, Executive shall be entitled to receive
severance payments, in the form of monthly cash payments in accordance with the
Company's payroll policies, for the remainder of the initial two-year Employment
Term under this Agreement at the Base Salary rate in effect at the time of
termination, but in no event shall Executive receive fewer than twelve (12)
monthly payments at such Base Salary rate following termination; (B) if the
termination occurs following the completion of two years of the Employment
Period, Executive shall be entitled to receive twelve (12) monthly payments at
the Base Salary rate for the period following
4.
<PAGE>
termination until Executive accepts any position with another employer, at which
time Executive shall receive no further payments.
(iii) Termination for Cause. If Executive's employment is
terminated for Cause, then Executive shall not be entitled to receive any
severance payments or other severance benefits under this Section 8. Executive's
benefits will be continued under the Company's then existing benefit plans and
policies in accordance with such plans and policies in effect on the date of
termination.
(b) Benefit Reduction. Should any of Executive's severance
benefits under this Section 8 (including any severance payments and any
accelerated vesting of outstanding options or shares of stock) be deemed to be
parachute payments under Code Section 280G, then, first, the dollar amount of
any severance payment and, secondly, the accelerated vesting of any options or
shares of stock, will be reduced to the extent (and only to the extent)
necessary to provide Executive with the maximum after-tax benefit available,
after taking into account any parachute excise tax which might otherwise be
payable by Executive under Code Section 4999 and any analogous State income tax
provision.
8. Noncompetition and Confidential Information. While employed by the
Company, Executive will not directly or indirectly manage, operate, participate
in, be employed by, perform consulting services for, or otherwise be connected
in any manner with, any firm, person, corporation, or enterprise which would be
competitive with the business of the Company. Executive will not at any time
disclose to others any confidential information relating to the Company or to
the business of the Company and confirms that such information constitutes the
exclusive property of the Company. The foregoing shall not preclude Executive's
investment in any such firm, corporation or enterprise provided that at any one
time Executive and members of Executive's immediate family do not own more than
one percent (1%) of any voting securities of any such entity.
9. Failure to Comply. If for any reason Executive shall cease to render
services as required by this Agreement without the written consent of the
Company, or if Executive shall breach the provisions of Section 8 hereof, then,
except as provided in Section 7 hereof, Executive will thereby relinquish all
rights to any benefits hereunder (other than vested stock options or other
vested benefits), and the Company shall reserve whatever rights, if any, it may
have against Executive under this Agreement or otherwise.
10. Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
or to all or substantially all of the Company's business and/or assets shall
assume the obligations under this Agreement and shall perform the obligations
under this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a succession.
5.
<PAGE>
11. Notices. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to Executive shall be
addressed to Executive at the home address from which Executive most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notice shall
be directed to the attention of its Secretary.
12. Miscellaneous Provisions.
(a) Definition of Terms. The capitalized terms in this Agreement
shall have the meanings set forth in this Agreement or in Appendix A hereto.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by Executive and by an authorized officer or
representative of the Company (other than Executive). No waiver by either party
of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other condition
or provision or of the same condition or provision of another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity of
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement may be settled by arbitration in the County of
San Francisco, California, in accordance with the rules of the American
Arbitration Association then in effect. Such arbitration proceedings shall be
nonbinding and any claim with respect to this Agreement, whether or not
previously the subject of an arbitration proceeding, may be brought in any court
of competent jurisdiction.
6.
<PAGE>
(g) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(h) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company; provided, however,
that if there is any such assignment, the Company will guarantee all payments
and the performance of all obligations under this Agreement. In the case of any
such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation or other entity that actually employs Executive.
(i) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement this day and year first above written.
SHARPER IMAGE CORPORATION EXECUTIVE
By: /s/ Richard Thalheimer /s/ Barry Gilbert
------------------------- ---------------------
Richard Thalheimer Barry Gilbert
Chairman of the Board and Chief
Executive Officer
7.
<PAGE>
APPENDIX A
Definitions
Cause. "Cause" shall mean (i) the material breach by Executive
of one or more of Executive's obligations under this Agreement which are not
otherwise corrected within ten (10) days following the Company's written notice
to Executive of such breach, (ii) conviction of a felony, (iii) repeated
unexplained or unjustified absence, (iv) willful breach of fiduciary duty under
this Agreement or (v) gross negligence or willful misconduct where such gross
negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries.
Involuntary Termination. "Involuntary Termination" shall mean
termination by the Company of Executive's employment for any reason other than
for Cause, and shall include Executive's voluntary resignation following (i) the
material breach by the Company of one or more of its obligations under this
Agreement which are not otherwise corrected within ten (10) days following
Executive's written notice to the Company of such breach, or (ii) the occurrence
of any of the following events without Executive's express prior written
consent: (A) a change in Executive's position with the Company which materially
reduces Executive's level of responsibilities, (B) a relocation of Executive's
place of employment by more than twenty (20) miles from the Company's current
executive offices without Executive's prior consent, or (c) the assignment of
additional material job responsibilities or a reduction in job responsibilities
inconsistent with Executive's position with the Company and Executive's prior
responsibilities.
1.
Exhibit 10.21
The CIT Group/
Business Credit, Inc.
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
Tel: 213-613-2575
Fax: 213-613-2588
[LOGO]
February 13, 1997
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
Gentlemen:
Reference is made to the Financing Agreement between us dated September 21,
1994, as amended (the "Financing Agreement"). Capitalized terms used herein
shall have the same meanings as specified in the Financing Agreement unless
otherwise specifically defined herein.
Effective immediately, pursuant to mutual understanding, the Financing Agreement
shall be, and hereby is, amended as follows:
(A) The definitions of Fixed Charge Coverage Ratio and Line of Credit shall be,
and each hereby is, amended in its entirety to read as follows:
"Fixed Charqe Coverage Ratio shall mean a ratio determined as of the
relevant calculation date by dividing EBITDA by the sum of i) Capital
Expenditures and ii) Interest Expenses, for the relevant period, provided,
however that if Availability (which, notwithstanding any provision to the
contrary contained in this Financing Agreement, shall for the purposes of
this definition of Fixed Charge Coverage Ratio be computed at all times
based upon advance percentages of (x) twenty percent (20%) with respect to
Eligible Proprietary Products Inventory and (y) forty-five percent (45%)
with respect to all other Eligible Inventory) upon the close of business on
each Friday during the ninety (90) day period immediately preceding and
ending on any calculation date equaled or exceeded $2,000,000, Capital
Expenditures will be excluded from the calculation of this ratio."
"Line of Credit shall mean the commitment of CITBC to make Revolving Loans
under Section 3 hereof, make CAPEX Term Loans under Section 3A hereof and
issue Letter of Credit Guaranties under Section 4 hereof, all pursuant to
and in accordance with Sections 3, 3A and 4 of this Financing
A company of
Dai-Ichi Kangyo Bank and
Chase Manhattan Corporation
<PAGE>
Agreement, in the aggregate amount of (a) $29,500,000 for the period from
October 1, 1997 through and including December 31, 1997 and (b) $24,500,000
at all other times, provided that (i) such amount shall be automatically
and without any further act by CITBC or the Company reduced by an amount
equal to the aggregate amount of all drawdowns of CAPEX Term Loans made by
CITBC to the Company hereunder and (ii) the aggregate outstanding balance
of Revolving Loans and Letters of Credit shall not exceed (x) $25,000,000
for the period from October 1, 1997, through and including December 31,
1997 and (y) $20,000,000 at all other times."
(B) Section 3, Paragraph 1 shall be, and hereby is, amended by amending the
second sentence thereof in its entirety to read as follows:
"Such loans and advances shall be in amounts up to the sum of:
(a) twenty percent (20%) of the aggregate value of the Company's Eligible
Inventory which is Proprietary Products Inventory plus (b) (i) fifty
percent (50%) for the period from August 1, 1997 through and including
August 31, 1997, (ii) fifty-five percent (55%) for the period from
September 1 1997 through and including October 31, 1997, (iii) sixty
percent (60%) for the period from November 1, 1997 through and including
December 31, 1997 and (iv) forty-five percent (45%) at all other times, of
the aggregate value of the Company's other Eligible Inventory provided that
in no event shall the aggregate amount of Eligible Inventory computed
pursuant to the clause (a) above exceed twenty-five percent (25%) of the
total of all Eligible Inventory."
(C) Section 6, Paragraphs 8, 10, 11 and 12 of the Financing Agreement shall be,
and each hereby is, amended as follows:
(i) The Net Worth covenant set forth in Paragraph 8 of Section 6 shall be,
and hereby is, amended by amending the Net Worth amount for the fiscal
quarter ending on October 31, 1997 to be "$24,000,000". Such covenant shall
remain unchanged for all other fiscal quarters and periods.
(ii) The Working Capital Covenant set forth in Paragraph 10 of Section 6
shall be, and hereby is, amended by amending the Working Capital amount for
the fiscal quarters ending July 31, 1997 and October 31, 1997 to be
$9,500,000" (for July 31, 1997) and "$7,500,000" (for October 31, 1997),
respectively. Such covenant shall remain unchanged for all other fiscal
quarters and periods.
(iii) The Fixed Charge Coverage Ratio set forth in Paragraph 11 of Section
6 shall be, and hereby is, amended by amending the Ratio solely for the
four (4) consecutive quarters ending July 31, 1997 and October 31, 1997 to
be ".40 to 1" (for July 31, 1997) and ".50 to 1" (for October 31, 1997),
<PAGE>
respectively, provided that such Ratio shall remain 1.0 to 1 for all other
periods computed for the four (4) consecutive quarters then ending, all as
more fully provided in said Paragraph 11 of Section 6.
(iv) The Leverage Ratio set forth in Paragraph 12 of Section 6 shall be,
and hereby is, amended by amending the ratio for the fiscal quarter ending
October 31, 1997 to be "2.50 to 1" Such ratio shall remain unchanged for
all other fiscal quarters and periods.
(D) The Effectiveness of all of the amendments set forth above shall be, and
hereby is, subject to the fulfillment to CITBC's satisfaction of each of the
Conditions Precedent. The "Conditions Precedent" shall mean:
(i) The Company shall pay all Out-of-Pocket Expenses incurred by CITBC in
connection with the agreement and all the documents and transactions
contemplated hereby (including, without limitation, the reasonable fees and
expenses of CITBC's outside legal counsel in connection with the warrant
referred to in clause (iii) below). All such expenses may be charged to
your Revolving Loan Account on the respective due dates thereof.
(ii) CITBC's receipt of a secretary's certificate certifying Board of
Directors Resolutions authorizing the execution, delivery and performance
by the Company of this Agreement and all documents and transactions
contemplated hereby.
(iii) The Company shall enter into a warrant agreement (in form and
substance satisfactory to CITBC) and take all other actions necessary to
grant to CITBC or its assigns a warrant to purchase up to 50,000 shares of
its voting common stock at $3.50 per share.
<PAGE>
Except to the extent set forth herein, no other change in any of the terms,
provisions or conditions of the Financing Agreement is intended or implied. If
the foregoing is in accordance with your understanding of our agreement kindly
so indicate by signing and returning the enclosed copy of this letter.
Very truly yours,
THE CIT GROUP/BUSINESS
CREDIT, INC.
By: /s/ Bonnie Schain
------------------------------------
Title: Assistant Vice President
Read and Agreed to:
SHARPER IMAGE CORPORATION
By: /s/ Craig P. Womack
------------------------------------------
Title: President, Chief Administrative Officer
By: /s/ Tracy Y. Wan
-------------------------------------------
Title: Sr. V.P., Chief Financial Officer
Exhibit 10.22
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE IN RELIANCE UPON EXEMPTIONS PROVIDED UNDER THE
SECURITIES ACT. ACCORDINGLY, THIS WARRANT MAY NOT BE SOLD, TRANSFERRED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION, THIS WARRANT MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED EXCEPT AS PROVIDED HEREIN. THE
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO REPURCHASE BY THE
COMPANY ON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN.
SHARPER IMAGE CORPORATION
WARRANT TO PURCHASE COMMON STOCK
Dated February 13, 1997
SHARPER IMAGE CORPORATION (the "Company") certifies that, for
valuable consideration, receipt of which is hereby acknowledged, the Holder is
entitled to purchase from the Company a number of shares of the Company's Common
Stock set forth in Section 1(h) hereof (the "Shares") at the purchase price set
forth in Section 1(e) hereof.
This Warrant and the Common Stock issuable upon exercise hereof
are subject to the terms and conditions hereinafter set forth:
1. Definitions. As used in this Warrant, the following terms
shall have the following meanings:
(a) "Common Stock" - Common Stock, par value $.01 per
share, of the Company;
(b) "Company" - Sharper Image Corporation, a Delaware
corporation;
(c) "Effective Date" - February 13, 1997;
(d) "Holder" - The CIT Group/Business Credit, Inc. or any
transferee thereof;
1.
<PAGE>
(e) "Purchase Price" - $3.50 per share, subject to
adjustments pursuant to Section 3 hereof;
(f) "Subscription Form" - the form attached to this Warrant
as Exhibit "A";
(g) "Warrant" - this Warrant and any warrants delivered in
substitution or exchange therefor as provided herein;
(h) "Shares" - up to 50,000 Shares, subject to adjustments
pursuant to Section 3 hereof; and
(i) "Expiration Date" - five (5) years from the Effective
Date.
2. Exercise.
(a) Time of Exercise. This Warrant may be exercised in whole
but not in part (and not as to a fractional share) at the office of the Company,
at any time, commencing on the Effective Date; provided, however, that this
Warrant shall expire and be null and void if not exercised in the manner herein
provided by 5:00 p.m., Pacific Standard Time, on the Expiration Date.
(b) Manner of Exercise. This Warrant is exercisable at the
Purchase Price, payable in cash or by certified check, payable to the order of
the Company, subject to adjustment as provided in Section 3 hereof. Upon
surrender of this Warrant with the annexed Subscription Form duly executed,
together with payment of the Purchase Price for the Shares purchased (and any
applicable transfer taxes) at the Company's principal executive offices, the
Holder shall be entitled to receive a certificate or certificates for the Shares
so purchased.
(c) Delivery of Stock Certificates. As soon as practicable,
but not exceeding 30 days, after exercise of this Warrant, the Company, at its
expense, shall cause to be issued in the name of the Holder (or upon payment by
the Holder of any applicable transfer taxes, the Holder's assigns) a certificate
or certificates for the number of fully paid and non-assessable Shares to which
the Holder shall be entitled upon such exercise, together with such other stock
or securities or property or combination thereof to which the Holder shall be
entitled upon such exercise, determined in accordance with Section 3 hereof.
(d) Record Date of Transfer of Shares. Irrespective of the
date of issuance and delivery of certificates for any stock or securities
issuable upon the exercise of this Warrant, each person (including a corporation
or partnership) in whose name any such certificate is to be issued shall for
all purposes be deemed to have become the holder of record of the stock or other
securities represented thereby immediately prior to the close of business on the
date on which (i) a duly executed Subscription Form containing notice of
exercise of this Warrant, (ii) payment of the Purchase Price, and (iii) the
opinion or certificate required by Section 4(a)(ii) of this Warrant is received
by the Company.
2.
<PAGE>
3. Adjustments. Except as otherwise provided in this Section 3,
after each adjustment of the Purchase Price pursuant to this Section 3, the
number of shares of Common Stock purchasable upon exercise of this Warrant shall
be the number derived by dividing such adjusted Purchase Price into the
Purchase Price in effect immediately prior to such adjustment. The Purchase
Price shall be subject to adjustment as follows:
(a) In the event, prior to the expiration of this Warrant by
exercise or by its terms, the Company shall issue any shares of its Common Stock
as a share dividend on its outstanding shares of Common Stock or shall subdivide
the number of outstanding shares of Common Stock into a greater number of
shares, then, in either of such events, the Purchase Price per share of Common
Stock purchasable pursuant to this Warrant in effect at the time of such action
shall be decreased proportionately and the number of shares purchasable pursuant
to this Warrant shall be increased proportionately. Conversely, in the event the
Company shall reduce the number of shares of its outstanding Common Stock by
combining such shares into a smaller number of shares, then, in such event, the
Purchase Price per share purchasable pursuant to this Warrant in effect at the
time of such action shall be increased proportionately and the number of shares
of Common Stock at that time purchasable pursuant to this Warrant shall be
decreased proportionately. Any dividend paid or distributed on the Common Stock
in shares of any other class of capital stock of the Company or securities
convertible into shares of Common Stock shall be treated as a dividend paid in
Common Stock to the extent that shares of Common Stock are issuable on the
conversion thereof.
(b) In the event, prior to the expiration of this Warrant by
exercise or by its terms, the Company merges or consolidates with or into
another person or entity in which the Company is not the surviving corporation
or entity or sells all or substantially all of its property, or dissolves,
liquidates or winds up its affairs, prompt, proportionate, equitable, lawful and
adequate provision shall be made as part of the terms of any such merger,
consolidation, sale, dissolution, liquidation or winding up such that the Holder
of this Warrant may thereafter receive, on exercise thereof, in lieu of each
share of Common Stock of the Company which the Holder would have been entitled
to receive, the same kind and amount of any shares, securities, or assets as may
be issuable, distributable or payable on any such merger, consolidation, sale,
dissolution, liquidation or winding up with respect to each share of Common
Stock of the Company; provided, however, that, in the event of any such merger,
consolidation, sale, dissolution, liquidation or winding up, the right to
exercise this Warrant shall terminate on a date fixed by the Company, such date
to be not earlier than 5:00 p.m., Pacific Standard Time, on the 30th day next
succeeding the date on which notice of such termination of the right to exercise
this Warrant has been given by mail to the Holder thereof at such address as may
appear on the books of the Company.
(c) Notwithstanding the provisions of this Section 3, no
adjustment of the Purchase Price shall be made whereby such Purchase Price is
adjusted in an amount less than $.001 or until the aggregate of such adjustments
shall equal or exceed $.001.
(d) In the event, prior to the expiration of this Warrant by
exercise or by its terms, the Company shall determine to take a record of the
Holders of its Common
3.
<PAGE>
Stock for the purpose of determining the shareholders entitled to receive any
share dividend or other right which will cause any change or adjustment in the
number, amount, price or nature of the shares of Common Stock or other
securities or assets deliverable on exercise of this Warrant pursuant to the
foregoing provisions, the Company shall give to the registered Holder of this
Warrant at the address as may appear on the books of the Company at least 15
days' prior written notice to the effect that the Company intends to take such a
record. Such notice shall specify (i) the date as of which such record is to be
taken, (ii) the purpose for which such record is to be taken, (iii) and the
number, amount, price and nature of the Shares or other shares, securities or
assets which will be deliverable on exercise of this Warrant after the action
for which such record will be taken has been completed. Without limiting the
obligation of the Company to provide notice to the registered Holder of this
Warrant of any corporate action hereunder, the failure of the Company to give
notice shall not invalidate such corporate action of the Company.
(e) Before taking any action which would cause an adjustment
reducing the Purchase Price below the then par value of the shares of Common
Stock issuable upon exercise of this Warrant, the Company will take any
corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable shares of such Common Stock at such adjusted Purchase Price.
(f) Upon any adjustment of the Purchase Price required to be
made pursuant to this Section 3, the Company, within 30 days thereafter, shall
cause to be mailed to the registered Holder of this Warrant written notice of
such adjustment setting forth the Purchase Price in effect after such adjustment
and the number of Shares or other shares, securities or property issuable upon
exercise of this Warrant, and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
4. Restriction on Transfer.
(a) The Holder, by its acceptance hereof, represents,
warrants, covenants and agrees that:
(i) the Holder has knowledge of the business and
affairs of the Company;
(ii) this Warrant and the Shares issuable upon the
exercise of this Warrant are being acquired for investment and not with a view
to the distribution thereof and that, absent an effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), covering
the disposition of the Shares issued or issuable upon exercise of this Warrant,
such Shares will not be sold, transferred, assigned, hypothecated or otherwise
disposed of without first providing the Company with an opinion of counsel
(which may be counsel for the Company) or other evidence, reasonably acceptable
to the Company, to the effect that such sale, transfer, assignment,
hypothecation or other disposal will be exempt from the registration and
prospectus delivery requirements
4.
<PAGE>
of the Securities Act and the registration or qualification requirements of any
applicable state or foreign securities laws; and
(iii) the Holder consents to the making of a
notation in the Company's books or giving to any transfer agent of this Warrant
or the Shares an order to implement such restrictions on transferability
described in subparagraph (ii) above.
(b) This Warrant (and any successor or replacement warrant)
shall bear the certificate shown on the front page hereof and the Shares
issuable upon the exercise of this Warrant shall bear the following legend or a
legend of similar import; provided, however, that such legend shall be removed
or not placed upon this Warrant or the certificate or other instrument
representing the Shares, as the case may be, if such legend is no longer
necessary to ensure compliance with the Securities Act:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE IN RELIANCE UPON THE EXEMPTION UNDER THE SECURITIES ACT AND
EXEMPTIONS FROM REGISTRATION AVAILABLE UNDER THE APPLICABLE SECURITIES
LAWS OF ANY STATE. ACCORDINGLY, SUCH SHARES MAY BE OFFERED AND SOLD
ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF
FEDERAL AND STATE SECURITIES LAWS OR IF AN EXEMPTION FROM SUCH
REGISTRATION OR QUALIFICATION IS APPLICABLE."
(c) This Warrant (and any successor or replacement Warrant)
may not be sold, transferred, assigned or hypothecated except to a wholly owned
subsidiary of the Holder or to a parent corporation owning a majority of the
outstanding securities of the Holder or to any successor of the Holder in
connection with a merger, sale or consolidation of the Holder in which the
Holder is not the surviving entity.
5. Payment of Taxes. All Shares issued upon the exercise of this
Warrant shall be validly issued, fully paid and non-assessable and the Company
shall pay all taxes and other governmental charges (other than income tax) that
may be imposed in respect of the issue or delivery thereof. The Company shall
not be required, however, to pay any tax or other charge imposed in connection
with any transfer involved in the issue of any certificate for Shares in any
name other than that of the Holder surrendered in connection with the purchase
of such Shares, and in such case the Company shall not be required to issue or
deliver any stock certificate until such tax or other charge has been paid or it
has been established to the Company's satisfaction that no tax or other charge
is due.
6. Repurchase Right.
(a) Notwithstanding anything herein to the contrary, in the
event the Holder of this Warrant provides notice of the exercise of this Warrant
to the Company with respect to any of the Shares, then, in such event, the
Company shall have the right (the
5.
<PAGE>
"Repurchase Right"), at its election, by delivery to the Holder of this Warrant
of written notice of the exercise of the Repurchase Right within thirty (30)
days following the receipt by the Company of the Repurchase Notice (the
"Repurchase Notice"), to repurchase all (but not less than all) of the Shares
issued or to be issued in connection with the exercise of this Warrant from the
Holder or Holders thereof at a purchase price per share of Shares equal to the
Current Market Price (as defined below) per share of Common Stock (the
"Repurchase Price") determined as of the close of business on the date on which
such Shares are to be repurchased as specified by the Company in the Repurchase
Notice (which date shall be not less than five (5) nor more than ten (10) days
from the date of the Repurchase Notice (the "Repurchase Date"). The Repurchase
Price of the Shares to be repurchased by the Company hereunder shall be payable
by the Company to the holder or holders of such Shares in immediately available
funds on the Repurchase Date specified in the Repurchase Notice.
(b) The "Current Market Price" per share of Common Stock
shall be determined as follows:
(i) if there then exists an active public trading market
for the Company's Common Stock, the Current Market Price shall be the
average of the daily market prices of the Common Stock over a period of 20
consecutive trading days prior to the day on which Current Market Price is
being determined. The market price for each such trading day shall be the
average of the closing prices on such day of the Common Stock on all
domestic exchanges on which the Common Stock is then listed, or, if there
shall have been no sales on any such exchange on such day, the average of
the highest bid and lowest asked prices on all such exchanges at the end of
the such day, or, if the Common Stock shall not be so listed, the average
of the representative bid and asked prices at the end of such trading day
as reported by NASDAQ.
(ii) if there then does not exist an active public trading
market or the Common Stock shall not be listed on any domestic exchange or
quoted on NASDAQ, the Current Market Price shall be the Fair Market Value
(as defined below) of the Common Stock based upon the Fair Market Value of
100% of the Company if the Company were sold as a going concern and without
regard to any discount for lack of liquidity or as to whether the Company
is then a public or a private company, or on the basis that the relevant
shares of Common Stock do not constitute a majority or controlling interest
in the Company and assuming the exercise or conversion of all or warrants,
options, convertible securities or other rights to subscribe for or
purchase any shares of Common Stock or convertible securities, all as
determined by an independent financial expert (the "Expert"), which such
Expert shall be mutually agreed upon by the parties. If the parties are
unable to agree on an Expert, then each party shall nominate a nationally
recognized independent investment firm, which such nominees shall mutually
appoint an Expert in their sole discretion. "Fair Market Value" shall mean
the value obtainable upon a sale in an arm's length transaction to an
unaffiliated third party under usual and normal circumstances, with neither
the buyer nor the seller under any compulsion to
6.
<PAGE>
act, with equity to both. The determination of the Fair Market Value by the
Expert shall be final, binding, and conclusive on the Company and the
Holder of this Warrant. All costs and expenses of the Expert shall be borne
by the Company.
7. Registration Rights.
(a) Right to Join in Registration. If, at any time prior to
two years after the Expiration Date, the Company proposes to file a Registration
Statement under the Securities Act (other than on Form S-4 or Form S-8, or
similar or replacement forms) seeking registration of any securities of the
Company for sale for cash to the public either for its own account or for the
account of any holder of securities of the Company, the Company shall promptly
notify, in writing, the Holder of its intention to file such Registration
Statement and in addition to, and independent of, the rights afforded by
subsection (b), will afford the Holder the opportunity to request inclusion in
such Registration Statement of all of the Shares issuable upon exercise of this
Warrant. If the Holder desires to join in such Registration Statement, it shall,
within twenty (20) days after the receipt of such notice by the Company, notify
the Company, in writing, of the number of Shares it desires to include in any
such Registration Statement. The Company shall cause to be registered under the
Securities Act all of the Shares that the Holder has requested to be registered
except as provided below.
If the Holder requests inclusion of any Shares in such
Registration Statement and if such public offering is to be underwritten, the
Company will request the underwriters of the offering to purchase and sell such
Shares. The right of the Holder to registration pursuant to this subsection
shall be conditioned upon the Holder's participation in such underwriting and
the inclusion of Shares in the underwriting unless otherwise agreed to by the
Company. If the managing underwriter determines that marketing factors require a
limitation or complete exclusion of the number of shares to be underwritten, the
Company shall so advise the Holder and the other persons distributing their
securities through such underwriting, and (i) Common Stock held (or issuable
upon conversion or exercise of securities held) by any person who does not have
contractual rights of registration shall first be excluded; and (ii) if such
exclusion is not sufficient, Common Stock held (or issuable upon exercise of
securities held) by any person other than the Holder and Shares held by the
Holder shall be excluded to the extent required to permit the number of Shares
held by the Holder and shares of Common Stock held by such other persons that
may be included in the registration and underwriting to be allocated among the
Holder and such other persons in proportion, as nearly as practicable, to the
number of Shares held by the Holder and shares of Common Stock held (or issuable
upon conversion or exercise of securities held) by such other persons at the
time of filing the Registration Statement.
(b) Form S-3 Registration. In case the Company shall
receive, at any time prior to two years after the Expiration Date, from the
Holder a written request that the Company effect a registration of Shares on a
Form S-3 Registration Statement and any related qualification or compliance
with respect to all or a part of the Shares, the Company will:
7.
<PAGE>
(i) as soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as
would permit or facilitate the sale and distribution of all of such
Holder's Shares as are specified in such request; provided, however, that
the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section: (i) if Form S-3 is
not available for such offering by the Holder; (ii) if the Company shall
furnish to the Holder a certificate signed by the President of the Company
stating that, in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its shareholders for
such Form S-3 registration to be effective at such time, in which event the
Company shall have the right to defer the filing of the Form S-3
Registration Statement for a period of not more than 120 days after
receipt of the request of the Holder under this Section; provided, however,
that the Company shall not utilize this right more than once in any twelve
month period; or (iii) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected one
registration on a Form S-3 Registration Statement for the Holder pursuant
to this Section.
(ii) Subject to the foregoing, the Company shall
file a Form S-3 Registration Statement covering the Shares and other
securities so requested to be registered as soon as practicable after
receipt of the request of the Holder.
(iii) If the Company is unable to effect a
registration pursuant to subsection (i) of this Section 7(b), the Company
shall be obligated, upon 120 days' prior written notice to the Company by
the Holder of this Warrant, to repurchase this Warrant (the "Put Option")
at a purchase price per share of Common Stock issuable upon exercise of the
Warrant equal to the then existing Current Market Price, as determined in
accordance with Section 6(b)(i) and (ii) hereof. Notwithstanding the
foregoing, the Holder of this Warrant shall be entitled to a determination
of the then existing Current Market Price (the "Put Option Price") prior
to an election to exercise its Put Option; provided, however, that the
Holder shall only be entitled to a determination of the Put Option Price
under this Section 7 once during the Term of this Warrant. Nothing herein
shall obligate the Holder of this Warrant to exercise its Put Option.
(c) Indemnification. In the event any Shares are included in
a registration statement under this Section:
(i) To the extent permitted by law, the Company will
indemnify and hold harmless the Holder, any underwriter (as defined in the
Securities Act) for the Holder and each person, if any, who controls the
Holder or underwriter within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), against
any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Securities Act or the Exchange Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission
8.
<PAGE>
or alleged omission to state therein a material fact required to be stated
therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act or the Exchange Act or any state
securities law; and the Company will pay to the Holder, underwriter or
controlling person any legal or other expenses reasonably incurred by one
law firm retained by them (or such additional law firms retained by the
Holder if such Holder reasonably believes there exists a conflict of
interest among them) in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any
such Holder, underwriter or controlling person.
(ii) To the extent permitted by law, the Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter, any other investor selling securities in such registration
statement and any controlling person of any such underwriter or other
investor, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject under the
Securities Act or the Exchange Act or other federal or state law, insofar
as such losses, claims, damages, or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by the Holder
expressly for use in connection with such registration; and the Holder will
pay, as incurred, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this subsection, in
connection with investigating or defending any such loss, claims, damage,
liability, or action; provided, however, that the indemnity agreement
contained in this subsection shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; provided, further, however, that in no event shall
any indemnity under this subsection exceed the net proceeds from the
offering received by the Holder.
(iii) Promptly after receipt by an indemnified party
under this Section of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party, provide a
written notice of the commencement thereof to the indemnifying party and
the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that any
indemnified party (together with all other indemnified parties which may be
represented without conflict by one counsel) shall have the right to
9.
<PAGE>
retain one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section, but the omission so
to deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section.
(iv) The obligations of the Company and the Holder
under this Section shall survive the completion of any offering of Shares in a
registration statement under this Section, and otherwise.
(d) Expenses. The Company shall bear all expenses incurred
in connection with all registrations of the Shares effected pursuant to Section
7(a) hereof and in connection with one registration effected pursuant to Section
7(b) hereof, in each case excluding any underwriting discounts or commissions.
8. Reservation of Common Stock. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the exercise of this Warrant,
such number of shares of Common Stock as shall be issuable up on the exercise
hereof. The Company covenants and agrees that, upon exercise of this Warrant and
payment of the Purchase Price thereof pursuant to Section 2(b) hereof, all
Shares of Common Stock issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable.
9. Rights; Notices. Nothing contained in this Warrant shall be
construed as conferring upon the Holder hereof the right to vote or to consent
or to receive notice as a shareholder in respect of any meetings of shareholders
for the election of directors or any other matter or as having any right
whatsoever as a shareholder of the Company. All notices, requests, consents and
other communications hereunder shall be in writing and shall be deemed to have
been duly made when delivered or mailed by registered or certified mail, postage
prepaid, return receipt requested:
(a) if to the Holder, to the address of such Holder as shown
on the books of the Company; or
(b) if to the Company, to its principal executive office.
10. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and (in case of loss, theft or destruction) upon
delivery of an indemnity agreement in an amount reasonably satisfactory to the
Company, or (in the case of mutilation) upon surrender and cancellation of the
mutilated Warrant, the Company will execute and deliver, in lieu thereof, a new
Warrant of like tenor.
10.
<PAGE>
11. Successors. All the covenants, agreements, representations
and warranties contained in this Warrant shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, distributees, successors and assigns.
12. Change; Waiver. Neither this Warrant nor any term hereof may
be changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. Headings. The section headings in this Warrant are inserted
for purposes of convenience only and shall have no substantive effect.
11.
<PAGE>
14. Law Governing. This Warrant shall for all purposes be
construed and enforced in accordance with, and governed by, the internal laws of
the State of California, without giving effect to principles of conflict of
laws.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated as of the
date first above written.
SHARPER IMAGE CORPORATION
By: /s/ Craig P. Womack
----------------------------------------------
Name: Craig P. Womack
Title: President, Chief Administrative Officer
By: /s/ Tracy Y. Wan
----------------------------------------------
Name: Tracy Y. Wan
Title: Sr. V.P., Chief Financial Officer
ACCEPTED AND AGREED:
CIT GROUP/BUSINESS CREDIT, INC.
/s/ Bonnie Schain
- --------------------------------
Name: Bonnie Schain
Title: Assistant Vice President
12.
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
(To be Executed by the Registered Holder
if it Desires to Exercise this Warrant)
To Sharper Image Corporation:
The undersigned hereby irrevocably elects to exercise the right
to purchase ____________ of the Shares covered by this Warrant according to the
conditions hereof and herewith makes payment of the Purchase Price in full in
accordance with Section 2(b) of the Warrant.
The undersigned requests that certificates for such Shares be
issued in the name of:
PLEASE INSERT SOCIAL SECURITY
OR TAX IDENTIFICATION NUMBER:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: Signature:
---------------- ---------------------------------------
NOTICE: The above signature must correspond with the name as written
within the Warrant in every particular, without alteration or
enlargement or any change whatsoever, and if the certificate
representing the Shares is to be registered in a name other than
that in which the Warrant is registered, the signature of the
Holder hereof must be guaranteed.
Signature Guaranteed:
----------------------------------------------------------
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
Exhibit 10.23
The CIT Group/
Business Credit, Inc.
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
Tel: 213-613-2575
Fax: 213-613-2588
[LOGO]
March 24, 1997
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
Gentlemen:
Reference is made to the Financing Agreement between us dated September 21,
1994, as amended (the "Financing Agreement"). Capitalized terms used herein
shall have the same meanings as specified in the Financing Agreement unless
otherwise specifically defined herein.
You have advised us that for the period ended January 31, 1997, you were not in
compliance with the Working Capital Covenant as set forth in paragraph 10 of
Section 6 of the Financing Agreement and the Fixed Charge Coverage Ratio as set
forth in paragraph 11 of Section 6 of the Financing Agreement. We hereby confirm
that solely for the period ended January 31, 1997, we shall not deem the
foregoing to be a breach of, or violation under the Agreement, provided,
however, henceforth you must be in strict compliance with such covenants.
In addition, pursuant to mutual understanding and effective immediately, the
Financing Agreement shall be, and hereby is, amended as follows.
(1) Section 1 of the Financing Agreement shall be, and hereby is, amended by
amending the definitions of EBITDA, Working Capital, Net Worth, and Leverage
Ratio in their entirety to read as follows:
A company of
Dai-Ichi Kangyo Bank and
Chase Manhattan Corporation
<PAGE>
"EBITDA shall mean, in any period, the net income (or net loss) of the Company
and its Subsidiaries, on a consolidated basis plus all amounts deducted in
determining net income in respect of Interest Expense, income tax obligations
(paid or accrued), depreciation expense and amortization expense plus, without
duplication, the Spa Writeoff before the related income tax benefit, each
determined in accordance with GAAP consistently applied."
"Working Capital shall mean (a) the sum of (i) Current Assets plus (ii) the
amount paid to Internationale Nederlanden with respect to the repurchase of
their warrant not to exceed an amount satisfactory to CITBC in the aggregate
minus (b) the difference of (i) Current Liabilities minus (ii) the Spa Reserve
less amounts written-off against the Spa Reserve for long term assets relating
to the Spa Division."
"Net Worth shall mean (a) the sum of (i) Total Assets plus (ii) the amount paid
to Internationale Nederlanden with respect to the repurchase of their warrant
not to exceed an amount satisfactory to CITBC in the aggregate plus (iii) the
Spa Writeoff minus (b) Total Liabilities, and shall be determined in accordance
with GAAP, on a consistent basis with the latest audited statements of the
Company."
"Leverage Ratio shall mean the ratio determined by dividing (i) Total
Liabilities minus the amount of the Spa Reserve, by (ii) Net Worth."
(2) Section I of the Financing Agreement shall be further amended by the
addition thereto of the following definitions of "Spa Reserve" and "Spa
Writeoff":
"Spa Reserve shall mean the amount of Current Liabilities recorded at January
31, 1997, by the Company pursuant to GAAP with respect to the discontinuance of
its Spa Division, provided such amount shall not exceed $8,000,000 in the
aggregate."
"Spa Writeoff shall mean all amounts deducted in determining net income with
respect to charges taken during the Fiscal Quarter ended January 31, 1997
related to the Company's discontinuance of its Spa Division, provided such net
amount shall not exceed $5,000,000 in the aggregate."
Except as specifically set forth above, no other amendment, modification,
waiver, or change in any of the terms or provisions of the Financing Agreement
is hereby intended or implied. This letter shall also not constitute a waiver by
us of any other existing defaults under the Financing Agreement, whether or not
we have knowledge of same, and shall not constitute a waiver of any other
default whatsoever.
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us the enclosed copy of this letter to so indicate.
Very truly yours,
THE CIT GROUP/BUSINESS
CREDIT, INC.
By: /s/ Bonnie Schain
-----------------------------------------
Title: Assistant Vice President
Read and Agreed to:
SHARPER IMAGE CORPORATION
By: /s/ Tracy Y. Wan
-------------------------------------
Title: Sr. V.P., C.F.O.
By: /s/ Vince Barriero
-------------------------------------
Title: Sr. V.P. CIO
Exhibit 11.1
SHARPER IMAGE CORPORATION
<TABLE>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, 1997 January 31, 1996 January 31, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Earnings (Loss) ($000) $ (4,345) $ 444 $ 3,683
=========== =========== ===========
Average Shares of Common
Stock Outstanding During
the Period 8,260,208 8,249,259 8,294,378
Add:
Incremental Shares from
Assumed Exercise of Stock
Options (primary) -- 432,819 604,911
----------- ----------- -----------
8,260,208 8,682,078 8,899,289
=========== =========== ===========
Primary Earnings (Loss) $ (0.53) $ 0.05 $ 0.41
per share
=========== =========== ===========
Average Shares of Common
Stock Outstanding During
the Period 8,260,208 8,249,259 8,294,378
Add:
Incremental Shares from
Assumed Exercise of Stock
Options (fully-diluted) -- 432,819 622,236
----------- ----------- -----------
8,260,208 8,682,078 8,916,614
=========== =========== ===========
Fully-Diluted Earnings (Loss)
Per Share $ (0.53) $ 0.05 $ 0.41
=========== =========== ===========
</TABLE>
Exhibit 13.1
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended January 31,
-----------------------------------------------------------------------------------
Operating Results 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Revenues $ 210,245 $ 204,184 $ 188,535 $ 147,441 $ 149,995
Provision for loss on the closure of
the SPA Collection division (8,000) -- -- -- --
Earnings (loss) before income taxes (7,241) 739 6,139 2,939 598
Net earnings (loss) (4,345) 444 3,683 1,763 359
Net earnings (loss) per share $ (0.53) $ 0.05 $ 0.41 $ 0.20 $ 0.04
Balance Sheet Data
Working capital $ 9,429(1) $ 17,233 $ 23,011 $ 19,488 $ 15,426
Total assets 78,804 70,456 64,036 55,095 53,739
Notes payable 4,245 3,355 838 987 648
Stockholders' equity $ 28,449 $ 32,758 $ 32,792 $ 29,868 $ 28,025
Current ratio 1.22 1.56 1.85 1.94 1.75
Statistics
Number of stores at year end 88(2) 82(2) 74 73 74
Comparable store sales (2.1%) 3.3% 17.8% (4.1%) 4.8%
Annualized net sales per selling square foot $ 817 $ 850 $ 832 $ 726 $ 796
Number of catalogs mailed 37,695,000(3) 32,780,000(3) 31,522,000 25,879,000 23,413,000
Number of catalog orders 470,000 536,000 426,000 252,000 248,000
Average revenue per order:
Stores $ 97 $ 106 $ 102 $ 95 $ 89
Catalog $ 138 $ 122 $ 116 $ 120 $ 112
Returns on average stockholder's equity N/A 1.4% 11.8% 6.1% 1.3%
Book value per share $ 3.44 $ 3.97 $ 3.96 $ 3.61 $ 3.40
Weighted average number of shares outstanding 8,260,208 8,682,078 8,899,289 8,683,929 8,652,178
<FN>
Dollars are in thousands except Net earnings (loss) per share and Statistics.
(1)Includes $8,000 of accrued liabilities related to the closure of the SPA
Collection division.
(2)Includes six and four SPA Collection stores at January 31, 1997 and 1996,
respectively.
(3)Includes 2,900,000 of The Sharper Image HOME Collection(a) catalogs mailed
for January 31, 1997. Excludes SPA Collection catalogs mailed for January 31,
1997 and 1996.
</FN>
</TABLE>
GRAPH GOES HERE
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
- --------------------------------------------------------------------------------
Sharper Image Corporation
Results Of Operations Fiscal Year Ended January 31,
1997 1996 1995
Percentage of Total Revenues (Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
- --------------------------------------------------------------------------------
Revenues:
Net store sales 71.0% 71.1% 71.7%
Net catalog sales 25.9 26.6 26.2
Net wholesale sales 1.9 1.5 1.0
List rental 0.6 0.5 0.8
Licensing 0.6 0.3 0.3
----- ----- -----
Total Revenues 100.0 100.0 100.0
Costs and Expenses:
Cost of products 51.8 50.3 51.1
Buying and occupancy 11.4 10.5 10.4
Advertising and promotion 12.2 15.5 11.3
General, selling, and
administrative 24.1 23.5 23.8
Provision for loss due
to closure of SPA
Collection division 3.8 -- --
----- ----- -----
Operating Income (Loss) (3.3) 0.2 3.4
Other Income (Expense) (0.2) 0.2 (0.1)
----- ----- -----
Earnings (Loss) Before
Income Tax (Benefit) (3.5) 0.4 3.3
Income Tax (Benefit) (1.4) 0.2 1.3
----- ----- -----
Net Earnings (Loss) (2.1%) 0.2% 2.0%
----- ----- -----
Supplemental Pro Forma Data
<TABLE>
The following supplemental pro forma data is presented to assist the reader
in understanding the impact of the closure of the SPA Collection division.
<CAPTION>
January 31, 1997 January 31, 1996
--------------------------------------- ---------------------------------------
Results excluding SPA Total Results excluding SPA Total
Dollars in thousands SPA Division Division Company SPA Division Division Company
- --------------------- --------------------------------------- ---------------------------------------
Fiscal year
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 199,120 $ 11,125 $ 210,245 $ 195,838 $ 8,346 $ 204,184
Provision for loss due to closure of
SPA Collection division -- (8,000) (8,000) -- -- --
Earnings (loss) from operations 4,618 (11,546) (6,928) 4,110 (3,750) 360
Net earnings (loss) $ 2,664 $ (7,009) $ (4,345) $ 2,771 $ (2,327) $ 444
Per share data:
Provision for loss due to closure of
SPA Collection division, net
of tax benefit $ -- $ (0.56) $ (0.56) $ -- $ -- $ --
Net earnings (loss) per share $ 0.32 $ (0.85) $ (0.53) $ 0.32 $ (0.27) $ 0.05
Fourth quarter
Revenues $ 85,045 $ 5,145 $ 90,190 $ 75,908 $ 3,481 $ 79,389
Provision for loss due to closure of
SPA Collection division -- (8,000) (8,000) -- -- --
Earnings (loss) from operations 9,579 (8,528) 1,051 6,905 (1,309) 5,596
Net earnings (loss) $ 5,732 $ (5,127) $ 605 $ 4,166 $ (795) $ 3,371
Per share data:
Provision for loss due to closure of
SPA Collection division, net
of tax benefit $ -- $ (0.56) $ (0.56) $ -- $ -- $ --
Net earnings (loss) per share $ 0.67 $ (0.60) $ 0.07 $ 0.48 $ (0.09) $ 0.39
</TABLE>
11
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Revenues
Fiscal Year Ended
----------------------------------------------------
Jan. 31, Jan. 31, Jan. 31,
1997 1996 1995
Dollars in thousands (Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
- --------------------------------------------------------------------------------
Net store sales $149,321 $ 145,095 $ 135,203
Net catalog sales 54,420 54,160 49,462
Net wholesale sales 4,029 3,145 1,912
------- ------- -------
Total Net Sales 207,770 202,400 186,577
List rental 1,177 1,102 1,442
Licensing 1,298 682 516
------- ------- -------
Total Revenues $210,245 $204,184 $188,535
------- ------- -------
Net sales of $207,770,000 for fiscal 1996 increased $5,370,000, or 2.7%, from
the prior fiscal year. Returns and allowances as a percentage of sales were
12.3% for fiscal 1996, compared to 12.2% for fiscal 1995. Net store sales
increased $4,226,000, or 2.9%, comparable store sales decreased 2.1%, net
catalog sales increased $260,000, or 0.5%, and net wholesale sales increased
$884,000, or 28.1%.
During the first nine months of fiscal 1996, the Company's sales and operating
results were negatively impacted by key factors ranging from key vendors missing
delivery dates, to out-of-stock situations with key items, to higher catalog
paper prices. These factors turned positive during the fourth quarter with key
new products arriving as planned, increased inventory levels and savings on
catalog paper prices.
The increase in net stores sales for fiscal 1996 was primarily attributable to
the addition of eight new stores opened during the year, two of which were
Sharper Image SPA stores. The increase in net store sales also reflected a 9.8%
increase in total store transactions, partially offset by a decrease in average
revenue per order from $106 to $97. Net sales per average selling square foot
were $817 for fiscal 1996, compared to $850 in fiscal 1995, and $832 in fiscal
1994. Sharper Image stores' sales productivity compares favorably with the
retail industry's specialty store (hard goods) average of $327 for fiscal 1995,
$295 for fiscal 1994, and $253 for fiscal 1993 (statistical information for 1996
is not yet available). Although comparable store sales decreased by 11.5% for
the first nine months of fiscal 1996, the excellent fourth quarter sales offset
almost all of the decrease. Comparable store sales increased 5.9% for the fourth
quarter, during which the Company generated approximately 43% of its revenues.
Management believes the successful quarter was primarily fueled by the
introduction of several key new products as well as better inventory in-stock
position.
Net catalog sales were positively impacted by the test mailings of the Sharper
Image HOME Collection catalog, an increase in average revenue per order from
$122 to $138, and by the changes that were made during the fourth quarter, which
included the new redesigned Sharper Image catalog and the advertising campaign
in major consumer magazines and newspapers. This was partially offset by the
decrease in net catalog sales related to the Sharper Image catalog, due
primarily to the decrease in the number of pages circulated for the Sharper
Image catalog.
Wholesale sales increased primarily due to the increase in the number of
wholesale customers both in the U.S. and internationally.
Net sales of $202,400,000 for fiscal 1995 increased $15,823,000, or 8.5%, from
the prior fiscal year. Returns and allowances as a percentage of sales were
12.2% for fiscal 1995, compared to 12.3% for fiscal 1994. Net store sales
increased $9,892,000, or 7.3%, comparable store sales increased 3.3%, net
catalog sales increased $4,698,000, or 9.5% and net wholesale sales increased
$1,233,000, or 64.5%.
The increase in net store sales and comparable store sales in 1995 reflected a
5.4% increase in total store transactions and an increase in average revenue per
order from $102 to $106. The increase in net store sales was partially
attributable to the addition of ten new stores opened during the year, four of
which were Sharper Image SPA test stores. The Sharper Image SPA store and
catalog concept was designed to tap into the female consumers market, offering a
product mix with a theme of "look better, feel better, live better."
The increase in net catalog sales in fiscal 1995 reflected a 4.2% increase in
total catalog orders, an increase in average revenue per order from $116 to
$122, and was primarily attributable to the sales related to the test mailings
of the Sharper Image SPA catalogs, partially offset by a slight decrease in net
catalog sales related to The Sharper Image Catalog.
The Company believes that the increase in the number of catalogs and catalog
pages circulated for the Sharper Image catalog during the first half of fiscal
1995, as well as the higher demand for the Company's merchandise assortment,
particularly the Company's proprietary and private label products, personal care
products and fitness equipment, also contributed to the increase in net store
sales and comparable store sales.
Wholesale sales increased primarily due to the increase in the number of
wholesale customers both in the U.S. and internationally, and to the increase in
the number of Sharper Image brand products offered to these wholesale customers.
The Company continually evaluates the profitability of each store location to
determine whether or not to expand, remodel, relocate, or close stores.
For the purpose of determining comparable store sales, comparable stores are
defined as those which were open during the entire comparable month of the
previous year and are compared monthly for purposes of this analysis.
Inflationary effects are not considered significant to the growth of sales.
12
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Cost of Products
Cost of products increased $6,071,000, or 5.9% in fiscal 1996 from fiscal 1995.
The increase was primarily related to increases in net sales and the higher cost
of products related to the merchandise mix. The gross margin rate for fiscal
1996 was 47.6%, compared to 49.1% for fiscal 1995. The lower gross margin rate
for fiscal 1996 as compared to fiscal 1995 is partially attributable to the
changes in the Company's merchandise mix, which reflected an increase in sales
of lower margin products, such as certain state-of-the-art electronic items and
games and a decrease in sales of certain higher margin products, such as the
Company's Sharper Image Design propriety products and fitness equipment.
Cost of products increased $6,415,000, or 6.7%, in fiscal 1995 from fiscal 1994.
This increase primarily reflected the increase in cost of products related to
increases in net sales. The gross margin rate for fiscal 1995 was 49.1%,
compared to 48.2 % for fiscal 1994. The higher gross margin rate for fiscal 1995
as compared to fiscal 1994 primarily reflected the positive impact of the
Company's merchandise mix during fiscal 1995, which included a number of
high-margin proprietary products, private label and exclusive products, and
improved margins on the balance of the merchandise mix.
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 individual product driven, as
opposed to general lines of merchandise. It is impossible to predict future
gross margin rates.
Buying and Occupancy
Buying and occupancy expenses increased $2,653,000, or 12.4%, in fiscal 1996
from fiscal 1995. The increase primarily reflected the occupancy costs
associated with the eight new stores opened during fiscal 1996 and the
annualized occupancy cost of the ten new stores opened in fiscal 1995, which was
partially offset by the elimination of the occupancy costs of the two stores
closed during fiscal 1996.
Buying and occupancy expenses increased $1,763,000, or 9.0%, in fiscal 1995 from
fiscal 1994. The increase primarily reflected the occupancy costs associated
with the ten new stores opened during fiscal 1995, and partially to the increase
in store rents due to the expiration of certain negotiated rent concessions.
Advertising and Promotion
Advertising and promotion expenses for fiscal 1996 decreased $5,974,000, or
18.8%, from fiscal 1995. The decrease in advertising and promotion expense was
primarily due to a 25% decrease in the number of catalog pages circulated for
the Sharper Image catalog, the decrease in the number of pages and the number of
catalogs mailed for the SPA Collection catalog, and lower paper prices since
July 1996. The decrease in advertising and promotion expense was partially
offset by a 3% increase in the number of Sharper Image catalogs circulated, the
costs incurred for the redesign of The Sharper Image catalog which was launched
in October 1996, the advertising campaign initiated during the fourth quarter in
major consumer magazines and newspapers designed to attract new customers, and
the test mailings of The Sharper Image Home Collection. The Company began to
receive rate decreases in paper costs during the second quarter of fiscal 1996,
which has had a favorable impact on costs for fiscal 1996 as compared to fiscal
1995.
Advertising and promotion expenses for fiscal 1995 increased $10,317,000, or
48.2%, from fiscal 1994. The increase in advertising and promotion expense was
primarily due to higher catalog costs related to the significant increases in
paper costs and partially due to a postage rate increase in January 1995. The
increases in paper and postage costs had a significant effect on the Company.
The Company estimates that about $5.2 million (on a pre-tax basis) of the
increase in advertising and promotion expense was attributable to these higher
costs. Another significant factor for the increase in advertising and promotion
expense was the costs related to the test mailings of the Sharper Image SPA
catalogs. The higher catalog costs also reflect the increase of approximately 4%
in the circulation and 7% in the number of pages mailed for The Sharper Image(R)
Catalog. These higher catalog costs were partially offset by the Company's
efforts to reduce these expenses, which included the trimming of the catalog
dimensions by fractions of an inch, and the use of a lighter weight of paper.
While The Sharper Image(R) Catalog serves as the primary source of advertising
for its retail stores and mail order business, the Company continually evaluates
its advertising strategies to maximize the effectiveness of its advertising
programs.
13
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
General, Selling, and Administrative
General, selling, and administrative (GS&A) expenses for fiscal 1996 increased
$2,599,000, or 5.4%, from fiscal 1995, primarily due to increases in overall
selling expenses related to the increase in net sales, the increase in store
expenses associated with the eight new stores opened during fiscal 1996, an
increase in corporate personnel expenses to support the additional stores, and
the development of new retail concepts. Also contributing to the increase in
GS&A expenses was an increase in net delivery expense related to mail-order
shipments.
GS&A expenses for fiscal 1995 increased $3,284,000, or 7.3% from fiscal 1994,
primarily due to increases in overall selling expenses related to the increase
in net sales. The increase in GS&A expenses also included increases in personnel
costs to support the higher sales volume, an increase in store expenses related
to ten new stores opened during fiscal 1995, and an increase in net delivery
expense related to the increase in mail-order sales.
Provision for Loss Due to Closure of SPA Collection Division
The Company critically evaluates the results and long-term potential of its
current and test business concepts in order to determine which will generate the
greatest return on its investments. As part of this process, the Company decided
to close the unprofitable SPA Collection division. As a result of the closure of
the SPA Collection division during the fourth quarter of fiscal 1996, the
Company incurred a one-time charge of $8,000,000 ($4,800,000 net of the tax
benefit, or 56 cents loss per share), which contributed to the Company's net
loss of 53 cents per share for the fiscal year ended January 31, 1997. The
Company estimates that the phase-out period will take six to twelve months.
Other Income (Expense)
Other income (expense) for fiscal 1996 decreased $692,000 from fiscal 1995. The
decrease in other income (expense) is primarily due to an increase in interest
expense related to borrowings on the Company's credit facility, and a decrease
in interest income from available cash.
Other income (expense) for fiscal 1995 increased $730,000 from fiscal 1994. The
increase in other income (expense) is primarily due to a decrease in interest
expense, an increase in interest income from available cash, and the commissions
earned from The Sharper Image(R) affinity credit card.
Income Taxes
The effective tax rate for fiscal 1996 and fiscal 1995 was 40.0%. 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 that have been recognized in the Company's consolidated
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.
Liquidity and Capital Resources
At January 31, 1997, the Company had cash and equivalents of $10,873,000, a
decrease of $1,603,000, as compared to $12,476,000 at January 31, 1996. During
fiscal 1996, the Company met its short-term liquidity needs and its capital
requirements with available cash, cash flow provided by operations, trade
credit, and the revolving and term loans. The decrease in cash was primarily due
to the property and equipment expenditures related to new and remodeled stores.
At January 31, 1997, the Company had no amounts outstanding on its revolving
loan credit facility. There was $1,833,000 of CAPEX Term Loans outstanding which
was included in notes payable. The highest amount of direct borrowings under the
revolving loan credit facility during fiscal 1996 was $11,711,000, compared with
$11,000,000 in fiscal 1995. Letters of credit commitments outstanding at January
31, 1997 were $1,285,000.
In September 1994, the Company entered into a five-year revolving secured credit
facility with The CIT Group/Business Credit, Inc. The credit facility allows the
Company to borrow and issue letters of credit up to $20,000,000 based upon
inventory levels. The credit facility is secured by the Company's inventory,
accounts receivable, general intangibles and certain other assets. Borrowings
under the credit facility bear interest at either prime plus 0.75% per annum, or
LIBOR plus 2.75% per annum. The credit facility contains certain financial
covenants pertaining to fixed-charge coverage ratio, leverage ratio, working
capital and net worth. The credit facility has limitations on operating leases,
other borrowings, dividend payments and stock repurchases.
In May 1996, an amendment to the credit facility was completed with CIT to
provide for term loans for capital expenditures ("CAPEX Term Loans") up to an
aggregate amount of $4.5 million. As a result of the amendment, the total credit
facility was increased from $20.0 million to $24.5 million and the expiration
has been extended for an additional two years to September 2001. The CAPEX Term
Loans allow the Company to borrow amounts for capital improvements. Amounts
borrowed under the CAPEX Term Loans bear interest at either prime plus 1% per
annum, or at LIBOR plus 3% per annum. Each CAPEX Term Loan is to be repaid in 36
equal monthly principal installments. Certain financial covenants of the credit
facility were revised in the amendment.
14
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Liquidity and Capital Resources (continued)
Subsequent to January 31, 1997, two amendments to the credit facility were
completed with CIT to amend certain financial covenants and to provide
additional seasonal borrowings during 1997. The credit facility has been
increased to $29.5 million for the period from October 1, 1997 through December
31, 1997. CIT also provided the Company a waiver for non-compliance of the
working capital and the fixed charge ratio covenants for the period ended
January 31, 1997. The non-compliance occurred as a result of the closure of the
SPA Collection division.
Notes payable included two mortgage loans collateralized by certain property and
equipment. In connection with the expansion of the Company's distribution center
which was completed in October 1995, the Company refinanced the mortgage loan
collateralized by the distribution center and paid off the existing mortgage.
The new note in the amount of $3 million was funded in December 1995, 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. The other
note bears interest at a variable rate equal to the rate on 30-Day commercial
paper plus 3.82%, provides for monthly payments of principal and interest in the
amount of $14,320, and matures in January 2000. Notes payable also included a
CIT funded CAPEX Term Loan which bears interest at a variable rate equal to the
prime rate plus 1%, provides for monthly principal payment of $55,555 plus the
related interest payment, and matures in October 1999.
The Company's merchandise inventory at January 31, 1997 was approximately 12.6%
higher than the prior fiscal year. The increase in inventory reflected the
incremental amounts for the support of eight new stores opened during 1996.
The Company leases all of its offices, stores, and seasonal warehouse space. The
Company opened six Sharper Image stores located in Chestnut Hill, Massachusetts;
Edina, Minnesota; Raleigh, North Carolina; Garden City, New York; Paramus, New
Jersey; and Naples, Florida. Two Sharper Image SPA Collection stores were also
opened. The Company remodeled five Sharper Image stores located in Redondo Beach
and San Diego, California; Chicago, Illinois; Boca Raton, Florida; and San
Antonio, Texas, and closed two stores located in Minneapolis, Minnesota, and
Lahaina, Maui, Hawaii.
The Company is currently evaluating its plan to open one to three new Sharper
Image stores and convert certain of the SPA Collection stores to Sharper Image
stores during fiscal 1997. Total capital expenditures estimated for new and
existing stores, corporate headquarters and the distribution center for fiscal
1997 are between $4.0 million and $6.0 million.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. The secondary peak period for the Company is June, reflecting
the gifting for Father's Day and graduations. A substantial portion of the
Company's total revenues and all or most of the Company's net earnings occur in
the fourth quarter ending January 31. The Company generally experiences lower
revenues and earnings during the other quarters and, as is typical in the retail
industry, 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.
Uncertainties and Risk
The foregoing discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included with this report. The
foregoing discussion contains certain forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market
condition in the overall economy and the retail industry, consumer demand, the
opening of new stores, actual advertising expenditures by the Company, the
success of the Company's advertising and merchandising strategy, availability of
products , and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date thereof. The Company undertakes no obligations to
publicly release any revisions to these forward-looking statement or reflect
events or circumstances after the date hereof.
15
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
Sharper Image Corporation
Board of Directors
Sharper Image Corporation
San Francisco, California
We have audited the accompanying balance sheets of Sharper Image Corporation as
of January 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sharper Image Corporation as of January 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
March 28, 1997
16
<PAGE>
<TABLE>
Statements of Operations
- ------------------------------------------------------------------------------------------------------
Sharper Image Corporation
<CAPTION>
Fiscal Year Ended
January 31,
---------------------------------------
Dollars in thousands except per share amounts 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Sales $ 236,844 $ 230,410 $ 212,785
Less: returns and allowances 29,074 28,010 26,208
----------- ----------- -----------
Net Sales 207,770 202,400 186,577
List rental 1,177 1,102 1,442
Licensing 1,298 682 516
----------- ----------- -----------
210,245 204,184 188,535
----------- ----------- -----------
Costs and Expenses:
Costs of products 108,799 102,728 96,313
Buying and occupancy 23,967 21,314 19,551
Advertising and promotion 25,736 31,710 21,393
General, selling, and administrative 50,671 48,072 44,788
Provision for loss due to closure of SPA
Collection division 8,000 -- --
----------- ----------- -----------
217,173 203,824 182,045
----------- ----------- -----------
Other Income (Expense):
Interest income (expense)--net (391) 220 (164)
Other--net 78 159 (187)
----------- ----------- -----------
(313) 379 (351)
----------- ----------- -----------
Earnings (Loss) before Income Tax (Benefit) (7,241) 739 6,139
Income Tax (Benefit) (2,896) 295 2,456
----------- ----------- -----------
Net Earnings (Loss) $ (4,345) $ 444 $ 3,683
----------- ----------- -----------
Net Earnings (Loss) Per Share $ (0.53) $ 0.05 $ 0.41
----------- ----------- -----------
Weighted Average Number of Shares 8,260,208 8,682,078 8,899,289
----------- ----------- -----------
<FN>
See Notes to Financial Statements
</FN>
</TABLE>
17
<PAGE>
Balance Sheets
- --------------------------------------------------------------------------------
Sharper Image Corporation
January 31,
----------------
Dollars in thousands except per share amounts 1997 1996
- --------------------------------------------------------------------------------
Assets
Current Assets:
Cash and equivalents $ 10,873 $ 12,476
Accounts receivable, net
of allowance for doubtful
accounts of $505 and $461 5,915 4,436
Merchandise inventories 27,365 24,313
Deferred catalog costs 3,713 4,135
Prepaid expenses and other 4,495 2,576
-------- ---------
Total Current Assets 52,361 47,936
Property and Equipment, Net 23,012 20,726
Deferred Taxes and Other Assets 3,431 1,794
-------- ---------
Total Assets $ 78,804 $ 70,456
-------- ---------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 17,025 $ 13,994
Accrued expenses 19,628 11,230
Deferred revenue 5,045 4,893
Income taxes payable 307 363
Current portion of notes payable 927 223
-------- ---------
Total Current Liabilities 42,932 30,703
Notes Payable 4,245 3,355
Other Liabilities 3,178 3,640
-------- ---------
Total Liabilities 50,355 37,698
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized, 3,000,000 shares:
Issued and outstanding, none
Common stock, $0.01 par value:
Authorized, 25,000,000 shares:
Issued and outstanding,
8,266,940 and 8,250,980 shares 83 82
Additional paid-in capital 9,590 9,555
Retained earnings 18,776 23,121
-------- ---------
Total Stockholders' Equity 28,449 32,758
-------- ---------
Total Liabilities and
Stockholders' Equity $ 78,804 $ 70,456
-------- ---------
See Notes to Financial Statements.
18
<PAGE>
<TABLE>
Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation
<CAPTION>
Additional
Common Stock Paid-in Retained
Dollars in thousands Shares Amount Capital Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1994 8,282,370 $ 83 $ 10,791 $ 18,994 $ 29,868
Issuance of
common stock for
stock options and warrant
(including tax benefit) 470,070 5 1,773 1,778
Repurchase of
common stock (469,300) (5) (2,532) (2,537)
Net earnings 3,683 3,683
---------- ---------- ---------- ---------- ----------
Balance at January 31, 1995 8,283,140 83 10,032 22,677 32,792
Issuance of
common stock
for stock options 62,640 1 127 128
Repurchase of
common stock (94,800) (2) (604) (606)
Net earnings 444 444
---------- ---------- ---------- ---------- ----------
Balance at January 31, 1996 8,250,980 82 9,555 23,121 32,758
Issuance of
common stock
for stock options 15,960 1 35 36
Net loss (4,345) (4,345)
---------- ---------- ---------- ---------- ----------
Balance at January 31, 1997 8,266,940 $ 83 $ 9,590 $ 18,776 $ 28,449
---------- ---------- ---------- ---------- ----------
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation
<CAPTION>
Fiscal Year
Ended January 31,
--------------------------------------------------
Dollars in thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Cash was Provided by (Used for) Operating Activities:
<S> <C> <C> <C>
Net earnings (loss) $ (4,345) $ 444 $ 3,683
Adjustments to reconcile net earnings (loss) to net cash
provided by operations:
Depreciation and amortization 4,195 3,461 3,269
Deferred rent expense 142 69 (3)
Deferred income taxes (3,188) (127) (63)
Change in operating assets and liabilities:
Accounts receivable (1,479) (1,202) 581
Merchandise inventories (3,052) (758) 1,806
Deferred catalog costs, prepaid expenses and other 54 (2,018) (743)
Accounts payable and accrued expenses 11,429(1) 4,141 4,953
Deferred revenue and other liabilities (508) (347) 1,235
-------- -------- --------
Cash Provided by Operating Activities 3,248 3,663 14,718
-------- -------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (6,579) (11,507) (2,655)
Disposals of equipment 98 14 191
-------- -------- --------
Cash Used for Investing Activities (6,481) (11,493) (2,464)
-------- -------- --------
Cash was Provided by (Used for) Financing Activities:
Issuance of common stock for stock options and warrant 36 128 1,778
Repurchase of common stock -- (606) (2,537)
Proceeds from notes payable and revolving loan 25,665 14,000 2,000
Principal payments on notes payable and revolving loan (24,071) (11,409) (2,168)
-------- -------- --------
Cash Provided by (Used for) Financing Activities 1,630 2,113 (927)
-------- -------- --------
Net Increase (Decrease) in Cash and Equivalents (1,603) (5,717) 11,327
Cash and Equivalents at Beginning of Period 12,476 18,193 6,866
-------- -------- --------
Cash and Equivalents at End of Period $ 10,873 $ 12,476 $ 18,193
-------- -------- --------
Supplemental Disclosure of Cash Paid for:
Interest $ 700 $ 312 $ 288
Income Taxes $ 459 $ 1,971 $ 1,008
<FN>
(1)Includes $8,000 of accrued liabilities related to the closure of the SPA
Collection division.
See Notes to Financial Statements.
</FN>
</TABLE>
20
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1997, 1996, and 1995
Note A--Summary of Significant Accounting Policies
The Company is a leading specialty retailer which introduces and sells quality,
innovative, and entertaining products. These products are sold through its
retail stores, catalogs, and other marketing channels throughout the United
States. The Company also has stores and catalog operations internationally
through licensees. Additional revenue is derived from rental of the Company's
mailing list and from licensing activities relating to the Company's trade name.
Revenue Recognition: Catalog sales are recorded when merchandise is shipped.
Deferred revenue represents merchandise certificates outstanding and unfilled
cash orders at the end of the fiscal period. Mailing list rental revenue is
recognized when the list is fulfilled.
Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments: The carrying value of cash, accounts
receivable, and accounts payable approximates the estimated fair value.
Merchandise Inventories: Merchandise inventories are stated at lower of cost
(first-in, first-out method) or market.
Cash and Equivalents: Cash and equivalents represent cash and short-term, highly
liquid investments with original maturities of three months or less.
Deferred Catalog and Advertising Costs: Direct costs incurred for the production
and distribution of catalogs are capitalized. Capitalized catalog costs are
amortized, once the catalog is mailed, over the expected sales period which is
generally three months. Other advertising costs are expensed as incurred and
amounted to $5,306,000, $3,807,000, and $3,019,000, for the fiscal years ended
January 31, 1997, 1996, and 1995.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the various assets which range from three to ten years for office furniture and
equipment, and transportation equipment, and 40 years for the building.
Leasehold improvements are amortized using the straight-line method over the
lesser of their estimated useful lives or the term of the applicable lease which
ranges from 7 to 18 years.
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 the Company's consolidated financial statements or tax
returns. In estimating future tax consequences, all expected future events then
known to managment are considered other than changes in the tax law or rates.
Stock-Based Compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.
Earnings Per Share: Earnings per share are based on weighted average common
shares outstanding which include common stock equivalents (stock options and
stock warrant).
Reclassification: Certain reclassifications have been made to prior years'
financial statements in order to conform with the classifications of January 31,
1997 financial statements.
New Accounting Standards: In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." SFAS No.128 requires dual presentation of basic EPS and
diluted EPS on the face of all income statements issued after December 15, 1997
for all entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other convertible
securities. The pro forma effect assuming adoption of SFAS No. 128 at the
beginning of each period is presented below:
Fiscal Year Ended January 31,
-----------------------------
1997 1996 1995
---- ---- ----
Pro forma Earnings (Loss)
Per Share:
Basic $(0.53) $0.05 $0.44
Diluted $(0.51) $0.05 $0.41
21
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1997, 1996, and 1995
Note B--Property and Equipment
Property and equipment is summarized as follows:
January 31,
-----------------------
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
Leasehold improvements $24,341 $22,542
Office furniture and equipment 26,839 23,264
Transportation 2,422 2,266
Land 53 53
Building 2,874 2,873
------- -------
56,529 50,998
Less accumulated depreciation
and amortization 33,517 30,272
------- -------
$23,012 $20,726
------- -------
Note C--Other Assets
In May 1995, the Company entered into an agreement under which the Company will
advance the premiums on a split-Dollar life insurance policy for its Chairman of
the Board, Founder, and Chief Executive Officer. The Company has an interest in
the insurance benefits equal to the amount of the premiums advanced. The amount
receivable for premiums advanced as of January 31, 1997 and 1996 was $392,000
and $196,000.
Note D--Revolving Loan and Notes Payable
In September 1994, the Company entered into a five-year revolving secured credit
facility with The CIT Group/Business Credit, Inc. The credit facility allows the
Company to borrow and issue letters of credit up to $20,000,000 based upon
inventory levels. The credit facility is secured by the Company's inventory,
accounts receivable, general intangibles and certain other assets. Borrowings
under the credit facility bear interest at either prime plus 0.75% per annum, or
at LIBOR plus 2.75% per annum. The credit facility contains certain financial
covenants pertaining to fixed charge coverage ratio, leverage ratio, working
capital and net worth. The credit facility has limitations on operating leases,
other borrowings, dividend payments and stock repurchases.
In May 1996, an amendment to the credit facility was completed with CIT to
provide for term loans for capital expenditures ("CAPEX Term Loans") up to an
aggregate amount of $4.5 million. As a result of the amendment, the total credit
facility was increased from $20.0 million to $24.5 million and the expiration
has been extended for an additional two years to September 2001. The CAPEX Term
Loans allow the Company to borrow amounts for capital improvements. Amounts
borrowed under the CAPEX Term Loans bear interest at either prime plus 1% per
annum, or at LIBOR plus 3% per annum. Each CAPEX Term Loan is to be repaid in 36
equal monthly principal installments. Certain financial covenants of the credit
facility were revised in the amendment.
Subsequent to January 31, 1997, two amendments to the credit facility were
completed with CIT to amend certain financial covenants and to provide
additional seasonal borrowings during 1997. The credit facility has been
increased to $29.5 million for the period from October 1, 1997 through December
31, 1997. CIT also provided the Company a waiver for non-compliance of the
working capital and the fixed charge ratio covenants for the period ended
January 31, 1997. The non-compliance occurred as a result of the closure of the
SPA collection division.
At January 31, 1997 and 1996, the Company had no amounts outstanding on its
revolving loan credit facility. Letters of credit commitments as of January 31,
1997 were $1,285,000.
Notes payable included two mortgage loans collateralized by certain property and
equipment. In connection with the expansion of the Company's distribution center
which was completed in October 1995, the Company refinanced the mortgage loan
collateralized by the distribution center and paid off the existing mortgage
(Note G). The new note in the amount of $3 million was funded in December 1995,
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.
The other note bears interest at a variable rate equal to the rate on 30-Day
commercial paper plus 3.82%, provides for monthly payments of principal and
interest in the amount of $14,320, and matures in January 2000. Notes payable
also included a CAPEX Term Loan which bears interest at a variable rate equal to
the prime rate plus 1%, provides for monthly principal payments of $55,555 plus
the related interest payment, and matures in October 1999. The respective
balance of each note payable is $2,887,000, $452,000 and $1,833,000. Future
minimum principal payments on notes payable are as follows:
Dollars in thousands
- -------------------------------------------------------------
Year ending January 31,
1998 $ 927
1999 946
2000 787
2001 147
2002 160
Later years 2,205
------
Total notes payable $5,172
------
22
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1997, 1996, and 1995
Note E--Income Taxes
January 31,
----------------------------------------
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Currently payable:
Federal $ 248 $ 359 $ 2,144
State 44 63 375
------- ------- -------
292 422 2,519
Deferred:
Federal (2,710) (107) (54)
State (478) (20) (9)
------- ------- -------
(3,188) (127) (63)
------- ------- -------
$(2,896) $ 295 $ 2,456
------- ------- -------
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
January 31,
---------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Federal tax rate 34.0% 34.0% 34.0%
State income tax,
less federal benefit 6.0 6.0 6.0
------- ------- -------
Effective tax rate 40.0% 40.0% 40.0%
------- ------- -------
Deferred taxes result from differences in the recognition of expense for income
tax and financial reporting purposes. Temporary differences which give rise to
deferred tax assets (liabilities) are as follows:
January 31,
---------------------------------------------
Dollars in thousands 1997 1996
- --------------------------------------------------------------------------------
Current:
Nondeductible reserves $ 4,457 $ 2,844
Deferred catalog costs (1,485) (1,654)
State taxes (551) (522)
Valuation allowance -- --
-------- --------
Current--net 2,421 668
-------- --------
Noncurrent:
Deferred rent 1,566 1,251
Depreciation 2,512 1,248
Deductible software costs (924) (800)
Other--net (168) (148)
Valuation allowance -- --
-------- --------
Noncurrent--net 2,986 1,551
-------- --------
Total $ 5,407 $ 2,219
-------- --------
Note F--Leases
The Company leases its offices, retail facilities, and equipment under operating
leases for terms expiring at various dates through 2008. Under the terms of
certain of the leases, rents are adjusted annually for changes in the consumer
price index and increases in property taxes. The aggregate minimum annual lease
payments under leases in effect at January 31, 1997, are as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Year ending January 31,
1998 $ 14,002
1999 13,977
2000 13,659
2001 12,181
2002 8,120
Later years 28,276
--------
Total minimum lease commitments $ 90,215
--------
Many of the Company's leases contain predetermined fixed escalations of the
minimum rentals during the initial term. For these leases, the Company has
recognized the related rental expense on a straight-line basis and has recorded
the difference between the expense charged to income and amounts payable under
the leases as deferred rent which is included in Other Liabilities.
Some store leases contain renewal options for periods ranging up to five years.
Most leases also provide for payment of operating expenses, real estate taxes,
and for additional rent based on a percentage of sales.
Net rental expense for all operating leases was as follows:
Fiscal Year Ended
January 31,
-----------------------------------
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------------------
Minimum rentals $ 13,259 $ 11,917 $ 11,094
Percentage rentals and
other charges 5,546 5,093 4,540
-------- -------- --------
$ 18,805 $ 17,010 $ 15,634
-------- -------- --------
23
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1997, 1996, and 1995
Note G--Related Party Transactions
In October 1993, the Company refinanced one of its existing mortgage loans with
a loan of $300,000 from a minority stockholder and director of the Company. This
loan balance of $256,000 was paid in full in December 1995.
In 1993, the Company acquired the rights to manufacture certain products along
with related tooling and equipment from a former director of the Company. The
agreement provided for ongoing manufacturing assistance with payments based on
sales of certain products. Under the agreement, the Company paid $640,000 for
the fiscal year ended January 31, 1995. In October 1994, the Company negotiated
for the early settlement of all amounts and obligations due under this
agreement, and no further payments are required.
Note H--Stockholders' Equity
Under the Company's stock repurchase program, the Company is authorized by its
Board of Directors to repurchase up to $1,600,000 of common stock. The Company
did not repurchase any shares during fiscal 1996. During fiscal 1995 and fiscal
1994, the Company repurchased 94,800 shares for $606,000 and 56,300 shares for
$378,000 under this stock repurchase program. Through January 31, 1997, the
Company has repurchased a total of 151,100 shares at an average price of $6.54
per share.
In November 1994, ING Capital, a former lender, exercised its rights to purchase
413,000 shares of the Company's common stock under a warrant agreement at $2.80
per share, which represented the fair market value of the Company's stock at the
date of the warrant issuance, plus an amount equal to 15% of the excess of the
current market value of the Company's stock at the time of exercise over $5.00
per share. Under a separate resolution, the Board approved the repurchase of the
outstanding shares owned by ING Capital. The net cash expended by the Company as
a result of the exercise of the warrant and the subsequent repurchase of the
shares was $1,000,000.
Under the Company's 1985 Stock Option Plan, as amended, non-qualified options to
purchase common stock are granted to officers, key employees and consultants.
Options generally vest over a four to six year period from the date of the grant
and are priced at 100% of the fair market value at the date of the grant. During
1995, with stockholders' approval, the Company amended the 1985 Stock Option
Plan to increase the number of shares of its common stock reserved for the
issuance of additional stock options by 750,000 shares, limit the maximum number
of shares any one individual may be granted per fiscal year, expand the
eligibility provisions to allow individuals owning more than 25% of the
Company's common stock to receive stock options and render the non-employee
members of the Board ineligible to receive stock option grants under this plan.
In 1995, the Company also implemented the 1994 Non-Employee Directors Stock
Option Plan, as approved by stockholders, to allow for stock option grants of
common stock to the non-employee members of the Board of Directors. Options will
be immediately exercisable, vest over one year of Board service from the date of
the grant, and are priced at 100% of the fair market value at the date of the
grant. Any shares purchased under the option will be subject to repurchase by
the Company upon the optionee's cessation of Board service prior to vesting.
At January 31, 1997, the Company had reserved 636,420 shares and 33,000 shares,
under the 1985 Stock Option Plan and the 1994 Non-Employee Directors Stock
Option Plan, respectively, for the granting of additional stock options.
Additional Stock Plan Information
As discussed in Note A, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", requires the disclosure of pro forma net earnings
(loss) and earnings (loss) per share had the Company adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life
five years from date of grant; stock volatility, 45% in fiscal 1996 and fiscal
1995; risk free interest rates, 6.21% in fiscal 1996 and 6.23% in fiscal 1995;
and no dividends during the expected term.
The Company's calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1996 and fiscal 1995 awards had been amortized to expense over the
vesting period of the awards, pro forma net earnings (loss) would have been
$(4,576,000) ($0.55 loss per share) in fiscal 1996 and $317,000 ($0.04 earnings
per share) in fiscal 1995. However, the impact of outstanding non-vested stock
options granted prior to fiscal 1995 has been excluded from the pro forma
calculation; accordingly, the fiscal 1996 and fiscal 1995 pro forma adjustments
are not indicative of future period pro forma adjustments, when the calculation
will apply to all future applicable stock options.
24
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1997, 1996, and 1995
Note H--Stockholders' Equity (continued)
The following table reflects the activity under these plans:
Weighted
Number of Average
Options Exercise Price
---------------------------
Balance at January 31, 1994 756,590 $1.99
Granted 378,100 6.73
Exercised (57,070) 1.94
-----------
Cancelled (113,950) 1.98
Balance at January 31, 1995 963,670 3.88
Granted (weighted average fair value of $2.76) 630,100 5.65
Exercised (62,640) 2.06
Cancelled (352,860) 6.80
-----------
Balance at January 31, 1996 1,178,270 4.03
Granted (weighted average fair value of $1.70) 951,800 3.54
Exercised (15,960) 4.39
Cancelled (609,610) 5.58
-----------
Balance at January 31, 1997 1,504,500 $3.13
-----------
Exercisable at January 31, 1996 624,000 $1.70
-----------
Exercisable at January 31, 1997 650,000 $2.49
-----------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- -----------------------------------------------
Number Weighted Average Weighted Average Number Weighted
Range of of Options Remaining Contractual Exercise of Options Average
Exercise Prices Outstanding Life (years) Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.16-$1.99 333,690 4.8 $1.81 323,000 $1.81
2.00- 3.99 1,089,910 9.3 3.37 295,000 2.92
4.00- 7.00 80,900 8.0 5.27 32,000 5.51
--------- -------
$1.16-$7.00 1,504,500 8.2 $3.13 650,000 $2.49
--------- -------
</TABLE>
Note I--Provision for Loss Due to Closure of SPA Collection Division
The Company critically evaluates the results and long-term potential of its
current and test business concepts in order to determine which will generate the
greatest return on its investments. As part of this process, the Company decided
to close the unprofitable SPA Collection division.
Related to the closure of the SPA Collection division, for the fourth quarter of
fiscal 1996, the Company incurred a one-time charge of $8,000,000 ($4,800,000
net of the tax benefit, or 56 cents loss per share). The Company estimates that
the phase-out period will take six to twelve months. The one-time charge of
$8,000,000 is primarily related to the lease commitments and the net book value
of fixed assets related to the SPA Collection division.
Note J--Commitments and Contingencies
The Company is party to various legal proceedings arising from normal business
activities. Management believes that the resolution of these matters will not
have an adverse material effect on the Company's financial condition.
25
<PAGE>
<TABLE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1997, 1996, and 1995
Note K--Quarterly Financial Information (Unaudited)
<CAPTION>
Dollars in thousands except per share amounts Three Months Ended
------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal year ended January 31,1997 1996 1996 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 36,501 $ 44,186 $ 39,368 $ 90,190
Expenses
Cost of products 19,245 22,872 20,282 46,400
Buying and occupancy 5,601 5,785 6,071 6,510
Advertising and promotion 4,726 5,806 4,562 10,642
General, selling and administrative 10,651 11,370 11,064 17,586
Provision for loss due to closure
of SPA Collection division(1) -- -- -- 8,000
Other income (expense) 21 (106) (184) (44)
Earnings (loss) before income tax (benefit) (3,701) (1,753) (2,795) 1,008
Income tax (benefit) (1,480) (701) (1,118) 403
Net earnings (loss) $ (2,221) $ (1,052) $ (1,677) $ 605
Net earnings (loss) per share $ (0.27) $ (0.13) $ (0.20) $ 0.07
Three Months Ended
------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal year ended January 31,1996 1995 1995 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 37,696 $ 45,764 $ 41,335 $ 79,389
Expenses
Cost of products 19,166 22,614 20,582 40,366
Buying and occupancy 4,903 5,199 5,370 5,842
Advertising and promotion 5,604 8,757 5,860 11,489
General, selling and administrative 9,791 11,338 10,847 16,096
Other income (expense) 213 213 (67) 20
Earnings (loss) before income tax (benefit) (1,555) (1,931) (1,391) 5,616
Income tax (benefit) (622) (772) (556) 2,245
Net earnings (loss) $ (933) $ (1,159) $ (835) $ 3,371
Net earnings (loss) per share(2) $ (0.11) $ (0.14) $ (0.10) $ 0.39
<FN>
(1)See Note I for discussion on the closure of SPA Collection Division.
(2)Net earnings per share for the fiscal year and for quarters with net earnings
are computed based on weighted average common shares outstanding which
include common stock equivalents (stock options and stock warrant). Net loss
per share for quarters with net losses is computed based solely on weighted
average common shares outstanding. Therefore, the net earnings (loss) per
share for each quarter do not sum up to the earnings per share for the full
fiscal year.
</FN>
</TABLE>
26
<PAGE>
Corporate Data
- --------------------------------------------------------------------------------
Sharper Image Corporation
Board of Directors
- --------------------------------------------------------------------------------
Richard Thalheimer Lawerence Feldman
Founder Chairman Emeritus
Chairman of the Board San Francisco Mart
Chief Executive Officer
J. Gary Shansby
Elyse Eng Thalheimer Founder
The Shansby Group
Alan Thalheimer
Retired Business Executive Gerald Napier*
Retired President of
Maurice Gregg I. Magnin and Company
Retail Financial Consultant *Joined April 1997.
Officers
- --------------------------------------------------------------------------------
Richard Thalheimer Jennifer Grellman
Founder Vice President
Chairman of the Board Corporate Marketing
Chief Executive Officer
Greg Hickey
Barry Gilbert Vice President
Vice Chairman Management Information Systems
Chief Operating Officer
Barry Jacobsen
Craig Womack Vice President
President Distribution
Chief Administrative Officer
Mary MacKenzie
Vincent Barriero Vice President
Senior Vice President Human Resources
Chief Information Officer
Assistant Corporate Secretary Richard Mueller
Vice President
Shannon King Merchandising
Senior Vice President
Merchandising Woodrow Nelson
Vice President
Sydney Klevatt Creative Services
Senior Vice President
Marketing Judith Serlin
Vice President
Tracy Wan Merchandising
Senior Vice President
Chief Financial Officer Charles Taylor
Corporate Secretary Vice President
TSI Design
Joe Williams
Vice President
Loss Prevention
Corporate Information
- --------------------------------------------------------------------------------
Corporate Headquarters
650 Davis Street
San Francisco, CA 94111
Telephone (415) 445-6000
FAX: (415) 445-1574
Transfer Agent and Registrar
Chase Mellon Shareholder Services
50 California Street
San Francisco, California 94111
Corporate Counsel
Brobeck, Phleger & Harrison LLP
One Market
Spear Street Tower
San Francisco, California 94105
Certified Public Accountants
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105
SEC Form 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
of Form 10-K (exclusive of exhibits) is available without charge upon written
request to:
Investor Relations
The Sharper Image
650 Davis Street
San Francisco, CA 94111
Annual Meeting
The Annual Meeting of Stockholders of Sharper Image Corporation will be held on
Monday June 9, 1997, at 2 pm at the World Trade Club, Ferry Building, Coit Tower
Room, San Francisco, California.
- --------------------------------------------------------------------------------
Common Stock Market Prices and Dividend Policy
The common stock of Sharper Image Corporation is traded in the Nasdaq National
Market under the symbol SHRP. The following table sets forth, for the periods
indicated, the range of high and low prices reported for the common stock.
The Company has not paid cash dividends to holders of its
common stock.
Fiscal Year 1996 High Low
First Quarter 6 1/4 3 5/8
Second Quarter 6 3/8 3 1/2
Third Quarter 4 1/2 3 1/4
Fourth Quarter 4 1/8 3 1/8
27
Deloitte &
Touche LLP
- ----------- --------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Board of Directors and Stockholders of
Sharper Image Corporation:
We have audited the financial statements of Sharper Image Corporation as of
January 31, 1997 and 1996 and for each of the three years in the period ended
January 31, 1997, and have issued our report thereon dated March 28, 1997, such
financial statements and reports are included in your 1996 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of Sharper Image Corporation, listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
March 28, 1997
- -----------------
Deloitte Touche
Tohmatsu
International
- -----------------
Deloitte &
Touche LLP
- ----------- --------------------------------------------------------------
50 Fremont Street Telephone: (415) 247-4000
San Francisco, California 94105-2230 Facsimile: (415) 247-4329
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-12755 and No. 33-80504 of Sharper Image Corporation on Forms S-8 of our
report dated March 28, 1997, appearing in this Annual Report on Form 10-K of
Sharper Image Corporation for the year ended January 31, 1997.
/s/ Deloitte & Touche LLP
April 29, 1997
- -----------------
Deloitte Touche
Tohmatsu
International
- -----------------
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