<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Sharper Image Corporation
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee was calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
LOGO
APRIL 28, 1999
TO THE STOCKHOLDERS OF
SHARPER IMAGE CORPORATION:
You are cordially invited to attend the Annual Meeting of Stockholders of
Sharper Image Corporation (the "Company") on June 7, 1999 at 10:00 a.m., which
will be held at the World Trade Club, Ferry Building, San Francisco, California
94111.
Details of business to be conducted at the Annual Meeting are given in the
attached Notice of Annual Meeting and Proxy Statement. At the Annual Meeting, we
will present a report on the progress of the Company during the past year.
Accompanying this Proxy Statement is our 1998 Annual Report to
Stockholders.
We hope that you will attend the Annual Meeting. Whether or not you plan to
attend the meeting, please sign, date and return the enclosed proxy promptly in
the accompanying reply envelope so that your shares will be represented at the
Annual Meeting.
Sincerely yours,
RICHARD THALHEIMER
Founder, Chairman of the Board, and
Chief Executive Officer
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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SHARPER IMAGE CORPORATION
650 DAVIS STREET
SAN FRANCISCO, CALIFORNIA 94111
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 7, 1999
The Annual Meeting of Stockholders of Sharper Image Corporation (the
"Company") will be held at the World Trade Club, Ferry Building, San Francisco,
California 94111, on Monday, June 7, 1999, at 10:00 a.m., for the following
purposes:
1. To elect Directors to serve until the next Annual Meeting and until
their successors have been elected and qualified;
2. To approve the 1999 amendment of the Company's Stock Option Plan
(the "Option Plan") in order to (i) increase the number of shares of Common
Stock reserved for issuance thereunder by an additional 750,000 shares and
(ii) to extend the term of the Option Plan through September 30, 2004.
3. To approve the 1999 amendment of the Non-Employee Directors Stock
Option Plan (the "Directors Plan") in order to (i) increase the number of
shares of Common Stock reserved for issuance thereunder by an additional
200,000 shares; (ii) grant the Non-Employee Directors an automatic 2,000
share option each fiscal quarter for each Director who has served for at
least six months on the date of the grant and (iii) delete the automatic
1,000 share grant to each eligible Non-Employee Director on the date of the
Annual Meeting.
4. To ratify the selection of Deloitte & Touche LLP as the Company's
independent auditor for the fiscal year ending January 31, 2000; and
5. To transact any other business which may properly come before the
meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement that accompanies this Notice.
Stockholders of record at the close of business on April 15, 1999 will be
entitled to vote at the Annual Meeting. Whether or not you plan to attend,
please sign, date, and return the enclosed proxy in the envelope provided. The
prompt return of your proxy will assist us in preparing for the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
RICHARD THALHEIMER
Founder, Chairman of the Board, and
Chief Executive Officer
San Francisco, California
April 28, 1999
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[SHARPER IMAGE LOGO]
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF STOCKHOLDERS OF
SHARPER IMAGE CORPORATION
TO BE HELD JUNE 7, 1999
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Sharper Image Corporation, a Delaware
corporation (the "Company"), for the Annual Meeting of Stockholders of the
Company to be held at 10:00 a.m. at the World Trade Club, Ferry Building, San
Francisco, California 94111 on June 7, 1999 and at any adjournments or
postponements thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting of Stockholders. This Proxy Statement and the proxy card were
first mailed to stockholders on or about April 28, 1999.
The address of the principal executive office of the Company is 650 Davis
Street, San Francisco, California 94111.
VOTING RIGHTS
Only stockholders of record of the Company's Common Stock ("Common Stock")
at the close of business on April 15, 1999 will be entitled to notice of and to
vote at the Annual Meeting. Each share of Common Stock entitles the holders
thereof to one vote on each matter to come before the Annual Meeting. On April
15, 1999, there were 8,959,648 shares of Common Stock outstanding.
The enclosed proxy is solicited by the Company's Board of Directors ("Board
of Directors" or "Board"), and, when returned properly completed, will be voted
as you direct on your proxy card. In the absence of contrary instructions,
shares represented by such proxies will be voted FOR the proposals discussed
herein and in the discretion of the proxy holders on other matters presented at
the Annual Meeting. Management does not know of any matters to be presented at
this Annual Meeting other than those set forth in this Proxy Statement and in
the Notice accompanying this Proxy Statement. If other matters should properly
come before the Annual Meeting, in the discretion of the proxy holder, shares
represented by such proxies will be voted upon any other business. Abstentions
and broker non-votes are each included in the number of shares present for
quorum purposes. Abstentions which may be specified on all proposals other than
the election of Directors are counted in tabulations of the votes cast on
proposals presented to stockholders; whereas broker non-votes are not counted
for purposes of determining whether a proposal has been approved.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the Annual Meeting and voting the shares covered by the
proxy in person.
SOLICITATION OF PROXIES
The entire cost of soliciting proxies will be borne by the Company. The
original solicitation of proxies by mail may be supplemented by solicitation by
telephone, facsimile, e-mail, or other means by Directors, officers, employees
or agents of the Company who will not receive additional compensation for such
solicitation. Copies of the solicitation material will be furnished to brokerage
firms, fiduciaries and other custodians holding shares in their names that are
beneficially owned by others to forward to such beneficial owners. Such persons
will be reimbursed by the Company for their reasonable expenses incurred in
sending proxy material to beneficial owners of the Common Stock.
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PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, five (5) Directors are to be elected to serve until
the next Annual Meeting and until their successors are elected and qualified.
Set forth below is information regarding the nominees to the Board of Directors
for election as Directors. Director Maurice Gregg will not be standing for
re-election.
It is intended that the proxies will be voted for the election as Directors
of the five nominees named below, unless authority to vote for any such nominee
is withheld. The five nominees receiving the highest number of affirmative votes
at the Annual Meeting will be elected. In the unanticipated event that a nominee
is unable or declines to serve as a Director at the time of the Annual Meeting,
the proxies will be voted for any nominee named by the present Board of
Directors to fill the vacancy. Each nominee has agreed to serve if elected, and
the Board of Directors is not aware of any nominee who is unable or will decline
to serve as a Director.
NOMINEES TO THE BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AGE
---- ----------------------------------------------------- ---
<S> <C> <C>
Richard Thalheimer Founder, Chairman of the Board and Chief Executive 51
Officer of Sharper Image Corporation
Alan Thalheimer Retired Business Executive 73
Gerald Napier Retired President, I. Magnin and Company 72
Morton David Retired Chairman, Franklin Electronic Publishers Inc. 62
George James Retired Senior Vice President and Chief Financial 61
Officer, Levi Strauss & Co.
</TABLE>
RICHARD THALHEIMER is the founder of the Company and has served as Chief
Executive Officer and as a Director of the Company since 1978 and as Chairman of
the Board of Directors since 1985. Mr. Richard Thalheimer also served as
President of the Company through July 1993.
ALAN THALHEIMER has been a Director of the Company since June 1981 and was
President of Thalheimer, Inc. or its predecessor from May 1981 until retiring in
1993. Mr. Alan Thalheimer is the father of Mr. Richard Thalheimer.
GERALD NAPIER was appointed by the Board of Directors to serve as a
Director of the Company in April 1997. Mr. Napier was the President of I. Magnin
and Company from February 1982 until retiring in 1988. Mr. Napier was Senior
Vice President of General Operations at Abraham and Straus from 1977 to 1982.
MORTON DAVID was appointed by the Board of Directors to serve as a Director
of the Company in January 1998. Mr. David was Chairman, President and Chief
Executive Officer of Franklin Electronic Publishers, Inc. from May 1984 until
his retirement in February 1998.
GEORGE JAMES is a nominee to serve as a Director of the Company. Mr. James
was Senior Vice President and Chief Financial Officer of Levi Strauss & Co. from
1985 until his retirement in 1998. Mr. James was Executive Vice President and
Group President from 1984 to 1985, and was Executive Vice President and Chief
Financial Officer from 1982 to 1983 at Crown Zellerbach Corporation. Mr. James
was Senior Vice President and Chief Financial Officer from 1972 to 1982 with
Arcata Corporation. Mr. James is a Director of Crown Vantage, Inc.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES LISTED ABOVE.
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BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held three meetings during fiscal
1998. Each Director attended more than seventy-five percent (75%) of the
aggregate of (i) the total number of such meetings held during the fiscal year,
or a portion of the fiscal year, during which such Director served as a member
of the Board, and (ii) the total number of meetings held by all committees of
the Board on which such Director served as a member, except Director Alan
Thalheimer who attended 67% of such meetings. The Board of Directors has an
Audit Committee and a Compensation Committee.
The Audit Committee of the Board was established in November 1987 and
during fiscal 1998 consisted of Directors Maurice Gregg, Alan Thalheimer and
Gerald Napier. Mr. Morton David was appointed to the Audit Committee in April
1999. The Audit Committee is responsible for recommending engagement of the
Company's independent auditor, approving services performed by such accountants
and reviewing internal accounting controls, audit plans and results, and
financial reporting procedures. The Audit Committee held three meetings during
fiscal 1998.
The Compensation Committee was established in November 1987 and during
fiscal 1998 consisted of Directors Maurice Gregg, Gerald Napier and Morton
David. The Compensation Committee is responsible for making and reviewing
recommendations regarding employee compensation and administering the Company's
Stock Option Plan (the "Option Plan"). The Compensation Committee held one
meeting during fiscal 1998.
The Board of Directors does not have a nominating committee or committee
performing similar functions.
DIRECTOR REMUNERATION
During fiscal 1998, each of the Company's non-employee Directors was paid
an annual retainer of $5,000 plus $1,000 for attending each regular meeting of
the Board of Directors. The general policy of the Company is to reimburse
Directors for all reasonable expenses incurred to attend each meeting of the
Board of Directors. All Directors are also eligible to participate in certain of
the Company's employee benefit plans. Under the 1994 Non-Employee Directors
Stock Option Plan, each individual who first becomes an eligible non-employee
Board member will be automatically granted an option to purchase 2,000 shares of
Common Stock. In addition, on the date of each Annual Stockholders Meeting, each
individual re-elected as a non-employee Board member at that Annual Meeting will
receive an automatic option grant to purchase 1,000 shares of Common Stock,
provided such individual has served as a Board member for at least six (6)
months. The exercise price will be 100% of the fair market value of the Common
Stock on the automatic grant date. The options are immediately exercisable and
the option shares will vest upon the optionee's completion of one (1) year of
Board service measured from the grant date. Any unvested shares purchased under
the option will be subject to repurchase by the Company upon the optionee's
cessation of Board service prior to vesting in those shares. This 1,000 share
grant at the Annual Meeting is being eliminated subject to stockholder approval
of Proposal No. 3. The three non-employee Board members elected to the Board at
the 1998 Annual Meeting, Messrs. A. Thalheimer, Gregg and Napier each received
at that time an automatic option grant for 1,000 shares of Common Stock with an
exercise price of $5.5625 per share. Messr. M. David did not receive an
automatic option grant because he had not served as a Board member for six
months at the time of the 1998 Annual Meeting. On November 1, 1998 and February
1, 1999 each of the four non-employee Directors was granted an option under the
1999 amendment of the Non-Employee Directors Stock Option Plan to purchase 2,000
shares of Common Stock at an exercise price of $3.875 and $17.00 respectively,
the fair market value on grant date. These option grants are subject to
stockholder approval of Proposal No. 3 below, and the terms and conditions of
the grants are summarized in that proposal. The shares subject to these options
will vest upon the optionee's completion of one (1) year of Board service
measured from the grant date.
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PROPOSAL NO. 2
APPROVAL OF 1999 AMENDMENT OF
THE COMPANY'S STOCK OPTION PLAN
INTRODUCTION
The stockholders are being asked to vote on a proposal to approve the 1999
amendment of the Company's Stock Option Plan (the "Option Plan"). The 1999
amendment was approved by the Board of Directors on September 25, 1998, subject
to stockholder approval at the 1999 Annual Meeting, and its principal purpose is
to (i) increase the number of shares of Common Stock authorized for issuance
over the remaining term of the Option Plan by an additional 750,000 shares,
increasing the total to 3,155,000 shares and (ii) to extend the term of the
Option Plan through September 30, 2004.
The Option Plan was originally adopted by the Board on May 20, 1985 and was
amended by the Board on March 13, 1987 to increase the number of issuable shares
under the Option Plan to 1,150,000 shares. Such amendment was approved by the
stockholders on April 14, 1987. The Option Plan was further amended by the Board
on January 20, 1992 to (a) increase the number of issuable shares to 1,655,000
shares, (b) allow consultants to receive option grants or stock appreciation
rights under the Option Plan, (c) conform the provisions of the option Plan to
certain changes in Rule 16b-3 of the Securities and Exchange Commission in order
to allow certain transactions effected by the Company's officers and directors
under the Option Plan to continue to qualify for exemption from the short-swing
liability provisions of the federal securities laws, and (d) extend the term of
the Option Plan to January 19, 2002. The amendments were approved by the
stockholders on April 29, 1992. The Option Plan was further amended on October
7, 1994 to (a) increase the number of issuable shares to 2,405,000, (b) limit
the maximum number of shares for which any one individual may be granted stock
options and separately exercisable stock appreciation rights to 300,000 shares
per fiscal year, except for the fiscal year in which an individual receives his
or her initial grant the limit was increased to 400,000 shares, (c) expand the
eligibility provisions to allow individuals in the Company's employ or service
who own or are deemed to own more the twenty-five percent (25%) of the Company's
outstanding common stock to receive stock options and stock appreciation rights
under the Option Plan and (d) render non-employee members of the Board
ineligible to receive any further stock option grants or stock appreciation
rights under the Option Plan. The amendments were approved by the stockholders
at the 1995 Annual Meeting.
The purpose of the 1999 amendment is to ensure that the Company will
continue to have sufficient reserves of Common Stock available under the Option
Plan to attract and retain the services of key individuals essential to the
Company's long-term growth and success and to extend the term of the Option Plan
for a period during which the reserved shares are expected to be issued.
The terms and provisions of the Option Plan, as revised by the 1999
amendment, are summarized below. The summary, however, is not intended to be a
complete description of all of the restated Option Plan. A copy of the restated
Option Plan will be furnished by the Company to any stockholder upon written
request to the Secretary of the Company at the corporate offices in San
Francisco, California.
ADMINISTRATION
The Option Plan may be administered by one or more committees comprised of
Board members appointed by the Board. The Primary Committee comprised of two (2)
or more Board members appointed by the Board will have the sole and exclusive
authority to grant stock options and stock appreciation rights to officers and
directors of the Company who are subject to the short-swing profit restrictions
of the federal securities laws. No Board member will be eligible to serve on the
Primary Committee if such individual has, within the twelve (12)-month period
immediately preceding the date of his or her appointment, received any option
grant or stock appreciation right under the Option Plan or any other stock plan
of the Company (or any parent or subsidiary corporation), except for any
automatic option grants received under the amended Directors Plan. Stock options
and stock appreciation rights may be granted under the Option Plan to all other
eligible individuals by either the Primary Committee or by a Secondary Committee
of two (2) or more Board members appointed by the Board.
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Subject to the limited authority which may from time to time be provided to
the Secondary Committee to grant stock options or stock appreciation rights
under the Option Plan, the Primary Committee will as the Plan Administrator have
full authority to determine the eligible individuals who are to receive option
grants or stock appreciation rights, the number of shares to be covered by each
such grant, the date or dates on which the grant is to become exercisable, and
the maximum term for which grant is to remain outstanding. The Plan
Administrator will also have the discretion to determine whether the granted
stock options are to be incentive stock options under the federal tax laws or
nonstatutory options. In addition, the Plan Administrator will have full
authority to accelerate the exercisability of outstanding options and stock
appreciation rights upon such terms and conditions as it may deem appropriate.
All expenses incurred in administering the Option Plan will be paid by the
Company. At present, the Compensation Committee of the Board serves as the sole
Plan Administrator.
ELIGIBILITY
The individuals who receive option grants or stock appreciation rights
pursuant to the Option Plan are key employees (including officers) and
independent consultants of the Company (or its parent or subsidiary companies).
As of April 15, 1999, all employees (including 8 executive officers) were
eligible to participate in the Option Plan.
PRICE AND EXERCISABILITY
The option exercise price may not be less than one hundred percent (100%)
of the fair market value per share of Common Stock on the grant date, and no
option may have a maximum term in excess of ten (10) years measured from the
grant date. Options are not assignable or transferable other than by will or by
the laws of inheritance following the optionee's death, and the option may,
during the optionee's lifetime, be exercised only by the optionee. The optionee
will not have any stockholder rights with respect to the option shares until the
option is exercised and the exercise price is paid for the purchased shares.
Options granted under the Option Plan may be immediately exercisable for
all the option shares, on either a vested or unvested basis, or may become
exercisable for fully vested shares in one or more installments over the
optionee's period of service. Any unvested shares of Common Stock issued under
the Option Plan will be subject to repurchase by the Company, at the original
exercise price paid per share, upon the optionee's cessation of service prior to
vesting in such shares. The Plan Administrator will have complete discretion in
establishing the vesting schedule for any such unvested shares and will have
full authority to cancel the Company's outstanding repurchase rights with
respect to one or more unvested shares held by the optionee and may exercise
that authority at any time, whether before or after the optionee's service
actually ceases.
The exercise price for the purchased shares will be payable in cash or in
shares of Common Stock valued at fair market value on the exercise date. The
option may also be exercised through a cashless exercise procedure pursuant to
which the optionee provides irrevocable written instructions to a
Company-designated brokerage firm to effect the immediate sale of the purchased
shares and remit to the Company, out of the sale proceeds available on the
settlement date, an amount equal to the aggregate exercise price payable for the
purchased shares plus all applicable withholding taxes. The Plan Administrator
may also assist any optionee (including any officer) in the exercise of one or
more outstanding options by authorizing a loan from the Company or permitting
the optionee to pay the exercise price through a promissory note payable in
installments over a period of years. The terms and conditions of any such loan
or promissory note will be established by the Plan Administrator in its sole
discretion, but in no event may the maximum credit extended to the optionee
exceed the aggregate exercise price payable for the repurchased shares (less the
par value of those shares), plus any federal and state income or employment
taxes incurred in connection with the purchase.
VALUATION
The fair market value per share of Common Stock on any relevant date under
the Option Plan will be deemed to be equal to the closing selling price of the
Common Stock on the date in question on either the Nasdaq National Market or any
national securities exchange which may subsequently serve as the primary
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market for the Common Stock. The fair market value of the Common Stock on April
15, 1999, as reported on the Nasdaq National Market, was $11.75 per share.
SECURITIES SUBJECT TO OPTION PLAN
Subject to stockholder approval of the 750,000 share increase which forms
part of this Proposal, 1,144,000 shares of the Common Stock are currently
reserved for future issuance under the Option Plan. The shares will be made
available either from the Company's authorized but unissued Common Stock or from
Common Stock reacquired by the Company. In no event, however, will any one
participant in the Option Plan be granted stock options or separately
exercisable stock appreciation rights for more than 300,000 shares in any fiscal
year, except that for the fiscal year in which an individual receives his or her
initial stock option grant under the Option Plan, the limit will be increased to
400,000 shares.
As of April 15, 1999, options for 1,088,118 shares were outstanding under
the Option Plan, and 1,144,000 shares were available for future option grants,
assuming stockholder approval of the 750,000 share increase which forms part of
this Proposal.
Should an option expire or terminate for any reason prior to exercise in
full (including options cancelled in accordance with the cancellation-regrant
provisions described below), the shares subject to the portion of the option not
so exercised will be available for subsequent option grant under the Option
Plan. Shares subject to any option surrendered or cancelled in accordance with
the stock appreciation right provisions of the Option Plan and all shares issued
under the Option Plan, whether or not those shares may be subsequently
reacquired by the Company pursuant to its repurchase rights under the Option
Plan, will reduce on a share-for-share basis the number of shares of Common
Stock available for subsequent issuance.
CHANGES IN CAPITALIZATION
In the event any change is made to the Common Stock issuable under the
Option Plan by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Option Plan, (ii) the maximum
number and/or class of securities for which any one participant may be granted
stock options or separately exercisable stock appreciation rights in any fiscal
year and (iii) the number and/or class of securities and the exercise price per
share in effect under each outstanding option. The adjustments to the
outstanding options will preclude the enlargement or dilution of rights and
benefits under those options.
TERMINATION OF SERVICE
Should the optionee cease to remain in the Company's service while holding
one or more options under the Option Plan, then those options will not remain
exercisable beyond the limited post-service period (not to exceed twelve (12)
months) designated by the Plan Administrator at the time of the option grant.
Under no circumstances, however, may any option be exercised after the specified
expiration date of the option term. Each such option will normally, during such
limited period, be exercisable only for the number of shares of Common Stock for
which the option is exercisable at the time of cessation of service.
The Plan Administrator will have complete discretion to extend the period
following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability of
such options in whole or in part. Such discretion may be exercised at any time
while the options remain outstanding, whether before or after the optionee's
actual cessation of service.
For all purposes under the Option Plan, an individual will be deemed to
remain in service for so long as he or she continues in the service of the
Company or one or more parent or subsidiary corporations, whether as an employee
or an independent consultant, unless otherwise provided in the applicable stock
option or stock issuance agreement.
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CORPORATE TRANSACTION
In the event of any one of the following stockholder-approved transactions
(a "Corporate Transaction"):
- a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated,
- the sale, transfer or other disposition of all or substantially all of
the Company's assets, or
- any reverse merger in which the Company is the surviving entity.
each outstanding option will automatically become exercisable, immediately prior
to the effective date of the Corporate Transaction, for all of the shares of
Common Stock at the time subject to that option and may be exercised for any or
all of such shares as fully vested shares. However, an outstanding option will
not so accelerate if and to the extent: (i) such option is either to be assumed
by the successor corporation (or parent thereof) or is otherwise to be replaced
by a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof) or (ii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
grant.
The Company's outstanding repurchase rights under the Option Plan will also
terminate, and the shares subject to such terminated rights will become fully
vested, upon the Corporate Transaction, except to the extent (i) one or more of
such repurchase rights are expressly assigned to the successor corporation (or
its parent company) in connection with the Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase rights are issued.
Immediately following the consummation of the Corporate Transaction, all
outstanding options will terminate and cease to be exercisable, except to the
extent assumed by the successor corporation (or its parent company).
STOCK APPRECIATION RIGHTS
At the discretion of the Plan Administrator, options may be granted with
tandem and/or limited stock appreciation rights. Tandem stock appreciation
rights will provide the holders with the right to surrender all or part of the
underlying stock option in exchange for an appreciation distribution from the
Company equal in amount to the excess of (i) the fair market value (on the
option surrender date) of the vested shares of Common Stock for which the
surrendered option is at the time exercisable over (ii) the aggregate exercise
price payable for those vested shares. Such appreciation distribution may, at
the discretion of the Plan Administrator, be made in cash or in Common Stock.
One or more officers of the Company subject to the short-swing profit
restrictions of the Federal securities laws may be granted limited stock
appreciation rights in connection with their option grants. Any option with such
limited stock appreciation right in effect for at least six (6) months will
automatically be cancelled, whether or not the option is otherwise at the time
exercisable for vested shares of Common Stock, upon the successful completion of
a hostile tender offer for securities possessing more than fifty percent (50%)
of the total combined voting power of the Company's outstanding securities. The
officer will in turn receive a cash distribution from the Company in an amount
per cancelled option share equal to the excess of (i) the highest reported price
per share of Common Stock paid in the tender offer over (ii) the exercise price
payable per option share.
The outstanding option grants under the Option Plan will in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets. However, the
acceleration of those options in the event of a Corporate Transaction or the
cancelation of such options in connection with a hostile take-over may be seen
as an anti-takeover provision and may have the effect of discouraging a proposal
for merger, a takeover attempt or other efforts to gain control of the Company.
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CANCELLATION AND NEW GRANT OF OPTIONS
The Plan Administrator will have the authority to effect, on one or more
separate occasions, the cancellation of outstanding options under the Option
Plan which have exercise prices in excess of the then current market price of
the Common Stock and to issue replacement options with an exercise price not
less than one hundred percent (100%) of the fair market value per share of
Common Stock on the new grant date.
EXCESS GRANTS
The Option Plan permits the grant of options to purchase shares of Common
Stock in excess of the number of shares then available for issuance under the
Option Plan. Any shares acquired upon the exercise of such options will be held
in escrow until the stockholders approve an amendment sufficiently increasing
the number of shares of Common Stock available for issuance under the Option
Plan.
AMENDMENT AND TERMINATION OF THE OPTION PLAN
The Board of Directors may amend or modify the Option Plan in any or all
respects whatsoever. However, no such amendment may adversely affect the rights
of holders of outstanding stock options or unvested share issuances without
their consent. In addition, the Board may not, without the approval of the
Company's stockholders, (i) materially increase the maximum number of shares
issuable under the Option Plan, except to reflect certain changes in the
Company's capital structure, (ii) materially modify the eligibility requirements
for option grants or (iii) otherwise materially increase the benefits accruing
to participants under the Option Plan.
The Board may terminate the Option Plan at any time, and the Option Plan
will in all events terminate on September 30, 2004. Subject to stockholder
approval, this date was extended from January 19, 2002 by the Board of Directors
as part of the 1999 amendment. Each stock option or unvested share issuance
outstanding at the time of such termination will remain in force in accordance
with the provisions of the agreement evidencing such grant or issuance.
STOCK AWARDS
The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table of the Executive Compensation and Other
Information section of this Proxy Statement and various indicated individuals
and groups, the number of shares of Common Stock subject to the options granted
under the 1999 amendment of the Company's Stock Option Plan between February 1,
1998 and April 15, 1999, together with the weighted average exercise price
payable per share.
OPTIONS AWARDED
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS GRANTED EXERCISE PRICE OF
NAME AND PRINCIPAL POSITION (NUMBER OF SHARES) GRANTED OPTIONS
--------------------------- ------------------ -----------------
<S> <C> <C>
Richard Thalheimer................................... 90,000 $3.875
Founder, Chairman of the Board,
and Chief Executive Officer
Barry Gilbert........................................ -0- -0-
Vice Chairman and Chief Operating Officer
Tracy Wan............................................ 75,000 $4.075
Executive Vice President, Chief Financial Officer
Davia Kimmey......................................... 10,000 $4.875
Senior Vice President, Marketing
Shannon King......................................... 15,000 $3.875
Senior Vice President, Merchandising
All executive officers as a group (6 persons)........ 229,000 $4.115
All employees and independent consultants, including
officers who are not executive officers, as a group
(29 persons)....................................... 239,000 $4.390
</TABLE>
9
<PAGE> 13
FEDERAL TAX CONSEQUENCES
Options granted under the Option Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as described
below:
Incentive Stock Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition.
For federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two minimum
holding periods prior to the sale or other disposition of the purchased shares,
then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, then the excess of (i) the fair market value of those shares on
the date the option was exercised over (ii) the exercise price paid for the
shares will be taxable as ordinary income. Any additional gain recognized upon
the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the date the option was exercised over (ii) the
exercise price paid for the shares. In no other instance will the Company be
allowed a deduction with respect to the optionee's disposition of the purchased
shares. The Company anticipates that the deductions attributable to the
compensation income arising from disqualifying dispositions under the Option
Plan will not be subject to the annual $1.0 million limit per covered individual
on the deductibility of compensation paid to certain executive officers of the
Company.
Non-statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
Special provisions of the Internal Revenue code apply to the acquisition of
unvested shares of Common Stock under a non-statutory option. These special
provisions may be summarized as follows:
(a) If the shares acquired upon exercise of the non-statutory option
are subject to repurchase by the Company, at the original exercise price
paid per share, upon the optionee's termination of service prior to vesting
in those shares, then the optionee will not recognize any taxable income at
the time of exercise but will have to report as ordinary income, as and
when the Company's repurchase right lapses, an amount equal to the excess
of (i) the fair market value of the shares on the date the Company's
repurchase right lapses with respect to those shares over (ii) the exercise
price paid for the shares.
(b) The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year of exercise
of the non-statutory option an amount equal to the excess of (i) the fair
market value of the purchased shares on the exercise date (determined as if
the shares were not subject to the Company's repurchase right) over (ii)
the exercise price paid for such shares. If the Section 83(b) election is
made, the optionee will not recognize any additional income as and when the
Company's repurchase right lapses.
10
<PAGE> 14
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. the deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee. The Company anticipates that the deductions attributable to the
compensation income arising from the exercises of non-statutory options under
the Option Plan will not be subject to the annual $1.0 million limit per covered
individual on the deductibility of compensation paid to certain executive
officers of the Company.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.
ACCOUNTING TREATMENT
Under present accounting rules, neither the grant nor the exercise of
options issued at fair market value under the Option Plan will result in any
direct charge to the Company's earnings. However, the fair value of those
options is required to be disclosed in the notes to the Company's financial
statements, and the Company must also disclose, in pro forma statements to the
Company's financial statements, the impact those options would have upon the
Company's reported earnings were the fair value of those options at the time of
grant treated as compensation expense. The number of outstanding options under
the Option Plan may be a factor in determining earnings per share.
The Financial Accounting Standards Board recently announced its intention
to issue an Exposure Draft of a proposed interpretation of APB Opinion 25,
"Accounting for Stock Issued to Employees." Under the proposed interpretation,
option grants made to non-employees after December 15, 1998 may result in a
direct charge to the Company's reported earnings based upon the fair value of
the option. Such charge is likely to include the appreciation in the value of
the option shares over the period between the grant date of the option (or, if
later, the effective date of the final amendment) and the vesting date of each
installment of the option shares. In addition, if the proposed interpretation is
adopted, any options which are repriced after December 15, 1998 may also trigger
a direct charge to Company's reported earnings measured by the appreciation in
the value of the underlying shares over the period between the grant date of the
option (or, if later, the effective date of the final amendment) and the date
the option is exercised for those shares.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to be
charged against the Company's earnings. Accordingly, at the end of each fiscal
quarter, the amount (if any) by which the fair market value of the shares of
Common Stock subject to such outstanding stock appreciation rights has increased
from the prior quarter-end will be accrued as compensation expense, to the
extent such fair market value is in excess of the aggregate exercise price in
effect for those rights.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative vote of a majority of the issued and outstanding voting
shares present or represented by proxy and entitled to vote at the Annual
Meeting is necessary for approval of the 1999 amendment of the Option Plan. If
such stockholder approval is not obtained, then the 750,000-share increase to
the share reserve will not be implemented, and any stock option grants made on
the basis of the 750,000-share increase will terminate without ever becoming
exercisable for the shares of Common Stock subject to those options. No
additional options will be granted on the basis of such share increase, and the
Option Plan will terminate once the existing share reserve available under the
1995 Plan has been issued.
The Board of Directors believes that the amendment of the Option Plan is
necessary in order to continue to provide equity incentives to attract and
retain the services of key employees and consultants.
FOR THIS REASON, THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
11
<PAGE> 15
PROPOSAL NO. 3
APPROVAL OF 1999 AMENDMENT OF
THE COMPANY'S NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
INTRODUCTION
The stockholders are being asked to vote on a proposal to approve the 1999
amendment of the Company's Non-Employee Stock Option Plan (the "Directors
Plan"). The 1999 amendment was approved by the Board of Directors on September
25, 1998, subject to stockholder approval at the 1999 Annual Meeting, and will
effect the following principal changes to the existing provisions of the
Directors Plan: (i) to increase the number of shares of Common Stock authorized
for issuance over the remaining term of the Directors Plan by an additional
200,000 shares to 250,000 shares, (ii) on the first day of each fiscal quarter
each non-employee board member will automatically be granted a nonstatutory
option to purchase 2,000 shares of Common Stock, provided such individual has
served as a Board member for a period of at least six months and (iii) delete
the automatic granting of a nonstatutory option to purchase 1,000 shares of
stock upon being re-elected as a non-employee Board member at the Annual
Meeting.
The Directors Plan was originally adopted by the Board on October 7, 1994
and approved by the stockholders on June 12, 1995.
The terms and provisions of the Directors Plan, as revised by the 1999
amendment, are summarized below. The summary, however, is not intended to be a
complete description of all of the restated Option Plan. A copy of the restated
Directors Plan will be furnished by the Company to any stockholder upon written
request to the Secretary of the Company at the corporate offices in San
Francisco, California.
The Directors Plan is designed to serve as an equity incentive program to
attract and retain highly-qualified individuals with substantial experience in
the industry to serve as non-employee members of the Board. The following is a
summary of the principal features of the Directors Plan. The summary, however,
does not purport to be a complete description of all the provisions of the
Directors Plan. Any stockholder who wishes to obtain a copy of the actual plan
document may do so by written request to the Corporate Secretary at the
Company's executive offices.
ADMINISTRATION
The terms and conditions of each automatic option grant (including the
timing and pricing of the option grant) will be governed by the express terms
and conditions of the Directors Plan, and neither the Board nor any committee of
the Board will exercise any discretionary functions with respect to such option
grants.
ISSUABLE SHARES
Subject to stockholder approval of the 200,000 share increase which forms
part of this Proposal, 211,000 shares of Common Stock are currently reserved for
future issuance under the Directors Plan. These shares may be drawn from either
the Company's authorized but unissued shares of Common Stock or from re-
acquired shares of Common Stock, including shares repurchased by the Company on
the open market. As of April 15, 1999, options for 30,000 shares were
outstanding under the Directors Plan.
Should one or more outstanding options under the Directors Plan expire or
terminate for any reason prior to exercise in full, then the shares subject to
the portion of each option not so exercised will be available for subsequent
option grants. Shares subject to any option or portion thereof surrendered in
accordance with the cash-out provisions of the Directors Plan and all share
issuances under the Directors Plan, whether or not the shares are subsequently
repurchased by the Company, will reduce on a share for share basis the number of
shares of Common Stock available for subsequent option grants.
Should any change be made to the outstanding Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration, then appropriate adjustments
will be made to (i) the maximum number and/or class of securities issuable under
the Directors Plan, (ii) the
12
<PAGE> 16
number and/or class of securities for which automatic option grants are to be
subsequently made to each newly-elected or continuing non-employee Board member
and (iii) the number and/or class of securities and exercise price per share in
effect under each option outstanding under the Directors Plan.
ELIGIBILITY
The individuals eligible to receive automatic option grants will be limited
to (i) those individuals serving as non-employee Board members on the September
25, 1998 effective date of the Directors Plan, (ii) those individuals who are
first elected or appointed as non-employee Board members after such effective
date, whether through appointment by the Board or election by the Company's
stockholders.
As of April 15, 1999, there were four (4) non-employee Board members
eligible to participate in the Directors Plan.
OPTION AWARDS
On November 1, 1998 and February 1, 1999 each eligible non-employee Board
member (Morton David, Maurice Gregg, Gerald Napier and Alan Thalheimer) was
granted a nonstatutory stock option to purchase 2,000 shares of Common Stock at
an exercise price of $3.875 and $17.00 respectively.
FUTURE OPTION GRANTS
Each individual who firsts becomes an eligible non-employee Board member
will automatically granted, at the time of his or her initial election or
appointment to the Board, a nonstatutory option to purchase 2,000 shares of
Common Stock.
In addition, on the first date of each fiscal quarter (February 1, May 1,
August 1 and November 1) each non-employee Board member will automatically be
granted a nonstatutory option to purchase 2,000 shares of Common Stock, provided
such individual has served as a Board member for a period of least (6) months.
There will be no limit on the number of such quarterly 2,000-share grants an
eligible non-employee Board member may receive over his or her period of
continued Board service.
PRICE AND EXERCISABILITY
The exercise price per share of Common Stock subject to each automatic
option grant will be equal to one hundred percent (100%) of the fair market
value per share on the automatic grant date. Such fair market value will be
deemed equal to the closing selling price per share of Common Stock on the grant
date, as reported on the Nasdaq National Market. On April 15, 1999, the fair
market value per share was $11.75.
The exercise price is payable in cash or in shares of Common Stock valued
at fair market vale on the exercise date. The exercise price may also be paid
through a same-day sale program, pursuant to which the a Company-designated
brokerage firm will effect the immediate sale of the shares purchased under the
option and pay over to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares.
Each automatic grant will be immediately exercisable for any or all of the
option shares. However, no such grant will become exercisable in whole or in
part unless the stockholders approve the amendment to the Directors Plan at the
1999 Annual Meeting. Any shares purchased under the option will be subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's cessation of Board service prior to vesting in those shares. The
shares subject to each automatic grant will vest upon optionee's completion of
one (1) year of Board service measured from the automatic grant date.
TERMINATION OF BOARD SERVICE
Should the optionee cease to serve as a Board member for any reason (other
than death or permanent disability) while holding one or more automatic option
grants, then that individual will have a six (6)-month
13
<PAGE> 17
period following the date of such cessation of Board service in which to
exercise each such option for any or all of the option shares in which he or she
is vested at the time of his or her cessation of Board service.
Should the optionee die within six (6) months after cessation of Board
service, then any automatic option grant held by him or her at the time of death
may subsequently be exercised, for any or all of the option shares in which the
optionee is vested at the time of his or her cessation of Board service, by the
personal representative of the optionee's estate or by the person or persons to
whom the option is transferred pursuant to his or her will or in accordance with
the laws of inheritance. The right to exercise each such option will lapse upon
the expiration of the twelve (12)-month period measured from the date of the
optionee's death.
Should the optionee die or become permanently disabled while serving as a
Board member, then any automatic option grant held by him or her at the time of
his or her death or permanent disability may subsequently be exercised by the
optionee (or a personal representative of the optionee's estate) for any or all
of the option shares as fully-vested shares of Common Stock. The option will
remain so exercisable until the expiration of the twelve (12)-month period
measured from the date of the optionee's death or permanent disability.
In no event, however, may any automatic grant be exercised more than ten
(10) years after the automatic grant date.
SPECIAL ACCELERATION EVENTS
In the event of the Company is acquired by a merger or asset sale, the
shares of Common Stock at the time subject to each outstanding automatic grant
but not otherwise vested will vest in full so that each such option will,
immediately prior to the specified effective date for such acquisition, become
fully exercisable for all of the shares at the time subject to that option and
may be exercised for all or any portion of such shares as fully-vested shares of
Common Stock. Immediately following the consummation of such acquisition, each
automatic option grant will terminate and cease to be outstanding, except to the
extent assumed by the successor corporation or its parent corporation.
In connection with any hostile take-over of the Company, whether effected
by a tender offer for securities possessing fifty percent (50%) or more of the
Company's outstanding voting power or by a change in the majority of the Board
resulting from one or more contested elections for Board membership, the shares
of Common Stock at the time subject to each outstanding automatic grant but not
otherwise vested will vest in full so that each such option will, immediately
prior to the specified effective date for such take-over, become fully
exercisable for all of the shares at the time subject to that option and may be
exercised for all or any portion of such shares as fully-vested shares of Common
Stock. Each such option will remain exercisable for such fully-vested option
shares until the expiration or sooner termination of the option term.
Upon the successful completion of a hostile tender offer for securities
possessing fifty percent (50%) or more of the Company's outstanding voting
power, each optionee will have a thirty (30)-day period in which to surrender to
the Company each automatic option grant held by him or her for a period of at
least six (6) months. The optionee will in return be entitled to a cash
distribution from the Company in an amount per share subject to the surrendered
option equal to the excess of (i) the highest reported price per share of Common
Stock paid by the tender offeror over (ii) the exercise price payable per share.
The automatic option grants will in no way affect the right of the Company
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets. However, the acceleration of vesting of
the option shares upon an acquisition of the Company by merger or asset sale or
upon a hostile take-over may be seen as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a take-over attempt or other
effort to gain control of the Company.
PLAN AMENDMENTS
The Board has complete and exclusive power and authority to amend or modify
the Directors Plan in any or all respects whatsoever. However, (i) the Directors
Plan, together with the option grants outstanding
14
<PAGE> 18
thereunder, may not be amended at intervals more frequently than once every six
(6) months, other than to the extent necessary to comply with applicable Federal
income tax laws and regulations, and (ii) no such amendment or modification may
adversely affect rights and obligations with respect to options at the time
outstanding under the Directors Plan, unless the affected optionees consent to
such amendment. In addition, the Board may not, without the approval of the
Company's stockholders, amend the Directors Plan to (i) materially increase the
maximum number of shares issuable thereunder or the number of shares issuable
per newly-elected or continuing non-employee Board member, except for
permissible adjustments in the event of certain changes to the Company's capital
structure, (ii) materially modify the eligibility requirements for participation
in the Directors Plan or (iii) materially increase the benefits accruing to
participants.
PLAN TERMINATION
The Directors Plan will terminate upon the earlier of (i) September 30,
2004 or (ii) the date on which all shares available for issuance under the
Directors Plan are issued or cancelled pursuant to the exercise or cash-out of
the granted options. If the date of plan termination is determined under clause
(i) above, then all option grants and unvested stock issuances outstanding on
such date will continue to have force and effect in accordance with the
provisions of the agreements evidencing those option grants or stock issuances.
FEDERAL INCOME TAX CONSEQUENCES
Options granted under the Directors Plan will be nonstatutory options which
do not satisfy the requirements of Section 422 of the Internal Revenue Code. No
taxable income will be recognize by an optionee upon the grant of the
nonstatutory option, but the optionee will normally recognize ordinary income in
the year in which the option is exercised. The amount of such ordinary income
will be equal to the excess of the fair market value of the purchased shares on
the exercise date over the exercise price paid for the shares.
Special provisions of the Internal Revenue Code apply to the acquisition of
unvested shares of the Company's common stock under a nonstatutory option. These
special provisions may be summarized as follows:
1. If the shares acquired upon exercise of the nonstatutory option are
subject to repurchase by the Company at the original exercise price in the
event of the optionee's termination of Board service prior to vesting in
those shares, then the optionee will not recognize any taxable income at
the time of exercise but will have to report as ordinary income, as and
when the optionee vests in the shares, an amount equal to the excess of (i)
the fair market value of the shares on the date the optionee vests in those
shares over (ii) the exercise price paid for such shares.
2. The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year of exercise
of the nonstatutory option an amount equal to the excess for (i) the fair
market value of the purchased shares on the exercise date over (ii) the
exercise price paid for such shares. If the Section 83(b) election is made,
the optionee will not recognize any additional income as and when he or she
vests in such shares.
3. The Company will be entitled to a business expense deduction equal
to the amount of ordinary income recognized by the optionee with respect to
the exercised nonstatutory option. The deduction will in general be allowed
for the taxable year of the Company in which such ordinary income is
recognized by the optionee.
The Financial Accounting Standards Board recently announced its intention
to issue an Exposure Draft of a proposed interpretation of APB Opinion 25,
"Accounting for Stock Issued to Employees." Under the proposed interpretation,
option grants made to non-employee Board members after December 15, 1998 may
result in a direct charge to the Company's reported earnings based upon the fair
value of the option. Such charge is likely to include the appreciation in the
value of the option shares over the period between the grant date of the option
(or, if later, the effective date of the final amendment) and the vesting date
of each installment of the option shares. In addition, if the proposed
interpretation is adopted, any options which are repriced after December 15,
1998 may also trigger a direct charge to Company's reported earnings measured
15
<PAGE> 19
by the appreciation in the value of the underlying shares over the period
between the grant date of the option (or, if later, the effective date of the
final amendment) and the date the option is exercised for those shares.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative vote of a majority of the issued and outstanding voting
shares present or represented by proxy and entitled to vote at the Annual
Meeting is necessary for approval of the 1999 amendment of the Directors Plan.
If such stockholder approval is not obtained, then the 200,000-share increase to
the share reserve will not be implemented, and any stock option grants made on
the basis of the 200,000-share increase will terminate and be cancelled. No
additional options will be granted on the basis of such share increase, and the
Option Plan will terminate once the existing share reserve available under the
1995 Plan has been issued. The nonstatutory options granted in accordance with
the amended 1999 Plan would be cancelled.
The Board of Directors believes that the amendment of the Directors Plan is
necessary in order to continue to provide equity incentives to attract and
retain the services of non-employee Board Members.
FOR THIS REASON, THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR THIS PROPOSAL.
SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of the Company's
Common Stock as of April 15, 1999 by (i) all persons known by the Company to
beneficially own more than five percent (5%) of its outstanding Common Stock,
(ii) each Director, (iii) each of the Company's executive officers named in the
Summary Compensation Table below, and (iv) all Directors and executive officers
as a group. All shares are subject to the named person's sole voting and
investment power except where otherwise indicated or where subject to applicable
community property laws.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME OWNERSHIP OF CLASS
---- ---------- --------
<S> <C> <C>
Richard Thalheimer............................ 5,060,145(1) 55.1%
Dimensional Fund Advisors..................... 478,000(2) 5.3%
Alan Thalheimer............................... 12,301(3) *
Morton David.................................. 26,000(4) *
Maurice Gregg................................. 5,000(5) *
Gerald Napier................................. 9,000(6) *
Tracy Wan..................................... 15,000(7) *
Shannon King.................................. 5,000(8) *
Barry Gilbert................................. -0- *
Davia Kimmey.................................. -0- *
All Directors and executive officers as a
group (10 persons).......................... 5,132,846(9) 55.6%
</TABLE>
- ---------------
* Less than one percent of class.
(1) Includes 3,777,617 shares owned by The Richard J. Thalheimer Revocable
Trust, of which Mr. Richard Thalheimer is trustee and sole beneficiary;
203,665 shares owned by The Richard J. Thalheimer and Elyse M. Thalheimer
Family Trust, of which Mr. Richard Thalheimer is a co-beneficiary; 238,000
shares owned by The Richard J. Thalheimer Children's Trust; 14,363 shares
owned by the Richard and Elyse Thalheimer Irrevocable Trust of 1995; 252,995
shares owned by the Richard J. Thalheimer 1997 Annuity Trust, of which Mr.
Richard Thalheimer is trustee, 353,505 shares owned by the Richard J.
Thalheimer 1997 Grantor Annuity Trust, of which Mr. Richard Thalheimer is
trustee and 220,000 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after April
15, 1999. Mr. Thalheimer's address is The Sharper Image, 650 Davis Street,
San Francisco, California 94111.
16
<PAGE> 20
(2) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 478,000 shares of the
Company's stock as of December 31, 1998, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares. Dimensional
has sole voting and disposition power with respect to 478,000 shares.
Dimensional Fund Advisors Inc.'s address is 1299 Ocean Avenue, 11th floor,
Santa Monica, California 90401.
(3) Does not include 74,200 shares owned by Mr. Alan Thalheimer's wife. Includes
2,301 shares owned by the Alan Thalheimer individual retirement account.
Does not include 238,000 shares owned by The Richard J. Thalheimer
Children's Trust, or 14,363 shares owned by the Richard and Elyse Thalheimer
Irrevocable Trust of 1995, of which Mr. Alan Thalheimer is Trustee. Includes
10,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999,
of which 4,000 shares are currently subject to repurchase by the Company.
(4) Includes 6,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999,
of which 4,000 shares are currently subject to repurchase by the Company.
(5) Includes 4,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999,
and are currently subject to repurchase by the Company.
(6) Includes 2,000 shares owned by the Napier Family Trust, of which Mr. Gerald
Napier is Trustee. Includes 5,000 shares issuable upon exercise of options,
which are currently exercisable or will become exercisable within 60 days
after April 15, 1999, of which 4,000 shares are currently subject to
repurchase by the Company.
(7) Includes 15,000 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after April
15, 1999.
(8) Includes 5,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999.
(9) Includes 265,000 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after April
15, 1999.
17
<PAGE> 21
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the four other most highly compensated
executive officers of the Company (hereafter referred to as the "named executive
officers") serving in that capacity as of January 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
FISCAL COMPENSATION
YEAR ANNUAL COMPENSATION ---------------------
ENDED --------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION JAN. 31 SALARY($) BONUS($) OPTIONS (# OF SHARES) COMPENSATION($)(1)
--------------------------- ------- --------- -------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard Thalheimer............ 1999 549,341 269,157 90,000 shares 51,808
Founder, Chairman of the 1998 479,134 150,000 -0- 78,783
Board, and Chief Executive 1997 510,514 -0- 300,000 shares(2) 45,085
Officer
Barry Gilbert................. 1999 325,000 50,000 -0- 4,319
Vice Chairman and 1998 325,000 14,000 -0- 4,783
Chief Operating Officer 1997 43,750(3) -0- 300,000 shares 87
Tracy Wan..................... 1999 192,019 65,000 75,000 shares 3,945
Executive Vice President, 1998 156,731 -0- -0- 775
Chief Financial Officer 1997 145,003 -0- 36,000 shares(4) 448
Davia Kimmey.................. 1999 200,045 20,000 10,000 shares 7,533
Senior Vice President, 1998 113,182(5) -0- 20,000 shares 155
Marketing
Shannon King.................. 1999 180,000 36,000 15,000 shares 3,836
Senior Vice President, 1998 180,000 -0- -0- 933
Merchandising 1997 180,005 -0- 15,000 shares(6) 556
</TABLE>
- ---------------
(1) Represents the following amounts for the named executive officers for the
fiscal year ended January 31, 1999: (i) the premiums paid on the life
insurance coverage provided such individuals, (ii) the contribution made by
the Company to match the salary deferral contribution made by the officer to
the Company's 401(k) Savings plan, up to a maximum of $250, (iii) the
imputed value for goods and services provided by the Company, (iv)
profit-sharing paid by the Company, and (v) the cash value compensation of
the split-dollar life insurance policy maintained for Mr. Thalheimer. The
clause (v) dollar value was determined by the demand loan approach for the
benefit provided by the whole life portion of the premium paid by the
Company, projected on an actuarial basis (see "Life Insurance Agreement").
<TABLE>
<CAPTION>
SPLIT-DOLLAR
LIFE INSURANCE
PROFIT SHARING LIFE INSURANCE MATCHING 401(K) VALUE OF GOODS "CASH VALUE"
NAME CONTRIBUTIONS($) PREMIUM($) CONTRIBUTION($) AND SERVICES($) COMPENSATION($)
---- ---------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard Thalheimer.... 12,735 877 250 20,460 17,486
Barry Gilbert......... 3,539 530 250 -0- -0-
Tracy Wan............. 3,494 201 250 -0- -0-
Davia Kimmey.......... 1,001 265 -0- 6,267 -0-
Shannon King.......... 3,275 311 250 -0- -0-
</TABLE>
(2) In aggregate, a total of 300,000 shares have been granted to Mr. Richard
Thalheimer. This option was originally granted on October 7, 1994 at an
exercise price of $6.875 and subsequently cancelled and regranted on April
12, 1995 at an exercise price of $5.625 and further cancelled and re-granted
on March 26, 1996 at an exercise price of $3.75.
(3) Mr. Barry Gilbert joined the Company on December 2, 1996. This reflects
salary paid from December 2, 1996 through January 31, 1997, based on an
annual salary of $325,000.
18
<PAGE> 22
(4) This includes 15,000 options granted on March 26, 1996 with an exercise
price of $3.75 per share in cancellation of an option previously granted on
April 12, 1995 with an exercise price of $5.625 per share and 21,000 shares
granted on November 8, 1996.
(5) Ms. Davia Kimmey joined the Company on June 30, 1997. This reflects salary
paid from June 30, 1997 through January 31, 1998, based on an annual salary
of $180,000.
(6) These options were granted on March 26, 1996 with an exercise price of $3.75
per share in cancellation of an option previously granted for the same
number of shares on April 12, 1995 with an exercise price of $5.625 per
share.
EMPLOYMENT AGREEMENT AND CHANGE IN CONTROL ARRANGEMENTS
During fiscal 1995, the Company adopted a Compensation Program for Mr.
Richard Thalheimer, the Company's Founder, Chief Executive Officer and Chairman
of the Board. The Compensation Program provides for the payment of base salary
to Mr. Thalheimer in respect of each fiscal year based on the Company's
performance during the prior fiscal year, and provides for the payment of a
bonus to Mr. Thalheimer in respect of each fiscal year based on the Company's
performance during that fiscal year. Specifically, the Compensation Program
provides that Mr. Thalheimer's base salary for any fiscal year will be increased
in the event the Company's earnings per share for the prior fiscal year has
increased as compared to the fiscal year preceding the prior fiscal year, and
will be reduced in the event that the Company's earnings per share for the
fiscal year has decreased as compared to the fiscal year preceding such prior
fiscal year. The Compensation Program also provides for bonus payments as a
percentage of base salary based on specific target percentage increases in the
Company's earnings per share for such fiscal years. The Compensation Program
provides that Mr. Thalheimer will not, in any event, be paid a base salary less
that the base salary established by the Compensation Committee for each fiscal
year. The base salary for fiscal 1998 was established at $538,313 and was
adjusted to $605,603 for 1999.
In connection with his employment as the Company's Vice Chairman and Chief
Operating Officer, beginning on December 2, 1996, the Company entered into an
employment agreement with Mr. Barry Gilbert. The employment agreement provides
for the payment of base salary to Mr. Gilbert, a guaranteed bonus payment of
$50,000 based upon two year's employment with the Company, bonus payments based
upon specific target percentage increases in the Company's earnings per share,
and stock option grants. The employment agreement continues through January 31,
1999 and provides for severance pay equal to Mr. Gilbert's base salary for the
remainder of the initial two-year employment term, but no fewer than 12 months,
or, if his employment is terminated subsequent to the completion of the two-year
employment agreement, up to 12 months of Mr. Gilbert's base salary until further
employment is found. The base salary for Mr. Gilbert for fiscal year 1998 was
set at $325,000. In 1998, the Company and Mr. Gilbert agreed to amend the
employment agreement. The amended employment agreement provides for (i) Mr.
Gilbert's employment to continue through May 31, 1999, unless sooner terminated
by Mr. Gilbert, or for cause by the Company, (ii) payment of a bonus of $50,000
in December 1998, (iii) termination of stock options held by Mr. Gilbert to
purchase 200,000 shares of common stock, previously granted but not yet
exercised and (iv) removal of all provisions for severance pay.
The Compensation Committee as administrator of the Company's Stock Option
Plan has the authority to provide for the accelerated vesting of the shares of
Common Stock subject to outstanding options held by the Chief Executive Officer
and the Company's other executive officers or any unvested shares actually held
by those individuals under the Option Plan, in the event their employment were
to be terminated (whether involuntarily or through a forced resignation)
following an acquisition of the Company by merger or asset sale.
LIFE INSURANCE AGREEMENT
Mr. Richard Thalheimer, the Company's Founder, Chairman of the Board, and
Chief Executive Officer, is presently the owner and holder of 4,840,145 shares
of the Company's Common Stock. The Company has been advised that on the death of
Mr. Thalheimer the estate may be required to publicly sell all or
19
<PAGE> 23
substantially all of such shares to satisfy estate tax obligations. The public
sale of such number of shares in all probability would destabilize the market
for the Company's publicly traded stock. Accordingly, in May 1995, an agreement
was entered into, and later amended, (commonly known as a split-dollar life
insurance agreement) under the terms of which the Company will pay the premiums
for certain life insurance policies with an aggregate face value of $15,000,000
on the life of Richard Thalheimer. The Company will have an interest in the
insurance policies equal to the amount of premiums it has paid with the balance
payable to a trust created by Mr. Thalheimer. To secure the repayment of the
advances, the trust has assigned the life insurance policies to the Company as
collateral.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the information noted for all grants of
stock options made to the named executive officers listed in the Summary
Compensation Table during the fiscal year ended January 31, 1999. No stock
appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------- ASSUMED ANNUAL
PERCENTAGE RATES OF
OF TOTAL STOCK PRICE
OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION TERM(5)
OPTIONS EMPLOYEES IN BASEPRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR ($/SH(4)) DATE 5%($) 10%($)
---- ----------- ----------------- ------------ ----------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard Thalheimer... 90,000(1) 19.7% $3.875 11/02/08 $219,327 $555,818
Barry Gilbert........ -- -- -- -- -- --
Tracy Wan............ 30,000(2) 6.6% $4.375 02/04/08 82,542 209,179
45,000(1) 9.9% $3.875 11/02/08 109,664 277,909
Davia Kimmey......... 10,000(3) 2.2% $4.875 6/30/08 30,659 77,695
Shannon King......... 15,000(1) 3.3% $3.875 11/02/08 36,555 92,636
</TABLE>
- ---------------
(1) The option grants have a maximum term of ten years, subject to earlier
termination upon the optionee's cessation of service. The option grants will
become exercisable in three successive equal annual installments beginning
January 31, 2000, provided the optionee continued in service. These options
were granted November 2, 1998.
(2) The option grant has a maximum term of ten years, subject to earlier
termination upon the optionee's cessation of service. The 30,000 share
option grants became exercisable in three successive equal annual
installments beginning January 31, 1999, provided the optionee continued in
service.
(3) The option grant has a maximum of ten years, subject to earlier termination
upon the optionee's cessation of service. The option grants will become
exercisable in three successive equal annual installments beginning January
31, 2001, provided the optionee continued in service. These options were
granted June 30, 1998.
(4) The exercise price may be paid in cash or in shares of common stock valued
at fair market value on the exercise date or through a cashless exercise
procedure involving same-day sale of the purchased shares.
(5) There is no assurance that the actual stock price appreciation over the
ten-year option term will be at those assumed rates or at any other level.
Unless the market price of the Company's common stock does in fact
appreciate over the option term, no value will be realized from the option
grants.
20
<PAGE> 24
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the named
executive officers concerning the exercise of options during the last fiscal
year and unexercised options held as of the end of the fiscal year. No stock
appreciation rights have been granted under the Stock Option Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
MONEY OPTIONS AT FISCAL
YEAR-END (MARKET PRICE OF
VALUE REALIZED NUMBER OF UNEXERCISED SHARES AT FISCAL YEAR-END
(MARKET PRICE AT OPTIONS AT FISCAL ($14.312) LESS EXERCISE
SHARES EXERCISE DATE LESS YEAR-END(#) PRICE)($)
ACQUIRED ON EXERCISE --------------------------- -----------------------------
NAME EXERCISE(#) PRICE)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------------ ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Richard Thalheimer...... -- -- 220,000 170,000 $3,148,750 $2,433,125
Barry Gilbert........... 100,000 $1,143,638 -- -- -- --
Tracy Wan............... 29,000 397,658 15,000 96,000 214,688 1,374,000
Davia Kimmey............ -- -- -- 30,000 -- 429,375
Shannon King............ 18,500 186,931 5,000 25,000 71,563 357,813
</TABLE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
Directors and greater than ten-percent stockholders are required by regulation
of the Securities and Exchange Commission to furnish the Company with copies of
all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended January 31, 1999, all other
Section 16(a) filing requirements applicable to its officers, Directors and
greater than ten-percent beneficial owners were complied with.
ANNUAL REPORT
A copy of the Annual Report of the Company for fiscal 1998 has been mailed
concurrently with this Proxy Statement to all Stockholders entitled to notice of
and to vote at the Annual Meeting. The Annual Report is not incorporated into
this Proxy Statement and is not considered proxy solicitation material.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
administers the Company's compensation policies and programs. The Committee has
responsibility for executive compensation matters, including setting the base
salaries of the Company's executive officers, approving individual bonuses and
bonus programs for executive officers, administering certain of the Company's
employee benefit programs, and the administration of the Company's Stock Option
Plan, under which grants may be made to executive officers and other key
employees. The following is a summary of policies of the Committee that affects
the compensation paid to executive officers, as reflected in the tables and text
set forth elsewhere in this Proxy Statement.
GENERAL COMPENSATION POLICY. The overall policy of the Committee is to
offer the Company's executive officers competitive compensation opportunities
based upon their personal performance,
21
<PAGE> 25
the financial performance of the Company and their contribution to that
performance. One of the primary objectives is to have a substantial portion of
each executive officer's compensation contingent upon the Company's financial
success as well as upon such executive officer's own level of performance. Each
executive officer's compensation package is generally comprised of three
elements: (i) base salary, which is determined primarily on the basis of the
individual's position and responsibilities and the level of the individual's
performance, (ii) incentive performance awards payable in cash and tied to the
Company's financial performance and individual performance, and (iii) long-term
stock-based incentive awards designed to strengthen the mutuality of interests
between the executive officers and the Company's stockholders. Generally, as an
executive officer's level of responsibility increases, a greater portion of such
executive officer's total compensation will be dependent upon Company
performance and stock price appreciation rather than base salary.
FACTORS. The principal factors considered in establishing the components of
each executive officer's compensation package, other than the Chief Executive
Officer, for the fiscal year ended January 31, 1999 are summarized below. The
Committee may at its discretion apply entirely different factors, such as
different measures of financial performance, for future fiscal years.
BASE SALARY. The base salary for each officer is set primarily on the
basis of personal performance, level of responsibility, salary levels for
comparable positions of other retailers (as estimated based on the
Committee's knowledge of the retail industry), internal comparability
considerations, and, to a lesser extent, on the financial performance of
the Company.
INCENTIVE COMPENSATION. Annual bonuses are earned by an executive
officer on the basis of the Company's financial performance and the base
salary, personal performance and level of responsibility of such executive
officer. The specific amount paid to each executive officer, other than the
Chief Executive Officer, was determined by the Company's Chief Executive
Officer on the basis of personal performance and level of responsibility of
each such executive officer, subject to the Committee's approval. A bonus
of $50,000 was paid to the Chief Operating Officer during the fiscal year
ended January 31, 1999 in accordance with the November 30, 1998 amended
employment agreement between Mr. Gilbert and the Company.
LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. Generally, the Committee
approves annual grants of stock options to each of the Company's executive
officers under the Stock Option Plan. The grants are designed to align the
interests of each executive officer with those of the stockholders and
provide each individual with a significant incentive to manage the Company
from the perspective of an owner with an equity stake in the business. Each
grant generally allows the officer to acquire shares of the Company's
common stock at a fixed price per share (the market price on the grant
date) over a specified period of time (up to 10 years), thus providing a
return to the executive officer only if the market price of the shares
appreciates over the option term. The Committee may also grant certain
performance-based stock options. The size of the option grant to each
executive officer generally is designed to create a meaningful opportunity
for stock ownership and is based upon the executive officer's current
position with the Company, internal comparability considerations regarding
option grants made to other executive officers of the Company, the
executive officer's current level of performance and the executive
officer's potential for future responsibility and promotion over the option
term. The Committee also considers the number of vested and unvested
options held by the executive officer at the time of the proposed grant in
order to maintain an appropriate level of equity incentive for that
individual. However, the Committee does not adhere to any specific
guidelines as to the relative option holdings of the Company's executive
officers.
CEO COMPENSATION. During fiscal 1995, the Company adopted a Compensation
Program for Mr. Richard Thalheimer, the Company's Founder, Chief Executive
Officer and Chairman of the Board. The Compensation Program provides for the
payment of base salary to Mr. Thalheimer in respect of each fiscal year based on
the Company's performance during the prior fiscal year, and provides for the
payment of a bonus to Mr. Thalheimer in respect of each fiscal year based on the
Company's performance during that fiscal year. Specifically, the Compensation
Program provides that Mr. Thalheimer's base salary for any fiscal year
22
<PAGE> 26
will be increased in the event the Company's earnings per share for the prior
fiscal year has increased as compared to the fiscal year preceding the prior
fiscal year, and will be reduced in the event that the Company's earnings per
share for the fiscal year has decreased as compared to the fiscal year preceding
such prior fiscal year. The Compensation Program also provides for bonus
payments as a percentage of base salary based on specific target percentage
increases in the Company's earnings per share for such fiscal years. The
Compensation Program provides that Mr. Thalheimer will not, in any event, be
paid a base salary less that the base salary established by the Compensation
Committee for each fiscal year. The base salary for fiscal 1998 was established
at $538,313 and was adjusted to $605,603 for fiscal 1999. On the basis of the
earnings per share for the fiscal year ended January 31, 1999, Mr. Thalheimer
was paid a bonus of $269,517. The Committee has also established a split-dollar
life insurance arrangement for Mr. Thalheimer as discussed above under "Life
Insurance Agreement."
TAX LIMITATION. As a result of Section 162(m) of the Internal Revenue Code,
which was enacted into law in 1993, the Company will not be allowed a federal
income tax deduction for compensation paid to certain executive officers, to the
extent that compensation exceeds $1 million per officer in any one year. This
limitation will be in effect for each fiscal year of the Company beginning after
December 31, 1993 and will apply to all compensation paid to the covered
executive officers which is not considered to be performance based. Compensation
which does qualify as performance-based compensation will not have to be taken
into account for purposes of this limitation.
The Company's Stock Option Plan is structured so that any compensation
deemed paid to an executive officer in connection with the exercise price of
option grants made under that plan will qualify as performance-based
compensation which will not be subject to the $1 million limitation. Because it
is very unlikely that the cash compensation payable to any of the Company's
executive officers in the foreseeable future will approach the $1 million limit,
the Committee has decided at this time not to take any other action to limit or
restructure the elements of cash compensation payable to the Company's executive
officers. The Committee will reconsider this decision should the individual cash
compensation of any executive officer ever approach the $1 million level.
Submitted by the Company's Compensation Committee of the Board of
Directors:
Maurice Gregg, Member, Compensation Committee
Gerald Napier, Member, Compensation Committee
Morton David, Member, Compensation Committee
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee. No member of the Compensation Committee is a former or
current officer or employee of the Company.
23
<PAGE> 27
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS*
OF THE COMPANY, THE NASDAQ STOCK MARKET (U.S.) INDEX,
THE RUSSELL 2000 INDEX AND THE NASDAQ RETAIL TRADE INDEX
The following graph compares the yearly percentage changes in the
cumulative total stockholder return on the Company's Common Stock with the
cumulative total return on the Nasdaq Stock Market (U.S.) Index, the Russell
2000 Index and the Nasdaq Retail Trade Index during the five fiscal years ended
January 31, 1999. The comparison assumes that $100 was invested on January 31,
1994 in the Company's Common Stock and in each of the foregoing indices and
assumes reinvestment of dividends.
<TABLE>
<CAPTION>
Measurement Period Sharper Image Nasdaq Stock Nasdaq Retail
(Fiscal Year Covered) Corporation Market (U.S.) Russell 2000 Trade
--------------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Jan-94 100.00 100.00 100.00 100.00
Jan-95 110.00 95.00 94.00 88.00
Jan-96 74.00 135.00 122.00 100.00
Jan-97 60.00 177.00 145.00 123.00
Jan-98 65.00 209.00 172.00 143.00
Jan-99 229.00 326.00 176.00 175.00
</TABLE>
* $100 INVESTED ON 01/31/94 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS,
FISCAL YEAR ENDING JANUARY 31.
24
<PAGE> 28
CERTAIN TRANSACTIONS
There were no reportable transactions during fiscal 1998.
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT AUDITOR
The firm of Deloitte & Touche LLP served as independent auditor for the
Company for the fiscal year ended January 31, 1999. The Board of Directors has
selected the firm to continue in this capacity for the current fiscal year.
Accordingly, the Company is asking the stockholders to ratify the selection of
Deloitte & Touche LLP as independent auditor.
Although the selection of Deloitte & Touche LLP is not required to be
submitted to a vote of the stockholders, the Board of Directors believes it
appropriate as a matter of policy to request that the stockholders ratify the
selection of the independent auditor for the fiscal year ending January 31,
2000. In the event the stockholders fail to ratify the appointment, the Audit
Committee of the Board of Directors will consider it as a direction to select
other auditors for the subsequent year. Even if the selection is ratified, the
Board in its discretion may direct the appointment of a different independent
accounting firm at any time during the year if the Board feels that such a
change would be in the best interests of the Company and its stockholders.
The Company anticipates that a representative of Deloitte & Touche LLP will
be present at the Annual Meeting. Such representative will be given the
opportunity to make a statement if he or she desires to do so, and is expected
to be available to respond to questions at the meeting.
The Board of Directors recommends a vote FOR ratification of the selection
of Deloitte & Touche LLP as the Company's independent auditor for the fiscal
year ending January 31, 2000.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be considered for inclusion in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held in
2000 must be received by the Company no later than December 29, 1999. The
proposal must be mailed to the Company's principal executive offices at 650
Davis Street, San Francisco, California 94111. Such proposals may be included in
next year's Proxy Statement if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission.
OTHER BUSINESS
The Board of Directors is not aware of any other matter which may be
presented for action at the meeting. Should any other matter requiring a vote of
the stockholders arise, the enclosed proxy card gives authority to the persons
listed on the card to vote at their discretion on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
Richard Thalheimer
Founder, Chairman of the Board, and
Chief Executive Officer
April 28, 1999
San Francisco, California
25
<PAGE> 29
SHARPER IMAGE CORPORATION
1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
(As amended and restated through September 25, 1998)
I. PURPOSE OF THE PLAN
This 1994 Non-Employee Directors Stock Option Plan (the "Plan") is
intended to promote the interests of Sharper Image Corporation, a California
corporation (the "Corporation"), by providing the non-employee members of the
Corporation's Board of Directors with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.
II. DEFINITIONS
For purposes of the Plan, the following definitions shall be in effect:
BOARD: the Corporation's Board of Directors.
CODE: the Internal Revenue Code of 1986, as amended.
COMMON STOCK: shares of the Corporation's common stock.
CHANGE IN CONTROL: a change in ownership or control of the Corporation
effected through either of the following transactions:
a. any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with the Corporation) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing fifty percent (50%) or more of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's shareholders which the Board
does not recommend such shareholders to accept; or
b. there is a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such that a majority of
the Board members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time such election or nomination was approved by the Board.
CORPORATE TRANSACTION: any of the following shareholder-approved
transactions to which the Corporation is a party:
1.
<PAGE> 30
a. a merger or consolidation in which the Corporation is
not the surviving entity, except for a transaction the principal purpose of
which is to change the State in which the Corporation is incorporated,
b. the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation or
dissolution of the Corporation, or
c. any reverse merger in which the Corporation is the
surviving entity but in which securities possessing fifty percent (50%) or more
of the total combined voting power of the Corporation's outstanding securities
are transferred to a person or persons different from the persons holding those
securities immediately prior to such merger.
EFFECTIVE DATE: October 7, 1994, the date on which the Plan was first
adopted by the Board.
FAIR MARKET VALUE: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:
a. If the Common Stock is not at the time listed or
admitted to trading on any national securities exchange but is traded on the
Nasdaq National Market, the Fair Market Value shall be the closing selling price
per share on the date in question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National Market. If there is no
reported closing selling price for the Common Stock on the date in question,
then the closing selling price on the last preceding date for which such
quotation exists shall be determinative of Fair Market Value.
b. If the Common Stock is at the time listed or admitted to
trading on any national securities exchange, then the Fair Market Value shall be
the closing selling price per share on the date in question on the exchange
serving as the primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there is no
reported sale of Common Stock on such exchange on the date in question, then the
Fair Market Value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
HOSTILE TAKE-OVER: a change in ownership of the Corporation effected
through the following transaction:
a. any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act)
of securities possessing fifty percent (50%) or more of the total combined
voting power of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's shareholders which the Board
does not recommend such shareholders to accept, and
2.
<PAGE> 31
b. more than fifty percent (50%) of the securities so
acquired in such tender or exchange offer are accepted from holders other than
the officers and directors of the Corporation subject to the short-swing profit
restrictions of Section 16 of the 1934 Act.
1934 ACT: the Securities Exchange Act of 1934, as amended.
OPTIONEE: any person to whom an option is granted under the Plan.
PERMANENT DISABILITY OR PERMANENTLY DISABLED: the inability of the
Optionee to perform his or her normal duties as a Board member as a result of
any medically determinable physical or mental impairment expected to result in
death or to be of continuous duration of twelve (12) months or more.
TAKE-OVER PRICE: the greater of (a) the Fair Market Value per share of
Common Stock on the date the option is surrendered to the Corporation in
connection with a Hostile Take-Over or (b) the highest reported price per share
of Common Stock paid by the tender offeror in effecting such Hostile Take-Over.
III. ADMINISTRATION OF THE PLAN
The terms and conditions of each automatic option grant (including the
timing and pricing of the option grant) shall be determined by the express terms
and conditions of the Plan, and neither the Board nor any committee of the Board
shall exercise any discretionary functions with respect to option grants made
pursuant to the Plan.
IV. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under the
Plan and shall be drawn from either authorized but unissued shares of Common
Stock or from reacquired shares of Common Stock, including shares repurchased by
the Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 250,000(1)
shares, subject to adjustment from time to time in accordance with the
provisions of this Article IV.
B. Should one or more outstanding options under this Plan expire or
terminate for any reason prior to exercise in full, then the shares subject to
the portion of each option not so exercised shall be available for subsequent
option grants under the Plan. Shares subject to any option or portion thereof
surrendered in accordance with Article VII and all share issuances under the
Plan, whether or not the shares are subsequently repurchased by the Corporation
pursuant to its repurchase rights under the Plan, shall reduce on a
share-for-share basis the number of shares of Common Stock available for
issuance under the Plan. In addition, should the exercise price of an
outstanding option under the Plan be paid with shares of Common Stock, then the
number of shares of Common Stock available for issuance under the Plan shall be
- --------
(1) This figure includes a 200,000-share increase approved by the Board
on September 25, 1998 and is subject to shareholder approval at the 1999 Annual
Stockholders Meeting.
3.
<PAGE> 32
reduced by the gross number of shares for which the option is exercised, and not
by the net number of shares of Common Stock actually issued to the holder of
such option.
C. Should any change be made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which automatic option grants are to be subsequently made to each
newly-elected or continuing non-employee Board member under the Plan and (iii)
the number and/or class of securities and price per share in effect under each
option outstanding under the Plan. The adjustments to the outstanding options
shall be made by the Board in a manner which shall preclude the enlargement or
dilution of rights and benefits under such options and shall be final, binding
and conclusive.
V. ELIGIBILITY
The individuals eligible to receive automatic option grants pursuant to
the provisions of this Plan shall be limited to (i) those individuals who are
serving as non-employee Board members on the Effective Date, (ii) those
individuals who are first elected or appointed as non-employee Board members
after the Effective Date, whether through appointment by the Board or election
by the Corporation's shareholders and (iii) those individuals who are re-elected
as non-employee Board members at one or more Annual Shareholders meetings held
after such Effective Date. Each non-employee Board member eligible to
participate in the Plan pursuant to the foregoing criteria shall be designated
an Eligible Director for purposes of the Plan.
VI. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Date. Option grants shall be made on the dates specified
below:
- Each individual who is serving as an Eligible Director on the
Effective Date shall automatically be granted at that time a non-statutory stock
option to purchase 2,000 shares of Common Stock.
- Each individual who is first elected or appointed as an
Eligible Director, whether through appointment by the Board or election by the
Corporation's shareholders, at any time after the Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
non-statutory stock option to purchase 2,000 shares of Common Stock.
- Each individual is serving as an Eligible Director for a
period of at least six months shall automatically be granted on the first day of
each fiscal quarter a nonstatutory option to purchase 2,000 shares of Common
Stock.
Exercise Price. The exercise price per share of Common Stock subject to
each automatic option grant shall be equal to one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the automatic grant date.
4.
<PAGE> 33
B. Payment. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one of the alternative forms
specified below:
(i) full payment in cash or check made payable to the
Corporation's order; or
(ii) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings for
financial-reporting purposes and valued at Fair Market Value on the Exercise
Date (as such term is defined below); or
(iii) full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market Value on the
Exercise Date and cash or check payable to the Corporation's order; or
(iv) to the extent the option is exercised for vested shares,
full payment through a broker-dealer sale and remittance procedure pursuant to
which the non-employee Board member (I) shall provide irrevocable written
instructions to a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares and (II) shall
concurrently provide written directives to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale transaction.
For purposes of this Section VI.C, the Exercise Date shall be the date
on which written notice of the option exercise is delivered to the Corporation.
Except to the extent the sale and remittance procedure specified above is
utilized in connection with the exercise of the option for vested shares,
payment of the exercise price for the purchased shares must accompany the
exercise notice. However, if the option is exercised for any unvested shares,
then the Optionee must also execute and deliver to the Corporation a stock
purchase agreement for those unvested shares which provides the Corporation with
the right to repurchase, at the exercise price paid per share, any unvested
shares held by the Optionee at the time of cessation of Board service and which
precludes the sale, transfer or other disposition of any shares purchased under
the option, to the extent those shares are at the time subject to the
Corporation's repurchase right.
C. Exercisability/Vesting. Each automatic grant shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each automatic
grant shall vest, and the Corporation's repurchase right with respect to those
shares shall lapse, upon Optionee's completion of one (1) year of Board service
measured from the automatic grant date. Vesting of the option shares shall be
subject to acceleration as provided in Section VI.G and Article VII. In no
event, however, shall any additional option shares vest after the Optionee's
cessation of Board service.
D. Option Term. Each automatic grant under the Plan shall have a
maximum term of ten (10) years measured from the automatic grant date.
5.
<PAGE> 34
E. Non-Transferability. During the lifetime of the Optionee, each
automatic option grant, together with the limited stock appreciation right
pertaining to such option, shall be exercisable only by the Optionee and shall
not be assignable or transferable by the Optionee other than a transfer of the
option effected by will or by the laws of descent and distribution following
Optionee's death.
F. Effect of Termination of Board Service.
1. Should the Optionee cease to serve as a Board member for
any reason (other than death or Permanent Disability) while holding one or more
automatic option grants under the Plan, then such individual shall have a six
(6)-month period following the date of such cessation of Board service in which
to exercise each such option for any or all of the option shares in which the
Optionee is vested at the time of such cessation of Board service. Each such
option shall immediately terminate and cease to be outstanding, at the time of
such cessation of Board service, with respect to any option shares in which the
Optionee is not otherwise at that time vested.
2. Should the Optionee die within six (6) months after
cessation of Board service, then any automatic option grant held by the Optionee
at the time of death may subsequently be exercised, for any or all of the option
shares in which the Optionee is vested at the time of his or her cessation of
Board service (less any option shares subsequently purchased by the Optionee
prior to death), by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution. The
right to exercise each such option shall lapse upon the expiration of the twelve
(12)-month period measured from after the date of the Optionee's death.
3. Should the Optionee die or become Permanently Disabled
while serving as a Board member, then the shares of Common Stock at the time
subject to each automatic option grant held by such Optionee shall immediately
vest in full (and the Corporation's repurchase right with respect to those
shares shall terminate), and the Optionee (or the representative of the
Optionee's estate or the person or persons to whom the option is transferred
upon the Optionee's death) shall have a twelve (12)-month period following the
date of the Optionee's cessation of Board service in which to exercise such
option for any or all of those vested shares of Common Stock.
4. In no event shall any automatic grant under this Plan
remain exercisable after the expiration date of the maximum ten (10)-year option
term. Upon the expiration of the applicable post-service exercise period under
subparagraphs 1 through 3 above or (if earlier) upon the expiration of the
maximum ten (10)-year option term, the automatic grant shall terminate and cease
to be outstanding for any option shares in which the Optionee was vested at the
time of his or her cessation of Board service but for which such option was not
otherwise exercised.
6.
<PAGE> 35
G. Shareholder Rights. The holder of an automatic option grant
shall have none of the rights of a shareholder with respect to any shares
subject to such option until such individual shall have exercised the option and
paid the exercise price for the purchased shares.
H. Remaining Terms. The remaining terms and conditions of each
automatic option grant shall be as set forth in the form Non-Statutory Stock
Option Agreement attached as Exhibit A.
VII. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the specified effective date for the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant under the Plan shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation or its parent company.
B. In connection with any Change in Control of the Corporation, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the specified effective date for the Change in
Control, become fully exercisable for all of the shares of Common Stock at the
time subject to that option and may be exercised for all or any portion of such
shares as fully-vested shares of Common Stock. Each such option shall remain
fully exercisable for the option shares which vest in connection with the Change
in Control until the expiration or sooner termination of the option term or the
cash-out of the option in accordance with Section VII.C.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
automatic option grant held by him or her under this Plan for a period of at
least six (6) months. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Take-Over Price of the shares of Common Stock at the time subject to the
surrendered option (whether or not the Optionee is otherwise at the time vested
in those shares) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent of the Board
shall be required in connection with such option surrender and cash
distribution.
D. The shares of Common Stock subject to each option surrendered in
connection with the Hostile Take-Over shall NOT be available for subsequent
option grant under this Plan.
E. The automatic option grants outstanding under the Plan shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or
7.
<PAGE> 36
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
VIII. AMENDMENT OF THE PLAN AND AWARDS
The Board has complete and exclusive power and authority to amend or
modify the Plan in any or all respects whatsoever. However, W the Plan, together
with the option grants outstanding under the Plan, may not be amended at
intervals more frequently than once every six (6) months, other than to the
extent necessary to comply with applicable Federal income tax laws and
regulations, and (ii) no such amendment or modification shall adversely affect
rights and obligations with respect to options at the time outstanding under the
Plan, unless the affected Optionees consent to such amendment. In addition, the
Board may not, without the approval of the Corporation's shareholders, amend the
Plan to U) materially increase the maximum number of shares issuable under the
Plan or the number of shares issuable per newly-elected or continuing
non-employee Board member, except for permissible adjustments under Section
IV.B., (ii) materially modify the eligibility requirements for Plan
participation or (iii) materially increase the benefits accruing to Plan
participants.
IX. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was initially adopted by the Board in on October 7,
1994. On September 25, 1998, the Plan was amended and restated by the Board (the
"1999 Restatement") to (I) increase the number of shares of Common Stock
authorized for issuance over the remaining term of the Plan by an additional
200,000 shares to 250,000 shares, (ii) grant on the first day of each fiscal
quarter each non-employee Board member a nonstatutory option to purchase 2,000
shares of Common Stock, provided such individual has served as a Board member
for a period of at least six months and (iii) delete the automatic granting of a
nonstatutory option to purchase 1,000 shares of stock upon being re-elected as a
non-employee Board member at the Annual Meeting. The 1999 Restatement is subject
to stockholder approval at the 1999 Annual Meeting.
B. The provisions of the 1999 Restatement apply only to options
granted under the Plan from and after the respective dates such Restatements
were adopted by the Board. All options which were issued and outstanding under
the Plan immediately prior to such adoption of the Restatement continue to be
governed by the terms and conditions of the Plan (and the instrument evidencing
each such option) as in effect on the date each such option was previously
granted, and nothing in the Restatement is to affect or otherwise modify the
respective rights or obligations of the holders of such options with respect to
the acquisition of shares of Common Stock thereunder.
C. The Plan shall terminate upon the earlier of (i) September 30,
2004 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued or cancelled pursuant to the exercise or cash-out of the
options granted under the Plan. If the date of termination is determined under
clause (i) above, then all option grants and unvested stock issuances
outstanding on such date shall thereafter continue to have force and effect in
accordance with the provisions of the instruments evidencing such option grants
or stock issuances.
8.
<PAGE> 37
X. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
pursuant to option grants or share issuances under the Plan shall be used for
general corporate purposes.
REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under
the Plan and the issuance of Common Stock upon the exercise of the option grants
made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any securities exchange on which the Common Stock is then listed for trading.
XII. NO IMPAIRMENT OF RIGHTS
Neither the action of the Corporation in establishing the Plan nor any
provision of the Plan shall be construed or interpreted so as to affect
adversely or otherwise impair the right of the Corporation or the shareholders
to remove any individual from the Board at any time in accordance with the
provisions of applicable law.
XIII. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any optionee.
B. The provisions of the Plan relating to the exercise of options
and the vesting of shares shall be governed by the laws of the State of
California, as such laws are applied to contracts entered into and performed in
such State.
9.
<PAGE> 38
SHARPER IMAGE CORPORATION
STOCK OPTION PLAN
(As amended and restated through September 25, 1998)
I. PURPOSE OF THE PLAN
This Sharper Image Corporation Stock Option Plan, as amended and
restated (the "Plan") is intended to promote the interests of the Sharper Image
Corporation (the "Company") by providing eligible individuals, who are
responsible for the management, growth and financial success of the Company or
its parent or subsidiary corporations or who otherwise render valuable services
to the Company or its parent or subsidiary corporations, with the opportunity to
acquire a proprietary interest, or increase their proprietary interest, in the
Company and thereby provide them with an incentive to remain in the service of
the Company or its parent or subsidiary corporations.
For purposes of the Plan, the following provisions shall be
applicable in determining the parent and subsidiary corporations of the Company:
A. Any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company shall be considered to be a PARENT
corporation of the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
B. Each corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company shall be considered to be a
SUBSIDIARY of the Company, provided each such corporation (other than the last
corporation) in the unbroken chain owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by one or more committees
comprised of members of the Company's Board of Directors (the "Board"). The
primary committee (the "Primary Committee") shall be comprised of two (2) or
more Board members and shall have sole and exclusive authority to grant stock
options and stock appreciation rights to officers of the Company subject to the
short-swing profit restrictions of the Federal securities laws. Stock options
may be granted to all other eligible employees and consultants by either the
Primary Committee or a secondary committee comprised of two (2) or more Board
members (the "Secondary Committee"). The members of the Primary Committee and
the Secondary Committee shall each serve for such period of time as the Board
may determine and shall be subject to removal by the Board at any time.
B. No Board member shall be eligible to serve on the
Primary Committee if such individual has, within the twelve (12)-month period
immediately preceding the date he or
<PAGE> 39
she is to be appointed to such Committee, received any option grant or stock
appreciation right under this Plan or any other stock plan of the Company (or
any parent or subsidiary corporation), except that non-employee Board members
may receive automatic option grants under the Company's 1994 Non-Employee
Director Stock Option Plan.
C. Subject to the limited authority provided the Secondary
Committee to effect option grants in accordance with the provisions of
subsection A of this Section II, the Primary Committee shall serve as the Plan
Administrator and shall have full power and authority (subject to the express
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for the proper administration of the Plan and to make such
determinations under the Plan and any outstanding option as it may deem
necessary or advisable. Decisions of the Plan Administrator shall be final and
binding on all parties with an interest in the Plan or any option outstanding
thereunder.
III. ELIGIBILITY FOR OPTION GRANTS
The persons eligible to receive option grants under the Plan
("Optionee") are as follows:
(i) key employees (including officers) of the
Company (or its parent or subsidiary corporations) who are responsible
for the management, growth and financial success of the Company (or its
parent or subsidiary corporations); and
(ii) those consultants who provide valuable services
to the Company (or its parent or subsidiary corporations).
The Plan Administrator shall have full authority to determine
which eligible individuals are to receive option grants under the Plan, the
number of shares to be covered by each such grant, whether the granted option is
to be an incentive stock option ("Incentive Option") which satisfies the
requirements of Section 422 of the Internal Revenue Code or a non-statutory
option not intended to meet such requirements, the time or times at which each
such option is to become exercisable, and the maximum term for which the option
is to remain outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall consist of
shares of the Company's authorized but unissued or reacquired common stock
("Common Stock"). The maximum number of issuable shares shall not exceed
3,155,000(1), subject to adjustment as provided in subsection C. In no event,
however, shall any one participant in the Plan be granted stock options or
separately exercisable stock appreciation rights for more than 300,000 shares in
any fiscal year, starting with the fiscal year beginning February 1, 1994,
except that for the fiscal year in which an individual receives his or her
initial stock option grant under the Option Plan,
- --------
(1) This figure includes a 750,000-share increase approved by the Board
on September 25, 1998 and is subject to shareholder approval at the 1999 Annual
Stockholders Meeting.
2.
<PAGE> 40
the limit will be increased to 400,000 shares. Such share limitation shall also
be subject to adjustment as provided in subsection C.
B. Shares of Common Stock subject to the unexercised
portion of any outstanding options under the Plan which expire or terminate
prior to exercise in full or which are otherwise cancelled in accordance with
the cancellation-regrant provisions of Section VIII shall be available for
subsequent option grants under the Plan. Shares subject to any option cancelled
or surrendered in accordance with the provisions of Section VII or Section X
shall not be available for subsequent option grants under the Plan. Shares
issued under the Plan, whether or not such shares are subsequently repurchased
by the Company, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent option grants under the Plan. In addition,
should the option price of an outstanding option under the Plan be paid with
shares of Common Stock, then the number of shares of Common Stock available for
issuance under the Plan shall be reduced by the gross number of shares for which
the option is exercised, and not by the net number of shares of Common Stock
actually issued to the option holder.
C. In the event any change is made to the Common Stock
issuable under the Plan by reason of any stock dividend, stock split,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which stock options and separately exercisable stock appreciation
rights may be granted per participant in any fiscal year and (iii) the aggregate
number and/or class of securities and the option price per share in effect under
each outstanding option in order to prevent the dilution or enlargement of
benefits thereunder. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive.
D. Shares of Common Stock issuable upon exercise of an
option granted under the Plan may be subject to such restrictions on transfer or
other restrictions as may be determined by the Plan Administrator.
V. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Plan shall be authorized by
action of the Plan Administrator and may, at the Plan Administrator's
discretion, be either Incentive Options or non--statutory options. Individuals
who are not Employees (as defined in subsection C.2 below) may only be granted
non-statutory options. Each option grant shall be evidenced by one or more
instruments in the form approved by the Plan Administrator; provided, however,
that each such instrument shall comply with the terms and conditions specified
in this Section V and in Section VII. Each instrument evidencing an Incentive
Option shall, in addition, be subject to the applicable provisions of Section
VI.
A. Option Price.
1. The option price per share shall be fixed by the
Plan Administrator. In no event, however, shall the option price per share be
less than one hundred percent (100%) of
3.
<PAGE> 41
the Fair Market Value of a share of Common Stock on the date of the option
grant, subject to Sections VI.A and VI.D.
2. The option price shall become immediately due
upon exercise of the option and shall, subject to the provisions of Section XI
and the documents evidencing the option grant, be payable in one of the
following alternative forms (as determined by the Plan Administrator):
(A) in cash or check made payable to the Company's
order; or
(B) in shares of Common Stock of the Company held by
the Optionee for the requisite period necessary to avoid a charge to the
Company's earnings for financial reporting purposes and valued at Fair
Market Value on the date the option is exercised; or
(C) through a broker-dealer sale and remittance
procedure pursuant to which the Optionee shall provide irrevocable
written instructions (I) to a Company-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate option price payable for the
purchased shares plus all applicable Federal and state income and
employment taxes required to be withheld by the Company by reason of
such purchase and (II) to the Company to deliver the certificates for
the purchased shares directly to such brokerage firm in order to effect
the sale transaction.
Except to the extent such sale and remittance procedure is
utilized, payment of the option price must occur at the time the option is
exercised.
3. The Fair Market Value of a share of Common Stock on
any relevant date under the Plan shall be determined in accordance with the
following provisions:
(A) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the Nasdaq
National Market, the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price
is reported on the Nasdaq National Market or any successor system. If
there is no reported closing selling price for the Common Stock on the
date in question, then the closing selling price on the last preceding
date for which such quotation exists shall be determinative of Fair
Market Value.
(B) If the Common Stock is at the time listed or
admitted to trading on any stock exchange, then the Fair Market Value
shall be the closing selling price per share of Common Stock on the date
in question on the stock exchange determined by the Plan Administrator
to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Common Stock on such exchange
on the date in question, then the Fair Market Value shall be the closing
selling price on the exchange on the last preceding date for which such
quotation exists.
4.
<PAGE> 42
B. Term and Exercise of Options. Each option
granted under the Plan shall be exercisable at such time or times,
during such period, and for such number of shares as shall be determined
by the Plan Administrator and set forth in the stock option agreement
evidencing such option. However, no option granted under the Plan shall
have a term in excess of ten (10) years from the grant date. During the
lifetime of the Optionee, the option shall be exercisable only by the
Optionee and shall not be assignable or transferable by the Optionee
otherwise than by will or by the laws of descent and distribution
following the Optionee's death.
C. Termination of Service.
1. Except to the extent otherwise provided
below, the following provisions shall govern the exercise period applicable to
any options held by the Optionee at the time of cessation of Service or death.
(A) Should the Optionee cease to remain in Service
for any reason other than death or permanent disability, then the period
during which each outstanding option held by such Optionee is to remain
exercisable shall be limited to the three (3)-month period following the
date of such cessation of Service.
(B) In the event such Service terminates by reason
of permanent disability (as defined in Section 22(e)(3) of the Internal
Revenue Code), then the period during which each outstanding option held
by the Optionee is to remain exercisable shall be limited to the twelve
(12)-month period following the date of such cessation of Service.
(C) Should the Optionee die while holding one or
more outstanding options, then the period during which each such option
is to remain exercisable shall be limited to the twelve (12)-month
period following the date of the Optionee's death. During such limited
period, the option may be exercised by the personal representative of
the Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the optionee's will or in accordance with the
laws of descent and distribution.
(D) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of shares (if any) which are exercisable at the time of his
or her cessation of Service. Upon the expiration of the limited
post-Service exercise period or (if earlier) upon the specified
expiration date of the option term, each such option shall terminate and
cease to be outstanding with respect to any shares for which the option
has not otherwise been exercised. Each outstanding option shall
immediately terminate and cease to be outstanding, at the time of the
Optionee's cessation of Service, with respect to any shares for which
the option is not otherwise at that time exercisable.
(E) The Board shall have full power and authority:
(i) to extend the period of time for which
the option is to remain exercisable following the optionee's termination
of Service from the normal three (3)-month (twelve (12) months in the
case of death or permanent disability) period
5.
<PAGE> 43
to such greater period of time as the Board shall deem appropriate under
the circumstances; provided, that in no event shall such option be
exercisable after the specified expiration date of the option term, or
(ii) to establish as a provision applicable
to the exercise of one or more options granted under the Plan that
during the limited period of exercisability following the cessation of
Service, the option may be exercised not only with respect to the number
of shares for which it is exercisable at the time of the optionee's
cessation of Service but also with respect to one or more subsequent
installments of purchasable shares for which the option would otherwise
have become exercisable had such cessation of Service not occurred.
2. For all purposes under the Plan, unless
specifically provided otherwise in the option agreement evidencing the option
grant, the Optionee shall be deemed to remain in Service for so long as such
individual renders services on a periodic basis to the Company or any parent or
subsidiary corporation in the capacity of an Employee, a non-employee member of
the board of directors or a consultant. The Optionee shall be considered to be
an Employee for so long as such individual remains in the employ of the Company
or one or more of its parent or subsidiary corporations, subject to the control
and direction of the employer entity as to both the work to be performed and the
manner and method of performance.
D. Stockholder Rights. An Optionee shall have none of the
rights of a stockholder with respect to any shares covered by the option until
such Optionee shall have exercised the option and paid the option price.
VI. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to
all Incentive Options granted under the Plan. Incentive Options may only be
granted to individuals who are Employees. Options which are specifically
designated as "non--statutory" options when issued under the Plan shall not be
subject to such terms and conditions.
A. Dollar Limitation. The aggregate Fair Market Value
(determined as of the respective date or dates of grant) of the Common Stock for
which one or more options granted to any Employee under this Plan (or any other
option plan of the Company or its parent or subsidiary corporations) may for the
first time become exercisable as incentive stock options under the Federal tax
laws during any one calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more
such options which become exercisable for the first time in the same calendar
year, the foregoing limitation on the exercisability of such options as
incentive stock options under the Federal tax laws shall be applied on the basis
of the order in which such options are granted. Should the number of shares of
Common Stock for which any Incentive Option first becomes exercisable in any
calendar year exceed the applicable One Hundred Thousand Dollar ($100,000)
limitation, then that option may nevertheless be exercised in that calendar year
for the excess number of shares as a non-statutory option under the Federal tax
laws.
6.
<PAGE> 44
B. 10% Stockholder. If the individual to whom an Incentive
Option is granted is the owner of stock (as determined under Section 424(d) of
the Internal Revenue Code) possessing ten percent (10%) or more of the total
combined voting power of all classes of stock of the Company or any parent or
subsidiary corporation (such individual to be designated a "10% Stockholder"),
then the option price per share shall not be less than one hundred ten percent
(110%) of the Fair Market Value of a share of Common Stock on the date of the
option grant, and no option granted to a 10% Stockholder shall have a term in
excess of five (5) years from the grant date.
Except as modified by the preceding provisions of this Section
VI, all provisions of the Plan shall be applicable to the Incentive Options
granted hereunder.
VII. CORPORATE TRANSACTION
A. In the event of one or more of the following
stockholder--approved transactions (a "Corporate Transaction"):
1. a merger or consolidation in which the
Company is not the surviving entity, except for a transaction the
principal purpose of which is to change the state of the Company's
incorporation;
2. the sale, transfer or other disposition
of all or substantially all of the assets of the Company; or
3. any reverse merger in which the Company
is the surviving entity,
then the exercisability of each option outstanding under the Plan shall
automatically accelerate so that each such option shall, immediately prior to
the specified effective date for the Corporate Transaction, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares. However, an outstanding option under the Plan shall not be so
accelerated if and to the extent: (i) such option is, in connection with the
Corporate Transaction, to be assumed by the successor corporation or parent
thereof or replaced with a comparable option to purchase shares of the capital
stock of the successor corporation or parent thereof or (ii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant, including provisions which wholly preclude
acceleration of exercisability upon any specified Corporate Transaction,
provided such provisions are set forth in the agreement evidencing the option.
The determination of comparability under clause (i) above shall be made by the
Plan Administrator, and its determination shall be final, binding and
conclusive.
B. Immediately following the consummation of the Corporate
Transaction, all outstanding options under the Plan shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation or its
parent company.
C. Each outstanding option which is assumed in connection
with the Corporate Transaction or is otherwise to continue in effect shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
and pertain to the number and class of
7.
<PAGE> 45
securities which would have been issued to the option holder, in consummation of
such Corporate Transaction, had such person exercised the option immediately
prior to such Corporate Transaction. Appropriate adjustments shall also be made
to the option price payable per share, provided the aggregate option price
payable for such securities shall remain the same. In addition, the class and
number of securities available for issuance under the Plan, on an aggregate and
per participant basis, shall be appropriately adjusted following the
consummation of the Corporate Transaction.
D. The grant of options under this Section VII shall in no
way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
VIII. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options under the Plan covering the same or different
numbers of shares of Common Stock but having an option price per share not less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the new grant date (or in the case of an Incentive Option granted to a
10% Stockholder, not less than one hundred and ten percent (110%) of such Fair
Market Value).
IX. STOCK APPRECIATION RIGHTS
A. One or more Optionees may, upon such terms and
conditions as the Plan Administrator may establish at the time of the option
grant or at any time thereafter, be granted the right to surrender all or part
of an unexercised option in exchange for a distribution equal in amount to the
excess of (i) the Fair Market Value (on the surrender date) of the number of
option shares which are at the time exercisable under the surrendered option or
portion thereof over (ii) the aggregate option price payable for such shares. No
surrender of an option, however, shall be effective unless it is approved by the
Plan Administrator. If the surrender is so approved, then the distribution to
which the option holder shall accordingly become entitled under this subsection
IX.A may be made in shares of Common Stock valued at Fair Market Value at date
of surrender, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
B. If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee had
under the surrendered option (or surrendered portion thereof) on the surrender
date and may exercise such rights at any time prior to the later of (i) the
expiration of the five (5) business-day period following receipt by the option
holder of the rejection notice or (ii) the last day on which the option is
otherwise exercisable in accordance with the terms of the instrument evidencing
such option, but in no event may such rights be exercised at any time after ten
(10) years following the date of the option grant.
C. Notwithstanding the foregoing provisions of this Section
IX, one or more officers or directors of the Company subject to the short-swing
profit restrictions of the Federal
8.
<PAGE> 46
securities laws may, in the Plan Administrator's sole discretion, be granted
limited stock appreciation rights in tandem with their outstanding options under
this Plan. Each outstanding option with such a limited stock appreciation right
in effect for at least six (6) months shall automatically be cancelled, whether
or not the option is otherwise at the time exercisable, upon the occurrence of a
Hostile Take-Over, and the Optionee shall in return be entitled to a cash
distribution from the Company in an amount equal to the excess of (i) the
Take-Over Price of the shares under the cancelled option over (ii) the aggregate
option price payable for such shares. Such cash distribution shall be made
within five (5) days following the consummation of the Hostile Take-Over.
Neither the approval of the Plan Administrator nor the consent of the Board
shall be required in connection with such option cancellation and cash
distribution.
D. For purposes of Section IX.C above, the following
definitions shall be in effect:
A HOSTILE TAKE-OVER shall be deemed to occur in the
event (i) any person or related group of persons (other than the Company
or a person that directly or indirectly controls, is controlled by, or
is under common control with, the Company) acquires ownership of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant
to a tender or exchange offer made directly to the Company's
stockholders which the Board does not recommend such stockholders to
accept and (ii) more than fifty percent (50%) of the securities so
acquired in such tender or exchange offer are accepted from holders
other than officers and directors of the Company subject to the
short-swing profit restrictions of Section 16 of the 1934 Act.
The TAKE-OVER PRICE per share shall be deemed to be
equal to the greater of (i) the Fair Market Value per share on the date
of the option cancellation or (ii) the highest reported price per share
paid in effecting such Hostile Take-Over.
E. The shares of Common Stock subject to any option
surrendered or cancelled for an appreciation distribution pursuant to this
Section IX shall not be available for subsequent option grants under the Plan.
X. LOANS
A. The Plan Administrator may assist any Optionee
(including an Optionee who is an officer of the Company) in the exercise of one
or more options granted to such Optionee, including the satisfaction of any
Federal and state income and employment tax obligations arising therefrom, by:
(i) authorizing the extension of a loan from the
Company to such Optionee, or
(ii) permitting the Optionee to pay the option price
for the purchased Common Stock in installments.
9.
<PAGE> 47
B. The terms of any loan or installment method of payment
(including the interest rate and terms of repayment) shall be established by the
Plan Administrator in its sole discretion. Loans or installment payments may be
granted with or without security or collateral. However, any loan made to a
consultant or other non-employee advisor must be secured by property other than
the purchased shares of Common Stock. In all events the maximum credit available
to each Optionee may not exceed the sum of (i) the aggregate option price
payable for the purchased shares (less the par value) plus (ii) any Federal and
state income and employment tax liability incurred by the Optionee in connection
with such exercise.
C. The Plan Administrator may, in its absolute discretion,
determine that one or more outstanding loans under the Plan shall be subject to
forgiveness by the Company in whole or in part upon such terms and conditions as
the Plan Administrator may in its discretion deem appropriate.
XI. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in the Service or employ of the Company (or any parent or subsidiary
corporation of the Company employing or retaining such Optionee) for any period
of specific duration or interfere with or otherwise restrict in any way the
rights of the Company (or any parent or subsidiary corporation of the Company
employing or retaining such Optionee) or of the Optionee, which rights are
hereby expressly reserved by each, to terminate the Optionee at any time for any
reason whatsoever, with or without cause.
XII. AMENDMENT OF THE PLAN AND OPTIONS
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects whatsoever.
However, no such amendment or modification shall adversely affect the rights and
obligations of an Optionee with respect to options at the time outstanding under
the Plan unless the Optionee consents to such amendment. In addition, the Board
shall not, without the approval of the Company's stockholders, amend the Plan to
(i) materially increase the maximum number of shares issuable under the Plan or
the maximum number of shares for which stock options and separately exercisable
stock appreciation rights may be granted per participant during any fiscal year,
except for permissible adjustments under Section IV.C, (ii) materially increase
the benefits accruing to individuals who participate in the Plan, or (iii)
materially modify the eligibility requirements for participation in the Plan.
B. Options to purchase shares of Common Stock may be
granted under the Plan which are in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued under the Plan are held in escrow until there is obtained stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock available for issuance under the Plan. If such stockholder approval is not
obtained within twelve (12) months after the date the excess issuances are made,
then (1) any unexercised options representing such excess shall terminate and
cease to be exercisable and (2) the Company shall promptly refund to the
Optionees the option price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short-Term
10.
<PAGE> 48
Federal Rate) for the period the shares were held in escrow, and such shares
shall thereupon be automatically cancelled and cease to be outstanding.
XIII. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was initially adopted by the Board in May,
1985. In March 1987 the Plan was amended and restated by the Board to increase
the number of shares issuable thereunder to an aggregate of 1,155,000 shares
(the "1987 Restatement"). The 1987 Restatement was approved by the stockholders
in April 1987. In January, 1992 the Board approved a further restatement of the
Plan (the "1992 Restatement") to effect the following principal amendments: (1)
increase the number of shares available for issuance pursuant to the Plan by
500,000 to 1,655,000 shares in the aggregate; (2) allow consultants to receive
option grants or stock appreciation rights under the Plan; (3) conform the Plan
to recent changes in Rule 16b-3 of the Securities and Exchange Commission; and
(4) extend the term of the Plan from May 19, 1995 to January 19, 2002. The 1992
Restatement was approved by the stockholders in June 1992. On October 7, 1994,
the Board approved a further restatement of the Plan (the "1995 Restatement") to
effect the following principal adjustments: (i) increase the number of shares of
Common Stock authorized for issuance over the remaining term of the Plan by an
additional 750,000 shares to 2,405,000 shares; (ii) limit the aggregate number
of shares for which any one individual may be granted stock options and
separately exercisable stock appreciation rights to 300,000 shares per fiscal
year, starting with the fiscal year beginning February 1, 1994, except that for
the fiscal year in which an individual receives his or her initial stock option
grant under the Plan, the limit will be increased to 400,000 shares; (iii) allow
individuals in the Company's employ or service who own or are deemed to own more
than twenty-five percent (25%) of the Company's outstanding Common Stock to
receive stock options and stock appreciation rights under the Plan and (iv)
render the non-employee members of the Board ineligible to receive any further
option grants or stock appreciation rights under the Plan. The 1995 Restatement
was approved by the stockholders at the 1995 Annual Stockholders Meeting. On
September 25, 1998, the Board approved a further restatement of the Plan ("the
1999 Restatement") to effect the following principal adjustments: (I) increase
the number of shares of Common Stock authorized for issuance over the remaining
term of the Plan by an additional 750,000 shares to 3,155,000 shares and (ii) to
extend the term of the Plan through September 30, 2004.
B. The provisions of the 1987, 1992, 1995 and 1999
Restatements apply only to options granted under the Plan from and after the
respective dates such Restatements were adopted by the Board. All options which
were issued and outstanding under the Plan immediately prior to such adoption of
the such Restatements continue to be governed by the terms and conditions of the
Plan (and the instrument evidencing each such option) as in effect on the date
each such option was previously granted, and nothing in the Restatements is to
affect or otherwise modify the respective rights or obligations of the holders
of such options with respect to the acquisition of shares of Common Stock
thereunder.
C. Unless sooner terminated in accordance with Section VII,
the Plan shall terminate upon the earlier of (i) September 30, 2004 or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued or cancelled pursuant to the exercise or surrender of options granted
hereunder. If the date of termination is determined under clause (i)
11.
<PAGE> 49
above, then options outstanding on such date shall thereafter continue to have
force and effect in accordance with the provisions of the instruments evidencing
such options.
XIV. USE OF PROCEEDS
Any cash proceeds received by the Company from the issuance of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
XV. WITHHOLDING
The Company's obligation to deliver shares upon the exercise of
any option or stock appreciation right or the surrender of any option granted
under the Plan shall be subject to the Optionee's satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
XVI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option or
stock appreciation right under the Plan, and the issuance of Common Stock upon
the exercise of any such option shall be subject to the Company's procurement of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
12.
<PAGE> 50
PROXY
SHARPER IMAGE CORPORATION
650 DAVIS STREET, SAN FRANCISCO, CA 94111
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Richard Thalheimer and Tracy Wan, and each
of them, with full power of substitution, the proxy or proxies of the
undersigned to vote all shares of Common Stock of Sharper Image Corporation
which the undersigned is entitled to vote at the Annual Meeting of Stockholders
of Sharper Image Corporation to be held at the World Trade Club, Ferry Building,
San Francisco, California 94111, on June 7, 1999 at 10:00 am., and at any
adjournments or postponements thereof, with the same force and effect as the
undersigned might or could do if personally present thereat:
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 51
<TABLE>
<S> <C> <C> <C> <C>
Please mark
your votes as
indicated in /X/
this example.
WITHHOLD
1. ELECTION OF DIRECTORS AUTHORITY 3. PROPOSAL TO APPROVAL OF 1999 FOR AGAINST ABSTAIN
AUTHORITY TO VOTE FOR ANY FOR to vote for AMENDMENT OF THE COMPANY'S / / / / / /
NOMINEE MAY BE WITHHELD BY all nominees all nominees NON-EMPLOYEE DIRECTORS STOCK OPTION
LINING THROUGH SUCH NOMINEE'S listed below listed below PLAN
NAME BELOW. / / / /
4. PROPOSAL TO RATIFY THE SELECTION OF FOR AGAINST ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS DELOITTE & TOUCHE LLP AS THE / / / / / /
A VOTE FOR COMPANY'S INDEPENDENT AUDITOR. (The
Board of Directors recommends a vote
RICHARD J. THALHEIMER, ALAN R. THALHEIMER, FOR.)
GERALD NAPIER, MORTON DAVID, GEORGE JAMES
5. In their discretion, the proxies are authorized to vote upon
FOR AGAINST ABSTAIN such other business as may properly come before the meeting
2. PROPOSAL TO APPROVAL OR 1999 / / / / / / and at any adjournments or postponements thereof.
AMENDMENT OF THE COMPANY'S
STOCK OPTION PLAN
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, 3, 4 AND 5 IN THE DISCRETION OF THE PROXY
HOLDERS, UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME
BEFORE THE MEETING AND AT ANY ADJOURNMENTS OR POSTPONE-
MENTS THEREOF.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
Signature(s)____________________________________________________________________________________________ Dated:____________, 1999
Please sign exactly as name appears above. When shares are held jointly, every holder should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name
by president or other authorized officer. If a partnership, please sign in partnership name by authorized person.
- ---------------------------------------------------------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
</TABLE>
