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, 1998
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. ____
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 15, 1998 was $8,430,160
The number of shares of Common Stock, with $.01 par value, outstanding on
April 15, 1998 was 8,361,820 shares.
Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January 31, 1998 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 8, 1998 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, monthly mail-order catalog, Internet, and other marketing channels. In
the past year the Company continued to test market a new concept, The Sharper
Image Home Collection. The Sharper Image Home Collection catalog had its initial
test mailing in January 1996 and the Company continued to test market the
concept through mail order during the year ended January 31, 1998 (fiscal 1997).
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,
1998, the Company operated 85 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 70% of total revenues for the fiscal year 1997. 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 three additional retail formats, Sharper Image Design
stores, Outlet stores and airport shops. These formats are discussed under
"Store Operations" and "Licensed Operations".
During fiscal 1997, the Company opened 4 new stores of The Sharper
Image concept and format and converted 2 SPA Collection stores to The Sharper
Image concept. Three under-performing Sharper Image stores were closed at the
maturity of their leases. The Company is planning to open four to eight new
stores during the fiscal year ending January 31, 1999 (fiscal
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1998). 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 fiscal 1998 and such locations may be relocated or closed. The
Company employs approximately 1,300 employees in twenty-eight states.
In addition to serving as the primary advertising vehicle for the
Company's stores, The Sharper Image Catalog, including sales from the Internet
generated about 83% of its total mail-order sales (approximately 28% of total
revenues) in fiscal 1997. The monthly color catalog, which ranged from 44 to 124
pages in fiscal 1997, is recognized for creative excellence within the catalog
industry. Worldwide, the Company mailed approximately 38 million of The Sharper
Image Catalogs in fiscal 1997. The Company continued the test mailings of the
Sharper Image Home Collection catalog in fiscal 1997. Management plans to
continue to evaluate the potential of this concept during fiscal 1998.
The Company believes the Internet is a leading-edge marketing
opportunity. The Sharper Image Catalog is on the World Wide Web at
http://www.sharperimage.com. While this sales medium is still in its early
development, the Company is encouraged with the sales growth in the developing
electronic marketplace and expects to continue be a leader as this market
continues its dynamic growth.Other electronic media include America Online's
Shopping Channel and Microsoft Plaza at http://plaza.msn.com. See "Factors
Affecting Future Operating Results".
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
55% male, 45% 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.
During fiscal 1997, 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 products. The result of the
increased resources devoted to Sharper Image Design products was reflected in
the fourth quarter when a number of new products were introduced and contributed
to the fourth quarter results. Wholesale sales decreased during fiscal 1997
primarily as a result of a decreased number of product offerings, since the
majority of the
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department stores had made commitment for holiday merchandise prior to our
introduction of new Sharper Image Design product offerings.
The Sharper Image Catalog/Retail Advertising
The Sharper Image Catalog is a full-color catalog that is mailed to an
average of approximately 2.6 million individuals each month. The catalog is also
the primary source of advertising for the Company's retail stores. During fiscal
1997, the Company mailed approximately 38 million of The Sharper Image Catalogs
to over 6 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.
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 1997,
The Sharper Image Catalog typically contained from 44 to 76 pages for non-peak
months and between 84 and 124 pages for the peak seasons of Father's Day and
Christmas. 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 Company continued this new format in fiscal 1997. 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 210 to 250 products during the first
three quarters of the year, increasing to 340 products during the fourth
quarter.
During fiscal 1997, the Company also utilized newspaper, leading
consumer magazine 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 1998. 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.
During fiscal 1997, the Company continued to mail test catalogs for The
Sharper Image Home Collection concept. This catalog features high quality,
luxury home furnishings and accessories. The Company mailed over 6 million
Sharper Image Home Collection catalogs during fiscal 1997. The Company plans to
continue to test this concept during fiscal 1998.
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 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
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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. Current 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 feature higher margin proprietary products
in addition to other top selling merchandise. At the end of fiscal 1997, the
Company had 74 The Sharper Image stores, 8 Sharper Image Design stores, and 3
outlet locations.
The Company has retained a leading design firm to update the look and
appeal of its retail stores. The Company plans to test at least one prototype
store during fiscal 1998.
Internet Operations
The Sharper Image was one of the first specialty retailers to enter the
world of electronic commerce. The Company has participated in online shopping
since 1994 and has maintained its own site on the World Wide Web at
http://www.sharperimage.com since 1995. The Company's revenue from its Internet
catalog has doubled for each of the last two years. The Company believes that
the experience it has gained is a strategic advantage. Online shopping is
forecasted to grow from $2 billion in 1997 to $12 billion in the year 2000
according to the Forrester Report. The Company believes that one of the
advantages of the Internet is the ability to introduce and/or market merchandise
at a low cost. The Company can present a full spectrum of styles or models at
reasonable cost, especially compared to the high cost of a similar presentation
in The Sharper Image catalog. The Company has been able to develop and expand
its Internet business without incurring high start-up costs because of its
market leadership position, its brand name and its strategic alliances including
AOL and Apple Computer. In addition, the Company
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leverages its experience in order processing, fulfillment and customer service
gained in over 20 years of mail order catalog operations.
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.
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 Turbo Groomer, Truth.Seeker, Ionic Hair Wand,
Stereo Sound Soother, Memo Manager Professional, Shower Companion, and the
portable 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's increasing flow of unique
and exclusive products in The Sharper Image stores and catalog and enhancing its
brand name extension. The Company's goal is to significantly increase the
proportionate sales and margin contribution from these proprietary products.
However, there is no assurance that the Company will be able to continue the
growth
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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 1997. Of the
products offered by the Company in recent catalogs, approximately 66% were
manufactured in the Far East, approximately 24% were manufactured within the
United States, approximately 6% were manufactured in Europe, and approximately
4% 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 12 to 18 months. However, certain product
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. 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.
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 is
generated and reviewed daily. Sales information by product and location is
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 1997, the Company's Corporate Marketing results 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 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.
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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
decreased from about $4.0 million in fiscal 1996 to about $3.2 million in fiscal
1997. The wholesale sales decreased during fiscal 1997 primarily as result of a
decreased number of products. The majority of the department stores had made
commitments for holiday merchandise prior to our introduction of a number of new
Sharper Image Design products in the fourth quarter of fiscal 1997. 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 for non-duty free airport
locations in the United States. 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, , 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,
two in Australia, one each in Switzerland, 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 and a second
location at Detroit Metropolitan. The Company continues to pursue additional
licensing and wholesale opportunities in foreign countries.
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
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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 and
at the Little Rock distribution center 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 of approximately 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. Store customers generally take their
purchase with them. In fiscal 1996, the Company established a telemarketing
center located at the Little 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.
Information Systems
The Company continually evaluates its computer systems and information
technology in connection with providing additional and improved management and
financial information. The Company recognizes that the arrival of the year 2000
poses a unique worldwide challenge to the ability of all systems to recognize
the date change from December 31, 1999 to January 1, 2000. The Company has
reviewed its computer and business processes, and is reprogramming its computer
applications to provide for their continued functionality. An assessment of the
readiness of the external entities with which the Company interfaces is ongoing.
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
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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 its 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 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's results of
operations for the entire fiscal year. During the fiscal years 1997 and 1996,
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, 1998, the Company employed approximately 1,300
associates, approximately 60% 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, 50
Chairman of the Board, and
Chief Executive Officer
Barry Gilbert Vice Chairman, 47
Chief Operating Officer
Davia Kimmey Senior Vice President, 44
Marketing
Shannon King Senior Vice President, 42
Merchandising
Tracy Wan Senior Vice President, 38
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.
Davia Kimmey has been the Company's Senior Vice President, Marketing
since June 1997. Prior to joining the Company, Ms. Kimmey was with Spiegel Inc.
where she served as Corporate Vice President, Advertising from 1995 to 1997 and
as Vice President, Advertising from 1992 to 1995.
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.
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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 1998 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.
(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.
12
<PAGE>
(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 fluctuate 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.
(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
13
<PAGE>
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 85 The Sharper Image stores under leases
covering a total of approximately 193,000 square feet of net selling space.
The Company's operates an 110,000 square foot distribution facility
located in Little Rock, Arkansas. All of the Company's distribution functions
are conducted through this facility and other seasonally occupied space rented
by the Company in close proximity thereto.
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 1997 Annual Report to Stockholders is
incorporated herein by reference. As of April 15, 1998 there were 490 holders of
record of the Registrant's Common Stock.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
page 3 of the Sharper Image Corporation 1997 Annual Report to Stockholders is
incorporated herein by reference.
14
<PAGE>
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 1997 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not currently applicable
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 1997 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 1998 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 1998 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 1998
Proxy Statement, pages 4 to 5.
Item 13. Certain Relationships and Related Transactions
None.
15
<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 1997 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:
Independent Auditor's Report
Statements of Operations for the years ended January 31, 1998, 1997 and 1996.
Balance sheets at January 31, 1998 and 1997
Statements of Stockholders' Equity for the years ended January 31, 1998, 1997
and 1996.
Statements of Cash Flows for the years ended January 31, 1998, 1997 and 1996.
Notes to Financial Statements.
(a)2. List of Financial Statement Schedule.
The following are filed as part of this Report:
Independent Auditors' Report on 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:
16
<PAGE>
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 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).
17
<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.
<TABLE>
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.
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard J. Thalheimer Chief Executive April 28, 1998
- ---------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Tracy Y. Wan Senior Vice President, April 28, 1998
- ---------------------------- Chief Financial Officer
Tracy Y. Wan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Elyse Eng Thalheimer Director April 28, 1998
- ----------------------------
Elyse Eng Thalheimer
18
<PAGE>
/s/ Alan Thalheimer Director April 28, 1998
- ----------------------------
Alan Thalheimer
/s/ Maurice Gregg Director April 28, 1998
- ----------------------------
Maurice Gregg
/s/ Gerald Napier Director April 28, 1998
- ----------------------------
Gerald Napier
/s/ Morton David Director April 28, 1998
- ----------------------------
Morton David
</TABLE>
19
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
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, 1998:
- ----------------------------
Inventory Obsolescence $1,509 $ 678 $ 701 $1,486
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
OTHER
YEAR ENDED JANUARY 31, 1998:
- ----------------------------
Other $ 505 $ 321 $ 318 $ 508
YEAR ENDED JANUARY 31, 1997:
- ----------------------------
Other $ 461 $ 351 $ 307 $ 505
YEAR ENDED JANUARY 31, 1996:
- ----------------------------
Other $ 291 $ 462 $ 292 $ 461
</TABLE>
20
<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)
21
<PAGE>
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.)
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.
10.24 Warrant to Purchase Common Stock Agreement dated April 6, 1998 between
the Company and The CIT Group/Business Credit Inc.
10.25 Amendment to the Financing Agreement dated April 6, 1998 between the
Company and The Cit Group/Business Credit Inc.
11.1 Statement Re: Computation of Earnings per Share.
13.1 1997 Annual Report to Stockholders.
22
<PAGE>
23.1 Independent Auditor's Consent.
27.0 Financial Data Schedule.
23
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
- --------------------------------------------------------------------------------
Sharper Image Corporation
Results Of Operations Fiscal Year Ended January 31,
-----------------------------------------------
1998 1997 1996
Percentage of Total Revenues (Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
- --------------------------------------------------------------------------------
Revenues:
Net store sales 69.9% 71.0% 71.1%
Net catalog sales 27.8 25.9 26.6
Net wholesale sales 1.5 1.9 1.5
List rental 0.5 0.6 0.5
Licensing 0.3 0.6 0.3
----- ----- -----
Total Revenues 100.0 100.0 100.0
Costs and Expenses:
Cost of products 53.3 51.8 50.3
Buying and occupancy 11.0 11.4 10.5
Advertising and promotion 10.5 12.2 15.5
General, selling, and
administrative 24.5 24.1 23.5
Provision for loss due to closure
of SPA Collection division -- 3.8 --
----- ----- -----
Operating Income (Loss) 0.7 (3.3) 0.2
Other Income (Expense) (0.2) (0.2) 0.2
----- ----- -----
Earnings (Loss) Before Income Tax
(Benefit) 0.5 (3.5) 0.4
Income Tax (Benefit) 0.2 (1.4) 0.2
----- ----- -----
Net Earnings (Loss) 0.3% (2.1)% 0.2%
===== ===== =====
Revenues
Fiscal Year Ended
--------------------------------------------
Jan. 31, Jan. 31, Jan. 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Dollars in thousands (Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Net store sales $151,589 $149,321 $145,095
Net catalog sales 60,405 54,420 54,160
Net wholesale sales 3,199 4,029 3,145
-------- -------- --------
Total Net Sales 215,193 207,770 202,400
List rental 982 1,177 1,102
Licensing 640 1,298 682
-------- -------- --------
Total Revenues $216,815 $210,245 $204,184
======== ======== ========
Net sales of $215,193,000 for fiscal 1997 increased $7,423,000, or 3.6%, from
the prior fiscal year. Returns and allowances as a percentage of sales were
12.2% for fiscal 1997, compared to 12.3% for fiscal 1996. Net store sales
increased $2,268,000, or 1.5%, comparable store sales increased 1.1%, net
catalog sales increased $5,985,000, or 11.0%, and net wholesale sales decreased
$830,000, or 20.6%, as compared to fiscal 1996.
The increase in net store sales for fiscal 1997 was primarily attributable to
the addition of six stores opened during the year. The increase in net store
sales also reflected a 7.2% increase in average revenue per transaction, to $104
from $97, and a 4.6% decrease in total store transactions. Net sales per average
square foot were $465 for fiscal 1997, compared to $458 in fiscal 1996, and $473
in fiscal 1995. Sharper Image stores' sales productivity compares favorably with
the retail industry's specialty store (hard goods) average of $343 for fiscal
1996, $252 for fiscal 1995, and $234 for fiscal 1994 (statistical information
for 1997 is not yet available). Strong comparable store sales increases of 7.3%
and 3.4% in the third and fourth quarters of fiscal 1997 more than offset the
comparable store sales decreases in the first half of the year. Management
believes the increase in net sales benefited from new product introductions,
including an increased selection of Sharper Image Design proprietary products
and more optimal inventory levels during the second half of the year.
11
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Revenues (continued)
Net catalog sales were positively impacted by an increase in Sharper Image
catalog average revenue per order to $158 from $134, advertising campaigns in
major consumer magazines and newspapers, a 10.0% increase in the number of
Sharper Image catalogs circulated, and a two-fold increase in the number of
catalogs circulated for the test concept Sharper Image Home Collection. The
Company believes that the increase in the number of catalogs and catalog pages
circulated for the Sharper Image catalog during fiscal 1997 also contributed to
the increases in net store sales and comparable store sales.
Wholesale sales decreased $830,000, or 20.6%, primarily due to a decrease
in the number of products offered to wholesale customers both in the U.S. and
internationally.
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%.
The increase in net store 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 net store sales increase also reflected a 9.8%
increase in total store transactions, partially offset by a decrease in average
revenue per order from $106 to $97. 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 believed the successful quarter was primarily fueled by
the introduction of several key new products, as well as a 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
for the Sharper Image catalog to $134 from $122, 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 $884,000, or 28.1%, primarily due to the increase
in the number of wholesale customers both in the U.S. and internationally.
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.
Cost of Products
Cost of products increased $6,736,000, or 6.2%, in fiscal 1997 from fiscal
1996. 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 1997 was 46.3%, compared to 47.6% for fiscal 1996. The lower gross
margin rate reflected an increase in sales of lower-margin products, such as
certain state-of-the-art electronic items and games, partially offset by an
increase in the Sharper Image Design proprietary products, which generally carry
higher margins.
Cost of products increased $6,071,000, or 5.9% , in fiscal 1996 from fiscal
1995. This increase primarily reflected the increase in cost of products 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 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
proprietary products and fitness equipment.
The Company's gross margin rate fluctuates with the changes in its
merchandise mix, which is affected by new items available in various categories.
The variation in merchandise mix from category to category from year to year
reflects the characteristic that the Company is driven by individual products,
as opposed to general lines of merchandise. It is impossible to predict future
gross margin rates. The Company's goal is to increase the number of Sharper
Image Design proprietary products and other exclusive private label products,
and the related sales. This goal, if met, should have a positive impact on the
Company's gross margin rate.
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Buying and Occupancy
Buying and occupancy expenses decreased $63,000, or 0.3%, in fiscal 1997
from fiscal 1996. The decrease primarily reflected lower buying costs and lower
occupancy costs associated with the closure of the SPA Collection division and
the elimination of the cost of two closed Sharper Image stores, partially offset
by the annualized occupancy cost of eight new stores opened during fiscal 1996
and the cost of six new stores opened in fiscal 1997.
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 ten new stores opened in fiscal 1995.
Advertising and Promotion
Advertising and promotion expenses for fiscal 1997 decreased $2,941,000, or
11.4%, from fiscal 1996. The decrease was primarily due to lower consumer
magazine and newspaper advertising and the elimination of the SPA Collection
catalog, partially offset by a 10% increase in the number of Sharper Image
catalogs mailed and a 3% increase in the number of pages circulated, along with
the two-fold increase in mailings of the test concept Sharper Image Home
Collection catalog.
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, and the advertising campaign initiated during the fourth
quarter in major consumer magazines and newspapers designed to attract new
customers. The Company began to receive rate decreases in paper costs during the
second quarter of fiscal 1996, which had a favorable impact on costs for fiscal
1996 as compared to fiscal 1995.
While the Sharper Image 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.
General, Selling, and Administrative
General, selling, and administrative (G S & A) expenses for fiscal 1997
increased $2,403,000, or 4.7%, from fiscal 1996, primarily due to increases in
overall selling expenses related to the increase in net sales. The increase in G
S & A expenses reflected higher net delivery expense related to mail-order
shipments and certain additional administrative support costs, which were
partially offset by the elimination of costs related to the closure of the SPA
division.
G S & 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 G S & A expenses was an increase
in net delivery expense related to mail order shipments.
Other Income (Expense)
Net other expense for fiscal 1997 increased $206,000 from fiscal 1996. The
increase in other 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.
Net other expense for fiscal 1996 increased $692,000 from fiscal 1995. The
increase in other 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.
Income Taxes
The effective tax rate for fiscal 1997 and fiscal 1996 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.
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Liquidity and Capital Resources
At January 31, 1998, the Company had cash and equivalents of $3,501,000, a
decrease of $7,372,000, as compared to $10,873,000 at January 31, 1997. During
fiscal 1997, 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 reflected the
outlay to bring inventories to an optimal level and the property and equipment
expenditures related to new stores. At January 31, 1998, the Company had no
amounts outstanding on its revolving loan credit facility. There was a capital
expenditure term loan outstanding of $1,167,000 included in notes payable. The
highest amount of direct borrowings under the revolving loan credit facility
during fiscal 1997 was $14,672,000, compared with $11,711,000 in fiscal 1996.
Letter of credit commitments outstanding at January 31, 1998 and 1997 were
$2,321,000 and $1,285,000, respectively.
The Company has a revolving secured credit facility with The CIT
Group/Business Credit, Inc., which expires September 2001. The credit facility
has been amended on several occasions and, as of January 31, 1998, the agreement
allows the Company borrowings and letters of credit up to a maximum of $25
million for the period from October 1, 1997 through December 31, 1997, and $20
million for other times of the year based on inventory levels. The credit
facility is secured by the Company's inventory, accounts receivable, general
intangibles and certain other assets. Borrowings under this facility bear
interest at either 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 and
contains limitations on operating leases, other borrowings, dividend payments
and stock repurchases. For the period ended January 31, 1998, the Company was in
compliance with all covenants. For the period ended January 31, 1997, the
Company was out of compliance with the working capital and fixed asset coverage
ratios as a result of the closure of the SPA Collection division. The Company
received waivers for such non-compliance.
Subsequent to January 31, 1998, an amendment to the credit facility was
completed to set lower interest rates based on performance, to provide for
additional seasonal borrowings and to extend the expiration to September 2003.
Borrowings under the credit facility will now bear interest at either prime plus
0.50% per annum or at LIBOR plus 2.50% per annum. The credit facility was
seasonally increased as follows:
October 1 through December 31,
1998 $28 million
1999 $30 million
2000 $31 million
2001 $32 million
2002 $33 million
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 1%
per annum or at LIBOR plus 3% per annum. Each Term Loan is to be repaid in 36
equal monthly principal installments. Subsequent to January 31, 1998, the
variable interest rate for all Term Loans was lowered to prime plus 0.75% or
LIBOR plus 2.75%. Notes payable included a Term Loan which bears interest at a
variable rate of prime plus 0.75%, provides for monthly principal payments of
$55,555 plus the related interest payment, and matures in October 1999.
Notes payable also 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 8.4%, 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.
The Company's merchandise inventory at January 31, 1998 was approximately
26.2% higher than the prior fiscal year. The increase in inventory reflected the
incremental amounts for the support of six new stores opened during 1997 and
increases to bring inventory to an optimal level to support store and catalog
sales.
The Company leases all of its offices, stores, and seasonal warehouse
space. The Company opened four Sharper Image
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
stores located in Denver, Colorado; Bloomington, Minnesota; Danbury,
Connecticut; and Aventura, Florida; and converted two SPA Collection stores in
Walnut Creek, California, and Skokie, Illinois, to Sharper Image stores. The
Company closed three Sharper Image stores located in Washington, D.C.; Novato,
California; and Baltimore, Maryland; and three SPA Collection stores in St.
Louis, Missouri; Troy, Michigan; and Beverly Hills, California.
The Company is currently evaluating its plan to open four to eight new
Sharper Image stores during fiscal 1998. Total capital expenditures estimated
for new and existing stores, corporate headquarters and the distribution center
for fiscal 1998 are between $6 million and $8 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.
Year 2000 Compliance
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999, to January 1, 2000. The Company has assessed its
computer and business processes, and is reprogramming its computer applications
to provide for their continued functionality. An assessment of the readiness of
the external entities with which it interfaces is ongoing.
The Company expects that the principal costs will be those associated with
the remediation and testing of its computer applications. This effort was begun
in 1996 and is following a process of inventory, scoping and analysis,
modification, testing and implementation. These efforts will be met primarily
from existing resources through a reprioritization of technology development
initiatives. The Company expects to complete the majority of its efforts in this
area during 1998 with final completion in mid-1999. The estimated cost for this
project is between $500,000 and $1,000,000 and is being funded through operating
cash flows. The cost of the project and the expected completion dates are based
on management's best estimates.
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 statements or reflect
events or circumstances after the date hereof.
<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, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1998. 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
San Francisco, California
March 25, 1998
<PAGE>
Statements of Operations
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Year Ended
January 31,
-----------------------------------------
Dollars in thousands
except per share amounts 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Sales $ 245,095 $ 236,844 $ 230,410
Less: returns and allowances 29,902 29,074 28,010
----------- ----------- ----------
Net Sales 215,193 207,770 202,400
List rental 982 1,177 1,102
Licensing 640 1,298 682
----------- ----------- ----------
216,815 210,245 204,184
----------- ----------- ----------
Costs and Expenses:
Cost of products 115,535 108,799 102,728
Buying and occupancy 23,904 23,967 21,314
Advertising and promotion 22,795 25,736 31,710
General, selling, and administrative 53,074 50,671 48,072
Provision for loss due to closure of
SPA Collection division -- 8,000 --
----------- ----------- ----------
215,308 217,173 203,824
----------- ----------- ----------
Other Income (Expense):
Interest income (expense) -- net (564) (391) 220
Other -- net 45 78 159
----------- ----------- ----------
(519) (313) 379
----------- ----------- ----------
Earnings (Loss) before Income Tax
(Benefit) 988 (7,241) 739
Income Tax (Benefit) 395 (2,896) 295
----------- ----------- ----------
Net Earnings (Loss) $ 593 $ (4,345) $ 444
=========== =========== ==========
Net Earnings (Loss) Per Share --
Basic $ 0.07 $ (0.53) $ 0.05
=========== =========== ==========
Net Earnings (Loss) Per Share --
Diluted $ 0.07 $ (0.53) $ 0.05
=========== =========== ==========
Weighted Average Number of Shares --
Basic 8,303,425 8,260,208 8,249,259
=========== =========== ==========
Weighted Average Number of Shares --
Diluted 8,537,032 8,260,208 8,682,078
=========== =========== ==========
See Notes to Financial Statements.
17
<PAGE>
Balance Sheets
- --------------------------------------------------------------------------------
Sharper Image Corporation
January 31,
------------------------
Dollars in thousands except per share amounts 1998 1997
- --------------------------------------------------------------------------------
Assets
Current Assets:
Cash and equivalents $ 3,501 $ 10,873
Accounts receivable, net of allowance for doubtful
accounts of $508 and $505 8,189 5,915
Merchandise inventories 34,534 27,365
Deferred catalog costs 4,982 3,713
Prepaid expenses and other 3,429 4,495
-------- --------
Total Current Assets 54,635 52,361
Property and Equipment, Net 20,842 23,012
Deferred Taxes and Other Assets 3,185 3,431
-------- --------
Total Assets $ 78,662 $ 78,804
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 18,439 $ 17,025
Accrued expenses 16,832 19,628
Deferred revenue 6,784 5,045
Income taxes payable -- 307
Current portion of notes payable 947 927
-------- --------
Total Current Liabilities 43,002 42,932
Notes Payable 3,299 4,245
Other Liabilities 3,205 3,178
-------- --------
Total Liabilities 49,506 50,355
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, 8,356,280 and 8,266,940 shares 83 83
Additional paid-in capital 9,704 9,590
Retained earnings 19,369 18,776
-------- --------
Total Stockholders' Equity 29,156 28,449
-------- --------
Total Liabilities and Stockholders' Equity $ 78,662 $ 78,804
======== ========
See Notes to Financial Statements.
<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, 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
Issuance of common stock for stock options 124,340 1 237 238
Repurchase of common stock (35,000) (1) (123) (124)
Net earnings 593 593
--------- ---- -------- -------- --------
Balance at January 31, 1998 8,356,280 $ 83 $ 9,704 $ 19,369 $ 29,156
========= ==== ======== ======== ========
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Sharper Image Corporation
<CAPTION>
Fiscal Year
Ended January 31,
--------------------------------------------------
Dollars in thousands 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net earnings (loss) $ 593 $ (4,345) $ 444
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 4,334 4,195 3,461
Deferred rent expense 151 142 69
Deferred income taxes 1,614 (3,188) (127)
Change in operating assets and liabilities:
Accounts receivable (2,274) (1,479) (1,202)
Merchandise inventories (7,169) (3,052) (758)
Deferred catalog costs, prepaid expenses and other (1,571) 54 (2,018)
Accounts payable and accrued expenses 838(1) 11,429(1) 4,141
Deferred revenue and other liabilities 1,308 (508) (347)
-------- -------- --------
Cash Provided by (Used for) Operating Activities (2,176) 3,248 3,663
-------- -------- --------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (4,437) (6,579) (11,507)
Disposals of equipment 53 98 14
-------- -------- --------
Cash Used for Investing Activities (4,384) (6,481) (11,493)
-------- -------- --------
Cash was Provided by (Used for) Financing Activities:
Issuance of common stock for stock options 238 36 128
Repurchase of common stock (124) -- (606)
Proceeds from notes payable and revolving loan 27,761 25,665 14,000
Principal payments on notes payable and revolving loan (28,687) (24,071) (11,409)
-------- -------- --------
Cash Provided by (Used for) Financing Activities (812) 1,630 2,113
-------- -------- --------
Net Decrease in Cash and Equivalents (7,372) (1,603) (5,717)
Cash and Equivalents at Beginning of Period 10,873 12,476 18,193
-------- -------- --------
Cash and Equivalents at End of Period $ 3,501 $ 10,873 $ 12,476
======== ======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 771 $ 700 $ 312
Income Taxes $ 409 $ 459 $ 1,971
<FN>
1 Includes $(4,178) and $8,000 of change in accrued liabilities for fiscal years ended January 31, 1998 and 1997, 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, 1998, 1997, and 1996
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 $3,580,000, $5,306,000, and $3,807,000, for the fiscal years ended
January 31, 1998, 1997, and 1996.
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.
The Company manufactures its own proprietary products for sale through its
stores and catalogs. Costs incurred for tooling, dies and package design are
deferred and amortized over the estimated life of these products, which is
generally two years. At January 31, 1998 and 1997, capitalized costs included in
property and equipment, net of related amortization, were $1,566,000 and
$585,000, respectively.
The Company reviews its long-lived assets, including identifiable intangible
assets, whenever events or changes indicate the carrying amount of such assets
may not be recoverable. The Company's policy is to review the recoverability of
all assets, at a minimum, on an annual basis. Based on the Company's review at
January 31, 1998, no material adjustment was made to long-lived assets.
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 management 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: In 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128
requires companies to present basic earnings per share and diluted earnings per
share. Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding during each year of
8,303,425, 8,260,208, and 8,249,259, for the fiscal years ended January 31,
1998, 1997, and 1996. Diluted earnings per share reflects the potential dilution
that could occur from common shares issuable through stock options, adjusted for
233,607 and 432,819 incremental shares assumed issued on the exercise of common
stock during the fiscal years ended January 31, 1998 and 1996. Stock options
were excluded from the computation of diluted loss per share for the year ended
January 31, 1997, as the effect would be anti-dilutive.
Options for which the exercise price was greater than the average market price
of common stock for the period were not included in the computation of diluted
earnings per share. The number of such options for which the exercise price was
greater than the average market price of $3.56 and $6.31 for the fiscal years
ended January 31, 1998 and 1996, was 97,500 and 642,400.
New Accounting Standards: In 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, which prescribes standards for reporting
comprehensive income and its components. Comprehensive income consists of net
income or loss for the current period and other comprehensive income (income,
expenses, gains and losses that currently bypass the income statement and are
reported directly as a separate component of equity). SFAS No. 130 requires that
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographical areas and major
customers.
Adoption of these statements will not impact the Company's consolidated
financial position results of operations or cash flows and any effect will be
limited to the form and content of disclosures. Both SFAS No. 130 and SFAS No.
131 are effective for the Company in 1998.
Reclassification: Certain reclassifications have been made to prior years'
financial statements in order to conform with the classifications of the January
31, 1998 financial statements.
21
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1998, 1997, and 1996
Note B -- Property and Equipment
Property and equipment is summarized as follows:
January 31,
----------------------
Dollars in thousands 1998 1997
- -----------------------------------------------------------------------
Leasehold improvements $ 24,071 $ 24,341
Office furniture and equipment 30,313 26,839
Transportation 2,439 2,422
Land 53 53
Building 2,874 2,874
-------- --------
59,750 56,529
Less accumulated depreciation
and amortization 38,908 33,517
-------- --------
$ 20,842 $ 23,012
======== ========
Note C -- Other Assets
The Company has an agreement under which it 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, 1998 and 1997 was $590,000 and $392,000,
respectively.
Note D -- Revolving Loan and Notes Payable
The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc., which expires September 2001. The credit facility has been amended
on several occasions and, as of January 31, 1998, the agreement allows the
Company borrowings and letters of credit up to a maximum of $25 million for the
period from October 1, 1997 through December 31, 1997, and $20 million for other
times of the year based on inventory levels. The credit facility is secured by
the Company's inventory, accounts receivable, general intangibles and certain
other assets. Borrowings under this facility bear interest at either 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 and contains limitations on operating
leases, other borrowings, dividend payments and stock repurchases. For the
period ended January 31, 1998, the Company was in compliance with all covenants.
For the period ended January 31, 1997, the Company was out of compliance with
the working capital and fixed asset coverage ratios as a result of the closure
of the SPA Collection division. The Company received waivers for such
non-compliance.
Subsequent to January 31, 1998, an amendment to the credit facility was
completed to set lower interest rates based on performance, to provide for
additional seasonal borrowings and to extend the expiration to September 2003.
Borrowings under the credit facility will now bear interest at either prime plus
0.50% per annum or at LIBOR plus 2.50% per annum. The credit facility was
seasonally increased as follows:
October 1 through December 31,
1998 $28 million
1999 $30 million
2000 $31 million
2001 $32 million
2002 $33 million
At January 31, 1998 and 1997, the Company had no amounts outstanding on its
revolving loan credit facility. Letter of credit commitments as of January 31,
1998 and 1997 were $2,321,000 and $1,285,000, respectively.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 1%
per annum or at LIBOR plus 3% per annum. Each Term Loan is to be repaid in 36
equal monthly principal installments. Subsequent to January 31, 1998, the
variable interest rate for all Term Loans was lowered to prime plus 0.75% or
LIBOR plus 2.75%. Notes payable included a Term Loan which bears interest at a
variable rate of prime plus 1%, provides for monthly principal payments of
$55,555 plus the related interest payment, and matures in October 1999. At
January 31, 1998 and 1997, the balance of the Term Loan was $1,167,000 and
$1,833,000, respectively.
Notes payable also 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.
The respective balance of each note payable is $2,772,000 and $307,000. Future
minimum principal payments on notes payable are as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Year ending January 31,
1999 $ 946
2000 787
2001 147
2002 160
2003 173
Later years 2,033
-------
Total notes payable $ 4,246
=======
22
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1998, 1997, and 1996
Note E -- Income Taxes
January 31,
------------------------------------------
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Currently payable (refundable):
Federal $(1,036) $ 248 $ 359
State (183) 44 63
------- ------- -------
(1,219) 292 422
Deferred:
Federal 1,372 (2,710) (107)
State 242 (478) (20)
------- ------- -------
1,614 (3,188) (127)
------- ------- -------
$ 395 $(2,896) $ 295
======= ======= =======
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
January 31,
--------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
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 1998 1997
- -------------------------------------------------------------------------------
Current:
Nondeductible reserves $ 3,809 $ 4,457
Deferred catalog costs (1,993) (1,485)
State taxes (569) (551)
------- -------
Current -- net 1,247 2,421
------- -------
Noncurrent:
Deferred rent 1,429 1,566
Depreciation 2,356 2,512
Deductible software costs (1,050) (924)
Other -- net (189) (168)
------- -------
Noncurrent -- net 2,546 2,986
------- -------
Total $ 3,793 $ 5,407
======= =======
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, 1998, are as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Year ending January 31,
1999 $ 14,280
2000 14,013
2001 12,540
2002 8,486
2003 7,919
Later years 22,318
--------
Total minimum lease commitments $ 79,556
========
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 1998 1997 1996
- ------------------------------------------------------------------------
Minimum rentals $ 13,812 $ 13,259 $ 11,917
Percentage rentals and other charges 5,559 5,546 5,093
-------- -------- --------
$ 19,371 $ 18,805 $ 17,010
======== ======== ========
23
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1998, 1997, and 1996
Note G -- 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. During fiscal
1997 and fiscal 1995, the Company repurchased 35,000 shares for $124,000, and
94,800 shares for $606,000, under this stock repurchase program. Through January
31, 1998, the Company has repurchased a total of 186,100 shares at an average
price of $5.95 per share.
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, 1998, the Company had reserved 513,120 shares and 27,000 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, 51% in fiscal 1997 and 45% in
both fiscal 1996 and fiscal 1995; risk-free interest rates, 6.10% in fiscal
1997, 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 1997, 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 $383,000 ($0.05 earnings per share -- basic and $0.04 earnings per share --
diluted) in fiscal 1997, $(4,576,000) ($0.55 loss per share -- basic and
diluted) in fiscal 1996 and $317,000 ($0.04 earnings per share -- basic and
diluted) 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 1997, 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.
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1998, 1997, and 1996
Note G -- Stockholders' Equity (continued)
The following table reflects the activity under these plans:
Weighted
Number of Average
Options Exercise Price
---------------------------
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
Granted (weighted average fair value of $1.81) 129,300 3.24
Exercised (124,340) 1.92
Cancelled (71,260) 3.83
---------
Balance at January 31, 1998 1,438,200 $ 3.21
=========
Exercisable at January 31, 1996 624,000 $ 1.70
=========
Exercisable at January 31, 1997 650,000 $ 2.49
=========
Exercisable at January 31, 1998 591,000 $ 2.73
=========
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------- -----------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of of Options Contractual Exercise of Options Average
Exercise Prices Outstanding Life (years) Price Exercisable Exercise Price
- ------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$1.16-$1.99 254,590 3.6 $ 1.88 255,000 $ 1.88
2.00- 3.99 1,101,110 8.6 3.37 301,000 3.13
4.00- 7.00 82,500 7.2 5.20 35,000 5.42
--------- -------
$1.16-$7.00 1,438,200 7.6 $ 3.21 591,000 $ 2.73
========= =======
</TABLE>
Note H -- 401k Savings Plan
The Company maintains a defined contribution, 401k Savings Plan (the Plan),
covering all employees who have completed one year of service with at least
1,000 hours and who are at least 21 years of age. The Company makes employer
matching contributions at its discretion. Company contributions amounted to
$77,000, $81,000, and $79,000 for the fiscal years ended January 31, 1998, 1997,
and 1996, respectively.
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, in January 1997 the
Company decided to close the unprofitable SPA Collection division.
During the fourth quarter of fiscal 1996, the Company incurred a one-time charge
related to the closure of the SPA Collection division of $8,000,000 ($4,800,000
net of the tax benefit, or 56 cents loss per share). The one-time charge
primarily related to the lease commitments and the net book value of fixed
assets related to the SPA Collection division. The liability related to this
one-time charge at January 31, 1998, and January 31, 1997, in the amount of
$3,822,000 and $8,000,000, respectively, was included in accrued expenses.
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.
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 1998, 1997, and 1996
<TABLE>
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, 1998 1997 1997 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 36,273 $ 43,340 $ 41,106 $ 96,096
Expenses
Cost of products 19,563 23,472 22,115 50,385
Buying and occupancy 5,707 5,783 5,946 6,468
Advertising and promotion 3,546 4,715 4,036 10,498
General, selling and administrative 11,021 11,739 11,429 18,885
Other income (expense) (45) (118) (198) (158)
Earnings (loss) before income tax (benefit) (3,609) (2,487) (2,618) 9,702
Income tax (benefit) (1,443) (995) (1,047) 3,880
Net earnings (loss) $ (2,166) $ (1,492) $ (1,571) $ 5,822
Net earnings (loss) per share -- Basic $ (0.26) $ (0.18) $ (0.19) $ 0.70
Diluted(2) $ (0.26) $ (0.18) $ (0.19) $ 0.67
Three Months Ended
----------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal year ended January 31, 1997 1996 1996 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 -- Basic $ (0.27) $ (0.13) $ (0.20) $ 0.07
Diluted(2) $ (0.27) $ (0.13) $ (0.20) $ 0.07
<FN>
1 See Note I for discussion on the closure of SPA Collection Division.
2 Diluted 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). 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>
<PAGE>
Corporate Data
- --------------------------------------------------------------------------------
Sharper Image Corporation
Board of Directors
- --------------------------------------------------------------------------------
Richard Thalheimer Morton David*
Founder Retired Chairman, President, and
Chairman of the Board Chief Executive Officer
Chief Executive Officer Franklin Electronic Publishers, Inc.
*Joined January 1998.
Elyse Eng Thalheimer Gerald Napier
Retired President of
I. Magnin and Company
Alan Thalheimer
Retired Business Executive
Maurice Gregg
Retail Financial Consultant
Officers
- --------------------------------------------------------------------------------
Richard Thalheimer Roger Bensinger
Founder Vice President
Chairman of the Board Business Development
Chief Executive Officer
Barry Gilbert Greg Hickey
Vice Chairman Vice President
Chief Operating Officer Management Information Systems
Craig Womack Barry Jacobsen
President Vice President
Chief Administrative Officer Distribution
Davia Kimmey Woodrow Nelson
Senior Vice President Vice President
Marketing Creative Services
Shannon King Judith Serlin
Senior Vice President Vice President
Merchandising Merchandising
Tracy Wan Mary Tanner
Senior Vice President Vice President
Chief Financial Officer Human Resources
Corporate Secretary
Charles Taylor
Vice President
Merchandising
Robert Thompson
Vice President
Merchandising
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 LLC
85 Challenger Road
Overbeck Center
Ridgefield Park, NJ 07660
Corporate Counsel
Brobeck, Phleger & Harrison LLP
One Market
Spear Street Tower
San Francisco, CA 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 8, 1998, at 10 am at the World Trade Club, Ferry Building, 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 1997 Fiscal Year 1996
High Low High Low
First Quarter 4 3/4 3 6 1/4 3 5/8
Second Quarter 4 2 7/8 6 3/8 3 1/2
Third Quarter 3 7/8 2 13/16 4 1/2 3 1/4
Fourth Quarter 4 3/8 2 7/8 4 1/8 3 1/8
<PAGE>
<TABLE>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fiscal Year Ended January 31,
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results 1998 1997 1996 1995 1994
Revenues $ 216,815 $ 210,245 $ 204,184 $ 188,535 $ 147,441
Provision for loss on the closure of
the SPA Collection division -- (8,000) -- -- --
Earnings (loss) before income taxes 988 (7,241) 739 6,139 2,939
Net earnings (loss) 593 (4,345) 444 3,683 1,763
Net earnings (loss) per share -- Basic(1) $ 0.07 $ (0.53) $ 0.05 $ 0.44 $ 0.21
Diluted(1) $ 0.07 $ (0.53) $ 0.05 $ 0.41 $ 0.20
Balance Sheet Data
Working capital $ 11,633(2) $ 9,429(2) $ 17,233 $ 23,011 $ 19,488
Total assets 78,662 78,804 70,456 64,036 55,095
Notes payable 3,299 4,245 3,355 838 987
Stockholders' equity $ 29,156 $ 28,449 $ 32,758 $ 32,792 $ 29,868
Current ratio 1.27 1.22 1.56 1.85 1.94
Statistics
Number of stores at year end 85 82(3) 78(3) 74 73
Comparable store sales 1.1% (2.1)% 3.3% 17.8% (4.1)%
Annualized net sales per square foot $ 465 $ 458 $ 473 $ 468 $ 385
Number of catalogs mailed 44,544,000(4) 37,695,000(4) 32,780,000(4) 31,522,000 25,879,000
Number of catalog orders 422,000 470,000 536,000 426,000 252,000
Average revenue per order:
Stores $ 104 $ 97 $ 106 $ 102 $ 95
Catalog $ 158(5) $ 134(5) $ 122 $ 116 $ 120
Returns on average stockholder's equity 2.1% N/A 1.4% 11.8% 6.1%
Book value per share $ 3.51 $ 3.44 $ 3.97 $ 3.96 $ 3.61
Weighted average number of shares
outstanding -- Basic(1) 8,303,425 8,260,208 8,249,259 8,294,378 8,248,159
Diluted(1) 8,537,032 8,260,208 8,682,078 8,899,289 8,683,929
<FN>
Dollars are in thousands except Net earnings (loss) per share and Statistics.
1 Amounts have been restated to reflect the adoption of SFAS No. 128 in fiscal year ended January 31, 1998.
2 Includes $3,822 and $8,000 of accrued liabilities at January 31, 1998 and 1997, related to the closure of the SPA Collection
division.
3 Excludes six and four SPA Collection stores at January 31, 1997 and 1996, respectively.
4 Includes 6,283,000 and 2,900,000 of The Sharper Image Home Collection catalogs mailed for January 31, 1998 and 1997. Excludes SPA
Collection catalogs mailed for January 31, 1997 and 1996.
5 Excludes The Sharper Image Home Collection which had average revenue per order of $678 and $577 for January 31, 1998 and 1997.
</FN>
</TABLE>
(a) Industry average statistics for "Specialty Stores -- Hard Goods" per
National Retail Federation.
(b) Industry average statistic is not yet available.
Sales per Square Foot
Industry Average(a) Sharper Image
1993 $202 $385
1994 $234 $468
1995 $252 $473
1996 $343 $458
1997(b) $465
Revenue Growth
(in millions of dollars)
Sharper Image
1993 $147.4
1994 $188.5
1995 $204.2
1996 $210.2
1997 $216.8
Customer File Growth
(in millions)
Sharper Image
1993 4.4
1994 5.0
1995 5.5
1996 6.2
1997 6.6
EXHIBIT 10.24 WARRANT TO PURCHASE COMMON STOCK
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 April 6, 1998
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" - April 6, 1998;
(d) "Holder" - The CIT Group/Business Credit, Inc. or any
transferee thereof;
(e) "Purchase Price" - $4.125 per share, subject to
adjustments pursuant to Section 3 hereof;
<PAGE>
(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 75,000 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.
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:
2.
<PAGE>
(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 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
3.
<PAGE>
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 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:
4.
<PAGE>
"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 "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:
5.
<PAGE>
(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 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.
6.
<PAGE>
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:
(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)
7.
<PAGE>
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 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
8.
<PAGE>
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 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 upon 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
9
<PAGE>
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.
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.
10.
<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/ Tracy Y. Wan
------------
Name: Tracy Y. Wan
Title: Senior Vice President,
Chief Financial Officer
By: /s/ Craig P. Womack
---------------
Name: Craig P. Womack
Title: President,
Chief Administrative Officer
ACCEPTED AND AGREED:
CIT GROUP/BUSINESS CREDIT, INC.
/s/ Adrian Avalos
-------------
Name: Adrian Avalos
Title: Loan Officer
11.
<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 10.25 AMENDMENT TO FINANCING AGREEMENT
As of April 6, 1998
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
Gentlemen:
Reference is made to (a) the Financing Agreement between us dated September 21,
1994, as amended (the "Financing Agreement") and (b) the Amendment Letter
between us dated May 15, 1996 (herein the "1996 Amendment Letter"). 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) Section 1 of the Financing Agreement shall be, and hereby is, amended by
amending the definitions of "Early Termination Date", "Early Termination Fee",
"Line of Credit" and "Line of Credit Fee" in their entirety to read as follows:
"Early Termination Date shall mean the date on which the Company
terminates this Financing Agreement or the Line of Credit which date is
prior to the fifth Anniversary Date."
"Early Termination Fee shall: i) mean the fee CITBC is entitled to
charge the Company in the event the Company terminates the Line of
Credit or this Financing Agreement on a date prior to the fifth
Anniversary Date (except as otherwise provided in Section 10 of this
Financing Agreement); and ii) be determined by calculating the sum of
(a) the average daily balance of the Revolving Loans for the period
from the date of this Financing Agreement to the Early Termination
Date, (b) the average daily undrawn face amount of the Letters of
Credit outstanding from the date of this Financing Agreement to the
Early Termination Date and (c) the average daily balance of CAPEX Term
Loans for the period from the effective date of the CAPEX Term Loan
Line of Credit to the Early Termination Date and multiplying that sum
by (i) one percent (1%) per annum if the Early Termination Date occurs
1
<PAGE>
prior to the second Anniversary Date; (ii) three-quarters of one
percent (3/4 of 1%) per annum if the Early Termination Date occurs on
or after the second Anniversary Date but prior to the third Anniversary
Date; and (iii) one-half of one percent (1/2 of 1%) per annum if the
Early Termination Date occurs on or after the third Anniversary Date
but prior to the fifth Anniversary Date, in each case for the number of
days from the Early Termination Date to the fifth Anniversary Date."
"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 Agreement, in the aggregate amount of $24,500,000 at all
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 $20,000,000 at
all times except as set forth below:
(a) October 1 - December 31, 1998 $28,000,000.00
(b) October 1 - December 31, 1999 $30,000,000.00
(c) October 1 - December 31, 2000 $31,000,000.00
(d) October 1 - December 31, 2001 $32,000,000.00
(e) October 1 - December 31, 2002 $33,000,000.00"
"Line of Credit Fee shall: i) mean the fee due CITBC at the end of each
month for the Line of Credit, and ii) be determined by multiplying x)
the difference between the Line of Credit at the end of such month less
the sum of a) the average daily Revolving Loans outstanding during such
month, and b) the average daily undrawn face amount of all outstanding
Letters of Credit for said month by y) one half of one percent (.500%)
per annum for the number of days in said month during which this
Financing Agreement was in effect (herein the "Line of Credit
Percentage"), provided, however, the percentage set forth in y) shall
be subject to increase or decrease (herein each a "Fee Adjustment") as
outlined below:
(i) The Line of Credit Percentage may be reduced or increased in
accordance with the grid set forth below from the rate set forth in y)
above, based on the EBITDA of the Company for any fiscal quarter
commencing with the fiscal quarter ending January 31, 1998 and each
fiscal quarter thereafter.
2
<PAGE>
EBITDA for Four Consecutive Line of Credit
Quarters, then ended Percentage
-------------------- ----------
1. Less than $5,000,000.00 0.500% per annum
2. $5,000,000.00 or more
but less than $6,500,000.00* 0.375% per annum
3. $6,500,000.00 or more* 0.250% per annum
*except solely with respect to the fiscal quarter ended July 1998, the figure
"$6,500,000.00" set forth in #2 and #3 above shall be "$6,000,000.00."
(ii) In addition to the foregoing requirements, each Fee Adjustment is
subject to the Company's compliance with each of the following
conditions:
(x) as to any fee reduction, the timely delivery by the
Company of the Relevant Financial Statements (as hereinafter
defined) in accordance with Paragraph 7 of Section 6 of this
Financing Agreement and CITBC has had reasonable time to
review such financial statements to its satisfaction
("Financial Statement Test"), and the absence of any Default
or Event of Default on the date of determination of the
Financial Statement Test or the effective date of any such Fee
Adjustment; and
(y) each Fee Adjustment will be effective only after CITBC's
receipt and review of (a) the Company's latest financial
statements reflecting the four (4) consecutive most recently
ended quarters (the "Relevant Financial Statements") for the
applicable fiscal quarter and (b) a certificate signed by an
authorized officer of the Company setting forth the
calculations used to determine the applicable Line of Credit
Percentage based on the terms and conditions set forth herein.
Any such Fee Adjustment shall be effective on the first day of
the month following CITBC's receipt and review of such
Relevant Financial Statements.
(iii) Notwithstanding the foregoing, if the Company fails to timely
deliver to CITBC the Relevant Financial Statements under this Financing
Agreement, and/or a Default or an Event of Default has occurred under
this Financing Agreement as further provided in clause (x) above, the
Line of Credit Percentage shall be 0.500% per annum."
(B) Section 1 of the Financing Agreement shall be, and hereby is, further
amended by adding the
3
<PAGE>
following definitions in their proper alphabetical order as follows:
"Chase Manhattan Bank Rate shall mean the rate of interest per annum
announced by Chase Manhattan Bank from time to time as its prime rate
in effect at its principal office in the City of New York. (The prime
rate is not intended to be the lowest rate of interest charged by Chase
Manhattan Bank to its borrowers).
All references in the Financing Agreement to the "Chemical Bank Rate"
shall be, and hereby are, amended to the "Chase Manhattan Bank Rate."
"Interest Coverage Ratio shall mean a ratio determined as of the
relevant calculation date by dividing EBITDA by Interest Expense for
the relevant period."
(C) 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-five percent (55%) for the period January 1 through and including
September 30 of each year, (ii) sixty percent (60%) for the period from
October 1, through and including October 31 of each year,
(iii)sixty-five percent (65%) for the period from November 1, through
and including December 31 of each year, 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."
(D) Section 6, Paragraphs 8, 10 and 11 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 all
fiscal quarters ending October of each fiscal year to be
"$24,000,000.00". 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 deleting it in its entirety and
substituting the following in lieu thereof:
"10. Intentionally Omitted."
(iii) The Fixed Charge Coverage Ratio covenant set forth in Paragraph
11 of Section
4
<PAGE>
6 shall be, and hereby is, amended by deleting it in its entirety and
substituting the following in lieu thereof:
"11. The Company shall maintain at the end of each fiscal
quarter for the four (4) consecutive fiscal quarters then
ending an Interest Coverage Ratio of at least 2.50 to 1.0."
(iii) The Leverage Ratio covenant set forth in Paragraph 12 of Section
6 shall be, and hereby is, amended by deleting it in its entirety and
substituting the following in lieu thereof:
"12. Without the prior written consent of CITBC, the Company
will not contract for, purchase, make expenditures for, lease
pursuant to a Capital Lease or otherwise incur obligations
with respect to Capital Expenditures (whether subject to a
security interest or otherwise) during any fiscal year in the
aggregate amount in excess of $10,000,000.00. Notwithstanding
the foregoing, if the Company, in any fiscal year, spends less
than the permitted Capital Expenditures for such year, then
fifty percent (50%) of such unused amount shall be added to
the amount permitted solely for the next succeeding fiscal
year."
(E) Paragraph 1 of Section 7 of the Financing Agreement shall be, and hereby is,
amended by adding the following subparagraph (d) to the end of such paragraph:
"(d) Subject to the conditions set forth in this subparagraph (d), the
interest rates set forth in Paragraph 1, subparagraphs (a) and (b)
shall be subject to increase or decrease (herein each a "Rate
Adjustment") as outlined below:
i) The spread over the Chase Manhattan Bank Rate and the Libor
may be reduced or increased in accordance with the grid set
forth below from the rate set forth in sub-Paragraphs (a) and
(b) above, as applicable (as such rate may be adjusted from
time to time hereunder) based on the EBITDA of the Company for
any fiscal quarter commencing with the fiscal quarter ending
January 31, 1998 and each fiscal quarter thereafter.
REVOLVING LOANS
---------------
EBITDA for Four Consecutive Chase Manhattan
- --------------------------- ---------------
Quarters, then ended Bank Rate Margin Libor Margin
- -------------------- ---------------- ------------
1. Less than $5,000,000.00 + 0.75% + 2.75%
5
<PAGE>
2. $5,000,000.00 or more
but less than $6,500,000.00* + 0.50% + 2.50%
3. $6,500,000.00 or more* + 0.25% + 2.25%
CAPEX LOANS
-----------
EBITDA for Four Consecutive Chase Manhattan
- --------------------------- ---------------
Quarters, then ended Bank Rate Margin Libor Margin
- -------------------- ---------------- ------------
1. Less than $5,000,000.00 + 1.00% + 3.00%
2. $5,000,000.00 or more
but less than $6,500,000.00* + 0.75% + 2.75%
3. $6,500,000.00 or more* + 0.50% + 2.50%
* except solely with respect to the fiscal quarter ended July, 1998, the figure
"$6,500,000.00" set forth in #2 and #3 in each grid above shall be
"$6,000,000.00."
(ii) In addition to the foregoing requirements, each Rate Adjustment is
subject to the Company's compliance with each of the following
conditions:
(x) as to any rate reduction, the timely delivery by the
Company of the Relevant Financial Statements (as hereinafter
defined) in accordance with Paragraph 7 of Section 6 of this
Financing Agreement and CITBC has had reasonable time to
review such financial statements to its satisfaction
("Financial Statement Test"), and the absence of any Default
or Event of Default on the date of determination of the
Financial Statement Test or the effective date of any such
Rate Adjustment; and
(y) each Rate Adjustment will be effective only after CITBC's
receipt and review of (a) the Company's latest financial
statements reflecting the four (4) consecutive most recently
ended fiscal quarters (the "Relevant Financial Statements")
for the applicable fiscal quarter and (b) a certificate signed
by an authorized officer of the Company setting forth the
calculations used to determine the applicable interest rate
margin based on the terms and conditions set forth herein. Any
such Rate Adjustment shall be effective as follows:
(A) as to the spread over the Chase Manhattan Bank
6
<PAGE>
Rate on the first day of the month following CITBC's
receipt and review of such Relevant Financial
Statements; and
(B) as to the spread over Libor on the first day of
the next interest period commencing after CITBC's
receipt and review of such Relevant Financial
Statements.
(iii) Notwithstanding the foregoing, if the Company fails to timely
deliver to CITBC the Relevant Financial Statements under this
Financing Agreement, the Chase Manhattan Bank Rate Margin or
the Libor Margin, as the case may be, shall be equal to the
highest rate set forth in the applicable grid set forth above;
provided, however, nothing contained herein shall be deemed to
affect CITBC's right to charge the Default Rate of Interest in
accordance with the terms of this Financing Agreement.
(F) Section 10 of the Financing Agreement shall be, and hereby is, amended as
follows:
(i) the reference to the seventh or any subsequent Anniversary Date" as
contained in the first sentence thereof shall be, and hereby is amended
to read "ninth or any subsequent Anniversary Date"; and
(ii) the reference to "fourth Anniversary Date" as contained in the
proviso at the end of the fourth sentence thereof shall be, and hereby
is, amended to read "fifth Anniversary Date".
(G) 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 amounts 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
7
<PAGE>
satisfactory to CITBC and take all other actions necessary to grant to
CITBC or its assigns a warrant to purchase up to 75,000 shares of its
voting common stock at $4.125 a share.
Pursuant to mutual understanding, a typographical error of omission appearing in
(F) on page 6 of the 1996 Amendment Letter is hereby corrected by adding the
words "Paragraph 1 of" to the beginning of the first sentence in (F) prior to
the reference to "Section 7" therein.
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.
/s/ Adrian Avalos
-------------
By: Adrian Avalos
Title: Loan Officer
Read and Agreed to:
SHARPER IMAGE CORPORATION
/s/ Tracy Y. Wan
------------
By: Tracy Y. Wan
Title: Senior Vice President, Chief Financial Officer
/s/ Barry Gilbert
-------------
By: Barry Gilbert
Title: Vice Chairman, Chief Operating Officer
8
Exhibit 11.1
<TABLE>
SHARPER IMAGE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Net Earnings (Loss) in thousands
Net Weighted Average Per-Share
Earnings (Loss) Shares Amount
---------------- ---------------- ----------
<S> <C> <C> <C>
Fiscal year ended January 31, 1998:
Basic $ 593 8,303,425 $ 0.07
==========
Effect of dilutive stock options $ - 233,607
---------------- ----------------
Diluted $ 593 8,537,032 $ 0.07
================ ================ ==========
Fiscal year ended January 31, 1997:
Basic $ (4,345) 8,260,208 $ (0.53)
==========
Diluted $ (4,345) 8,260,208 $ (0.53)
================ ================ ==========
Fiscal year ended January 31, 1996:
Basic $ 444 8,249,259 $ 0.05
==========
Effect of dilutive stock options $ - 432,819
---------------- ----------------
Diluted $ 444 8,682,078 $ 0.05
================ ================ ==========
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-12755, No. 33-80504, and No. 33-3327 of Sharper Image Corporation on Forms
S-8 of our reports dated March 25, 1998, appearing in and incorporated by
reference in this Annual Report on Form 10-K of Sharper Image Corporation for
the year ended January 31, 1998.
/s/ Deloitte & Touche LLP
April 29, 1998
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, 1998 and 1997, and for each of the three years in the period ended
January 31, 1998, and have issued our report thereon dated March 25, 1998; such
financial statements and report are included in your 1997 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
---------------------
San Francisco, California
March 25, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR YEAR ENDED JANUARY 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 3,501
<SECURITIES> 0
<RECEIVABLES> 8,697
<ALLOWANCES> (508)
<INVENTORY> 34,534
<CURRENT-ASSETS> 54,635
<PP&E> 59,750
<DEPRECIATION> (38,908)
<TOTAL-ASSETS> 78,662
<CURRENT-LIABILITIES> 43,002
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 29,073
<TOTAL-LIABILITY-AND-EQUITY> 78,662
<SALES> 245,095
<TOTAL-REVENUES> 216,815
<CGS> 115,535
<TOTAL-COSTS> 215,308
<OTHER-EXPENSES> (45)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 564
<INCOME-PRETAX> 998
<INCOME-TAX> 395
<INCOME-CONTINUING> 593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 593
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE RESTATED FOR QUARTERS 1,2,3 FOR YEAR ENDED 1/3/1/98
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-01-1997 MAY-01-1997 AUG-01-1997
<PERIOD-END> APR-30-1997 JUL-31-1997 OCT-31-1997
<CASH> 4,260 647 547
<SECURITIES> 0 0 0
<RECEIVABLES> 5,011 5,286 7,450
<ALLOWANCES> (512) (516) (493)
<INVENTORY> 28,793 26,939 38,496
<CURRENT-ASSETS> 47,351 42,864 61,808
<PP&E> 56,535 56,475 57,690
<DEPRECIATION> (34,390) 36,212) (37,904)
<TOTAL-ASSETS> 72,926 66,753 85,220
<CURRENT-LIABILITIES> 39,417 34,967 43,882
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 83 83 83
<OTHER-SE> 26,200 24,680 23,203
<TOTAL-LIABILITY-AND-EQUITY> 72,926 66,753 85,220
<SALES> 40,701 48,135 44,584
<TOTAL-REVENUES> 36,273 43,340 41,106
<CGS> 19,563 23,472 22,115
<TOTAL-COSTS> 39,837 45,709 43,526
<OTHER-EXPENSES> (10) (10) (30)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 55 128 228
<INCOME-PRETAX> (3,609) (2,487) (2,618)
<INCOME-TAX> (1,443) (995) (1,047)
<INCOME-CONTINUING> (2,166) (1,492) (1,571)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,166) (1,492) (1,571)
<EPS-PRIMARY> (0.26) (0.18) (0.19)
<EPS-DILUTED> (0.26) (0.18) (0.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINACIAL DATA SCHEDULE RESTATED FOR FISCAL YEAR ENDED JANUARY 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 10,873
<SECURITIES> 0
<RECEIVABLES> 6,420
<ALLOWANCES> (505)
<INVENTORY> 27,365
<CURRENT-ASSETS> 52,361
<PP&E> 56,529
<DEPRECIATION> (33,517)
<TOTAL-ASSETS> 78,804
<CURRENT-LIABILITIES> 42,932
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 28,366
<TOTAL-LIABILITY-AND-EQUITY> 78,804
<SALES> 236,844
<TOTAL-REVENUES> 210,245
<CGS> 108,799
<TOTAL-COSTS> 209,173
<OTHER-EXPENSES> (78)
<LOSS-PROVISION> 8,000
<INTEREST-EXPENSE> 391
<INCOME-PRETAX> (7,241)
<INCOME-TAX> (2,896)
<INCOME-CONTINUING> (4,345)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,345)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE RESTATED FOR QUARTERS 1,2,3 FOR YEAR ENDED 1/31/97
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1997 JAN-31-1997
<PERIOD-START> FEB-01-1996 MAY-01-1996 AUG-01-1996
<PERIOD-END> APR-30-1996 JUL-31-1996 OCT-31-1996
<CASH> 858 781 573
<SECURITIES> 0 0 0
<RECEIVABLES> 4,627 4,694 6,264
<ALLOWANCES> (331) (539) (506)
<INVENTORY> 32,516 25,646 36,403
<CURRENT-ASSETS> 46,274 38,394 55,378
<PP&E> 51,968 53,031 54,949
<DEPRECIATION> (30,827) (31,329) (32,375)
<TOTAL-ASSETS> 69,217 62,095 79,950
<CURRENT-LIABILITIES> 31,784 25,822 35,933
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 83 83 83
<OTHER-SE> 30,463 29,426 27,757
<TOTAL-LIABILITY-AND-EQUITY> 69,217 62,095 79,950
<SALES> 40,730 49,133 41,326
<TOTAL-REVENUES> 36,501 44,186 39,368
<CGS> 19,245 22,872 20,282
<TOTAL-COSTS> 40,223 45,833 41,979
<OTHER-EXPENSES> (13) (19) (15)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (8) 102 199
<INCOME-PRETAX> (3,701) (1,753) (2,795)
<INCOME-TAX> (1,480) (701) (1,118)
<INCOME-CONTINUING> (2,221) (1,052) (1,677)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,221) (1,052) (1,677)
<EPS-PRIMARY> (0.27) (0.13) (0.20)
<EPS-DILUTED> (0.27) (0.13) (0.20)
</TABLE>
