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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1999
REGISTRATION NO. 333-79211
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SHARPER IMAGE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2493558
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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650 DAVIS STREET
SAN FRANCISCO, CALIFORNIA 94111
(415) 445-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY P. FORGAN
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SHARPER IMAGE CORPORATION
650 DAVIS STREET
SAN FRANCISCO, CALIFORNIA 94111
(415) 445-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
------------------------
COPIES TO:
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SCOTT D. LESTER BRUCE K. DALLAS
BROBECK, PHLEGER & HARRISON LLP DAVIS POLK & WARDWELL
SPEAR TOWER, ONE MARKET 450 LEXINGTON AVENUE
SAN FRANCISCO, CALIFORNIA 94105 NEW YORK, NEW YORK 10017
(415) 442-0900 (212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security holders
or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this
form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE (1)(2) REGISTRATION FEE
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Common stock, $0.01 par
value(3).................... 3,450,000 shares $9.8125 $33,853,125 $9,412(4)
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(1) Includes 450,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) The price of $9.8125 per share, which was the average of the high and low
prices of the Registrant's common stock on The Nasdaq National Market on May
21, 1999, is set forth solely for the purposes of calculating the
registration fee in accordance with Rule 457(c) of the Securities Act of
1933, as amended.
(3) Includes rights to be issued under the Registrant's stockholders rights
agreement.
(4) Paid in connection with the Registrant's initial filing on May 25, 1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
SUBJECT TO COMPLETION
DATED JUNE 17, 1999
PROSPECTUS
SHARPER IMAGE LOGO
3,000,000 Shares
Common Stock
(Par value $0.01 per share)
The Sharper Image is offering 3,000,000 shares of its common stock.
The Sharper Image common stock is traded on the Nasdaq National Market under the
symbol "SHRP." On June 16, 1999, the reported last sale price of our common
stock was $8.75 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE SHARPER IMAGE
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Per Share $ $ $
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Total $ $ $
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The Sharper Image has granted the underwriters the right to purchase up to an
additional 450,000 shares of common stock to cover over-allotments. If the
over-allotment option is exercised in full, The Sharper Image will receive
proceeds of $ .
It is expected that delivery of the shares will be made to investors on or about
, 1999.
J.P. MORGAN & CO. U.S. BANCORP PIPER JAFFRAY
, 1999
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[PHOTOGRAPH OF SHARPER IMAGE DESIGN PRODUCT]
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[PHOTOGRAPHS OF EXTERIOR OF STORE, CATALOG AND WEBSITE]
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[PHOTOGRAPH OF INDIVIDUALS USING PRODUCTS]
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-------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary........................ 1
Risk Factors.............................. 5
Use of Proceeds........................... 12
Price Range of Common Stock............... 12
Dividend Policy........................... 12
Capitalization............................ 13
Selected Financial Information............ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 15
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Business.................................. 24
Management................................ 34
Principal Stockholders.................... 36
Description of Capital Stock.............. 38
Underwriting.............................. 41
Legal Matters............................. 43
Experts................................... 43
Where You Can Find More Information....... 43
Index to Financial Statements............. F-1
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-------------------------
You should rely only on the information contained or incorporated by reference
in this prospectus. To understand this offering fully, you should read this
entire prospectus carefully including the financial statements and notes. We
have included a brief overview of the most significant aspects of the offering
itself in the prospectus summary. However, individual sections of the prospectus
are not complete and do not contain all of the information that you should
consider before investing in The Sharper Image's common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference in this prospectus. This prospectus is an offer to
sell, or a solicitation of offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common stock.
-------------------------
We own or have rights to various copyrights, trademarks and trade names used in
our business. These include The Sharper Image(R), Ionic Breeze(TM) Silent Air
Purifier, Wee-Bot(TM) Electronic Pet, CD Radio/Alarm Clock with Sound
Soother(R), Ionic Hair Wand II(TM), Personal Cooling System(TM), Shower
Companion(TM) Plus CD Player, Ultra Heart and Sound Soother(R), Quiet Power(TM)
Tie Rack, Turbo-Groomer(TM), Steam Wizard(R), Power Tower(TM) and Truth
Quest(TM). We also have registered Internet domain names as follows:
sharperimage, sharperimagehome, auctiongalleria, thesharperimage,
sharperimagewoman, sharperimagebest, sharperimageauction, tsimail,
sharperimageawards, sharperimagekids, sharperimagedesign. This prospectus also
includes trademarks, service marks and trade names of other companies.
Except as otherwise noted, information in this prospectus assumes no exercise of
the underwriters' over-allotment option.
Except as otherwise noted, we present all financial and operational data on a
fiscal year and fiscal quarter basis. Our fiscal year ends on January 31. For
example, we refer to the year ended January 31, 1999 as "fiscal 1998" or "1998."
Our fiscal quarters end April 30, July 31 and October 31.
References to our common stock include rights issued under our stockholders
rights agreement.
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PROSPECTUS SUMMARY
This is a summary, and, therefore, it may not contain all of the information
that may be important to you. For a more complete understanding of this
offering, we encourage you to read this entire document and the documents we
refer you to. You should read the following summary together with the more
detailed information and consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus. The words "Sharper
Image," "we," "ours," and "us" refer to Sharper Image Corporation, but not to
any of the underwriters.
THE SHARPER IMAGE
The Sharper Image is a leading specialty retailer of innovative, high quality
products that are useful and entertaining and are designed to make life easier
and more enjoyable. We offer a unique assortment of products in the electronics,
recreation and fitness, personal care, houseware, travel, toy, gift and other
categories. Our merchandising philosophy focuses on new and creative proprietary
Sharper Image Design products, Sharper Image private label products and branded
products, a portion of which we offer on an exclusive basis. Our products are
marketed and sold through three primary sales channels: The Sharper Image
stores, The Sharper Image catalog, and the Internet, primarily through our
sharperimage.com website. We believe that our unique merchandising and creative
marketing strategies have made The Sharper Image one of the most widely
recognized retail brand names in the United States.
As of June 10, 1999, we operated 89 The Sharper Image stores in 27 states and
the District of Columbia, which generated 67% of our total revenues in 1998 and
72% in the first quarter of 1999. During 1998, we mailed approximately 41
million The Sharper Image catalogs, excluding specialty catalogs, to over 6.5
million individuals. Catalog operations, excluding specialty catalogs, generated
24% of our total revenues in 1998 and 21% in the first quarter of 1999. The
Sharper Image catalog also serves as the primary advertising vehicle for our
stores. Our Internet revenues grew significantly in 1998 to $4.9 million from
$1.6 million in 1997 and to $2.3 million in the first quarter of 1999 from $0.5
million in the first quarter of 1998. Our total revenues for 1998 were $243.1
million, representing a 12% increase from $216.8 million in 1997 and for the
first quarter of 1999 were $40.9 million, representing a 3% increase from $39.8
million in the first quarter of 1998.
COMPETITIVE ADVANTAGES
We believe that the following competitive advantages have contributed
significantly to our past success, and we intend to continue to capitalize on
these advantages in executing our growth strategy:
- - Strong brand name. We believe our unique merchandising and creative marketing
have made The Sharper Image one of the most widely recognized retail brands in
the United States. We continue to leverage our Sharper Image brand name by
increasing our proprietary product offerings, growing our online and catalog
businesses and opening new stores.
- - Proprietary Sharper Image Design products. In recent years, we have focused
significant resources on the design, development and marketing of our Sharper
Image Design products, which grew to 18% of total revenues in 1998 from 8% in
1997 and to 25% of total revenues in the first quarter of 1999. We have
developed and introduced over 35 new-to-market products in the last three
years, with 16 new-to-market products in the last year. Of our ten best
selling products during the 1998 Holiday shopping season, five were Sharper
Image Design products.
- - Unique product offering. The Sharper Image offers a unique assortment of new
and creative products in a variety of categories. Many of our products are
difficult to find elsewhere and are not easily replicated. Our merchandising
philosophy focuses on Sharper Image Design products, Sharper Image private
label products and branded products, a portion of which we offer on an
exclusive basis. We believe our merchandising strategy limits price shopping
and enhances our ability to achieve attractive margins.
- - Three synergistic retail sales channels. We offer our products through three
main sales channels: The Sharper Image stores, The Sharper Image catalog and
the Internet, primarily through our sharperimage.com website. We believe that
our three sales channels allow us to increase the visibility of our brand
name, leverage our existing infrastructure and experience in marketing, order
fulfillment and customer service and provide customers with increased shopping
flexibility and service.
1
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- - Loyal customer base with attractive demographics. A cornerstone of our
business strength has been our attractive customer base of loyal, repeat
customers. These customers are typically high net worth men and women between
the ages of 35 and 55, with an average yearly income in excess of $100,000. We
have developed an internal database of over 10 million customer names. Our
Internet presence is broadening our customer base to include a younger
audience that shares our core customer demographics.
GROWTH STRATEGY
We believe that substantial opportunities exist to enhance our revenues and
profitability by implementing the following growth strategy:
- - Increase Sharper Image Design product offerings. A key element of our growth
strategy is to continue to increase our efforts to design, develop and market
innovative Sharper Image Design products that offer new features, are designed
to appeal to a broad customer base, and are sold at popular price points. Our
high quality proprietary products generally are unique and exclusive to the
Sharper Image, which limits price shopping. Sharper Image Design products
typically generate higher margins than our other products because they have
broad consumer appeal and are manufactured directly for The Sharper Image.
- - Increase Internet retail operations. Our goal is to offer our online
customers an interactive and entertaining experience similar to our Sharper
Image stores. We plan to substantially increase our Internet advertising and
marketing in an effort to increase our Internet sales. The success of our
online retail operations has been achieved to date with minimal incremental
investment in advertising and marketing. We believe our success has been a
result of our strong brand name, unique product offerings, demographically
attractive customer base and established order fulfillment and customer
service capabilities. We recently launched our Internet auction site as a key
component of our Internet strategy. We currently have marketing partnerships
with America Online, @Home, Catalog City, DoubleClick, Linkshare, Microsoft
Plaza, PC World Shopping and Yahoo! Shopping.
- - Broaden customer base. We believe that significant opportunities exist to
attract a broader customer base by:
c developing proprietary products at popular price points with broad
market appeal,
c offering products with wider functional appeal,
c developing more products that appeal to women, and
c expanding the demographic mix of our customers by reaching a younger
and broader audience.
- - Open new stores. We plan to continue to selectively open new stores in
premium locations in the United States. We currently intend to open four
stores during 1999, two of which have been opened to date. Each new store will
be configured in our new format, which we believe appeals to a broader
customer base and highlights our proprietary products.
Our principal executive offices are located at 650 Davis Street, San Francisco,
California 94111. Our telephone number is (415) 445-6000.
2
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THE OFFERING
COMMON STOCK OFFERED BY
THE SHARPER IMAGE.............. 3,000,000 shares
OVER-ALLOTMENT OPTION............... 450,000 shares
SHARES TO BE OUTSTANDING AFTER THE
OFFERING............................ 11,964,831 shares
USE OF PROCEEDS..................... For working capital and general corporate
purposes, including investments in our
Internet business and for expansion of our
distribution and fulfillment capacity.
NASDAQ NATIONAL MARKET SYMBOL....... "SHRP"
The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of June 10, 1999 and does not
include 347,460 shares of common stock issuable upon exercise of outstanding
stock options under our employee and non-employee director stock option plans at
a weighted average exercise price of $4.12 per share.
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SUMMARY FINANCIAL DATA AND OPERATING STATISTICS
The statements of operations data for the fiscal years ended January 31, 1999,
1998 and 1997 have been derived from the financial statements, which have been
audited by Deloitte & Touche LLP, independent auditors, included elsewhere in
this prospectus. The statements of operations data for the years ended January
31, 1996 and 1995 are derived from audited financial statements not included in
this prospectus. The statements of operations data for the three month periods
ended April 30, 1999 and 1998 and the balance sheet data as of April 30, 1999
are derived from unaudited financial statements that include, in the opinion of
management, all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
results of operations for the three month period ended April 30, 1999 or any
other period are not necessarily indicative of future results.
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Dollars in thousands, YEAR ENDED JANUARY 31,
except per share data THREE MONTHS ---------------------------------------------
ENDED APRIL 30,
----------------------- 1999 1998 1997
STATEMENTS OF OPERATIONS 1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
DATA: ---------- ---------- ------------- ------------- -------------
(UNAUDITED)
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Revenues................... $40,859 $39,751 $243,114 $216,815 $210,245
Gross margin(1)............ 20,204 18,495 118,376 99,658 98,971
Provision for loss on the
closure of the SPA
Collection division...... -- -- -- -- (8,000)
Operating income (loss).... (2,816) (3,487) 7,428 1,507 (6,928)
Earnings (loss) before
income taxes (benefit)... (2,852) (3,650) 7,670 988 (7,241)
Net earnings (loss)........ (1,711) (2,190) 4,602 593 (4,345)
Net earnings (loss) per
share:
Basic.................... $ (0.19) $ (0.26) $ 0.54 $ 0.07 $ (0.53)
Diluted.................. $ (0.19) $ (0.26) $ 0.51 $ 0.07 $ (0.53)
Weighted average number of
shares outstanding:
Basic.................... 8,944,669 8,361,017 8,532,588 8,303,425 8,260,208
Diluted.................. 8,944,669 8,361,017 9,072,832 8,537,032 8,260,208
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Dollars in thousands, YEAR ENDED JANUARY 31,
except per share data -----------------------------
1996 1995
STATEMENTS OF OPERATIONS (FISCAL 1995) (FISCAL 1994)
DATA: ------------- -------------
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Revenues................... $204,184 $188,535
Gross margin(1)............ 99,672 90,264
Provision for loss on the
closure of the SPA
Collection division...... -- --
Operating income (loss).... 360 6,490
Earnings (loss) before
income taxes (benefit)... 739 6,139
Net earnings (loss)........ 444 3,683
Net earnings (loss) per
share:
Basic.................... $ 0.05 $ 0.44
Diluted.................. $ 0.05 $ 0.41
Weighted average number of
shares outstanding:
Basic.................... 8,249,259 8,294,378
Diluted.................. 8,682,078 8,899,289
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Dollars in thousands
BALANCE SHEET DATA:
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Cash and cash equivalents...........................................................................
Working capital.....................................................................................
Total assets........................................................................................
Long term notes payable.............................................................................
Stockholders' equity................................................................................
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AS OF APRIL 30, 1999
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Dollars in thousands ACTUAL AS ADJUSTED(2)
BALANCE SHEET DATA: ------------- --------------
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Cash and cash equivalents.. $539
Working capital............ 14,648
Total assets............... 77,236
Long term notes payable.... 2,477
Stockholders' equity....... 35,092
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THREE MONTHS YEAR ENDED JANUARY 31,
ENDED APRIL 30, ---------------------------------------------
----------------------- 1999 1998 1997
1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
---------- ---------- ------------- ------------- -------------
OPERATING STATISTICS: (UNAUDITED)
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Number of stores at period
end...................... 89 83 87 85 82(3)
Comparable store sales
increase (decrease)...... 6.2% 2.0% 5.3% 1.1% (2.1)%
Annualized net sales per
square foot(4)........... -- -- $484 $465 $458
Number of catalogs
mailed(5)................ 8,162,000 6,962,000 41,338,000 38,261,000 34,795,000
Number of catalog
orders(5)(6)............. 103,000 73,000 543,000 391,000 389,000
Average revenue per
transaction:
Stores................... $100 $104 $102 $104 $ 97
Catalog(5)(6)............ $148 $169 $141 $158 $134
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YEAR ENDED JANUARY 31,
-----------------------------
1996 1995
(FISCAL 1995) (FISCAL 1994)
------------- -------------
OPERATING STATISTICS:
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Number of stores at period
end...................... 78(3) 74
Comparable store sales
increase (decrease)...... 3.3% 17.8%
Annualized net sales per
square foot(4)........... $473 $468
Number of catalogs
mailed(5)................ 32,780,000 31,522,000
Number of catalog
orders(5)(6)............. 444,000 420,000
Average revenue per
transaction:
Stores................... $106 $102
Catalog(5)(6)............ $122 $116
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(1) Gross margin represents net sales less cost of products.
(2) As adjusted gives effect to the sale of 3,000,000 shares of common stock
being sold by The Sharper Image in this offering.
(3) Excludes six and four SPA Collection stores at January 31, 1997 and 1996.
(4) This information is not meaningful for the quarters ended April 30, 1999 and
1998.
(5) This information excludes specialty catalogs.
(6) Includes Internet transactions. Our Internet sales were $2,329,000 and
$520,000 for the quarters ended April 30, 1999 and April 30, 1998,
respectively, and $4,922,000, $1,633,000 and $843,000 for the years ended
January 31, 1999, 1998 and 1997, respectively. Internet sales prior to
February 1, 1996 were not material.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. This could cause a
decline in the trading price of our common stock, and you may lose all or part
of your investment.
This prospectus also contains "forward-looking" statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks described below and in the documents incorporated by
reference in this prospectus.
RISKS SPECIFIC TO THE SHARPER IMAGE
IF WE FAIL TO OFFER MERCHANDISE THAT OUR CUSTOMERS FIND ATTRACTIVE, OUR BUSINESS
AND OPERATING RESULTS WILL BE HARMED
In order to meet our strategic goals, we must successfully offer to our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other retailers. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
If other retailers, especially department stores or discount retailers, offer
the same products or products similar to those we sell or if our products become
less popular with our customers, our sales may decline or we may decide to offer
our products at lower prices. If customers buy fewer of our products or if we
have to reduce our prices, our revenues and earnings will decline.
In addition, we must be able to deliver our merchandise in sufficient quantities
to meet the demands of our customers and deliver this merchandise to customers
in a timely manner. We must be able to maintain sufficient inventory levels,
particularly during peak selling seasons. Our future results would be adversely
affected if we are not successful in achieving these goals.
Our success depends on our ability to anticipate and respond to changing product
trends and consumer demands in a timely manner. Our products must appeal to a
broad range of consumers whose preferences we cannot predict with certainty and
may change between sales seasons. If we misjudge either the market for our
products or our customers' purchasing habits, our sales may decline, our
inventories may increase or we may be required to sell our products at lower
prices. This would result in a negative effect on our business.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND
SEASONALITY
Our business is highly seasonal, reflecting the general pattern of peak sales
and earnings for the retail industry during the Holiday shopping season. A
substantial portion of our total revenues and all or most of our net earnings
occur during our fourth quarter ending January 31. During our 1998 and 1997
fiscal years, our total revenues for the fourth quarter ending January 31
accounted for more than 40% of total revenues for the full fiscal year. In
anticipation of increased sales activity during the fourth quarter, we incur
significant additional expenses, including significantly higher inventory costs
and the costs of hiring a substantial number of temporary employees to
supplement our regular store staff. If for any reason our sales were to be
substantially below those normally expected during the fourth quarter, our
annual results would be adversely affected. Due to this seasonality, our
operating results for any one period may not be indicative of our operating
results for the full fiscal year.
Our operating results during the other quarters of the year are generally lower
and we have historically experienced losses in these periods. It is likely that
we will experience similar losses in the future in these periods. Our quarterly
results of operations may fluctuate significantly as a result of a variety of
factors, including among other things, the timing of new store openings, net
sales contributed by new stores, increases or decreases in comparable store
sales, changes in our merchandise mix and net catalog sales.
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In addition, like other retailers we typically make merchandising and purchasing
decisions well in advance of the Holiday shopping season. As a result, poor
economic conditions or differences from projected customer demand for our
products during the fourth quarter could result in lower revenues and earnings.
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO DESIGN, DEVELOP, OBTAIN AND TIMELY
DELIVER OUR PROPRIETARY PRODUCTS
We are increasingly dependent on the success of the proprietary products that we
design and develop for our customers. We must design and develop products that
meet the demands of our customers and manufacture these products
cost-effectively. We rely solely on our contract manufacturers, most of whom are
located in Asia, to produce these products in sufficient quantities to meet
customer demand and to obtain and deliver these products to our customers in a
timely manner. These arrangements are subject to the risks of relying on
products manufactured outside the United States, including political unrest and
trade restrictions, currency fluctuations, work stoppages, and economic
uncertainties including inflation and foreign government regulations. If we are
unable to successfully design and develop or to obtain and timely deliver
sufficient quantities of these products, our operating results may be adversely
affected.
OUR INTERNET STRATEGY MAY NOT SUCCEED
Our growth strategy depends in substantial part on our ability to significantly
increase sales of our products over the Internet. We believe that, in order to
continue to grow our business and to achieve our goals, we need to market and
sell our products to our current customers and new customers through channels
other than store and catalog operations. We are pursuing opportunities to sell
our products over the Internet through our website sharperimage.com as well as
through Internet marketing partnerships with America Online, @Home, Catalog
City, DoubleClick, LinkShare, Microsoft Plaza, PC World Shopping and Yahoo!
Shopping. This is a new business and marketing strategy for us and involves
risks and uncertainties. We may not succeed in marketing our products over the
Internet. In addition, our Internet strategy will require us to significantly
increase our online advertising and marketing expenditures. If these
expenditures do not result in significant sales, our results of operations will
be adversely affected.
WE FACE RISKS ASSOCIATED WITH EXPANSION OF OUR STORE OPERATIONS
We plan to continue to increase the number of The Sharper Image stores in the
future in order to grow our revenues. Our ability to expand will depend in part
on the following factors:
- the availability of attractive store locations;
- our ability to negotiate favorable lease terms;
- our ability to identify customer demand in different geographic areas;
- general economic conditions; and
- the availability of sufficient funds for expansion.
As we continue to expand, we have started to and may continue to become
concentrated in limited geographic areas. This could increase our exposure to
customer demand, weather, competition, distribution problems, and poor economic
conditions in these regions. In addition, our catalog sales, including Internet
sales, or existing store sales in a specific region may decrease as a result of
new store openings.
In order to continue our expansion, we will need to hire additional management
and staff for our corporate offices and employees for each new store. We must
also expand our management information systems and distribution systems to serve
these new stores. If we are unable to hire necessary personnel or grow our
existing systems, our expansion efforts may not succeed and our operations may
suffer.
Some of our expenses will increase with the opening of new stores. If store
sales are inadequate to support these new costs, our profitability will
decrease. For example, inventory costs will increase as we increase inventory
levels to supply additional stores. We may not be able to manage this increased
inventory without decreasing our profitability. We may need additional financing
in excess of our current credit facility to be used for new store openings.
Furthermore, our current credit facility has various loan covenants we must
comply with in
6
<PAGE> 13
order to maintain the credit facility. We cannot predict with certainty that we
will be successful in obtaining additional funds or new credit facilities on
favorable terms or at all.
WE ARE DEPENDENT ON THE SUCCESS OF OUR ADVERTISING AND MARKETING EFFORTS
Our revenues depend in part on our ability to effectively market and advertise
our products through The Sharper Image catalog and other advertising vehicles.
Increases in advertising, paper costs or postage may limit our ability to
advertise without reducing our profitability. If we decrease our advertising
efforts due to increased advertising costs or for any other reason, our future
operating results may be materially adversely affected. We are also testing
other advertising media, such as television (infomercials) and are planning to
significantly increase advertising and marketing over the Internet. Expenditures
on these and other media are expected to increase, but may not produce a
sufficient level of sales to cover such expenditures, which would reduce our
profitability.
WE RELY ON OUR CATALOG OPERATIONS
Our success depends in part on the success of our catalog operations. We believe
that the success of our catalog operations depends on the following factors:
- our ability to achieve adequate response rates to our mailings;
- our ability to continue to offer a merchandise mix that is attractive to
our mail order customers;
- our ability to cost-effectively add new customers; and
- our ability to cost-effectively design and produce appealing catalogs.
Catalog production and mailings entail substantial paper, postage, merchandise
acquisition and human resource costs, including costs associated with catalog
development and increased inventories. We incur nearly all of these costs prior
to the mailing of each catalog. As a result, we are not able to adjust the costs
being incurred in connection with a particular mailing to reflect the actual
performance of the catalog. If we were to experience a significant shortfall in
anticipated revenue from a particular mailing, and thereby not recover the costs
associated with that mailing, our future results would be adversely affected. In
addition, response rates to our mailings and, as a result, revenues generated by
each mailing are affected by factors such as consumer preferences, economic
conditions, the timing and mix of catalog mailings and changes in our
merchandise mix, several of which may be outside our control. Further, we have
historically experienced fluctuations in the response rates to our catalog
mailings. If we are unable to accurately target the appropriate segment of the
consumer catalog market or to achieve adequate response rates, we could
experience lower sales, significant markdowns or write-offs of inventory and
lower margins, which would adversely affect our future results.
OUR NEW BUSINESS LINES MAY NOT SUCCEED
In the past we have tested new lines of business that have not always proven
profitable. We continually examine and evaluate all sales channels for
profitability. We may decide to develop new business lines or to acquire
additional businesses in the future, and we cannot predict whether such efforts
will be successful. During 1998, we discontinued our test mailing of catalogs
for The Sharper Image Home Collection concept which we initiated in January
1996. Additionally, during 1997 we closed our SPA Collection division and
eliminated our SPA Collection catalog after critical evaluation of its operating
results and prospects. The failure of new business lines or acquisitions could
adversely affect our future results.
OUR CATALOG AND MERCHANDISE DELIVERY COSTS ARE UNPREDICTABLE
Historically, a significant portion of our revenues have been from purchases
made by customers from The Sharper Image catalog. Increases in the costs of
producing and distributing the catalog may reduce the profitability of our
catalog sales. Specifically, we may experience increases in postage, paper or
shipping costs due to factors beyond our control. As a result, our future
results may be adversely affected.
We maintain an annual contract that expires July 15, 1999 with a major package
carrier for the delivery of merchandise ordered through our catalog and the
Internet. Although we have no reason to believe that we will not be able to
renegotiate the contract, there can be no assurance that, once this contract
expires or is
7
<PAGE> 14
terminated, we will be able to negotiate similar or better terms with this major
carrier or another shipping company or that the resulting contract(s) will be on
terms favorable to us. Our inability to secure suitable or commercially
favorable contracts for the delivery of our merchandise could have an adverse
effect on our future results.
WE DEPEND ON OUR VENDORS' ABILITY TO TIMELY DELIVER SUFFICIENT QUANTITIES OF
PRODUCTS
Our performance depends on our ability to purchase our products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, production capacities and limited operating
histories. We have no long-term purchase contracts or other contracts that
provide continued supply, pricing or access to new products and any vendor or
distributor could discontinue selling to us at any time. We cannot assure you
that we will be able to acquire the products we desire in sufficient quantities
or on terms that are acceptable to us in the future. In addition, we cannot
assure you that our vendors will make and deliver high quality products in a
cost-effective, timely manner. We may also be unable to develop relationships
with new vendors. All products we purchase from vendors in Asia must be shipped
to our distribution centers by freight carriers and we cannot assure you that we
will be able to obtain sufficient freight capacity at favorable rates. Our
inability to acquire suitable products in a cost-effective, timely manner or the
loss of one or more key vendors or freight carriers could have a negative effect
on our business.
Additionally, our relationships with our vendors are also subject to the risks
of relying on products manufactured outside the United States, including
political unrest and trade restrictions, work stoppages, economic uncertainties
including inflation, foreign government regulation and currency fluctuations.
Because 75% of our products were manufactured in various countries in Asia,
primarily China, during 1998, any significant disruption in any of these
countries may impair our ability to obtain sufficient quantities of products in
a timely manner.
WE FACE RISKS RELATING TO CUSTOMER SERVICE
Our ability to provide customer service depends, to a large degree, on the
efficient and uninterrupted operation of our two call centers, our contracting
services with third party call centers and our sharperimage.com website. Any
material disruption or slowdown in our order processing systems resulting from
labor disputes, telephone or Internet down times, electrical outages, mechanical
problems, human error or accidents, fire, earthquakes, natural disasters, or
comparable events could cause delays in our ability to receive orders by
telephone or over the Internet and distribute orders, and may cause orders to be
lost or to be shipped or delivered late. As a result, customers may be unable to
place orders, cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs. We cannot assure you that telephone
call volumes will not exceed our present telephone system capacity. If this
occurs, we could experience telephone answer delays and delays in placing
orders. Because our strategies depend in part on maintaining our reputation for
superior levels of customer service, any impairment of our customer service
reputation could have an adverse effect on our business.
WE FACE RISKS ASSOCIATED WITH OUR DISTRIBUTION AND FULFILLMENT OPERATIONS
We conduct all of our distribution operations and all of our catalog and
Internet order processing fulfillment functions from a single facility in Little
Rock, Arkansas. We also use contract warehouse facilities for additional
seasonal requirements. Any disruption in the operations at the distribution
center, particularly during the Holiday shopping season, could have a negative
effect on our business. In addition, we rely upon third party carriers for our
product shipments, including shipments to and from all of our stores. As a
result, we are subject to certain risks, including employee strikes and
inclement weather, associated with such carriers' ability to provide delivery
services to meet our shipping needs. We are also dependent on temporary
employees to adequately staff our distribution facility, particularly during
busy periods such as the Holiday shopping season. We cannot assure you that we
will continue to receive adequate assistance from our temporary employees, or
that we will continue to have access to sufficient sources of temporary
employees.
8
<PAGE> 15
RESULTS FOR OUR COMPARABLE STORE SALES MAY FLUCTUATE
Our comparable store sales are affected by a variety of factors, including,
among others:
- customer demand in different geographic regions;
- our ability to efficiently source and distribute products;
- changes in our product mix;
- effects of competition; and
- general economic conditions.
Our comparable store sales have fluctuated significantly in the past and we
believe that such fluctuations may continue.
Our results are not necessarily indicative of future results, and we cannot
assure you that our comparable store sales results will not decrease in the
future. Any changes in our comparable store sales results could affect our
future operating performance and cause the price of our common stock to
fluctuate.
WE EXPERIENCE INTENSE COMPETITION IN THE RAPIDLY CHANGING RETAIL MARKETS
We operate in a highly competitive environment. We principally compete with a
variety of department stores, sporting goods stores, discount stores, specialty
retailers and other catalogs that offer products similar to or the same as our
products. We may increasingly compete with major Internet retailers. Many of our
competitors are larger companies with greater financial resources, a wider
selection of merchandise and a greater inventory availability. If we experience
increased competition, our business and operating results could be adversely
affected.
The United States retail industry, and the specialty retail industry in
particular, is dynamic in nature and has undergone significant changes over the
past several years. Our ability to anticipate and successfully respond to
continuing challenges is critical to our long term growth.
WE MAY BE SUBJECT TO REGULATIONS REGARDING STATE SALES AND USE TAX ON CATALOG
AND INTERNET SALES AND OTHER INTERNET REGULATION
Our business may be affected by the adoption of regulations or rules governing
the sale of our products, with regard to state sales and use taxes and the
regulation of the Internet. Because we have broad store presence, we are
currently required to collect taxes for the majority of our catalog and Internet
transactions. However, any unfavorable change in the state sales and use taxes
which affects our catalog and Internet sales could adversely affect our business
and results of operations. In addition, the Internet at present is largely
unregulated and we are unable to predict whether significant regulations or
taxes will be imposed on Internet commerce in the near future. We are unable to
predict how such regulations could affect the further development of our
Internet business.
POOR ECONOMIC CONDITIONS MAY HURT OUR BUSINESS
Certain economic conditions that affect the level of consumer spending on our
products include the following:
- general business conditions;
- interest rates;
- taxation; and
- consumer confidence in future economic conditions.
Our business could be negatively affected by a recession or poor economic
conditions and any related decline in consumer demand for discretionary items
such as our products. Because we purchase merchandise from foreign entities and
use foreign manufacturers on a contract basis for Sharper Image Design products
and other private label products, we are subject to risks resulting from
fluctuations in the economic conditions in foreign countries. The majority of
our vendors and manufacturers are located in various countries in Asia, and as a
result, our business may be particularly impacted by changes in the political,
social, legal, and economic
9
<PAGE> 16
conditions in these countries. Additionally, weather and product transportation
problems could affect our ability to maintain adequate inventory levels and
adversely affect our future results.
WE DEPEND ON OUR KEY PERSONNEL
Our success depends to a significant extent upon the abilities of our senior
management, particularly Richard Thalheimer, our founder, Chairman and Chief
Executive Officer. The loss of the services of any of the members of our senior
management or of certain other key employees could have a significant adverse
effect on our business. We maintain key man life insurance on Mr. Thalheimer in
the amount of $15 million. In addition, our performance will depend upon our
ability to attract and retain qualified management, merchandising and sales
personnel. There can be no assurance that Mr. Thalheimer and the other members
of our existing management team will be able to manage our company or our growth
or that we will be able to attract and hire additional qualified personnel as
needed in the future.
EXCESSIVE MERCHANDISE RETURNS COULD HARM OUR BUSINESS
As part of our customer service commitment, we maintain a liberal merchandise
return policy which allows customers to return most merchandise. We make
allowances for returns of catalog and Internet sales in our financial statements
based on historical return rates. We cannot assure you that actual merchandise
returns will not exceed our allowances. In addition, because our allowances are
based on historical return rates, we cannot assure you that the introduction of
new merchandise in our stores or catalogs, the opening of new stores, the
introduction of new catalogs, increased sales over the Internet, changes in the
merchandise mix or other factors will not cause actual returns to exceed return
allowances. Any significant increase in merchandise returns that exceed our
allowances could adversely affect our future results.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH OUR PRODUCTS, INCLUDING PRODUCT
LIABILITY OR PATENT AND TRADEMARK INFRINGEMENT CLAIMS
Our current and future products may contain defects which could subject us to
product liability claims. Although we maintain limited products liability
insurance, if any successful products liability claim is not covered by or
exceeds our insurance, our business, results of operation and financial
condition would be harmed. Additionally, third parties may assert claims against
us alleging infringement, misappropriation or other violations of patent,
trademark or other proprietary rights, whether or not such claims have merit.
Such claims can be time consuming and expensive to defend and could require us
to cease using and selling the allegedly infringing products and to incur
significant litigation costs and expenses.
FAILURE OF OUR COMPUTER SYSTEMS OR OUR BUSINESS PARTNERS' COMPUTER SYSTEMS TO
RECOGNIZE THE YEAR 2000 COULD NEGATIVELY AFFECT OUR BUSINESS
We recognize that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. We have assessed our computer and business
processes and we are reprogramming our computer applications to provide for
their continued functionality. We are currently assessing the readiness of our
vendors and other third parties with which we interface.
We are presently unable to assess the likelihood that we will experience
operational problems due to unresolved Year 2000 problems of third parties with
whom we do business. We cannot assure you that other entities will achieve
timely Year 2000 compliance; and if they do not, Year 2000 problems could have
an adverse effect on our operations. Where commercially reasonable to do so, we
intend to assess our risks with respect to failure by third parties to be Year
2000 compliant and to seek to mitigate those risks. If we cannot achieve such
mitigation, Year 2000 problems could have an adverse effect on our operations.
Our estimated remediation cost for this project is between $400,000 and
$600,000, and is being funded through operating cash flows. We will incur
operating costs related to Year 2000 compliance projects over several quarters
and we will expense such costs as incurred. Through April 30, 1999, we have
incurred expenses totaling approximately $315,000 on work related to Year 2000
compliance.
Our estimates of the costs of achieving Year 2000 compliance and the date by
which Year 2000 compliance will be achieved are based on management's best
estimates, which were derived using numerous assumptions about
10
<PAGE> 17
future events including the continued availability of certain resources, third
party modification plans and other factors.
However, we cannot assure you that these estimates will be achieved, and actual
results could differ materially from these estimates. Specific factors that
might cause such material differences include, but are not limited to the
following:
- the availability and cost of personnel trained in Year 2000 remediation
work;
- the ability to locate and correct all computer codes;
- our vendors and suppliers success in reaching Year 2000 readiness; and
- the timely availability of necessary replacement items.
We presently believe that the most reasonably likely worst-case scenarios that
we might confront with respect to Year 2000 issues have to do with third parties
not being Year 2000 compliant. We are presently evaluating vendor and customer
compliance and will develop contingency plans, such as alternate vendor
opportunities, after obtaining compliance evaluations. We intend to develop
contingency plans by September 1999.
RISKS SPECIFIC TO THE OFFERING
WE ARE CONTROLLED BY A SINGLE STOCKHOLDER
As of June 10, 1999, Richard Thalheimer beneficially owned approximately 55.1%
(41.5% upon completion of the offering) of all of the outstanding shares of the
common stock of our company. As a result, Mr. Thalheimer will continue to exert
substantial influence over the election of directors and over our corporate
actions.
OUR COMMON STOCK PRICE IS VOLATILE
Our common stock is quoted on the Nasdaq National Market, which has experienced
and is likely to experience in the future significant price and volume
fluctuations which could reduce the market price of our common stock without
regard to our operating performance. Additionally, as our Internet business
grows, we may become increasingly subject to stock price fluctuations associated
with companies operating in the Internet sector. We believe that among other
factors, any of the following factors could cause the price of the common stock
to fluctuate substantially:
- quarterly fluctuations in our comparable store sales;
- announcements by other accessory and gift item retailers;
- the trading volume of our common stock in the public market;
- general economic conditions; and
- financial market conditions.
OUR CHARTER DOCUMENTS, OUR STOCKHOLDERS RIGHTS AGREEMENT AND DELAWARE LAW MAY
MAKE A TAKEOVER MORE DIFFICULT
We are a Delaware corporation. The Delaware General Corporation Law contains
certain provisions that may make a change in control of our company more
difficult or prevent the removal of incumbent directors. In addition, our
Certificate of Incorporation and Bylaws and our recently adopted stockholders
rights agreement contain provisions that have the same effect. These provisions
may have a negative impact on the price of our common stock, may discourage
third-party bidders from making a bid for our company or may reduce any premiums
paid to stockholders for their common stock.
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<PAGE> 18
USE OF PROCEEDS
The net proceeds to The Sharper Image from the sale of 3,000,000 shares of the
common stock offered by The Sharper Image, after deducting underwriting
discounts and commissions and estimated expenses payable by us, are estimated to
be approximately $ million, or $ million if the underwriter's over-allotment
option is exercised in full. The Sharper Image intends to use the net proceeds
of the offering for working capital and for general corporate purposes,
including investments in our Internet business and for expansion of our
distribution and fulfillment capacity. Pending use of the net proceeds, we will
invest the net proceeds in short-term investment grade securities.
PRICE RANGE OF COMMON STOCK
Our shares of common stock are traded on the Nasdaq National Market System under
the symbol "SHRP." The prices set forth below represent reported last sale
prices of our common stock.
<TABLE>
<CAPTION>
-------------
HIGH LOW
-------------
<S> <C> <C>
FISCAL 1997
First Quarter............................................... $ 4 1/2 $ 3 1/8
Second Quarter.............................................. 4 2 7/8
Third Quarter............................................... 3 13/16 2 13/16
Fourth Quarter.............................................. 4 1/4 3
FISCAL 1998
First Quarter............................................... $ 8 1/4 $ 4 1/16
Second Quarter.............................................. 7 15/16 4 7/8
Third Quarter............................................... 5 3/8 2 21/32
Fourth Quarter.............................................. 21 3/16 3 13/16
FISCAL 1999
First Quarter............................................... $17 $ 9 15/16
Second Quarter through June 16, 1999........................ 11 8 1/4
</TABLE>
On June 16, 1999, the reported last sale price of our common stock was $8.75. As
of May 31, 1999, there were approximately 443 holders of record of our common
stock.
DIVIDEND POLICY
We have not paid any dividends since our inception. We currently intend to
retain any earnings for use in developing and growing our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Additionally, our revolving secured credit facility with our current
lender contains limitations on dividend payments.
12
<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization and certain other information
as of April 30, 1999 (a) on an actual basis and (b) on an as adjusted basis to
give effect to the issuance of the common stock offered by The Sharper Image
(assuming no exercise of the underwriters' over-allotment option), as described
under "Use of Proceeds." This table should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
----------------------
AS OF APRIL 30, 1999
----------------------
ACTUAL AS ADJUSTED
Dollars in thousands ------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $ 539 $
======= =======
Long-term obligations....................................... $ 2,477 $ 2,477
------- -------
Stockholders' equity:
Preferred Stock, $.01 par value; authorized 3,000,000
shares; no shares issued and outstanding.................. -- --
Common Stock, $.01 par value; authorized 25,000,000 shares;
issued and outstanding, 8,964,048 shares (actual) and
11,964,048 shares (as adjusted)(1)........................ 89 120
Additional paid in capital.................................. 12,743
Retained earnings........................................... 22,260 22,260
------- -------
Total stockholders' equity................................ 35,092
------- -------
Total capitalization...................................... $37,569 $
======= =======
</TABLE>
- -------------------------
(1) As of April 30, 1999, excludes 339,460 shares of common stock issuable
pursuant to outstanding employee stock options under our employee and
non-employee director stock option plans at a weighted average exercise price of
$3.98 per share. See Note G of Notes to Financial Statements.
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<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and should be
read in conjunction with the financial statements and related notes thereto
appearing elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected statements of
operations data for the fiscal years ended January 31, 1999, 1998 and 1997 and
balance sheet data as of January 31, 1999 and 1998 are derived from financial
statements, which have been audited by Deloitte & Touche LLP, independent
auditors, included elsewhere in this prospectus. The statements of operations
data for the years ended January 31, 1996 and 1995 and the balance sheet data as
of January 31, 1997, 1996 and 1995 are derived from audited financial statements
not included in this prospectus. The statements of operations data for the three
month periods ended April 30, 1999 and 1998 and the balance sheet data as of
April 30, 1999 and 1998 are derived from unaudited financial statements that
include, in the opinion of management, all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the
information set forth therein. The results of operations for the three month
period ended April 30, 1999 or any other period are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Dollars in thousands, YEAR ENDED JANUARY 31,
except per share data THREE MONTHS ENDED -----------------------------------------------------------------------------
APRIL 30,
----------------------- 1999 1998 1997 1996 1995
STATEMENTS OF OPERATIONS 1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996) (FISCAL 1995) (FISCAL 1994)
DATA ---------- ---------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 40,859 $ 39,751 $ 243,114 $ 216,815 $ 210,245 $ 204,184 $ 188,535
Gross margin(1).......... 20,204 18,495 118,376 99,658 98,971 99,672 90,264
Provision for loss on the
closure of the SPA
Collection division.... -- -- -- -- (8,000) -- --
Operating income
(loss)................. (2,816) (3,487) 7,428 1,507 (6,928) 360 6,490
Earnings (loss) before
income taxes
(benefit).............. (2,852) (3,650) 7,670 988 (7,241) 739 6,139
Net earnings (loss)...... (1,711) (2,190) 4,602 593 (4,345) 444 3,683
Net earnings (loss) per
share --
Basic.................. $ (0.19) $ (0.26) $ 0.54 $ 0.07 $ (0.53) $ 0.05 $ 0.44
Diluted................ $ (0.19) $ (0.26) $ 0.51 $ 0.07 $ (0.53) $ 0.05 $ 0.41
Weighted average number
of shares outstanding:
Basic.................. 8,944,669 8,361,017 8,532,588 8,303,425 8,260,208 8,249,259 8,294,378
Diluted................ 8,944,669 8,361,017 9,072,832 8,537,032 8,260,208 8,682,078 8,899,289
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
AS OF APRIL 30, AS OF JANUARY 31,
----------------------- -----------------------------------------------------------------------------
Dollars in thousands 1999 1998 1999 1998 1997 1996 1995
BALANCE SHEET DATA ---------- ---------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 539 $ 483 $ 8,389 $ 3,501 $ 10,873 $ 12,476 $ 18,193
Working capital.......... 14,648 17,520 16,003 11,633 9,429 17,233 23,011
Total assets............. 77,236 72,509 82,045 78,662 78,804 70,456 64,036
Long term notes
payable................ 2,477 3,059 2,513 3,299 4,245 3,355 838
Stockholders' equity..... 35,092 26,988 36,649 29,156 28,449 32,758 32,792
</TABLE>
- -------------------------
(1) Gross margin represents net sales less cost of products.
14
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and our Financial Statements and the related Notes
thereto which are included elsewhere in this prospectus.
OVERVIEW
The Sharper Image is a leading specialty retailer of innovative, high quality
products that are useful and entertaining and are designed to make life easier
and more enjoyable. We offer a unique assortment of products in the electronics,
recreation and fitness, personal care, houseware, travel, toy, gift and other
categories. Our merchandising philosophy focuses on new and creative proprietary
Sharper Image Design products, Sharper Image private label products and branded
products, a portion of which we offer on an exclusive basis. Our products are
marketed and sold through three primary sales channels: The Sharper Image
stores, The Sharper Image catalog, and the Internet, primarily through our
sharperimage.com website.
During fiscal 1998, our total revenues increased to $243.1 million from $216.8
million for fiscal 1997 and to $40.9 million in the first quarter of 1999 from
$39.8 million in the first quarter of 1998. Gross margins increased to 49.0% for
fiscal 1998 from 46.3% for fiscal 1997 and to 49.9% in the first quarter of 1999
from 47.1% in the first quarter of 1998. The Sharper Image stores generated
approximately 67% of our total revenues in fiscal 1998 and 72% in the first
quarter of 1999. Comparable store sales increased 5.3% for fiscal 1998 and 6.2%
for the first quarter of 1999. Our catalog operations contributed approximately
24% of our total revenues in fiscal 1998 (29% including our Home Collection
catalog, which was discontinued in fiscal 1998), and 21% in the first quarter of
1999. We mailed approximately 41 million Sharper Image catalogs during fiscal
1998 (44 million including our Home Collection catalog). The newest sales and
marketing channel for The Sharper Image is our Internet operations. Internet
sales were approximately $4.9 million, or 2% of our total revenues, for fiscal
1998, as compared to $1.6 million for fiscal 1997, and approximately $2.3
million, or 6% of total revenues, for the first quarter of 1999, as compared to
$0.5 million for the first quarter of 1998. Net earnings for fiscal 1998
increased to $4.6 million from $0.6 million during fiscal 1997 and our net loss
decreased to $1.7 million in the first quarter of 1999 from $2.2 million in the
first quarter of 1998.
In recent years, we have focused significant resources on the development and
marketing of our Sharper Image Design products and Sharper Image private label
products, which are exclusive to The Sharper Image. Sharper Image Design
products typically generate higher sale margins than our other products and, we
believe, broaden our customer reach. During the last three years, we have
developed and introduced over 35 new-to-market Sharper Image Design products, 16
of which were introduced in fiscal 1998. Of our ten best selling products during
the fiscal 1998 Holiday shopping season, five products were Sharper Image Design
products. We have increased the percentage of our sales attributable to Sharper
Image Design products to 25.4% for the first quarter of 1999 from 18% in fiscal
1998 and 8% in fiscal 1997. This increase contributed significantly to a 2.8
percentage point gross margin increase in the first quarter of 1999 over the
first quarter of 1998 and a 2.7 percentage point improvement during fiscal 1998
over fiscal 1997. One of our key strategic goals is to continue to increase the
proportion of our sales derived from Sharper Image Design products.
As of June 10, 1999, we operated 89 The Sharper Image stores in 27 states and
the District of Columbia, and our licensees operated six stores internationally
and two airport stores in the United States. During the past three fiscal years,
we have opened an average of four to six The Sharper Image stores each year.
During fiscal 1998, we opened four new stores, and closed two stores at the
maturity of their leases. In January 1997, we closed the SPA Collection
division, including several SPA stores, and incurred a one-time charge of $8.0
million related to the closing. We are currently planning to open four new The
Sharper Image stores during fiscal 1999, two of which were opened as of June 10,
1999.
In addition to our store and catalog operations, we market and sell our products
over the Internet, primarily through our sharperimage.com website, which was
established in 1995. Internet sales were $4.9 million for fiscal 1998, a 201%
increase from $1.6 million during fiscal 1997 and $2.3 million in the first
quarter of 1999, a 348% increase from $0.5 million in the first quarter of 1998.
We believe that the Internet will continue to provide The Sharper Image with a
significant marketing and sales opportunity. We plan to devote an increasing
amount of resources to the continued development of our Internet operations,
including advertising and
15
<PAGE> 22
marketing and enhancing the technical capabilities of our website and entering
into strategic relationships with major Internet companies.
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
THREE MONTHS ENDED APRIL 30, FISCAL YEAR ENDED JANUARY 31,
------------------------------ ---------------------------------------------
1999 1998 1997
1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
REVENUES: ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net store sales...................... 71.6% 66.7% 66.8% 69.9% 71.0%
Net catalog sales(1)................. 20.5 30.0 29.1 27.1 25.5
Net Internet sales................... 5.7 1.3 2.0 0.7 0.4
Net wholesale sales.................. 1.3 0.7 1.4 1.5 1.9
List rental.......................... 0.7 0.8 0.5 0.5 0.6
Licensing............................ 0.2 0.5 0.2 0.3 0.6
----- ----- ----- ----- -----
TOTAL REVENUES......................... 100.0 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of products..................... 49.6 52.2 50.6 53.3 51.8
Buying and occupancy................. 16.5 15.9 10.8 11.0 11.4
Advertising and promotion............ 10.4 11.4 11.2 10.5 12.2
General, selling, and
administrative.................... 30.4 29.3 24.3 24.5 24.1
Provision for loss due to closure of
SPA Collection division........... -- -- -- -- 3.8
----- ----- ----- ----- -----
OPERATING INCOME (LOSS)................ (6.9) (8.8) 3.1 0.7 (3.3)
Other income (expense)................. (0.1) (0.4) 0.1 (0.2) (0.2)
----- ----- ----- ----- -----
EARNINGS (LOSS) BEFORE
INCOME TAX (BENEFIT)................. (7.0) (9.2) 3.2 0.5 (3.5)
Income tax (benefit)................... (2.8) (3.7) 1.3 0.2 (1.4)
----- ----- ----- ----- -----
NET EARNINGS (LOSS).................... (4.2)% (5.5)% 1.9% 0.3% (2.1)%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the components of total revenues for the periods
indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
THREE MONTHS ENDED APRIL 30, FISCAL YEAR ENDED JANUARY 31,
--------------------------------- -----------------------------------------------
1999 1998 1997
1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
------------- ------------- ------------- ------------- -------------
Dollars in thousands (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net store sales..................... $29,240 $26,502 $162,371 $151,589 $149,321
Net catalog sales(1)................ 8,373 11,944 70,750 58,772 53,577
Net Internet sales.................. 2,329 520 4,922 1,633 843
Net wholesale sales................. 542 272 3,464 3,199 4,029
------------- ------------- ------------- ------------- -------------
TOTAL NET SALES..................... 40,484 39,238 241,507 215,193 207,770
List rental......................... 282 322 1,088 982 1,177
Licensing........................... 93 191 519 640 1,298
------------- ------------- ------------- ------------- -------------
TOTAL REVENUES...................... $40,859 $39,751 $243,114 $216,815 $210,245
============= ============= ============= ============= =============
</TABLE>
- -------------------------
(1) Includes specialty catalogs.
16
<PAGE> 23
Comparison of three months ended April 30, 1999 with three months ended April
30, 1998.
Net Sales. Net sales of $40,484,000 for the three-month period ended April 30,
1999, increased $1,246,000 or 3.2% from the comparable period of the prior
fiscal year. The increase in net sales reflects an increase of approximately 13%
in net sales derived from Sharper Image stores, The Sharper Image catalog and
Internet operations, partially offset by the decrease in net sales attributable
to the decrease in the Sharper Image Home Collection catalog sales due to the
discontinuance of the test mailing of that catalog in fiscal 1998. Returns and
allowances for the three-month period ended April 30, 1999, were 11.3% of sales,
as compared with 13.0% of sales for the comparable prior year period. Management
believes that continued increases in sales of Sharper Image Design proprietary
products and Internet transactions were key to the achievement of the overall
increase in net sales.
For the three-month period ended April 30, 1999 as compared with the same period
last year, net store sales increased $2,738,000, or 10.3% and comparable store
sales increased 6.2%. The increase in net store sales resulted from a 15.3%
increase in total store transactions, which was partially offset by a 4.3%
decrease in average revenue per transaction. The increase in net store sales for
the three-month period ended April 30, 1999 is also attributable to the opening
of six new stores since April 30, 1998, partially offset by the effects of
closing two stores, each of which closed at its lease maturity during the
quarter ended April 30, 1998.
For the three-month period ended April 30, 1999, net catalog sales decreased
$3,571,000, or 29.9%, as compared with the same period last year. The primary
reason for the decrease in net catalog sales was the decrease in the Sharper
Image Home Collection catalog sales due to the discontinuation of the test
mailing of that catalog in fiscal 1998. The net catalog sales decrease
attributable to the Home Collection catalog was $3,444,000 for the quarter ended
April 30, 1999 compared to the same period last year. Excluding the operations
of Home Collection catalog, net catalog sales decreased $127,000, or 1.5% for
the three-month period ended April 30, 1999 compared to the same prior year
period. This decrease in net catalog sales reflects a 3.8% decrease in average
revenue per transaction, which was partially offset by an increase of 2.4% in
transactions compared to the same prior year period. Management believes the
decrease in Sharper Image catalog sales is also attributable to a 7.4% decrease
in Sharper Image catalog pages circulated in the three-month period ended April
30, 1999 as compared to the same period last year. Management is continually
reviewing the pages and the number of catalogs circulated in its efforts to
enhance the effectiveness of its advertising.
For the three-month period ended April 30, 1999, our Internet sales, primarily
through the sharperimage.com website, increased to $2,329,000, a 348% increase
from the $520,000 for the same period last year. This increase is attributable
to a 422% increase in Internet transactions, partially offset by a decrease of
14.1% in average revenue per transaction, compared to the same quarter last
year. The decrease in average revenue per transaction is partially attributable
to the Internet auction activity which began in the quarter ended April 30,
1999. The auction site was launched to further our strategy of increasing our
Internet business and has attracted additional Internet customers. Through the
auction site, customers can bid for and win brand new products and close out
items, as well as certain returned, repackaged and refurbished products.
Cost of Products. Cost of products decreased $463,000, or 2.2%, for the
three-month period ended April 30, 1999 from the comparable prior year period.
The decrease in cost of products is primarily due to the reduced sales of The
Sharper Image Home Collection catalog, which carried products with higher costs.
Such costs were partially offset by the higher sales volume of our other
marketing channels compared to the same period last year. The gross margin rate
for the three-month period ended April 30, 1999 was 49.9%, which was 2.8
percentage points better than the comparable period of the prior year. The
higher gross margin rate reflects an increase in sales of the Sharper Image
Design proprietary products to 25.4% of net sales from 12.2% for the comparable
prior year period. These proprietary products generally carry higher margins
than our other products.
Buying and Occupancy. Buying and occupancy expenses increased $411,000, or 6.5%,
for the three-month period ended April 30, 1999 from the comparable prior year
period. The increase primarily reflects the occupancy costs associated with the
six new stores opened since April 30, 1998, which was partially offset by the
elimination of the occupancy costs of the two Sharper Image stores closed at
their lease maturity during the first quarter of 1998.
17
<PAGE> 24
Advertising and Promotion. Advertising and promotion expenses decreased
$278,000, or 6.2%, for the three-month period ended April 30, 1999 from the
comparable prior year period. The decrease in advertising and promotion was
primarily attributable to the discontinuance of The Sharper Image Home
Collection Catalog and a 7.4% decrease in pages circulated for The Sharper Image
catalog, which was partially offset by other advertising costs, such as
infomercials and other direct response mailings.
General, Selling, and Administrative. General, selling and administrative (GS&A)
expenses for the three-month period ended April 30, 1999 increased $767,000, or
6.6%, from the comparable prior year period. The increase was primarily due to
increases in overall selling expenses related to the increase in net sales.
Other Income (Expense). Other expense, net, for the three-month period ended
April 30, 1999, decreased $127,000 from the comparable prior years periods,
reflecting the decrease in interest expense due to decreased borrowings under
our revolving credit loan facility resulting from our improved cash and cash
equivalents position created from improved operating results for the quarters
ended January 31, 1999 and April 30, 1999.
Comparison of years ended January 31, 1999, 1998 and 1997.
Net Sales. Net sales of $241,507,000 for 1998 increased $26,314,000, or 12.2%,
from the prior fiscal year. Returns and allowances as a percentage of sales were
11.4% for 1998, compared to 12.2% for 1997. Net store sales increased
$10,782,000, or 7.1%, net catalog sales increased $11,978,000, or 20.4%, net
Internet sales increased $3,289,000, or 201%, and net wholesale sales increased
$265,000, or 8.3%, as compared to 1997. Management believes that the
introduction of new Sharper Image Design products was key to the achievement of
the growth in total net sales.
The increase in net store sales for 1998 was primarily attributable to a
comparable store sale increase of 5.3% over the prior year consisting of an 8.7%
increase in total store transactions, partially offset by a 1.3% decrease in
average revenue per transaction. Also contributing to the increase was the 1998
opening of four new stores and annualized sales of six stores opened in 1997,
partially offset by the 1998 closing of two stores at the maturity of the store
leases. Net sales per average square foot increased to $484 for 1998, compared
to $465 in 1997 and $458 in 1996.
Net catalog sales were positively affected by an increase of 34.7% in total
catalog transactions partially offset by a 10.6% decrease in average revenue per
transaction. The increase in catalog transactions was partially attributable to
advertising campaigns in major consumer magazines and newspapers. We believe
that the 8.0% increase in the number of catalogs and catalog pages circulated
for The Sharper Image catalog during 1998 also contributed to increases in net
store sales and comparable store sales.
Our Internet sales increased to $4.9 million in 1998 from $1.6 million in 1997.
1998 experienced a 139.1% increase in Internet transactions and a 26.1% increase
in average revenue per transaction from 1997. The threefold increase in sales
reflects the increase in the number of online shoppers and our commitment to
grow our online retailing business. Our website at sharperimage.com regularly
undergoes design and technology enhancements to provide shoppers with easy and
fun shopping experiences. Although we were at the forefront of electronic
shopping and activated our website in late 1995, Internet sales in 1996 were
minimal due to the newness of the online retailing industry. Internet sales
increased 94% to $1.6 million in 1997, primarily due to Internet industry
growth, continual improvements to our website and increased marketing emphasis.
Net wholesale sales increased $264,000, or 8.3% for 1998, primarily due to the
increased sales of our Sharper Image Design products.
Net sales of $215,193,000 for 1997 increased $7,423,000, or 3.6%, from 1996.
Returns and allowances as a percentage of sales were 12.2% for 1997, compared to
12.3% for 1996. Net store sales increased $2,268,000, or 1.5%, comparable store
sales increased 1.1%, net catalog sales increased $5,195,000, or 9.7%, and net
wholesale sales decreased $830,000, or 20.6% as compared to 1996.
The increase in net store sales for 1997 was primarily attributable to the
addition of six stores opened during the year. The increase in net store sales
also reflected a 7.2% increase in average revenue per transaction, to $104 from
$97, and a 4.6% decrease in total store transactions. Management believes the
increase in net sales partially resulted from new product introductions,
including an increased selection of Sharper Image Design products and improved
inventory management during the second half of the year.
18
<PAGE> 25
Net catalog sales in 1997 were positively affected by an increase in average
revenue per transaction in our catalog operations to $183 from $140, advertising
campaigns in major consumer magazines and newspapers, a 10.0% increase in the
number of Sharper Image catalogs circulated, and a twofold increase in the
number of catalogs circulated for the test concept Sharper Image Home
Collection. We believe that the increase in the number of catalogs and catalog
pages circulated for The Sharper Image catalog during 1997 also contributed to
the increases in net store sales and comparable store sales.
Net wholesale sales decreased $830,000, or 20.6% for 1997, primarily due to a
decrease in the number of products offered to wholesale customers both in the
U.S. and internationally.
For the purpose of determining comparable store sales, comparable stores are
defined as those stores which were open during the entire comparable month of
the previous year and are compared monthly for purposes of this analysis.
Inflationary effects are not considered significant to the growth of sales.
Cost of Products. Cost of products increased $7,596,600, or 6.6%, in 1998 from
1997. The increase was primarily related to an increase in net sales. The
increase in cost of sales was lower than the increase in sales, reflecting the
beneficial impact of the higher gross margin rate produced during 1998. The
gross margin rate for 1998 was 49.0%, compared to 46.3% for 1997. The higher
gross margin rate reflected an increase in the sales of Sharper Image Design
products to 18% of total revenue from 8% for the prior fiscal year. These
propriety products generally carry higher margins.
Cost of products increased $6,736,000, or 6.2%, in 1997 from 1996. The increase
was primarily related to increases in net sales and the higher cost of products;
related to the merchandise mix. The gross margin rate for 1997 was 46.3%,
compared to 47.6% for 1996. The lower gross margin rate reflected an increase in
sales of lower margin products, such as certain state-of-the-art electronic
items and games, partially offset by an increase in The Sharper Image Design
products.
Our gross margin rate fluctuates with the changes in our merchandise mix, which
is affected by new items available in various categories. The variation in
merchandise mix from category to category and from year to year reflects the
characteristic that Sharper Image is driven by individual products, as opposed
to general lines of merchandise. It is impossible to predict future gross margin
rates although our goal is to continue to increase the sales of Sharper Image
Design products and other exclusive private label products, as these products
generally carry higher margins. The popularity of these proprietary products
contributed to the 2.7 percentage point increase in the gross margin rate for
1998 over 1997, and is expected to continue to have a positive impact on our
gross margin rate.
Buying and Occupancy. Buying and occupancy expenses increased $2,249,000, or
9.4%, in 1998 from 1997. The increase primarily reflects a full year of
occupancy cost of six new stores opened during 1997 and the cost of four new
stores opened in 1998, partially offset by the 1998 closure of two stores at
their lease maturity.
Buying and occupancy expenses decreased $63,000, or 0.3%, in 1997 from 1996. The
decrease primarily reflected lower buying costs and lower occupancy costs
associated with the closure of the SPA Collection division and the elimination
of the cost of two closed Sharper Image stores, partially offset by a full year
of occupancy cost of eight new stores opened during 1996 and the cost of six new
stores opened in 1997.
Advertising and Promotion. Advertising and promotion expenses for 1998 increased
$4,601,000, or 20.2%, from 1997. The increase was primarily due to an 8.0%
increase in the number of Sharper Image catalogs mailed and an 11.6% increase in
the number of pages circulated, as compared with 1997. Other costs, such as
advertising campaigns in major consumer magazines and newspapers, infomercials
and development of Internet marketing also contributed to the increased expenses
in 1998. The increase was partially offset by the 51.3% decrease in mailings of
the test concept Sharper Image Home Collection catalog. The test mailings of the
Home Collection catalog were discontinued in 1998.
Advertising and promotion expenses for 1997 decreased $2,941,000, or 11.4%, from
1996. The decrease was primarily due to lower consumer magazine and newspaper
advertising and the elimination of the SPA Collection catalog, partially offset
by a 10% increase in the number of Sharper Image catalogs mailed and a 3%
increase in the number of pages circulated, along with the twofold increase in
mailings of the test concept Sharper Image Home Collection catalog.
19
<PAGE> 26
While The Sharper Image catalog serves as the primary source of advertising for
our retail stores and mail order business, we continually evaluate our
advertising strategies to maximize the effectiveness of our advertising
programs. We plan to expand our advertising for our online business as well as
our use of infomercials.
General, Selling, and Administrative. GS&A expenses for 1998 increased
$5,932,000, or 11.2%, from 1997, primarily due to increases in overall selling
expenses related to the increase in net sales and related additional
administrative support costs. The increase was partially offset by the
improvement in net delivery income related to mail order shipments.
GS&A expenses for 1997 increased $2,403,000, or 4.7%, from 1996, primarily due
to increases in overall selling expenses related to the increase in net sales
and higher net delivery expense related to mail-order shipments and certain
additional administrative support costs, which were partially offset by the
elimination of costs related to the closure of the SPA Collection division.
Other Income (Expense). Other income, net, for 1998 increased $761,000 from
1997, reflecting the gain on sale of certain equipment.
Net other expense for 1997 increased $206,000 from 1996. The increase in other
expense is primarily due to an increase in interest expense related to
borrowings on our credit facility, and a decrease in interest income from
available cash.
Income Taxes. The effective tax rate for 1998, 1997, and 1996 was 40.0%. Income
taxes are accounted for using an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our consolidated financial
statements or tax returns. In estimating future tax consequences, all expected
future events then known to management are considered, other than changes in the
tax law or rates.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following sets forth quarterly financial information for the periods
indicated.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
QUARTER ENDED
----------------------------------------------------------------------------------------
APRIL 30, JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, JANUARY 31, OCTOBER 31,
Dollars in thousands 1999 1999 1998 1998 1998 1998 1997
except per share amounts --------- ----------- ----------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $40,859 $110,876 $42,955 $49,532 $39,751 $96,096 $41,106
Expenses
Cost of products....... 20,280 54,204 22,404 25,780 20,743 50,385 22,115
Buying and occupancy... 6,748 7,158 6,397 6,261 6,337 6,468 5,946
Advertising and
promotion............ 4,234 11,074 4,906 6,904 4,512 10,498 4,036
General, selling and
administrative....... 12,413 22,692 12,285 12,383 11,646 18,885 11,429
Other income (expense)... (36) (22) 603 (176) (163) (158) (198)
Earnings (loss) before
income tax (benefit)... (2,852) 15,726 (2,434) (1,972) (3,650) 9,702 (2,618)
Income tax (benefit)..... (1,141) 6,291 (974) (789) (1,460) 3,880 (1,047)
Net earnings (loss)...... $(1,711) $ 9,435 $(1,460) $(1,183) $(2,190) $ 5,822 $(1,571)
Net earnings (loss) per
share --
Basic(1)............... $ (0.19) $ 1.08 $ (0.17) $ (0.14) $ (0.26) $ 0.70 $ (0.19)
Diluted(2)............. $ (0.19) $ 0.98 $ (0.17) $ (0.14) $ (0.26) $ 0.67 $ (0.19)
<CAPTION>
--------------------
QUARTER ENDED
--------------------
JULY 31, APRIL 30,
Dollars in thousands 1997 1997
except per share amounts -------- ---------
<S> <C> <C>
Revenues................. $43,340 $36,273
Expenses
Cost of products....... 23,472 19,563
Buying and occupancy... 5,783 5,707
Advertising and
promotion............ 4,715 3,546
General, selling and
administrative....... 11,739 11,021
Other income (expense)... (118) (45)
Earnings (loss) before
income tax (benefit)... (2,487) (3,609)
Income tax (benefit)..... (995) (1,443)
Net earnings (loss)...... $(1,492) $(2,166)
Net earnings (loss) per
share --
Basic(1)............... $ (0.18) $ (0.26)
Diluted(2)............. $ (0.18) $ (0.26)
</TABLE>
- -------------------------
(1) Basic earnings per share is calculated for interim periods including the
effect of stock options exercised in prior interim periods. Basic earnings per
share for the fiscal year is calculated using weighted shares outstanding based
on the date stock options were exercised. Therefore, basic earnings per share
for the cumulative four quarters may not equal fiscal year basic earnings per
share.
(2) Diluted net earnings per share for the fiscal year and for quarters with net
earnings are computed based on weighted average common shares outstanding which
include common stock equivalents (stock options). Net loss per share for
quarters with net losses is computed based solely on weighted average common
shares outstanding. Therefore, the net earnings (loss) per share for each
quarter do not equal the earnings per share for the full fiscal year.
20
<PAGE> 27
Our business is highly seasonal, reflecting the general pattern associated with
the retail industry of peak sales and earnings during the Holiday shopping
season. The secondary peak period for us is June, reflecting the gifting for
Father's Day and graduations. A substantial portion of our total revenues and
all or most of our net earnings occur in the fourth quarter ending January 31.
We generally experience lower revenues and earnings during the other quarters
and, as is typical in the retail industry, have incurred and may continue to
incur losses in these quarters. The results of operations for these interim
periods are not necessarily indicative of the results for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
We met our short-term liquidity needs and our capital requirements in the
three-month period ended April 30, 1999 with cash generated from operations and
trade credit. During the three-month period ended April 30, 1999, we used cash
primarily for working capital purposes resulting in a decrease in cash by
$7,850,000 to $539,000. At April 30, 1999, we had no amounts outstanding on our
revolving credit facility. As of April 30, 1999, letter of credit commitments
outstanding under our revolving credit facility were $2.1 million.
At January 31, 1999, we had cash and equivalents of $8,389,000, an increase of
$4,888,000, as compared to $3,501,000 at January 31, 1998. During 1998, we met
our short-term liquidity needs and our capital requirements with available cash,
cash flow provided by operations, trade credit, and the revolving and term
loans. The increase in cash reflected the highest fourth quarter revenues and
earnings in our history. At January 31, 1999, we had no amounts outstanding on
our revolving loan credit facility. The highest amount of direct borrowings
under the revolving loan credit facility during 1998 was $14,288,000, compared
with $14,672,000 in 1997. Letter of credit commitments outstanding at January
31, 1999 and 1998 were $4,108,000 and $2,321,000, respectively.
We have a revolving secured credit facility with The CIT Group/Business Credit,
Inc. which expires in September 2003. The credit facility has been amended on
several occasions and, as of April 30, 1999, the agreement allows borrowings and
letters of credit up to a maximum of $30 million for the period from October 1,
1999 through December 31, 1999, and up to $20 million at other times of the year
based on inventory levels. The credit facility is secured by our inventory,
accounts receivable, general intangibles and certain other assets. Borrowings
under this facility bear interest at either prime plus 0.25% per year or at
LIBOR plus 2.25% per year, but may change based on our financial performance.
The credit facility contains certain financial covenants pertaining to interest
coverage ratio and net worth and contains limitations on operating leases, other
borrowings, dividend payments and stock repurchases. For the fiscal year ended
January 31, 1999, we were in compliance with all covenants. The credit facility
allows for seasonal borrowings of up to $30 million for the period October 1
through December 31, 1999 increasing by $1 million for this period in each of
the three subsequent years.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans currently bear interest at a variable rate of either prime
plus 0.50% per year or at LIBOR plus 2.50% per year, but may change based on our
financial performance. Each Term Loan is to be repaid in 36 equal monthly
principal installments. At April 30, 1999, notes payable included a Term Loan
which bears interest at a variable rate of prime plus 0.50%, provides for
monthly principal payments of $55,555 plus the related interest payment, and
matures in October 1999. At April 30, 1999, the balance of the Term Loan was
$330,000.
At April 30, 1999, notes payable included an approximately $2,615,000 mortgage
loan collateralized by our distribution center. This note bears interest at a
fixed rate of 8.40%, provides for monthly payments of principal and interest in
the amount of $29,367, and matures in January 2011.
We lease all of our offices, stores, and seasonal warehouse space. During the
fiscal year ended January 31, 1999, we opened four Sharper Image stores located
in Orlando, Florida; King of Prussia, Pennsylvania; West Nyack, New York; and
Towson, Maryland. We closed two Sharper Image stores located in Escondido,
California and Gurnee Mills, Illinois.
We are currently planning to open four new Sharper Image stores during 1999, two
of which have been opened as of April 30, 1999. Total capital expenditures
estimated for new and existing stores, corporate headquarters and the existing
distribution center for 1999 are between $7 million and $8 million. We believe
that we will be
21
<PAGE> 28
able to fund our cash needs for at least the next 12 months through internally
generated cash, trade credit, the credit facility and the proceeds of this
offering.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks, which include changes in interest rates and, to
a lesser extent, foreign exchange rates. We do not engage in financial
transactions for trading or speculative purposes.
The interest payable on our credit facility is based on variable interest rates
and therefore affected by changes in market interest rates. If interest rates on
existing variable rate debt rose 0.8% (10% from the bank's reference rate) as of
April 30, 1999, our results from operations and cash flows would not be
materially affected. In addition, we have fixed and variable income investments
consisting of cash equivalents and short-term investments, which are also
affected by changes in market interest rates. We do not use derivative financial
instruments to manage market risks.
We enter into a significant amount of purchase obligations outside of the U.S.
which are settled in U.S. dollars and, therefore, have only minimal exposure to
foreign currency exchange risks. We do not hedge against foreign currency risks
and believe that foreign currency exchange risk is immaterial.
YEAR 2000 COMPLIANCE
We recognize that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of many systems to recognize the date change from
December 31, 1999 to January 1, 2000. The Year 2000 issue could result, at The
Sharper Image and elsewhere, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities. We
have assessed our computer and business processes and are reprogramming our
computer applications to provide for their continued functionality. An
assessment of the readiness of the external entities with which we interface is
ongoing.
In 1996, we developed a detailed Year 2000 Conversion Project Plan (Plan) to
address the methods to correct possible disruptions of operations due to the
Year 2000 issue. The Plan took into consideration the following items: (1)
identification and inventorying of hardware, application software, and equipment
utilizing programmable logic chips to control aspects of their operation, with
potential Year 2000 problems; (2) assessment of scope of Year 2000 issues for,
and assigning priorities to, each item based on its importance to our
operations; (3) remediation of Year 2000 issues in accordance with assigned
priorities, by correction, upgrade, replacement or retirement; (4) testing for
and validation of Year 2000 compliance; and, (5) determination of key vendors
and customers and their Year 2000 compliance. Because we use a variety of
information technology systems, internally-developed and third-party provided
software and embedded chip equipment, depending on business function and
location, various aspects of our Year 2000 efforts are in different phases and
are proceeding in parallel. At this time, the difficult and time consuming task
of identifying and inventorying hardware and application software with Year 2000
issues and developing specific strategies for compliance has been completed. The
assessment process of internal operating systems is complete, with critical
applications being determined, planned for, and outlined. Our main operating
system and hardware have been upgraded for Year 2000 compliance, with all
application conversion work nearing completion. Non-critical system conversions
have been identified and scheduled for completion by the end of June 1999. This
conversion process encompasses all areas of our operations, from verification of
the Year 2000 compliance of the software accounting packages, to e-mail systems,
to telephone systems. Based upon a detailed review and update of the Plan
performed in January 1999, conversion of all our programs is expected to be
completed with full implementation by the end of June 1999. In addition, a
systemwide test will be completed by September 1999 to simulate the rollover to
January 1, 2000, to ensure all critical systems supporting the business will
remain operational.
Our operations are also dependent on the Year 2000 readiness of third parties
that do business with us. In particular, our information technology systems
interact with commercial electronic transaction processing systems to handle
customer credit card purchases and other point of sale transactions, and we are
dependent on third-party suppliers of such infrastructure elements as telephone
services, electric power, water, and banking facilities. We do not depend to any
significant degree on any single merchandise vendor or upon electronic
transaction processing with individual vendors for merchandise purchases. The
Plan includes identifying and
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initiating formal communications with key third parties and suppliers and with
significant merchandise vendors to determine the extent to which we will be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Although we have not been put on notice that any known third party problem will
not be resolved, we have limited information and no assurance of additional
information concerning the Year 2000 readiness of third parties. The resulting
risks to our business are very difficult to assess.
Through April 30, 1999 we have incurred expenses totaling approximately $315,000
on work related to Year 2000 compliance. The estimated cost for this project is
between $400,000 and $600,000, and is being funded through operating cash flows.
The total estimated cost for this project includes a provision for the potential
costs associated with third party vendor or supplier failures. Operating costs
related to Year 2000 compliance projects will be incurred over several quarters
and will be expensed as incurred.
Based upon the planning and conversions completed to date, we believe that, with
modifications to existing software, conversions to new software, and appropriate
remediation of embedded chip equipment, the Year 2000 issue is not reasonably
likely to pose significant operational problems for our information technology
systems and embedded chip equipment as so modified and converted.
We are presently unable to assess the likelihood that we will experience
operational problems due to unresolved Year 2000 problems of third parties with
whom we do business. There can be no assurance that other entities will achieve
timely Year 2000 compliance; if they do not, Year 2000 problems could have a
material impact on our operations. Where commercially reasonable to do so, we
intend to assess our risks with respect to failure by third parties to be Year
2000 compliant and to seek to mitigate those risks. If such mitigation is not
achievable, Year 2000 problems could have a material impact on our operations.
Our estimates of the costs of achieving Year 2000 compliance and the date by
which Year 2000 compliance will be achieved are based on management's best
estimates, which were derived using numerous assumptions about future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 remediation work, the ability to locate and
correct all computer codes, the success achieved by our suppliers in reaching
Year 2000 readiness, the timely availability of necessary replacement items and
similar uncertainties.
We presently believe that the most reasonably likely worst-case scenarios that
we might confront with respect to Year 2000 issues have to do with third parties
not being Year 2000 compliant. We are presently evaluating vendor and customer
compliance and will develop contingency plans, such as alternative vendor
opportunities, after obtaining compliance evaluations. We intend to develop
contingency plans by September 1999.
UNCERTAINTIES AND RISKS
This discussion and analysis should be read in conjunction with our financial
statements and notes included with this prospectus. This discussion contains
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in these
forward-looking statements. These risks and uncertainties include, without
limitation, risks of changing market conditions in the overall economy and the
retail industry, consumer demand, the opening of new stores, actual advertising
expenditures by us, the success of our advertising and merchandising strategy,
availability of products, and other factors detailed from time to time in our
annual and other reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus. We undertake no
obligations to publicly release any revisions to these forward-looking
statements or reflect events or circumstances after the date of this prospectus.
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<PAGE> 30
BUSINESS
OVERVIEW
The Sharper Image is a leading specialty retailer of innovative, high quality
products that are useful and entertaining and are designed to make life easier
and more enjoyable. We offer a unique assortment of products, in the
electronics, recreation and fitness, personal care, houseware, travel, toy, gift
and other categories. Our merchandising philosophy focuses on new and creative
proprietary Sharper Image Design products, Sharper Image private label products
and branded products, a portion of which we offer on a exclusive basis. Our
products are marketed and sold through three primary sales channels: The Sharper
Image stores, The Sharper Image catalog, and the Internet, primarily through our
sharperimage.com website. We believe that our unique merchandising and creative
marketing strategies have made The Sharper Image one of the most widely
recognized retail brand names in the United States.
Our merchandising strategy emphasizes products that are innovative and
new-to-market. In recent years, we have focused significant resources on the
development and marketing of our Sharper Image Design products and our Sharper
Image private label products, which are exclusive to The Sharper Image. Sharper
Image Design products typically generate higher sales margins than our other
products and, we believe, broaden our customer reach. During the last three
years, we have developed and introduced over 35 new-to-market Sharper Image
Design products with 16 new-to-market products in the last year alone. In
addition, in the last three years we introduced improved versions of more than
30 Sharper Image Design products. Recently introduced Sharper Image Design
products include our Ionic Breeze(TM) Silent Air Purifier, Wee-Bot(TM)
Electronic Pet, CD Radio/Alarm Clock with Sound Soother(R), Ionic Hair Wand
II(TM), Personal Cooling System(TM), Shower Companion(TM) Plus CD Player, Ultra
Heart and Sound Soother(R), and the newest versions of our Quiet Power(TM) Tie
Rack and Turbo-Groomer(TM). Of our ten best selling products during the 1998
Holiday shopping season, five were Sharper Image Design products. We have
increased the percentage of our sales attributable to Sharper Image Design
products to 25% for the first quarter of 1999 from 18% in 1998 and 8% in 1997.
One of our key strategic goals is to continue to increase the proportion of
sales derived from our Sharper Image Design products.
We market and sell our merchandise through a variety of sales channels,
including The Sharper Image stores, The Sharper Image catalog and the Internet,
primarily through our sharperimage.com website. We believe that this
multi-channel approach provides us with significant marketing, sales and
operational synergies, and provides our customers with enhanced shopping
flexibility and superior customer service. Our store operations generate the
highest proportion of our sales, representing approximately 67% of total
revenues in 1998 and 72% in the first quarter of 1999. As of June 10, 1999, we
operated 89 The Sharper Image stores in 27 states and the District of Columbia.
The Sharper Image stores present an interactive and entertaining selling
environment that emphasizes the features and functionality of our products and
allows the customer to truly experience the product while shopping. Our average
store sales per square foot are consistently above industry averages, and during
1998 we generated average sales of $484 per square foot.
We also offer our products through our award-winning The Sharper Image catalog,
a full-color monthly catalog that uses dramatic visuals and creative product
descriptions designed and produced by our in-house staff of writers and
production artists. The Sharper Image catalog, which generally features between
180 and 250 products in each monthly catalog, increasing to over 300 products
during the Holiday shopping season, also currently serves as the primary
advertising vehicle for our stores. During 1998, we mailed approximately 41
million The Sharper Image catalogs, excluding specialty catalogs, to over 6.5
million individuals. Approximately 24% of our total revenues were generated by
catalog operations, excluding specialty catalogs, in 1998 and 21% in the first
quarter of 1999.
Sharper Image products are also marketed through our Internet retail operations,
including our own website, which we have maintained at sharperimage.com since
1995. The Sharper Image was one of the early entrants into Internet retailing,
and has participated in online shopping since 1994. Our Sharper Image Internet
operations grew significantly in 1998 to $4.9 million, or approximately 2% of
our total revenues, from $1.6 million in 1997 and to $2.3 million in the first
quarter of 1999, or 6% of our total revenues, from $0.5 million in the first
quarter of 1998. In addition to our own website, we have offered our products
through Internet marketing partnerships with America Online Shopping Channel,
@Home, Catalog City, DoubleClick, Linkshare, Microsoft Plaza, PC World Shopping
and Yahoo! Shopping. We believe that online retailing over the
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Internet presents The Sharper Image with a significant opportunity for the
marketing and sale of our products and will enable us to significantly expand
and diversify our existing customer base. We believe that our Sharper Image
Design products are particularly well-positioned to be marketed and sold over
the Internet. We plan to significantly expand the resources dedicated to our
Internet retail operations by increasing the level of online advertising,
establishing additional strategic relationships with major online retail
partners and continuing to enhance the technical capabilities and presentation
of our website.
The Sharper Image was founded in 1977 by Richard Thalheimer, who currently
serves as our Chairman and Chief Executive Officer. The Sharper Image mailed its
first catalog in 1981, began the expansion into store operations in 1984, and
commenced Internet online retail operations in 1994.
COMPETITIVE ADVANTAGES
We believe that the following competitive advantages have contributed
significantly to our past success and intend to continue to capitalize on these
advantages in executing our growth strategy:
STRONG BRAND NAME. We believe our unique merchandising and creative marketing
have made The Sharper Image one of the most widely recognized retail brands in
the United States. The Sharper Image is recognized as a leading source of new,
innovative, high-quality products designed to make life easier and more
enjoyable. Because of our strong brand name, we are frequently sought after by
manufacturers and inventors to introduce technologically innovative products. We
continue to leverage our Sharper Image brand name by increasing our proprietary
product offerings, growing our online retail and catalog businesses and opening
new stores.
PROPRIETARY SHARPER IMAGE DESIGN PRODUCTS. In recent years, we have focused
significant resources on the design, development and marketing of our Sharper
Image Design products, which are exclusive to The Sharper Image. The proprietary
nature of Sharper Image Design products provides us with higher margins than our
other products. We have developed and introduced over 35 new-to-market products
in the last three years, with 16 new-to-market products in the last year alone.
In addition, we have introduced improved versions of more than 30 products in
the last three years. Of our ten best selling products during the 1998 Holiday
shopping season, five were from our Sharper Image Design product line. We have
formed a nine person in-house product development team and established a broad
network of engineers and creative professionals, allowing us to bring to market
unique, proprietary products. We are devoting significant resources to develop
new products in 1999, and we currently have a significant pipeline of product
ideas under development.
UNIQUE PRODUCT OFFERING. The Sharper Image offers a unique assortment of
high-quality, innovative products, many of which are difficult to find elsewhere
and are not easily replicated. Our merchandising philosophy focuses on Sharper
Image Design products, Sharper Image private label products and branded
products, a portion of which we offer on an exclusive basis. We offer a wide
variety of products in numerous product categories, including electronics,
recreation and fitness, personal care, houseware, travel, toy and gift. We offer
a variety of branded products, including products manufactured by Panasonic,
JVC, Olympus and 3Com. We also benefit from numerous exclusive product
offerings, in which manufacturers grant us the right to offer certain latest
generation and new-to-market products on an exclusive basis for a limited period
of time. For example, we currently offer Interactive Health's Get-A-Way
Chair(R), a reclining electronic massage chair, on an exclusive basis. In
product lines where we compete directly with other retailers, we generally
choose to sell the most advanced, full featured version of the product. We
believe our merchandising strategy limits price shopping and enhances our
ability to achieve attractive margins on our products.
THREE SYNERGISTIC RETAIL SALES CHANNELS. We offer our products through three
main sales channels: The Sharper Image Stores, our catalog and the Internet,
primarily through our sharperimage.com website. We believe this combination
gives us the following competitive advantages:
- our catalog and Internet operations, which include our auction site,
increase the visibility and exposure of our brand name, generate store
traffic and provide effective product marketing and advertising for The
Sharper Image stores;
- our existing catalog infrastructure and experience in areas such as order
fulfillment and customer service provide us with an advantage over many
other Internet retailers; and
- our operations allow a customer to identify and purchase a product over
the Internet or in our catalog with the confidence of being able to
return it to a nearby store for a refund or credit if desired, and
provide our customers with increased shopping flexibility and superior
customer service.
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LOYAL CUSTOMER BASE WITH ATTRACTIVE DEMOGRAPHICS. A cornerstone of our business
strength has been our ability to develop, cultivate and satisfy an attractive
customer base of loyal, repeat customers. These customers are typically high net
worth men and women between the ages of 35 and 55, with an average yearly income
in excess of $100,000. We have developed an internal database of over 10 million
customer names. Approximately two million of these customers have made purchases
from us in the past 24 months, and of the two million, 50% have made multiple
purchases. In addition, we believe the demographics of our customer base are
characteristic of online shoppers, representing an opportunity to expand our
customer base. During the 1998 Holiday shopping season, approximately 70% of our
Internet customers were first time Sharper Image buyers. Ten percent of these
new customers subsequently purchased additional products from us through our
catalog or stores.
GROWTH STRATEGY
We believe that substantial opportunities exist to enhance our revenues and
profitability by implementing the following strategies.
INCREASE PROPRIETARY PRODUCT OFFERINGS. A key element of our business strategy
is to design, develop and market our proprietary products. We believe that in
general our proprietary products generate higher margins than other products
because they are less susceptible to price shopping. The percentage of our sales
attributable to Sharper Image Design proprietary products increased to 25% for
the first quarter of 1999 from 18% in 1998 and 8% in 1997 and contributed
significantly to the 2.8 percentage point increase in our gross margin in the
first quarter of 1999 over the first quarter of 1998 and the 2.7 percentage
point increase in our gross margin in 1998 over 1997. It is our goal to continue
to increase the percentage of proprietary product sales and enhance our gross
margins.
INCREASE INTERNET RETAIL OPERATIONS. Our goal is to provide a website that
offers our online customers an interactive and entertaining experience similar
to The Sharper Image stores. We intend to increase our online retail operations
by leveraging our strong brand name, unique product offerings, demographically
attractive customer base and established order fulfillment capability. The
Sharper Image website is capable of displaying our most popular products using
interactive, 3D enriched product presentations with sound. We recently launched
our Internet auction site as a key component of Internet strategy. To date, we
have Internet marketing partnerships with America Online, @Home, Catalog City,
DoubleClick, Linkshare, Microsoft Plaza, PC World Shopping and Yahoo! Shopping.
Our Internet-based revenues increased to $4.9 million in 1998 from $1.6 million
in 1997 and to $2.3 million the first quarter of 1999 from $0.5 million in the
first quarter of 1998. Our goal is to expand our Internet operations as follows:
- create and effectively implement an online advertising strategy;
- maintain sharperimage.com's leading edge technological capabilities;
- enter into additional relationships with strategic Internet marketing
partners; and
- expand sharperimage.com's auction website activity.
BROADEN CUSTOMER BASE. We believe that significant opportunities exist to
attract a broader customer base by pursuing the following key strategies:
- developing proprietary products at popular price points with broader
market appeal, such as the $39.95 Wee-Bot(TM), a mobile electronic space
pet, the $49.95 Personal Cooling System(TM), a miniature wearable
evaporative cooling system, and the $39.95 Turbo-Groomer(TM), a battery
powered personal hair trimmer;
- offering products with wider functional appeal, such as the Ionic
Breeze(TM), a silent air purifier, the Steam Wizard(R), a steamer and
wet/dry vacuum, and the Power Tower(TM), a motorized, rotating CD holder;
- developing more products that appeal to women, such as the Ionic Hair
Wand II(TM), a conditioning hairbrush, the CD Shower Companion(TM) and
the Women's Personal Care Kit; and
- expanding the demographic mix of our customers by reaching a younger and
broader audience through our Internet operations, including our auction
site.
OPEN NEW STORES. We plan to continue to selectively open new stores in premium
locations in the United States. We currently intend to open four additional
stores during 1999, two of which have been opened to date. Each new store will
be configured in our new format which we believe is appealing to a broader
customer base and
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highlights our proprietary products. During 1998 we remodeled four stores and
opened four new stores utilizing the new format.
THE SHARPER IMAGE STORES
As of June 10, 1999, we operated 89 The Sharper Image stores in the United
States across 27 states and the District of Columbia. The Sharper Image stores
accounted for approximately 67% of our revenues in 1998 and 72% in the first
quarter of 1999. The Sharper Image stores are located in densely populated,
downtown financial districts and business centers, upscale shopping malls and
drive-up suburban locations. The following map shows the locations of our
stores:
89 STORES NATIONWIDE [MAP]
ARIZONA
Phoenix
CALIFORNIA
Beverly Hills
Carmel
Corte Madera
Glendale
Milpitas
Newport Beach
Palm Desert
Palm Springs
Palo Alto
Redondo Beach
Sacramento
San Diego
San Francisco(3)
Santa Ana
Santa Clara
Walnut Creek
COLORADO
Aspen
Denver(2)
CONNECTICUT
Danbury
Farmington
Stamford
FLORIDA
Aventura
Boca Raton
Ft. Lauderdale
Miami(2)
Naples
Orlando(2)
Palm Beach Gardens
Sunrise
Tampa(2)
GEORGIA
Atlanta
HAWAII
Honolulu
Maui
ILLINOIS
Chicago(2)
Northbrook
Oak Brook
Schaumburg
Skokie
INDIANA
Indianapolis
LOUISIANA
New Orleans
MARYLAND
North Bethesda
Towson
MASSACHUSETTS
Boston
Burlington
Chestnut Hill
MICHIGAN
Novi
Troy
MINNESOTA
Bloomington
Edina
MISSOURI
Kansas City
Richmond Heights
NEVADA
Las Vegas
Reno
NEW JERSEY
Bridgewater
Hackensack
Paramus
Short Hills
NEW YORK
Garden City
New York(3)
West Nyack
White Plains
NORTH CAROLINA
Raleigh
OHIO
Cincinnati
Columbus
Woodmere
OKLAHOMA
Oklahoma City
OREGON
Portland
PENNSYLVANIA
Ardmore
King of Prussia
Pittsburgh
TENNESSEE
Germantown
TEXAS
Austin
Dallas
Houston(2)
San Antonio
VIRGINIA
McLean
WASHINGTON
Seattle
WASHINGTON, DC
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Each store is generally staffed with approximately six to eight employees,
including a manager, an assistant manager, a senior sales associate, sales
associates, and other support staff. Our store managers have an average tenure
of over six years. Our store personnel are compensated primarily through
commissions. In order to maintain a high customer service level, our sales
associates undergo considerable training on our many new and often technically
oriented products.
Our stores are operated according to standardized procedures for customer
service, merchandise display and pricing, product demonstration, inventory
maintenance, personnel training, administration and security. Our original The
Sharper Image stores typically have 2,200 to 2,500 square feet of selling space
and approximately 1,300 to 2,200 square feet of storage and administrative
space. In 1996, 1997 and 1998 we opened an aggregate of 17 new stores. During
that period, the cost of leasehold improvements, net of landlord contributions,
but including fixtures and pre-opening expenses, averaged $325,000 per store.
Initial inventory averaged approximately $250,000 per store. In 1998, stores
operating at least one full year generated average sales and cash contributions
of approximately $1,878,000 and $383,000, respectively.
In addition to our Sharper Image stores, our products are sold through two
outlet stores and eight Sharper Image Design stores, which are approximately
half the size of the original stores and feature higher margin proprietary
products and other top selling merchandise.
In 1997 we decided to update the look and appeal of our new retail stores and
select existing stores. The new format presents an open, fresh and inviting
environment that appeals to both men and women and highlights our proprietary
products. The average cost of remodeling a store is $350,000, subject to
leasehold allowances. During 1998 we opened four new stores and remodeled four
stores utilizing the new format. We currently plan to open four new stores in
1999, two of which have been opened to date.
See Note K to our financial statements for further financial information.
THE SHARPER IMAGE CATALOG
The Sharper Image catalog is a full-color catalog that is mailed to an average
of approximately three million individuals each month. Our catalog operations
generated approximately 24% (29% including the Home Collection catalog) of our
total revenues in 1998 and 21% of our total revenues in the first quarter of
1999. Our catalog is recognized for creative excellence by the Direct Marketing
Association, a leading catalog industry trade group. The catalog is currently
the primary advertising vehicle for our retail stores and our online store.
During 1998, we mailed approximately 41 million The Sharper Image catalogs
(approximately 44 million including the Home Collection catalog) to over 6.5
million different individuals. Circulation and number of pages of The Sharper
Image catalog is under continual review to balance the costs of mailing the
catalogs with the revenues generated. The mailings increase for Father's Day and
the Holiday shopping season reflecting the seasonal nature of our business.
The Sharper Image catalog design uses dramatic visuals and benefit-oriented
product descriptions. The catalog design features the most important products
prominently. The number of items featured each month ranges between 180 and 250
products during the first three quarters of the year, increasing to more than
300 products during the fourth quarter. The Sharper Image catalog is designed
and produced by our in-house staff of writers and production artists. This
enables us to maintain quality control and shorten the lead-time needed to
produce the catalog. The monthly production and distribution schedule permits
frequent changes in the product selection. During 1998, The Sharper Image
catalog contained from 52 to 76 pages for non-peak months and between 76 and 124
pages for the peak seasons of Father's Day and the Holiday shopping season.
We have developed a proprietary customer database of over 10 million names which
we use regularly and periodically rent to third parties. We collect customer
names through our catalog and online website order processing as well as
electronic point-of-sale registers in our retail stores. The names and
associated sales information are merged daily into our customer master file.
This daily merge process provides a constant source of current information to
help assess the effectiveness of the catalog as a form of retail advertising,
identify new customers that can be added to our in-house mailing list without
using customer lists obtained from other catalogers, and identify our top
purchasers. To further enhance the effectiveness of our catalog mailings to
individuals in our customer data base, our in-house staff utilizes statistical
evaluation and selection techniques to determine which customer segments are
likely to contribute the greatest revenue per mailing. We have
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<PAGE> 35
established a data bank of top purchasers who receive preferred treatment,
including invitations for special sales events and enhanced customer service.
See Note K to our financial statements for further financial information.
SHARPERIMAGE.COM OPERATIONS
The Sharper Image was an early entrant into Internet retailing. We have
participated in online shopping since 1994, and have maintained our own website
since 1995. In May 1999, we had approximately 166,000 unique visitors and
approximately 1.8 million page views on our website, as well as approximately
1.4 million page views on our auction site. Revenues from our Internet
operations have increased to $4.9 million in 1998 from $1.6 million in 1997 and
increased to $2.3 million in the first quarter of 1999 from $0.5 million in the
first quarter of 1998. We achieved these results without significant incremental
investment in infrastructure or advertising. Our online retailing operations
benefit from our brand name, customer base and unique product offering. In
addition, we are able to leverage our catalog infrastructure and fulfilment and
customer service experience, providing us with a significant advantage over
Internet retailers who have not developed such capabilities.
Our goal is to make sharperimage.com a website that provides our online
customers with an interactive experience similar to our Sharper Image stores. We
are aggressively updating our site by incorporating advanced technologies to
improve our product presentations and making our site increasingly customer
friendly. In March 1999 we implemented technology which allows us to display our
products using interactive 3D enriched presentations and sound. We believe that
these presentation features are a valuable tool for further increasing our brand
recognition and advertising our products, and will prove particularly useful in
reaching our goal of attracting younger consumers to our website.
In February 1999, we also established our online auction site. Our auction site
allows customers to bid on and acquire a broad range of new, returned,
repackaged and refurbished Sharper Image products for less than list price. All
products purchased on the auction site have the same warranty and return
benefits that accompany full price products. We believe that bidders have an
enhanced level of confidence in our operations since, unlike other retailers
with auction sites, we are an established retailer with an inventory of
well-known products under warranty and an established return policy.
We are pursuing additional steps to achieve continued growth of our Internet
operations. These steps included hiring a Director of Global Internet Marketing,
developing and implementing an Internet advertising strategy and seeking to
establish strategic Internet marketing partnerships. We have established key
relationships with America Online, @Home, Catalog City, DoubleClick, Linkshare,
Microsoft Plaza, PC World Shopping and Yahoo! Shopping.
OTHER OPERATIONS
In addition to our store, catalog and Internet operations, we also have a
corporate marketing program, wholesale sales group, list rental program and
licensed operations.
We sell incentive and gift merchandise certificates to client companies who in
turn distribute them under their programs to increase their sales, or to
motivate and reward their high achievers and best customers. The Sharper Image
stores and catalog are the primary means of offering and conveniently delivering
the incentives and gifts. Our certificates are redeemable for Sharper Image
merchandise through our retail stores, by mail, or over the telephone through
the catalog telemarketing group. We are also developing the Internet channel for
this area of our business. We record revenues and expenses for our corporate
marketing program through our catalog and retail channels.
We sell our proprietary products on a limited basis to department stores in the
United States and to selected retailers outside the United States. In addition,
we rent our customer list to third parties for a fee or in exchange for their
customer lists. List exchanges are not included in our receivables.
There are currently six Sharper Image retail stores operated by foreign
licensees; two are in Switzerland, three are in Saudi Arabia and one is in
Dubai. In addition, we have a catalog license agreement in Japan as well as two
licenses for non-duty free airport locations in the United States. Under the
license agreements, we receive
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royalties on sales by the licensees and the licensees are granted the right to
use the trademarked name, "The Sharper Image."
MERCHANDISING, SOURCING AND DEVELOPMENT
Merchandising
Our merchandise mix emphasizes innovative products that are unique and
new-to-market, and that are proprietary, private label or available exclusively
through The Sharper Image, or branded products not available in broad
distribution. Currently, our product offerings include approximately 1,700
stock-keeping units (SKUs) with approximately 1,200 active SKUs representing
products in the electronics, recreation and fitness, personal care, houseware,
travel, toys and gifts categories.
We choose each product separately because our sales are driven by individual
products, and our marketing efforts focus on each item's unique attributes,
features and benefits. This approach distinguishes us from other retailers who
are more category or product classification oriented. We adjust our merchandise
mix to reflect market trends and customer buying habits. New products are
selected or developed and brought into our merchandise mix based on criteria
such as anticipated popularity, gross margin, uniqueness, value, competitive
alternatives, exclusivity, quality and vendor performance.
MERCHANDISE MIX
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------
THREE MONTHS ENDED
TYPE OF PRODUCT APRIL 30, 1999 1998 1997
--------------- ------------------ ---- ----
<S> <C> <C> <C>
Sharper Image Design..................................... 25.4% 18.1% 8.2%
Sharper Image private label.............................. 14.2% 11.3% 9.0%
Branded (including exclusive products)................... 60.4% 70.6% 82.8%
</TABLE>
Our merchandise strategy is to offer an assortment of products with emphasis on
Sharper Image Design proprietary and private label products. We intend to focus
on offering products in the $50 to $300 price range to appeal to a wide customer
base. We also intend to increase our proprietary product offerings.
We generate information on merchandise orders and inventory, which is reviewed
daily by our buyers, our senior merchandising staff and top management. We
generally replace approximately 10% to 25% of our product offerings each month.
We carefully consider which products will be offered in future months based upon
numerous factors, including revenues generated, gross margins, the cost of
catalog and store space devoted to each product, product availability and
quality.
Sourcing
The process of finding new products involves our buyers reviewing voluminous
product literature, traveling throughout North America and Asia to attend trade
shows and exhibitions, and meeting with manufacturers. We enjoy relationships
with many major manufacturers who use The Sharper Image regularly to introduce
their newest products in the United States.
We purchase merchandise from approximately 630 foreign and domestic
manufacturers and importers. Of the products we offered in 1998, approximately
75% were manufactured in Asia, approximately 20% were manufactured within the
United States, approximately 3% were manufactured in Europe, and approximately
2% were manufactured in Mexico and Canada. In 1998, none of our vendors
accounted for greater than 10% of net merchandise purchases of approximately
$122,000,000.
Development
In addition to finding new product ideas from outside sources, our product
development group conceives, designs and produces Sharper Image Design products.
The product development group meets regularly with the merchandising staff to
review new product opportunities, product quality, and customer feedback. From
these creative sessions product ideas are put into design, development and
production. Successful product introductions during the past two years include
the Ionic Breeze(TM) Silent Air Purifier, CD Radio/Alarm Clock
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<PAGE> 37
with Sound Soother(R), Wee-Bot(TM) Electronic Pet, Personal Cooling System(TM),
Turbo-Groomer(TM), Truth Quest(TM), Ionic Hair Wand II(TM), Stereo Sound
Soother(TM), Shower Companion(TM) Plus, and the portable Sound Soother(R).
We believe that the Sharper Image Design group will continue to design and
develop a variety of unique products that enhance sales and maintain or increase
margins. We believe that the appeal of these proprietary products also serves as
a key driver in broadening our customer base and enhancing our brand appeal. Our
goal is to increase sales of these proprietary products.
Sharper Image Design products are produced for us on a contract basis by
manufacturers located primarily in Asia. We provide all product specifications
to the contract manufacturers. Product development cycles vary, but generally
range from 12 to 18 months.
CUSTOMER SERVICE
We are committed to providing our customers with courteous, knowledgeable, and
prompt service. Our customer service and catalog sales groups at the corporate
headquarters and at the Little Rock distribution center provide personal
attention to customers who call toll free to request a catalog subscription,
place an order, or inquire about a product. Our Customer Service group is also
responsible for resolving customer problems promptly and to the customer's
complete satisfaction. We also contract with third party call centers to provide
twenty-four hour coverage for catalog sales.
We seek to hire, train and retain qualified sales and customer service
representatives in both our mail-order catalog and store operations. Each new
store manager undergoes an intensive program during which the manager is trained
in all aspects of our business. Sales personnel are trained during the first two
weeks of employment, or during the weeks before a new store opens. Training
focuses primarily on acquiring a working knowledge of our products and on
developing selling skills and an understanding of our high customer service
standards. Each sales associate is trained to adhere to our philosophy of
"taking ownership" of every customer service issue that may arise. We have also
developed ongoing programs conducted at each store that are designed to keep
each salesperson up to date on each new product offered.
ORDER FULFILLMENT AND DISTRIBUTION
We have an order fulfillment and distribution facility in Little Rock, Arkansas
of approximately 110,000 square feet, and use contract warehouse facilities for
additional seasonal requirements. Our merchandise generally is delivered to
catalog and Internet customers and is distributed to The Sharper Image stores
directly from our distribution facility. A number of products are shipped
directly from the vendor to the customer or to the stores. The shipment of
products directly from vendors to the stores and customers reduces the level of
inventory required to be carried at the distribution center, freight costs, and
the lead-time required to receive the products. Each catalog order is received
via remote terminal at the distribution facility after the order has been
approved for shipment. During 1998, approximately 90% of our catalog and
Internet orders were shipped within 48 hours after the order is received. We are
currently evaluating various alternatives to expand the capacity of our
distribution facilities to provide for projected business growth.
Sales and inventory information about store, catalog and Internet operations is
provided on an ongoing basis to our merchandising staff and to top management
for review. Our stores are equipped with electronic point-of-sale registers that
communicate daily with the main computer system at corporate headquarters,
transmitting sales, inventory and customer data as well as receiving data from
our headquarters. The sales, inventory, and customer data enables sales and
corporate personnel to monitor sales by item on a daily basis, provides the
information utilized by the automatic replenishment system (ARS) for inventory
allocations, provides management with current inventory and merchandise
information, and enables our in-house mailing list to be updated regularly with
customer names and activity.
We have developed a proprietary ARS which is used to maximize sales with minimal
inventory investment. Under our ARS, information on merchandise inventory and
sales by each store location is generated and reviewed daily. Sales information
by product and location is systematically compared daily to each product's
"model stock" to determine store shipment quantities and frequency. The ARS
computes any adjustments to the model stock level based on factors such as sales
history by location in relation to total our sales of each product. Under this
system, the model stock is continually revised based on this analysis.
Recommended adjustments to
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model stock levels and recommended shipment amounts are reviewed daily by our
group of store distributors and merchandising managers who are responsible for
allocating inventory to stores.
ADVERTISING
While the catalog remained our primary advertising vehicle during 1998, we also
utilized newspaper, leading consumer magazine and airline magazine inserts to
advertise specific products. Major news publications where we advertised our
proprietary products and website include USA Today, The Wall Street Journal and
The New York Times. We plan to continue these efforts in 1999. We also tested
televised "infomercials" in 1998 and plan to increase the number of infomercials
in 1999. In addition, in 1999 we plan to expand our advertising for our Internet
operations. We believe these advertisements generate store sales as well as
mail-order sales.
MANAGEMENT INFORMATION SYSTEMS
We maintain an integrated management information system for order fulfillment,
distribution and financial reporting. We believe our system increases our
productivity by providing extensive merchandise information and inventory
control. We continually evaluate and enhance our computer systems and
information technology in connection with providing additional and improved
management and financial information. In 1998 and 1999, technology development
and enhancement initiative for our Internet website was and will be part of the
key objectives of our Information Systems Team.
We recognize that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. We have reviewed our computer and business
processes, and are reprogramming our computer applications to provide for
continued functionality. An assessment of the readiness of the external entities
with which we interface is ongoing.
COMPETITION
We operate in a highly competitive environment. We principally compete with a
diverse mix of department stores, sporting goods stores, discount stores,
specialty retailers and other catalog and Internet retailers that offer products
similar to or the same as some of those offered by us. Many of our competitors
are larger companies with greater financial resources, a wider selection of
merchandise and a greater inventory availability. Although we attempt to market
products not generally available elsewhere and have emphasized exclusive
products in our merchandising strategy, many of our products or similar products
can also be found in other retail stores or through other catalogs or on-line.
We offer competitive pricing where other retailers market certain products
identical to ours at lower prices. In addition, a number of other companies have
attempted to imitate the presentation and method of operation of our catalog and
stores, and our proprietary designed products. We compete principally on the
basis of product exclusivity, selection, quality and price of our products,
merchandise presentation in the catalog, stores, and on the Internet, our
customer list, name recognition, and the quality of our customer service. We are
committing additional resources to our internal product development group to
create and produce proprietary products exclusively available from us. We
believe that these proprietary products provide a competitive advantage for us
in our merchandising offering.
TRADEMARK AND LICENSES
We believe our registered service mark and trademark, "The Sharper Image," and
the brand name recognition that it has developed, are of significant value. We
actively protect our brand name and other intellectual property rights to ensure
that the quality of our brand and the value of our proprietary rights are
maintained. We currently license the use of our trademarked name in connection
with the production and circulation of foreign language editions of The Sharper
Image catalog in Japan and Switzerland and in connection with The Sharper Image
stores in Switzerland, Saudi Arabia and Dubai in consideration for royalties and
other fees. In addition to these international licensees, we have also entered
into a license for the right to operate Sharper Image stores in domestic
non-duty free airport locations as well as various product license agreements
which grant the right to licensees to manufacture and sell products bearing our
trademark.
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LEGAL PROCEEDINGS
We are party to various legal proceedings arising from normal business
activities. Management believes that the resolution of these matters will not
have a material adverse effect on our financial position or results of
operations.
EMPLOYEES
As of April 30, 1999, we employed approximately 1,300 associates, approximately
60% of whom were full-time. We consider our employee relations to be good.
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<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is a list of the executive officers and directors of The Sharper
Image, together with brief biographical descriptions.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard Thalheimer........ 51 Founder, Chairman of the Board, and Chief Executive
Officer
Tracy Wan................. 39 President, Chief Operating Officer and Corporate
Secretary
Shannon King.............. 43 Executive Vice President, Merchandising
Jeffrey Forgan............ 41 Senior Vice President and Chief Financial Officer
Anthony Farrell........... 49 Senior Vice President, Creative Services
Joe Williams.............. 49 Senior Vice President, Loss Prevention
Greg Alexander............ 37 Senior Vice President, Management Information
Systems
Davia Kimmey.............. 45 Senior Vice President, Marketing
Alan Thalheimer........... 73 Director
Gerald Napier............. 72 Director
Morton David.............. 62 Director
George James.............. 61 Director
</TABLE>
RICHARD THALHEIMER is the founder of The Sharper Image and has served as the
Chief Executive Officer and as a Director since 1978 and as Chairman of the
Board of Directors since 1985. Mr. Thalheimer also served as our President from
1977 through July 1993.
TRACY WAN has been our President, Chief Operating Officer and Corporate
Secretary since April 1999. Ms. Wan served as Executive Vice President, Chief
Financial Officer from August 1998 through April 1999, Senior Vice President and
Chief Financial Officer from February 1995 through August 1998, Vice President,
Chief Financial Officer from September 1994 through February 1995, Vice
President, Controller from November 1991 through September 1994, and as
Controller from July 1989 through November 1991. Ms. Wan is a certified public
accountant.
SHANNON KING has been our Executive Vice President, Merchandising since May
1999. Ms. King served as Senior Vice President, Merchandising, from February
1995 through May 1999. Ms. King served as our Vice President, Merchandising from
March 1993 through February 1995, and as Director of Merchandising from July
1988 through March 1993.
JEFFREY FORGAN has been our Senior Vice President and Chief Financial Officer
since April 1999. Prior to that, Mr. Forgan served as Vice President, Corporate
Finance with Foundation Health Systems from 1995 to 1998, and was with Deloitte
& Touche LLP from 1980 to 1995. Mr. Forgan is a certified public accountant.
ANTHONY FARRELL has been our Senior Vice President, Creative Services, since
July 1998. Mr. Farrell was a consultant to The Sharper Image from April 1998
through July 1998. Mr. Farrell was a senior vice president, merchandising with
SelfCare Catalog from March 1991 through December 1997.
JOE WILLIAMS has been our Senior Vice President, Loss Prevention, since March
1999. Mr. Williams served as Vice President, Loss Prevention, from March 1993
through March 1999 and served as Director, Loss Prevention from April 1989
through March 1993.
GREG ALEXANDER has been our Senior Vice President, Management Information
Systems since March 1999. Mr. Alexander served as Vice President, Management
Information Systems from February 1995 through March 1999 and as Director,
Management Information Systems from July 1991 through February 1995.
DAVIA KIMMEY has been our Senior Vice President, Marketing since June 1997.
Prior to joining us, Ms. Kimmey was with Spiegel Inc. where she served as
Corporate Vice President, Advertising from 1995 to 1997 and as Vice President,
Advertising from 1992 to 1995.
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<PAGE> 41
ALAN THALHEIMER has been a Director 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 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 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 was elected to the Board of Directors in June 1999. Mr. James was
Senior Vice President, 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, a forest products and printing concern. Mr. James is
non-executive Chairman of the Board and a director of Crown Vantage, Inc., a
specialty paper manufacturing company.
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<PAGE> 42
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the common stock as of June 10, 1999, and as adjusted to reflect
the sale of common stock offered hereby by (1) each person who is known by us to
own beneficially more than five percent (5%) of the outstanding shares of common
stock, (2) each of our directors, (3) each of the executive officers named below
and (4) all of our directors and executive officers as a group. Unless otherwise
indicated below, to our knowledge, all persons listed below have sole voting and
investing power with respect to their shares of common stock, except to the
extent such power is shared by spouses under applicable law or described in the
footnotes below.
<TABLE>
<CAPTION>
------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED
OFFERING(1) AFTER THE OFFERING(1)
----------------------- ----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Richard Thalheimer(2).................................. 5,060,145 55.1% 5,060,145 41.5%
Dimensional Fund Advisors(3)........................... 478,000 5.3% 478,000 4.0%
Alan Thalheimer(4)..................................... 14,301 * 14,301 *
Gerald Napier(5)....................................... 11,000 * 11,000 *
Morton David(6)........................................ 28,000 * 28,000 *
George James(7)........................................ 17,000 * 17,000 *
Tracy Wan(8)........................................... 15,000 * 15,000 *
Shannon King(9)........................................ 5,000 * 5,000 *
Davia Kimmey........................................... -- *
All Directors and executive officers as a group (12
persons)(10)......................................... 5,164,778 55.8 5,164,778 42.2%
</TABLE>
- -------------------------
* Less than one percent of class
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of June 10, 1999 and warrants to
purchase shares of common stock that are exercisable within 60 days of June 10,
1999 are deemed outstanding. Percentage of beneficial ownership is based upon
8,964,831 shares of common stock outstanding prior to the offering and
11,964,831 shares of common stock outstanding after the offering, as of June 10,
1999 and assuming no exercise of the underwriters' over-allotment option. To our
knowledge, except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table has sole
voting and investment power with respect to the shares set forth opposite such
person's name. Except as otherwise indicated, the address of each of the
Directors, Named Executive Officers and 5% stockholders in this table is as
follows: c/o Sharper Image 650 Davis Street, San Francisco, California 94111.
(2) 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 June 10, 1999.
(3) Dimensional Fund Advisors Inc., a registered investment advisor, is deemed
to have beneficial ownership of 478,000 shares of our 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 Fund Advisors, Inc. disclaims beneficial ownership of all
such
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<PAGE> 43
shares. Dimensional Fund Advisors, Inc. 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.
(4) 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 12,000 shares issuable
upon exercise of options, which are currently exercisable or will become
exercisable within 60 days after June 10, 1999, of which 6,000 shares are
currently subject to repurchase by us.
(5) Includes 2,000 shares owned by the Napier Family Trust, of which Mr. Gerald
Napier is Trustee. Includes 7,000 shares issuable upon exercise of options,
which are currently exercisable or will become exercisable within 60 days after
June 10, 1999, of which 6,000 shares are currently subject to repurchase by us.
(6) Includes 8,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after June 10, 1999, of
which 6,000 shares are currently subject to repurchase by us.
(7) Includes 2,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after June 10, 1999, and
are currently subject to repurchase by us.
(8) Includes 15,000 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after June 10,
1999.
(9) Includes 5,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after June 10, 1999.
(10) Includes 283,332 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after June 10,
1999.
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<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of The Sharper Image consists of 3,000,000 shares
of Preferred Stock, $.01 par value, issuable in series and 25,000,000 shares of
Common Stock, $.01 par value. The following statements are brief summaries of
certain provisions relating to our capital stock contained in the Certificate of
Incorporation (the "Certificate") and Bylaws and in the laws of Delaware.
COMMON STOCK
Our authorized Common Stock consists of 25,000,000 shares, $.01 par value, of
which 8,964,048 shares were issued and outstanding as of June 10, 1999. The
issued and outstanding shares of common stock are fully paid and non-assessable.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. As of May 31,
1999, there were approximately 443 holders of record of our common stock. Each
share of our common stock is entitled to equal dividend rights and to equal
rights in our assets available for distribution to holders of common stock upon
liquidation, subject to the rights of outstanding series of preferred stock. Our
Certificate and Bylaws do not provide for preemptive rights of the holders of
its common stock. The transfer agent and registrar for the common stock is
ChaseMellon, LLC. Their telephone number is (415) 743-1434.
PREFERRED STOCK
The Board of Directors may, without further action by our stockholders, from
time to time direct the issuance of preferred stock in series and may, at the
time of issuance, determine the rights, preferences and limitations of each
series. Satisfaction of any dividend preferences of outstanding preferred stock
would reduce the amount of funds available for the payment of dividends on
shares of the common stock. Also, holders of preferred stock would normally be
entitled to receive a preference payment in the event of any liquidation,
dissolution or winding-up before any payment is made to the holders of common
stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of The Sharper Image without further
action by the stockholders. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting powers of the holders of
common stock, including the loss of voting control to others. No shares of
preferred stock have been issued.
CHANGE OF CONTROL PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203") regulating corporate takeovers. Section 203
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging, under certain
circumstances, in a "business combination" (which includes a merger or sale of
more than 10% of the corporation's assets) with any "interested stockholder" (a
stockholder who acquired 15% or more the corporation's outstanding voting stock
without the prior approval of the corporation's board of directors) for three
years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of Section 203 with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Sharper Image has not "opted out" of the provisions of
Section 203.
PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. We
believe that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly the Certificate includes a provision
eliminating liability for monetary damages for any breach of fiduciary duty as a
director, except as provided under Delaware law. Pursuant to Delaware law, our
directors are not insulated from liability for breach of their duty of loyalty
(requiring that, in making a business decision, directors act in good faith and
in the honest belief that the action was taken in the best interest of the
corporation), or for certain other claims. The foregoing provisions of the
Certificate may reduce the likelihood of success of derivative litigation
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited The Sharper Image and its
stockholders. Furthermore, we intend to enter into
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indemnity agreements with present and future officers and directors for the
indemnification of and the advancing of expenses to such persons to the full
extent permitted by law.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
RIGHTS AGREEMENT
Under Delaware law, every corporation may create and issue rights entitling the
holders of such rights to purchase from the corporation shares of its capital
stock of any class or classes, subject to any provisions in its certificate of
incorporation. The price and terms of such shares must be stated in the
certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
We have entered into a stockholder rights agreement. As with most stockholders
rights agreements, the terms of our rights agreement are complex and not easily
summarized, particularly as they relate to the acquisition of our common stock
and to exercisability. This summary may not contain all of the information that
is important to you.
Our rights agreement provides that each share of our prospective common stock
outstanding will have one right to purchase one one-thousandth of a preferred
share attached to it. The purchase price per one one-thousandth of a preferred
share under the stockholder rights agreement is $47.00.
Initially, the rights under our rights agreement are attached to outstanding
certificates representing our common stock and no separate certificates
representing the rights will be distributed. The rights will separate from our
common stock and be represented by separate certificates on the day someone
acquires 15% of our common stock, or approximately 10 days after someone
commences a tender offer for 15% of our outstanding common stock.
After the rights separate from our common stock, certificates representing the
rights will be mailed to record holders of the common stock. Once distributed,
the rights certificates alone will represent the rights. All shares of our
common stock issued prior to the date the rights separate from the common stock
will be issued with the rights attached. The rights are not exercisable until
the date the rights separate from the common stock. The rights will expire on
June 22, 2009 unless earlier redeemed or exchanged by us.
If an acquiror obtains or has the rights to obtain 15% or more of our common
stock, then each right will entitle the holder to purchase a number of one
one-thousandths of a preferred share having a market value of twice the purchase
price of each right. Each right will entitle the holder to purchase a number of
shares of common stock of the acquiror having a then current market value of
twice the purchase price if an acquiror obtains 15% or more of our common stock
and any of the following occurs: -
- - we merge into another entity; -
- - an acquiring entity merges into us; or --
- - we sell more than 50% of our assets or earning power.
Under our rights agreement, any rights that are or were owned by an acquiror of
more than 15% of our outstanding common stock will be null and void.
Our rights agreement contains exchange provisions which provide that after an
acquiror obtains 15% or more, but less than 50% of our respective outstanding
common stock, our board of directors may, at its option, exchange all or part of
the then outstanding and exercisable rights for shares of our preferred stock.
In such an event, the per right exchange ratio is a formula set forth in our
stockholder rights plan.
Our board of directors may, at its option, redeem all of the outstanding rights
under our rights agreement prior to the earlier of (1) the time that an acquiror
obtains 15% or more of our outstanding common stock or (2) the
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<PAGE> 46
final expiration date of the rights agreement. The redemption price under our
rights agreement is $0.001 per right, subject to adjustment. The right to
exercise the rights will terminate upon the action of our board ordering the
redemption of the rights and the only right of the holders of the rights will be
to receive the redemption price.
Holders of rights will have no rights as our stockholders including the right to
vote or receive dividends, simply by virtue of holding the rights.
Our rights agreement provides that the provisions of the rights agreement may be
amended by the board of directors prior to the day someone acquires 15% of our
outstanding common stock or 10 days after someone commences a tender offer for
15% of our outstanding common stock without the approval of the holders of the
rights. However, after that date, the rights agreement may not be amended in any
manner which would adversely affect the interests of the holders of the rights,
excluding the interests of any acquiror.
Our rights agreement contains rights that have anti-takeover effects. The rights
may cause substantial dilution to a person or group that attempts to acquire us
without conditioning the offer on a substantial number of rights being acquired.
Accordingly, the existence of the rights may deter acquirors from making
takeover proposals or tender offers. However, the rights are not intended to
prevent a takeover, but rather are designed to enhance the ability of our board
to negotiate with an acquiror on behalf of all the stockholders. In addition,
the rights should not interfere with a proxy contest.
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UNDERWRITING
The underwriters named below, for whom J.P. Morgan Securities Inc. and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives, have severally agreed,
subject to the terms and conditions set forth in the underwriting agreement
among us and the underwriters, to purchase from us and we have agreed to sell to
the underwriters, the respective number of shares of common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
---------
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
J.P. Morgan Securities Inc..................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total....................................................... 3,000,000
=========
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The representatives of the underwriters have advised us that the several
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and may
offer the common stock to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such dealers may
reallow, a concession to other dealers not to exceed $ per share.
According to the terms of the underwriting agreement, we have granted to the
underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to 450,000 additional shares of common stock, on the same terms and
conditions as set forth on the cover page of this prospectus. If the
underwriters' over-allotment option is exercised in full, the total price to the
public, underwriting discounts and commissions, and proceeds to us will be
$ , $ and $ , respectively. The underwriters may
exercise such option solely to cover over-allotments, if any, made in connection
with the sale of shares of common stock offered by this prospectus.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in connection with those liabilities.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be approximately $ 489,298.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot this offering, creating a syndicate
short position. In addition, the underwriters may bid for, and purchase, shares
of common stock in the open market to cover syndicate shorts or to stabilize the
price of the common stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing shares of common stock in this
offering, if the syndicate repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares of
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Under the SEC's rules, market makers in the common stock who are also
underwriters or prospective underwriters in this offering may, subject to
certain limitations, make bids for purchases of shares of common stock as a
"passive market maker" during the period when Rule 101 of Regulation M would
otherwise prohibit such activity. Passive market making activity may take place
so long as no stabilizing bid for shares of common stock is in effect and the
following conditions are met:
- - The passive market maker's net daily purchases of the common stock may not
exceed the greater of (a) 30% of its average daily trading volume in the
common stock for the two full consecutive calendar months immediately
preceding the filing date of the registration statement relating to this
offering, which was May 25, 1999, or (b) 200 shares;
41
<PAGE> 48
- - The passive market maker may not effect transactions in, or display bids for,
the common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers; and
- - The passive market maker must identify its bid as a passive market making bid
and the bid must not exceed the amount the passive market maker could buy
under the limitations described above.
The Sharper Image, its officers and directors and certain stockholders have
agreed that during the period beginning on the date of this prospectus and
continuing to and including the date 90 days after the date of this prospectus
they will not (1) offer, pledge, announce the intention to sell, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
or (2) enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of common stock, other than
pursuant to employee stock option plans existing on the date of this prospectus
without the prior written consent of J.P. Morgan Securities Inc.
The common stock is traded on the Nasdaq National Market under the symbol
"SHRP."
42
<PAGE> 49
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for Sharper
Image by Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain
legal matters will be passed upon for the underwriters by Davis Polk & Wardwell,
New York, New York.
EXPERTS
The financial statements for The Sharper Image as of January 31, 1999 and 1998
and for each of the three years in the period ended January 31, 1999 included
and incorporated by reference in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are included
and incorporated by reference herein and have been so included and incorporated
by reference in reliance upon the reports.
With respect to the unaudited interim financial information for the periods
ended April 30, 1999 and 1998 which is included and incorporated herein by
reference, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as stated
in their reports included in the Company's Quarterly Reports on Form 10-Q for
the quarter ended April 30, 1999 and incorporated by reference herein, they did
not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their reports on such
information should be restricted in light of the limited nature of the review
procedures applied. Deloitte & Touche LLP are not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their reports on the
unaudited interim financial information because those reports are not "reports"
or a "part" of the registration statement prepared or certified by an accountant
within the meaning of Sections 7 and 11 of the aforementioned securities act.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-2 to register the shares of common stock being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the registration
statement. For further information about us and the shares of common stock
offered in this prospectus, you should refer to the registration statement and
its exhibits and our other SEC filings. You may read and copy any document we
file at the SEC's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's website at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus. We incorporate by reference the documents listed
below.
(a) Quarterly report on Form 10-Q for the quarter ended April 30,
1999.
(b) Annual Report on Form 10-K for the year ended January 31, 1999.
(c) The description of Sharper Image common stock contained in its
registration statement on Form 8-A filed May 6, 1987, including any
amendments or reports filed for the purpose of updating such descriptions.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Jeffrey P. Forgan
Senior Vice President and Chief Financial Officer
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
(415) 445-6000
You should rely only on the information incorporated by reference or provided in
this prospectus or the prospectus supplement. We have authorized no one to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.
43
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Statements of Operations.................................... F-3
Balance Sheets.............................................. F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sharper Image Corporation
San Francisco, California
We have audited the accompanying balance sheets of Sharper Image Corporation as
of January 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sharper Image Corporation as of January 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- ------------------------------------------
San Francisco, California
March 26, 1999
F-2
<PAGE> 52
SHARPER IMAGE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------- ---------------------------------------------
THREE MONTHS ENDED
APRIL 30, FISCAL YEAR ENDED JANUARY 31,
----------------------- ---------------------------------------------
1999 1998 1997
1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
---------- ---------- ------------- ------------- -------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales.................................. $ 45,621 $ 45,108 $ 272,721 $ 245,095 $ 236,844
Less: returns and allowances........... 5,137 5,870 31,214 29,902 29,074
---------- ---------- ---------- ---------- ----------
Net sales.............................. 40,484 39,238 241,507 215,193 207,770
List rental............................ 282 321 1,088 982 1,177
Licensing.............................. 93 192 519 640 1,298
---------- ---------- ---------- ---------- ----------
40,859 39,751 243,114 216,815 210,245
---------- ---------- ---------- ---------- ----------
Cost and Expenses:
Cost of products....................... 20,280 20,743 123,131 115,535 108,799
Buying and occupancy................... 6,748 6,337 26,153 23,904 23,967
Advertising and promotion.............. 4,234 4,512 27,396 22,795 25,736
General, selling, and administrative... 12,413 11,646 59,006 53,074 50,671
Provision for loss due to closure of
SPA Collection division.............. -- -- -- -- 8,000
---------- ---------- ---------- ---------- ----------
43,675 43,238 235,686 215,308 217,173
---------- ---------- ---------- ---------- ----------
Other Income (Expense):
Interest expense -- net................ (41) (165) (645) (564) (391)
Other -- net........................... 5 2 887 45 78
---------- ---------- ---------- ---------- ----------
(36) (163) 242 (519) (313)
---------- ---------- ---------- ---------- ----------
Earnings (Loss) before Income Tax
(Benefit)............................ (2,852) (3,650) 7,670 988 (7,241)
Income Tax (Benefit)................... (1,141) (1,460) 3,068 395 (2,896)
---------- ---------- ---------- ---------- ----------
Net Earnings (Loss).................... $ (1,711) $ (2,190) $ 4,602 $ 593 $ (4,345)
========== ========== ========== ========== ==========
Net Earnings (Loss) Per
Share -- Basic....................... $ (0.19) $ (0.26) $ 0.54 $ 0.07 $ (0.53)
========== ========== ========== ========== ==========
Net Earnings (Loss) Per
Share -- Diluted..................... $ (0.19) $ (0.26) $ 0.51 $ 0.07 $ (0.53)
========== ========== ========== ========== ==========
Weighted Average Number Of Shares --
Basic................................ 8,944,669 8,361,017 8,532,588 8,303,425 8,260,208
========== ========== ========== ========== ==========
Weighted Average Number Of Shares --
Diluted.............................. 8,944,669 8,361,017 9,072,832 8,537,032 8,260,208
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 53
SHARPER IMAGE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
------------------------------
APRIL 30, 1999 1998
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1999 (FISCAL 1998) (FISCAL 1997)
--------------------------------------------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents...................................... $ 539 $ 8,389 $ 3,501
Accounts receivable, net of allowance for doubtful
accounts of $804 and $508.............................. 5,458 6,787 8,189
Merchandise inventories................................... 34,870 32,598 34,534
Deferred catalog costs.................................... 3,354 2,454 4,982
Prepaid expenses and other................................ 7,076 5,605 3,429
------- ------- -------
Total Current Assets........................................ 51,297 55,833 54,635
Property and Equipment, Net................................. 22,241 22,513 20,842
Deferred Taxes and Other Assets............................. 3,698 3,699 3,185
------- ------- -------
Total Assets...................................... $77,236 $82,045 $78,662
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $14,451 $11,653 $18,439
Accrued expenses.......................................... 14,707 16,960 16,832
Deferred revenue.......................................... 7,020 7,268 6,784
Income taxes payable...................................... -- 3,314 --
Current portion of notes payable.......................... 471 635 947
------- ------- -------
Total Current Liabilities................................... 36,649 39,830 43,002
Notes Payable............................................... 2,477 2,513 3,299
Other Liabilities........................................... 3,018 3,053 3,205
Commitments and Contingencies............................... -- -- --
------- ------- -------
Total Liabilities........................................... 42,144 45,396 49,506
------- ------- -------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized, 3,000,000 shares: Issued and outstanding,
none
Common stock, $0.01 par value:
Authorized, 25,000,000 shares: Issued and outstanding,
8,964,048, 8,916,995 and 8,356,280 shares.............. 89 89 83
Additional paid-in capital................................ 12,743 12,589 9,704
Retained earnings......................................... 22,260 23,971 19,369
------- ------- -------
Total Stockholders' Equity.................................. 35,092 36,649 29,156
------- ------- -------
Total Liabilities and Stockholders' Equity........ $77,236 $82,045 $78,662
======= ======= =======
</TABLE>
See notes to financial statements.
F-4
<PAGE> 54
SHARPER IMAGE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
----------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
DOLLARS IN THOUSANDS SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------------------- --------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996..................... 8,250,980 $82 $ 9,555 $23,121 $32,758
Issuance of common stock for stock options
exercised, (net of income tax benefit)........ 15,960 1 35 -- 36
Net loss........................................ -- -- -- (4,345) (4,345)
--------- --- ------- ------- -------
Balance at January 31, 1997..................... 8,266,940 83 9,590 18,776 28,449
Issuance of common stock for stock options
exercised, (net of income tax benefit)........ 124,340 1 237 -- 238
Repurchase of common stock...................... (35,000) (1) (123) -- (124)
Net earnings.................................... -- -- -- 593 593
--------- --- ------- ------- -------
Balance at January 31, 1998..................... 8,356,280 83 9,704 19,369 29,156
Issuance of common stock for stock options and
warrants exercised (net of income tax
benefit)...................................... 560,715 6 2,885 -- 2,891
Net earnings.................................... -- -- -- 4,602 4,602
--------- --- ------- ------- -------
Balance at January 31, 1999..................... 8,916,995 89 12,589 23,971 36,649
Issuance of common stock for stock options (net
of income tax benefit) (unaudited)............ 47,053 -- 154 -- 154
Net loss (unaudited)............................ -- -- -- (1,711) (1,711)
--------- --- ------- ------- -------
Balance at April 30, 1999 (unaudited)........... 8,964,048 $89 $12,743 $22,260 $35,092
========= === ======= ======= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE> 55
SHARPER IMAGE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------------------------------------
THREE MONTHS ENDED FISCAL YEAR ENDED JANUARY 31,
APRIL 30, ---------------------------------------------
--------------------- 1999 1998 1997
1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
--------- --------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
Cash was Provided by (Used for) Operating
Activities:
Net earnings (loss)...................... $(1,711) $ (2,190) $ 4,602 $ 593 $ (4,345)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization......... 1,488 1,148 5,027 4,334 4,195
Deferred rent expense................. 31 18 78 151 142
Deferred income taxes................. (1,141) (1,460) (1,459) 1,614 (3,188)
Gain on sale of equipment............. -- -- (840) -- --
Change in operating assets and
liabilities:
Accounts receivable................... 1,329 1,317 1,402 (2,274) (1,479)
Merchandise inventories............... (2,272) 3,491 1,936 (7,169) (3,052)
Deferred catalog costs, prepaid
expenses and other.................. (1,229) (926) 1,298 (1,571) 54
Accounts payable and accrued
expenses............................ 545 (10,862) (5,822) 838 11,429
Deferred revenue and other
liabilities......................... (3,628) (354) 3,568 1,308 (508)
------- -------- -------- -------- --------
Cash Provided by (Used for) Operating
Activities............................... (6,588) (9,818) 9,790 (2,176) 3,248
------- -------- -------- -------- --------
Cash Was Provided by (Used for) Investing
Activities:
Property and equipment expenditures... (1,216) (603) (8,431) (4,437) (6,579)
Proceeds from sale of equipment....... -- -- 1,736 53 98
------- -------- -------- -------- --------
Cash Used for Investing Activities......... (1,216) (603) (6,695) (4,384) (6,481)
------- -------- -------- -------- --------
Cash Was Provided by (Used for) Financing
Activities:
Issuance of common stock for warrants
and stock options exercised, (net of
stock repurchases).................. 154 22 2,891 114 36
Proceeds from notes payable and
revolving credit facility........... -- 12,166 46,921 27,761 25,665
Principal payments on notes payable
and revolving credit facility....... (200) (4,785) (48,019) (28,687) (24,071)
------- -------- -------- -------- --------
Cash Provided by (Used for) Financing
Activities:.............................. (46) 7,403 1,793 (812) 1,630
------- -------- -------- -------- --------
Net Increase (Decrease) in Cash and
Equivalents.............................. (7,850) (3,018) 4,888 (7,372) (1,603)
Cash and Equivalents at Beginning of
Period................................... 8,389 3,501 3,501 10,873 12,476
------- -------- -------- -------- --------
Cash and Equivalents at End of Period...... $ 539 $ 483 $ 8,389 $ 3,501 $ 10,873
======= ======== ======== ======== ========
Supplemental Disclosure of Cash Paid for:
Interest................................. $ 101 $ 162 $ 813 $ 771 $ 700
Income Taxes............................. $ 3,418 $ -- $ -- $ 409 $ 459
</TABLE>
See notes to financial statements.
F-6
<PAGE> 56
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading specialty retailer which introduces and sells quality,
innovative, and entertaining products. These products are sold through its
retail stores, catalogs, Internet, and other marketing channels throughout the
United States. The Company also has stores and catalog operations
internationally through licensees. Additional revenue is derived from rental of
the Company's mailing list and from licensing activities relating to the
Company's trade name.
Revenue Recognition: Catalog sales are recorded when merchandise is shipped and
the Company provides for allowance for returns based upon historical returns
rate. Deferred revenue represents merchandise certificates outstanding and
unfilled cash orders at the end of the fiscal period. Mailing list rental
revenue is recognized when the list is fulfilled.
Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments: The carrying value of cash, accounts
receivable, accounts payable and notes payable approximates the estimated fair
value.
Merchandise Inventories: Merchandise inventories are stated at lower of cost
(first-in, first-out method) or market.
Cash and Equivalents: Cash and equivalents represent cash and short-term, highly
liquid investments with original maturities of three months or less.
Deferred Catalog and Advertising Costs: Direct costs incurred for the production
and distribution of catalogs are capitalized. Capitalized catalog costs are
amortized, once the catalog is mailed, over the expected sales period which is
generally three months. Other advertising costs are expensed as incurred and
amounted to $1,418,000 (unaudited) for the quarter ended April 30, 1999 and
$4,470,000, $3,580,000, and $5,306,000, for the fiscal years ended January 31,
1999, 1998, and 1997.
Start-Up Activities: All start-up and preopening costs that are not otherwise
capitalizable as long-lived assets are expensed as incurred by the Company.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the various assets which range from three to ten years for office furniture and
equipment and transportation equipment, and 40 years for the building. Leasehold
improvements are amortized using the straight-line method over the lesser of
their estimated useful lives or the term of the applicable lease which ranges
from 7 to 18 years.
The Company manufactures its own proprietary products for sale through its
stores and catalogs. Costs incurred for tooling, dies and package design are
deferred and amortized over the estimated life of these products, which is
generally two years. At April 30, 1999, January 31, 1999 and 1998, capitalized
costs included in property and equipment, net of related amortization, were
$2,206,000 (unaudited), $2,239,000 and $1,566,000, respectively.
The Company reviews its long-lived assets, including identifiable intangible
assets, whenever events or changes indicate the carrying amount of such assets
may not be recoverable. The Company's policy is to review the recoverability of
all assets, at a minimum, on an annual basis. Based on the Company's review at
January 31, 1999, no material adjustment was made to long-lived assets.
Income Taxes: Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events then known to management that
have been recognized in the Company's consolidated financial statements or tax
returns. In estimating future tax consequences, all expected future events then
known to management are considered other than changes in the tax law or rates.
F-7
<PAGE> 57
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.
Earnings Per Share: Basic earnings per share is computed as net earnings divided
by the weighted average number of common shares outstanding during each quarter
of 8,944,669 (unaudited) and 8,361,017 (unaudited) and each year of 8,532,588,
and 8,303,425, and 8,260,208, for the quarters ended April 30, 1999 and 1998 and
fiscal years ended January 31, 1999, 1998, and 1997. Diluted earnings per share
reflects the potential dilution that could occur from common shares issuable
through stock options. Weighted average number of common shares outstanding was
adjusted for 540,244 and 233,607 incremental shares assumed issued on the
exercise of common stock during the fiscal years ended January 31, 1999 and
1998. Stock options were excluded from the computation of diluted loss per share
for quarters ended April 30, 1999 and 1998 and for the year ended January 31,
1997, as the effect would be anti-dilutive.
Options for which the exercise price was greater than the average market price
of common stock for the period were not included in the computation of diluted
earnings per share. The number of such options for which the exercise price was
greater than the average market price of $6.66 and $3.56 for the fiscal years
ended January 31, 1999 and 1998, was 14,000 and 97,500.
Comprehensive Income: In 1998, the Company implemented Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
Comprehensive income consists of net earnings or loss for the current period and
other comprehensive income (income, expenses, gains, and losses that currently
bypass the income statement and are reported directly as a separate component of
equity). Comprehensive income does not differ from net earnings (loss) for the
Company for the years ended January 31, 1999, 1998, and 1997.
New Accounting Standards: In June 1998, the FASB issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value. The
FASB has recently issued an exposure draft that would extend the required
implementation to fiscal years beginning after June 15, 2000. The Company
believes that this statement will not have a material effect on its financial
statements.
Reclassification: Certain reclassifications have been made to prior years'
financial statements in order to conform with the classifications of the January
31, 1999 financial statements.
Interim Financial Statements (unaudited): In the opinion of management the
accompanying unaudited interim financial statements of the Company contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of April 30, 1999, and
the results of its operations and its cash flows for the three months ended
April 30, 1999 and 1998. A substantial portion of the Company's total revenues
and all or most of the Company's net earnings occur in the fourth quarter ending
January 31. Therefore, the results of operations and cash flows for the three
months ended April 30, 1999 are not necessarily indicative of the results of
operations or cash flows which may be reported for the year ended January 31,
2000.
F-8
<PAGE> 58
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
------------------------------
FISCAL YEAR ENDED JANUARY 31,
------------------------------
1999 1998
(FISCAL 1998) (FISCAL 1997)
------------- -------------
<S> <C> <C>
DOLLARS IN THOUSANDS
Leasehold improvements.................................... $25,419 $24,071
Office furniture and equipment............................ 35,466 30,313
Transportation............................................ 16 2,439
Land...................................................... 53 53
Building.................................................. 2,874 2,874
------- -------
63,828 59,750
Less accumulated depreciation and amortization............ 41,315 38,908
------- -------
$22,513 $20,842
======= =======
</TABLE>
NOTE C -- OTHER ASSETS
The Company has an agreement under which it will advance the premiums on a
split-dollar life insurance policy for its Chairman of the Board, Founder, and
Chief Executive Officer. The Company has an interest in the insurance benefits
equal to the amount of the premiums advanced. The amount receivable for premiums
advanced as of January 31, 1999 and 1998 was $766,000 and $590,000,
respectively.
NOTE D -- REVOLVING LOAN AND NOTES PAYABLE
The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc., which expires September 2003. The credit facility has been amended
on several occasions and, as of January 31, 1999, the agreement allows Company
borrowings and letters of credit up to a maximum of $30 million for the period
from October 1, 1999 through December 31, 1999, and up to $20 million for other
times of the year based on inventory levels. The credit facility is secured by
the Company's inventory, accounts receivable, general intangibles and certain
other assets. Borrowings under this facility bear interest at either prime plus
0.25% per annum or at LIBOR plus 2.25% per annum based on financial performance.
The credit facility contains certain financial covenants pertaining to interest
coverage ratio and net worth and contains limitations on operating leases, other
borrowings, dividend payments and stock repurchases. For the fiscal years ended
January 31, 1999 and 1998, the Company was in compliance with all covenants.
The credit facility allows for seasonal borrowings as follows:
<TABLE>
<CAPTION>
OCTOBER 1 THROUGH DECEMBER 31,
- ------------------------------
<S> <C>
2000 $31 million
2001 $32 million
2002 $33 million
</TABLE>
At January 31, 1999 and 1998, the Company had no amounts outstanding on its
revolving loan credit facility. Letter of credit commitments as of April 30,
1999, January 31, 1999 and 1998 were $2,063,000, $4,108,000 and $2,321,000,
respectively.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
(8.25% at January 31,1999) per annum or at LIBOR plus 2.50% per annum based on
financial performance. Each Term Loan is to be repaid in 36 equal monthly
principal installments. Notes payable included a Term Loan which bears interest
at a variable rate of prime plus 0.50%, (8.25% at January 31, 1999) provides for
monthly principal payments of $55,555 plus the related interest payment, and
matures in
F-9
<PAGE> 59
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 1999. At January 31, 1999 and 1998, the balance of the Term Loan was
$500,000 and $1,167,000, respectively.
Notes payable included a mortgage loan collateralized by the Company's
distribution center. This note bears interest at a fixed rate of 8.40%, provides
for monthly payments of principal and interest in the amount of $29,367, and
matures in January 2011. At January 31, 1999 and 1998, the balance of this note
was $2,648,000 and $2,772,000, respectively.
At January 31, 1998, notes payable also included a mortgage loan collateralized
by equipment. This note was paid off in fiscal 1998 with the proceeds from sale
of the collateralized equipment.
Future minimum principal payments on notes payable at January 31, 1999, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31,
------------------------------
DOLLARS IN THOUSANDS
<S> <C>
2000............................................... $ 635
2001............................................... 147
2002............................................... 160
2003............................................... 173
2004............................................... 189
Later years........................................ 1,844
------
Total notes payable.............................. $3,148
======
</TABLE>
NOTE E -- INCOME TAXES
<TABLE>
<CAPTION>
---------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------
1999 1998 1997
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
------------- ------------- -------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
Currently payable (refundable):
Federal............................................... $ 3,848 $(1,036) $ 248
State................................................. 679 (183) 44
------- ------- -------
4,527 (1,219) 292
Deferred:
Federal............................................... (1,240) 1,372 (2,710)
State................................................. (219) 242 (478)
------- ------- -------
(1,459) 1,614 (3,188)
------- ------- -------
$ 3,068 $ 395 $(2,896)
======= ======= =======
</TABLE>
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------
1999 1998 1997
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
------------- ------------- -------------
<S> <C> <C> <C>
Federal tax rate........................................ 34.0% 34.0% 34.0%
State income tax, less federal benefit.................. 6.0 6.0 6.0
---- ---- ----
Effective tax rate...................................... 40.0% 40.0% 40.0%
==== ==== ====
</TABLE>
F-10
<PAGE> 60
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred taxes result from differences in the recognition of expense for income
tax and financial reporting purposes. Temporary differences which give rise to
deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
-----------------------------
FISCAL YEAR ENDED
JANUARY 31,
-----------------------------
1999 1998
(FISCAL 1998) (FISCAL 1997)
------------- -------------
<S> <C> <C>
DOLLARS IN THOUSANDS
Current:
Nondeductible reserves.................................... $4,123 $3,809
Deferred catalog costs.................................... (981) (1,993)
State taxes............................................... (755) (569)
------ ------
Current -- net.............................................. 2,387 1,247
------ ------
Noncurrent:
Deferred rent............................................. 1,198 1,429
Depreciation.............................................. 2,967 2,356
Deductible software costs................................. (1,127) (1,050)
Other -- net.............................................. (173) (189)
------ ------
Noncurrent -- net........................................... 2,865 2,546
------ ------
Total............................................. $5,252 $3,793
====== ======
</TABLE>
NOTE F -- LEASES
The Company leases its offices, retail facilities, and equipment under operating
leases for terms expiring at various dates through 2008. Under the terms of
certain of the leases, rents are adjusted annually for changes in the consumer
price index and increases in property taxes. The aggregate minimum annual lease
payments under leases in effect at January 31, 1999, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31,
------------------------------
DOLLARS IN THOUSANDS
<S> <C>
2000.............................................. $14,875
2001.............................................. 13,392
2002.............................................. 9,625
2003.............................................. 9,411
2004.............................................. 8,891
Later years....................................... 19,535
-------
Total minimum lease commitments......... $75,729
=======
</TABLE>
Many of the Company's leases contain predetermined fixed escalations of the
minimum rentals during the initial term. For these leases, the Company has
recognized the related rental expense on a straight-line basis and has recorded
the difference between the expense charged to income and amounts payable under
the leases as deferred rent which is included in Other Liabilities.
Some store leases contain renewal options for periods ranging up to five years.
Most leases also provide for payment of operating expenses, real estate taxes,
and for additional rent based on a percentage of sales.
F-11
<PAGE> 61
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Net rental expense for all operating leases was as follows:
<TABLE>
<CAPTION>
---------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------
1999 1998 1997
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
DOLLARS IN THOUSANDS ------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals......................................... $15,273 $13,812 $13,259
Percentage rentals and other charges.................... 5,914 5,559 5,546
------- ------- -------
$21,187 $19,371 $18,805
======= ======= =======
</TABLE>
NOTE G -- STOCKHOLDERS' EQUITY
Under the Company's stock repurchase program, the Company is authorized by its
Board of Directors to repurchase up to $1,600,000 of common stock. Through April
30, 1999, the Company has repurchased a total of 186,100 shares at an average
price of $5.95 per share, including 35,000 shares in fiscal 1997 for $124,000.
Under the Company's 1985 Stock Option Plan, as amended, non-qualified options to
purchase common stock are granted to officers, key employees and consultants, up
to an aggregate 2,405,000 shares. Options generally vest over a four to six year
period from the date of the grant and are priced at 100% of the fair market
value at the date of the grant. The Stock Option Plan limits the maximum number
of shares any one individual may be granted per fiscal year, and allows
individuals owning more than 25% of the Company's common stock to receive stock
options. Non-employee members of the Board are ineligible to receive stock
option grants under this plan.
The Company also has the 1994 Non-Employee Directors Stock Option Plan, as
approved by stockholders, to allow for stock option grants of common stock to
the non-employee members of the Board of Directors, up to an aggregate 50,000
shares. Options will be immediately exercisable, vest over one year of Board
service from the date of the grant, and are priced at 100% of the fair market
value at the date of the grant. Any shares purchased under the option plan 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.
At January 31, 1999, the Company had reserved 403,500 shares and 19,000 shares,
under the 1985 Stock Option Plan and the 1994 Non-Employee Directors Stock
Option Plan, respectively, for the granting of additional stock options.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note A, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
requires the disclosure of pro forma net earnings (loss) and earnings (loss) per
share had the Company adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
five years from date of grant; stock volatility, 51% in both fiscal 1998 and
1997, and 45% in fiscal 1996; risk-free interest rates, 5.12% in fiscal 1998,
6.10% in fiscal 1997, and 6.21% in fiscal 1996; and no dividends during the
expected term.
The Company's calculations are based on a single option valuation approach, and
forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1998, fiscal 1997, and fiscal 1996 awards had been amortized to expense
over the vesting period of the awards, pro forma net earnings (loss) would have
been
F-12
<PAGE> 62
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$4,338,715 ($0.51 earnings per share -- basic and $0.48 earnings per
share -- diluted) in fiscal 1998, $383,000 ($0.05 earnings per share -- basic
and $0.04 earnings per share -- diluted) in fiscal 1997, and $(4,576,000) ($0.55
loss per share -- basic and diluted) in fiscal 1996. However, the impact of
outstanding non-vested stock options granted prior to fiscal 1995 has been
excluded from the pro forma calculation; accordingly, the fiscal 1998, fiscal
1997, and fiscal 1996 pro forma adjustments are not necessarily indicative of
future period pro forma adjustments, when the calculation will apply to all
future applicable stock options.
The following table reflects the activity under these plans:
<TABLE>
<CAPTION>
-----------------------------
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at January 31, 1996................................. 1,178,270 $4.03
Granted (weighted average fair value of $1.70).............. 951,800 3.54
Exercised................................................... (15,960) 4.39
Cancelled................................................... (609,610) 5.58
---------
Balance at January 31, 1997................................. 1,504,500 3.13
Granted (weighted average fair value of $1.81).............. 129,300 3.24
Exercised................................................... (124,340) 1.92
Cancelled................................................... (71,260) 3.83
---------
Balance at January 31, 1998................................. 1,438,200 3.21
Granted (weighted average fair value of $2.07).............. 463,000 4.05
Exercised................................................... (410,715) 2.39
Cancelled................................................... (345,380) 3.48
---------
Balance at January 31, 1999................................. 1,145,105 $3.76
=========
Exercisable at January 31, 1997............................. 624,000 $2.49
=========
Exercisable at January 31, 1998............................. 591,000 $2.73
=========
Exercisable at January 31, 1999............................. 379,000 $3.58
=========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------ ------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OF OPTIONS REMAINING CONTRACTUAL WEIGHTED AVERAGE OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.16 - $1.99 9,995 2.9 $1.88 10,000 $1.88
2.00 - 3.99 976,470 8.5 3.58 326,000 3.40
4.00 - 7.94 158,640 8.9 4.99 43,000 5.33
--------- -------
$1.16 - $7.94 1,145,105 8.5 $3.76 379,000 $3.58
========= =======
</TABLE>
NOTE H -- 401K SAVINGS PLAN
The Company maintains a defined contribution, 401k Savings Plan, covering all
employees who have completed one year of service with at least 1,000 hours and
who are at least 21 years of age. The Company makes employer matching
contributions at its discretion. Company contributions amounted to $73,000,
$77,000, and $81,000 for the fiscal years ended January 31, 1999, 1998, and
1997, respectively.
NOTE I -- PROVISION FOR LOSS DUE TO CLOSURE OF SPA COLLECTION DIVISION
The Company critically evaluates the results and long-term potential of its
current and test business concepts in order to determine which will generate the
greatest return on its investments. As part of this process, in January 1997 the
Company decided to close the unprofitable SPA Collection division.
During the fourth quarter of fiscal 1996, the Company incurred a one-time charge
related to the closure of the SPA Collection division of $8,000,000 ($4,800,000
net of the tax benefit, or 56 cents loss per share). The one-
F-13
<PAGE> 63
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
time charge primarily related to the lease commitments and the net book value of
fixed assets related to the SPA Collection division. The liability related to
this one-time charge at January 31, 1999, and January 31, 1998, in the amount of
$200,000 and $3,822,000, respectively, was included in accrued expenses.
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company is party to various legal proceedings arising from normal business
activities. Management believes that the resolution of these matters will not
have an adverse material effect on the Company's financial position and results
of operations.
NOTE K -- SEGMENT INFORMATION
The Company classifies its business interests into two reportable segments:
retail stores and catalog. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies (Note A).
The Company evaluates performance and allocates resources based on operating
contribution, which excludes unallocated corporate general and administrative
costs and income tax expense or benefit. The Company's reportable segments are
strategic business units that offer the same products and utilize common
merchandising, distribution, and marketing functions, as well as common
information systems and corporate administration. The Company does not have
intersegment sales, but the segments are managed separately because each segment
has different channels for selling the products.
F-14
<PAGE> 64
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Financial information for the Company's business segments is as follows:
<TABLE>
<CAPTION>
------------------------ ---------------------------------------------
QUARTER ENDED APRIL 30, FISCAL YEAR ENDED JANUARY 31,
------------------------ ---------------------------------------------
1999 1998 1997
DOLLARS IN THOUSANDS 1999 1998 (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
-------------------- ---------- ---------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Stores............................... $$29,240 $26,502 $162,371 $151,589 $149,321
Catalog.............................. 8,373 11,944 70,750 58,772 53,577
Other................................ 3,246 1,305 9,993 6,454 7,347
------- ------- -------- -------- --------
Total Revenues..................... $40,859 $39,751 $243,114 $216,815 $210,245
======= ======= ======== ======== ========
Operating Contributions:
Stores............................... $ 714 $ (445) $ 19,405 $ 15,170 $ 7,634
Catalog.............................. 870 1,351 8,814 3,059 7,411
Unallocated.......................... (4,436) (4,556) (20,549) (17,241) (22,286)
------- ------- -------- -------- --------
Earnings (Loss) Before Income Tax
(Benefit).......................... $(2,852) $(3,650) $ 7,670 $ 988 $ (7,241)
======= ======= ======== ======== ========
Depreciation and Amortization:
Stores............................... $ 2,812 $ 2,516 $ 2,692
Catalog.............................. -- -- --
Unallocated.......................... 2,215 1,818 1,503
-------- -------- --------
Total Depreciation and
Amortization.................... $ 5,027 $ 4,334 $ 4,195
======== ======== ========
Asset Expenditures:
Stores............................... $ 5,988 $ 2,722 $ 4,104
Catalog.............................. -- -- --
Unallocated.......................... 2,443 1,715 2,475
-------- -------- --------
Total Asset Expenditures........... $ 8,431 $ 4,437 $ 6,579
======== ======== ========
Assets:
Stores............................... $ 13,673 $ 11,564 $ 14,434
Catalog.............................. -- -- --
Unallocated.......................... 68,372 67,098 64,370
-------- -------- --------
Total Assets....................... $ 82,045 $ 78,662 $ 78,804
======== ======== ========
</TABLE>
F-15
<PAGE> 65
SHARPER IMAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE L -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
FISCAL YEAR ENDED JANUARY 31, 1999 1998 1998 1998 1999
---------------------------------- --------- -------- ----------- -----------
DOLLARS IN THOUSAND EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Revenues................................................... $39,751 $49,532 $42,955 $110,876
Expenses
Cost of products......................................... 20,743 25,780 22,404 54,204
Buying and occupancy..................................... 6,337 6,261 6,397 7,158
Advertising and promotion................................ 4,512 6,904 4,906 11,074
General, selling and administrative...................... 11,646 12,383 12,285 22,692
Other income (expense)..................................... (163) (176) 603 (22)
Earnings (loss) before income tax (benefit)................ (3,650) (1,972) (2,434) 15,726
Income Tax (benefit)....................................... (1,460) (789) (974) 6,291
Net earnings (loss)........................................ $(2,190) $(1,183) $(1,460) $ 9,435
Net earnings (loss) per share --
Basic(1)................................................. $ (0.26) $ (0.14) $ (0.17) $ 1.08
Diluted(2)............................................... $ (0.26) $ (0.14) $ (0.17) $ 0.98
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
FISCAL YEAR ENDED JANUARY 31, 1998 1997 1997 1997 1998
---------------------------------- --------- -------- ----------- -----------
DOLLARS IN THOUSAND EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Revenues................................................... $36,273 $43,340 $41,106 $96,096
Expenses
Cost of products......................................... 19,563 23,472 22,115 50,385
Buying and occupancy..................................... 5,707 5,783 5,946 6,468
Advertising and promotion................................ 3,546 4,715 4,036 10,498
General, selling and administrative...................... 11,021 11,739 11,429 18,885
Other income (expense)..................................... (45) (118) (198) (158)
Earnings (loss) before income tax (benefit)................ (3,609) (2,487) (2,618) 9,702
Income Tax (benefit)....................................... (1,443) (995) (1,047) 3,880
Net earnings (loss)........................................ $(2,166) $(1,492) $(1,571) $ 5,822
Net earnings (loss) per share --
Basic(1)................................................. $ (0.26) $ (0.18) $ (0.19) $ 0.70
Diluted (2).............................................. $ (0.26) $ (0.18) $ (0.19) $ 0.67
</TABLE>
- -------------------------
(1) Basic earnings per share is calculated for interim periods including the
effect of stock options exercised in prior interim periods. Basic earnings
per share for the fiscal year is calculated using weighted shares
outstanding based on the date stock options were exercised. Therefore, basic
earnings per share for the cumulative four quarters may not equal fiscal
year basic earnings per share.
(2) Diluted net earnings per share for the fiscal year and for quarters with net
earnings are computed based on weighted average common shares outstanding
which include common stock equivalents (stock options). Net loss per share
for quarters with net losses is computed based solely on weighted average
common shares outstanding. Therefore, the net earnings (loss) per share for
each quarter do not sum up to the earnings per share for the full fiscal
year.
F-16
<PAGE> 66
[INSIDE BACK COVER PAGE OF PROSPECTUS]
[PHOTOGRAPHS OF SAMPLE PRODUCTS WITH PRODUCT DESCRIPTIONS]
<PAGE> 67
SHARPER IMAGE LOGO
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Registrant
in connection with the sale of common stock being registered. All amounts are
estimates except the registration fee, the NASD fee and the Nasdaq National
Market.
<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
--------
<S> <C>
Registration fee............................................ $ 9,412
NASD filing fee............................................. 3,886
Nasdaq National Market fee.................................. 17,500
Printing and engraving...................................... 85,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 70,000
Transfer agent fees and expenses............................ 3,500
D&O Insurance............................................... 100,000
Miscellaneous............................................... 50,000
--------
Total............................................. $489,298
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
The Company's Certificate of Incorporation provides that the Company shall
indemnify its directors to the fullest extent permitted by law either now or
hereafter. Article VII, Section 6 of the Bylaws of the Company provides for
indemnification of the officers and directors of the Company to the fullest
extent permitted by applicable law. The Company has also entered into an
agreement with each of its directors and certain of its officers, a form of
which is attached as Exhibit 10.9 hereto, wherein it has agreed to indemnify
each of them to the fullest extent permitted by law. Reference is also made to
Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Company against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
II-1
<PAGE> 69
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock.
4.01 Form of Rights Certificate.
4.02 Form of Rights Agreement dated as of June 7, 1999.
5.01 Opinion of Brobeck Phleger & Harrison LLP.
10.1 Amended and Restated Stock Option Plan (Incorporated by
reference to appendix to Form 14A for the fiscal year ended
January 31, 1999).
10.2 1994 Non-Employee Director Stock Option Plan dated October
7, 1994, as amended (Incorporated by reference to appendix
to Form 14A for the fiscal year ended January 31, 1999).
10.3 Cash or Deferred Profit Sharing Plan, as amended
(Incorporated by reference to Exhibit 10.2 to Registration
Statement on Form S-1 (Registration No. 33-12755)).
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3
(Incorporated by reference to Exhibit 10.15 to Form 10-K for
fiscal year ended January 31, 1988).
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4
(Incorporated by reference to Exhibit 10.16 to Form 10-K for
fiscal year ended January 31, 1988).
10.6 Form of Stock Purchase Agreement dated July 26, 1985
relating to shares of Common Stock purchased pursuant to
exercise of employee stock options (Incorporated by
reference to Exhibit 10.3 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.7 Form of Stock Purchase Agreement dated December 13, 1985
relating to shares of Common Stock purchased pursuant to
exercise of employee stock options (Incorporated by
reference to Exhibit 10.4 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.8 Form of Stock Purchase Agreement dated November 10, 1986
relating to shares of Common Stock purchased pursuant to
exercise of employee stock options (Incorporated by
reference to Exhibit 10.5 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.9 Form of Director Indemnification Agreement (Incorporated by
reference to Exhibit 10.42 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.10 Financing Agreement dated September 21, 1994 between the
Company and CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.12 to Form 10-Q for the quarter
ended October 31, 1994).
10.11 The Sharper Image 401(k) Savings Plan (Incorporated by
reference to Exhibit 10.21 to Registration Statement on Form
S-8 (Registration No. 33-80504) dated June 21, 1994)).
10.12 Chief Executive Officer Compensation Plan dated February 3,
1995 (Incorporated by reference to Exhibit 10.24 to Form
10-K for the fiscal year ended January 31, 1995).
10.13 Annual Report for the Sharper Image 401(k) Savings Plan
(Incorporated by reference to Form 11-K (Registration No.
33-80504) for the plan year ended December 31, 1995).
10.14 Split-Dollar Agreement between the Company and Mr. R.
Thalheimer, its Chief Executive Officer dated October 13,
1995, effective as of May 17, 1995 (Incorporated by
reference to Exhibit 10.17 to Form 10-K for the fiscal year
ended January 31, 1996).
10.15 Assignments of Life Insurance Policy as Collateral, both
dated October 13, 1995, effective May 17, 1995 (Incorporated
by reference to Exhibit 10.18 to Form 10-K for the fiscal
year ended January 31, 1996).
10.16 Amendment to the Financing Agreement dated May 15, 1996
between the Company and The CIT Group/Business Credit Inc
(Incorporated by reference to Exhibit 10.19 to the Form 10-Q
for the quarter ended April 30, 1996).
10.17 Warrant to Purchase Common Stock Agreement dated May 15,
1996 between the Company and The CIT Group/Business Credit
Inc (Incorporated by reference to Exhibit 10.20 to the Form
10-Q for the quarter ended April 30, 1996).
10.18 CAPEX Term Loan Promissory Note dated October 15, 1996
between the Company and The CIT Group/Business Credit Inc
(Incorporated by reference to Exhibit 10.21 to the Form 10-Q
for the quarter ended October 31, 1996).
</TABLE>
II-2
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S>
10.19 Employment Agreement between the Company and Mr. Barry
Gilbert, its Vice Chairman and Chief Operating Officer dated
and effective December 2, 1996 (Incorporated by Reference to
Exhibit 10.20 to the Form 10-K for the year ended January
31, 1997).
10.20 Amendment to the Financing Agreement dated February 13, 1997
between the Company and The CIT Group/Business Credit Inc
(Incorporated by Reference to Exhibit 10.21 to the Form 10-K
for the year ended January 31, 1997).
10.21 Warrant to Purchase Common Stock Agreement dated February
13, 1997 between the Company and The CIT Group/Business
Credit Inc (Incorporated by Reference to Exhibit 10.22 to
the Form 10-K for the year ended January 31, 1997).
10.22 Amendment to the Financing Agreement dated March 24, 1997
between the Company and The CIT Group/Business Credit Inc
(Incorporated by Reference to Exhibit 10.23 to the Form 10-K
for the year ended January 31, 1997).
10.23 Warrant to Purchase Common Stock Agreement dated April 6,
1998 between the Company and The CIT Group/Business Credit
Inc (Incorporated by Reference to Exhibit 10.24 to the Form
10-K for the year ended January 31, 1997).
10.24 Amendment to the Financing Agreement dated April 6, 1998
between the Company and The CIT Group/Business Credit Inc
(Incorporated by Reference to Exhibit 10.25 to the Form 10-K
for the year ended January 31, 1997).
10.25 Amendment to Employment Agreement between the Company and
Mr. Barry Gilbert, its Vice Chairman and Chief Operating
Officer dated and effective November 30, 1998 (Incorporated
by Reference to Exhibit 10.26 to the Form 10-K for the year
ended January 31, 1998).
11.1 Statement Re: Computation of Earnings per Share.
(Incorporated by Reference to Exhibit 11.1 to the Form 10-K
for the year ended January 31, 1998).
13.1 1998 Annual Report to Stockholders (Incorporated by
Reference to Exhibit 13.1 to the Form 10-K for the year
ended January 31, 1999).
15.1 Letter re Unaudited Interim Financial Statements
23.1 Independent Auditors' Consent.
23.2 Consent of Brobeck, Phleger & Harrison LLP, Reference is
made to exhibit 5.01.
23.3 Consent of Director Nominee.
</TABLE>
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(2) The undersigned Registrant hereby undertakes:
(a) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of the registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared
effective.
(b) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Pre-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, state of
California, on June 16, 1999.
SHARPER IMAGE CORPORATION
By: /s/ RICHARD J. THALHEIMER
--------------------------------------
Richard J. Thalheimer
Founder, Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Pre-Effective Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD J. THALHEIMER Founder, Chairman and Chief June 16, 1999
- ----------------------------------------------------------- Executive Officer (Principal
Richard J. Thalheimer Executive Officer)
/s/ TRACY Y. WAN President, Chief Operating Officer June 16, 1999
- ----------------------------------------------------------- and Corporate Secretary
Tracy Y. Wan
/s/ JEFFREY P. FORGAN Senior Vice President, Chief June 16, 1999
- ----------------------------------------------------------- Financial Officer (Principal
Jeffrey P. Forgan Financial and Accounting Officer)
* Director June 16, 1999
- -----------------------------------------------------------
Alan Thalheimer
* Director June 16, 1999
- -----------------------------------------------------------
Gerald Napier
* Director June 16, 1999
- -----------------------------------------------------------
Morton David
/s/ GEORGE JAMES Director June 16, 1999
- -----------------------------------------------------------
George James
*By: /s/ TRACY Y. WAN June 16, 1999
------------------------------------------------------
Tracy Y. Wan
Power-of-Attorney
</TABLE>
II-4
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
1.01 Form of Underwriting Agreement.
3.01 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock.
4.01 Form of Rights Certificate.
4.02 Form of Rights Agreement dated as of June 7, 1999.
5.01 Opinion of Brobeck Phleger & Harrison LLP.
10.1 Amended and Restated Stock Option Plan (Incorporated by
reference to appendix to Form 14A for the fiscal year ended
January 31, 1999).
10.2 1994 Non-Employee Director Stock Option Plan dated October
7, 1994, as amended (Incorporated by reference to appendix
to Form 14A for the fiscal year ended January 31, 1999).
10.3 Cash or Deferred Profit Sharing Plan, as amended
(Incorporated by reference to Exhibit 10.2 to Registration
Statement on Form S-1 (Registration No. 33-12755)).
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3
(Incorporated by reference to Exhibit 10.15 to Form 10-K for
fiscal year ended January 31, 1988).
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4
(Incorporated by reference to Exhibit 10.16 to Form 10-K for
fiscal year ended January 31, 1988).
10.6 Form of Stock Purchase Agreement dated July 26, 1985
relating to shares of Common Stock purchased pursuant to
exercise of employee stock options (Incorporated by
reference to Exhibit 10.3 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.7 Form of Stock Purchase Agreement dated December 13, 1985
relating to shares of Common Stock purchased pursuant to
exercise of employee stock options (Incorporated by
reference to Exhibit 10.4 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.8 Form of Stock Purchase Agreement dated November 10, 1986
relating to shares of Common Stock purchased pursuant to
exercise of employee stock options (Incorporated by
reference to Exhibit 10.5 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.9 Form of Director Indemnification Agreement (Incorporated by
reference to Exhibit 10.42 to Registration Statement on Form
S-1 (Registration No. 33-12755)).
10.10 Financing Agreement dated September 21, 1994 between the
Company and CIT Group/ Business Credit Inc. (Incorporated by
reference to Exhibit 10.12 to Form 10-Q for the quarter
ended October 31, 1994).
10.11 The Sharper Image 401(k) Savings Plan (Incorporated by
reference to Exhibit 10.21 to Registration Statement on Form
S-8 (Registration No. 33-80504) dated June 21, 1994)).
10.12 Chief Executive Officer Compensation Plan dated February 3,
1995 (Incorporated by reference to Exhibit 10.24 to Form
10-K for the fiscal year ended January 31, 1995).
10.13 Annual Report for the Sharper Image 401(k) Savings Plan
(Incorporated by reference to Form 11-K (Registration No.
33-80504) for the plan year ended December 31, 1995).
10.14 Split-Dollar Agreement between the Company and Mr. R.
Thalheimer, its Chief Executive Officer dated October 13,
1995, effective as of May 17, 1995 (Incorporated by
reference to Exhibit 10.17 to Form 10-K for the fiscal year
ended January 31, 1996).
10.15 Assignments of Life Insurance Policy as Collateral, both
dated October 13, 1995, effective May 17, 1995 (Incorporated
by reference to Exhibit 10.18 to Form 10-K for the fiscal
year ended January 31, 1996).
10.16 Amendment to the Financing Agreement dated May 15, 1996
between the Company and The CIT Group/Business Credit Inc
(Incorporated by reference to Exhibit 10.19 to the Form 10-Q
for the quarter ended April 30, 1996).
10.17 Warrant to Purchase Common Stock Agreement dated May 15,
1996 between the Company and The CIT Group/Business Credit
Inc (Incorporated by reference to Exhibit 10.18 to the Form
10-Q for the quarter ended April 30, 1996).
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
10.18 CAPEX Term Loan Promissory Note dated October 15, 1996
between the Company and The CIT Group/Business Credit Inc
(Incorporated by reference to Exhibit 10.21 to the Form 10-Q
for the quarter ended October 31, 1996).
10.19 Employment Agreement between the Company and Mr. Barry
Gilbert, its Vice Chairman and Chief Operating Officer dated
and effective December 2, 1996 (Incorporated by Reference to
Exhibit 10.20 to the Form 10-K for the year ended January
31, 1997).
10.20 Amendment to the Financing Agreement dated February 13, 1997
between the Company and The CIT Group/Business Credit Inc
(Incorporated by Reference to Exhibit 10.21 to the Form 10-K
for the year ended January 31, 1997).
10.21 Warrant to Purchase Common Stock Agreement dated February
13, 1997 between the Company and The CIT Group/Business
Credit Inc (Incorporated by Reference to Exhibit 10.22 to
the Form 10-K for the year ended January 31, 1997).
10.22 Amendment to the Financing Agreement dated March 24, 1997
between the Company and The CIT Group/Business Credit Inc
(Incorporated by Reference to Exhibit 10.23 to the Form 10-K
for the year ended January 31, 1997).
10.23 Warrant to Purchase Common Stock Agreement dated April 6,
1998 between the Company and The CIT Group/Business Credit
Inc (Incorporated by Reference to Exhibit 10.24 to the Form
10-K for the year ended January 31, 1997).
10.24 Amendment to the Financing Agreement dated April 6, 1998
between the Company and The CIT Group/Business Credit Inc
(Incorporated by Reference to Exhibit 10.25 to the Form 10-K
for the year ended January 31, 1997).
10.25 Amendment to Employment Agreement between the Company and
Mr. Barry Gilbert, its Vice Chairman and Chief Operating
Officer dated and effective November 30, 1998 (Incorporated
by Reference to Exhibit 10.26 to the Form 10-K for the year
ended January 31, 1998).
11.1 Statement Re: Computation of Earnings per Share.
(Incorporated by Reference to Exhibit 11.1 to the Form 10-K
for the year ended January 31, 1998).
13.1 1998 Annual Report to Stockholders (Incorporated by
Reference to Exhibit 13.1 to the Form 10-K for the year
ended January 31, 1999).
15.1 Letter re Unaudited Interim Financial Statements
23.1 Independent Auditors' Consent.
23.2 Consent of Brobeck, Phleger & Harrison LLP, Reference is
made in exhibit 5.01.
23.3 Consent of Director Nominee.
</TABLE>
<PAGE> 1
EXHIBIT 1.01
SHARPER IMAGE CORPORATION
_______ SHARES OF COMMON STOCK
Form of Underwriting Agreement
________________, 1999
J.P. Morgan Securities Inc.
U.S. Bancorp Piper Jaffray Inc.
As Representatives of several underwriters
listed in Schedule I hereto
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
Sharper Image Corporation, a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters listed in Schedule I
hereto (the "UNDERWRITERS"), for whom you are acting as representatives (the
"REPRESENTATIVES"), an aggregate of [________] shares and, at the election of
the Underwriters, up to _______ additional shares of Common Stock, par value
$0.01 per share (the "STOCK"), of the Company. The aggregate of _________ shares
to be sold by the Company is herein called the "UNDERWRITTEN SHARES" and the
aggregate of ________ additional shares to be sold by the Company is herein
called the "OPTION SHARES". The Underwritten Shares and the Option Shares are
herein referred to as the "SHARES". [The Stock, including the Shares, will have
attached thereto rights (the "RIGHTS") to purchase [add description of any
poison pill security.] The Rights are to be issued pursuant to a Rights
Agreement (the "RIGHTS AGREEMENT") dated as of [__________, 1999] between the
Company and [______________].
The Company has prepared and filed with the Securities and Exchange Commission
(the "COMMISSION") in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations of the Commission thereunder
(collectively, the "SECURITIES ACT"), a registration statement, including a
prospectus, relating to the Shares [and the Rights]. The registration statement
as amended at the time when it shall become effective including information (if
any) deemed to be part of the registration statement at
<PAGE> 2
the time of effectiveness pursuant to Rule 430A under the Securities Act, is
referred to in this Agreement as the "REGISTRATION STATEMENT", and the
prospectus in the form first used to confirm sales of Shares is referred to in
this Agreement as the "PROSPECTUS". If the Company has filed an abbreviated
registration statement pursuant to Rule 462(b) under the Securities Act (the
"RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement. Any reference in this Agreement to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-2
under the Securities Act, as of the effective date of the Registration Statement
or the date of such preliminary prospectus or the Prospectus, as the case may
be.
The Company hereby agrees with the Underwriters as follows:
1. The Company agrees to sell the Underwritten Shares to the several
Underwriters as hereinafter provided, and each Underwriter, upon the basis of
the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees to purchase, severally and not jointly,
from the Company at a purchase price per share of $[______] (the "PURCHASE
PRICE") the number of Underwritten Shares (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying the aggregate number of
Underwritten Shares to be sold by the Company by a fraction, the numerator of
which is the aggregate number of Underwritten Shares to be purchased by such
Underwriter as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the aggregate number of Underwritten
Shares to be purchased by all the Underwriters from the Company hereunder.
In addition, the Company agrees to sell the Option Shares to the several
Underwriters and the Underwriters shall have the option to purchase at their
election up to [________] Option Shares for the sole purpose of covering
over-allotments in the sale of the Underwritten Shares. The Underwriters on the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, shall have the option to purchase, severally and
not jointly, from the Company at the Purchase Price that portion of the number
of Option Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Option Shares by a fraction the numerator of which is the maximum
number of Option Shares which such Underwriter is entitled to purchase and the
denominator of which is the maximum number of Option Shares that all of the
Underwriters are entitled to purchase hereunder, for the sole purpose of
covering over-allotments (if any) in the sale of the Underwritten Shares by the
several Underwriters.
2
<PAGE> 3
The Underwriters may exercise the option to purchase the Option Shares at
any time (but not more than once) on or before the thirtieth day following the
date of this Agreement, by written notice from the Representatives to the
Company. Such notice shall set forth the aggregate number of Option Shares as to
which the option is being exercised and the date and time when the Option Shares
are to be delivered and paid for which may be the same date and time as the
Closing Date (as hereinafter defined) but shall not be earlier than the Closing
Date nor later than the tenth full Business Day (as hereinafter defined) after
the date of such notice (unless such time and date are postponed in accordance
with the provisions of Section 9 hereof). Any such notice shall be given at
least two Business Days prior to the date and time of delivery specified
therein.
2. The Company understands that the Underwriters intend (i) to make a
public offering of the Shares as soon after (A) the Registration Statement has
become effective and (B) the parties hereto have executed and delivered this
Agreement, as in the judgment of the Representatives is advisable and (ii)
initially to offer the Shares upon the terms set forth in the Prospectus.
3. Payment for the Shares shall be made by wire transfer in immediately
available funds to the account specified to the Representatives by the Company
in the case of the Underwritten Shares, on ___________, 1999, or at such other
time on the same or such other date, not later than the fifth Business Day
thereafter, as the Representatives and the Company may agree upon in writing or,
in the case of the Option Shares, on the date and time specified by the
Representatives in the written notice of the Underwriters' election to purchase
such Option Shares. The time and date of such payment for the Underwritten
Shares is referred to herein as the "CLOSING DATE" and the time and date for
such payment for the Option Shares, if other than the Closing Date, are herein
referred to as the "ADDITIONAL CLOSING DATE". As used herein, the term "BUSINESS
DAY" means any day other than a day on which banks are permitted or required to
be closed in New York City.
Payment for the Shares to be purchased on the Closing Date or the
Additional Closing Date, as the case may be, shall be made against delivery to
the Representatives for the respective accounts of the several Underwriters of
the Shares to be purchased on such date registered in such names and in such
denominations as the Representatives shall request in writing not later than two
full Business Days prior to the Closing Date or the Additional Closing Date, as
the case may be, with any transfer taxes payable in connection with the transfer
to the Underwriters of the Shares duly paid by the Company. The certificates for
the Shares will be made available for inspection and packaging by the
Representatives at the office of J.P. Morgan Securities Inc. set forth above not
3
<PAGE> 4
later than 1:00 P.M., New York City time, on the Business Day prior to the
Closing Date or the Additional Closing Date, as the case may be.
4. The Company represents and warrants to each Underwriter that:
(i) no order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission, and each preliminary
prospectus filed as part of the Registration Statement as originally filed
or as part of any amendment thereto, or filed pursuant to Rule 424 under
the Securities Act, complied when so filed in all material respects with
the Securities Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided that this
representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by such Underwriter
through the Representatives expressly for use therein;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has been
instituted or, to the knowledge of the Company, threatened by the
Commission; and the Registration Statement and Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) comply, or will comply, as the case may be, in all
material respects with the Securities Act and do not and will not, as of
the applicable effective date as to the Registration Statement and any
amendment thereto and as of the date of the Prospectus and any amendment
or supplement thereto, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, and the Prospectus, as
amended or supplemented, if applicable, at the Closing Date or Additional
Closing Date, as the case may be, will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that the foregoing representations and
warranties shall not apply to statements or omissions in the Registration
Statement or the Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through the Representatives expressly for use
therein;
4
<PAGE> 5
(iii) the documents incorporated by reference in the Prospectus,
when they were filed with the Commission conformed in all material
respects to the requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulation of the Commission thereunder
(collectively, the "EXCHANGE ACT") and none of such documents contained an
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(iv) the financial statements, and the related notes thereto,
included or incorporated by reference in the Registration Statement and
the Prospectus present fairly the consolidated financial position of the
Company as of the dates indicated and the results of its operations and
changes in its consolidated cash flows for the periods specified; and said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis, and the
supporting schedules included or incorporated by reference in the
Registration Statement present fairly the information required to be
stated therein;
(v) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company, or any
material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, business,
prospects, management, financial position, stockholders' equity or results
of operations of the Company, taken as a whole, otherwise than as set
forth or contemplated in the Prospectus; and except as set forth or
contemplated in the Prospectus the Company has not entered into any
transaction or agreement (whether or not in the ordinary course of
business) material to the Company taken as a whole;
(vi) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other jurisdiction
in which it owns or leases properties, or conducts any business, so as to
require such qualification, other than where the failure to be so
qualified or in good standing would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole;
5
<PAGE> 6
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the Company has an authorized capitalization as set forth in
the Prospectus and such authorized capital stock conforms as to legal
matters to the description thereof set forth in the Prospectus, and all of
the outstanding shares of capital stock of the Company have been duly
authorized and validly issued, are fully-paid and non-assessable and are
not subject to any pre-emptive or similar rights; and, except as described
in or expressly contemplated by the Prospectus, there are no outstanding
rights (including, without limitation, pre-emptive rights), warrants or
options to acquire, or instruments convertible into or exchangeable for,
any shares of capital stock or other equity interest in the Company, or
any contract, commitment, agreement, understanding or arrangement of any
kind relating to the issuance of any capital stock of the Company, any
such convertible or exchangeable securities or any such rights, warrants
or options;
(ix) the Shares to be issued and sold by the Company hereunder have
been duly authorized, and, when issued and delivered to and paid for by
the Underwriters in accordance with the terms of this Agreement, will be
duly issued and will be fully paid and non-assessable and will conform to
the descriptions thereof in the Prospectus; and the issuance of the Shares
is not subject to any preemptive or similar rights;
[(x) the Rights Agreement has been duly authorized, executed and
delivered by the Company; the Rights have been duly authorized and validly
issued by the Company, and the [poison pill security] has been duly
authorized by the Company and validly reserved for issuance upon the
exercise in accordance with the terms of the Rights Agreement, will be
validly issued, fully paid and non-assessable;]
(xi) the Company is not, or with the giving of notice or lapse of
time or both would not be, in violation of or in default under, its
Certificate of Incorporation or By-Laws or any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which it or any of its respective properties is
bound, except for violations and defaults which individually and in the
aggregate are not material to the Company taken as a whole; the issue and
sale of the Shares to be sold by the Company hereunder and the performance
by the Company of its obligations under this Agreement and the
consummation of the transactions contemplated herein will not conflict
with or result in a breach of any of the terms or provisions of, or
constitute
6
<PAGE> 7
a default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company is a party or by which
the Company is bound or to which any of the property or assets of the
Company is subject, nor will any such action result in any violation of
the provisions of the Certificate of Incorporation or the By-Laws of the
Company or any applicable law or statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over the
Company or any of its respective properties; and no consent, approval,
authorization, order, license, registration or qualification of or with
any such court or governmental agency or body is required for the issue
and sale of the Shares to be sold by the Company hereunder or the
consummation by the Company of the transactions contemplated by this
Agreement, except such consents, approvals, authorizations, orders,
licenses, registrations or qualifications as have been obtained under the
Securities Act and as may be required under state securities or Blue Sky
Laws in connection with the purchase and distribution of the Shares by the
Underwriters;
(xii) other than as set forth or contemplated in the Prospectus,
there are no legal or governmental investigations, actions, suits or
proceedings pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its respective properties or to
which the Company is or may be a party or to which any property of the
Company is or may be the subject which, if determined adversely to the
Company, could individually or in the aggregate have, or reasonably be
expected to have, a material adverse effect on the general affairs,
business, prospects, management, financial position, stockholders' equity
or results of operations of the Company, taken as a whole, and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others; and
there are no statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or Prospectus or to
be filed as exhibits to the Registration Statement that are not described
or filed as required;
(xiii) the Company has good and marketable title in fee simple to
all items of real property and good and marketable title to all personal
property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described or referred to in
the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made or proposed to be made of
such property by the Company; and any real property and buildings held
under lease by the Company are held by it under valid, existing and
enforceable leases with
7
<PAGE> 8
such exceptions as are not material and do not interfere with the use made
or proposed to be made of such property and buildings by the Company;
(xiv) no relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
by the Securities Act to be described in the Registration Statement and
the Prospectus which is not so described;
(xv) no person has the right to require the Company to register any
securities for offering and sale under the Securities Act by reason of the
filing of the Registration Statement with the Commission or the issue and
sale of the Shares to be sold by the Company hereunder;
(xvi) the Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT");
(xvii) the Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida) relating to
doing business with the Government of Cuba or with any person or affiliate
located in Cuba;
(xviii) Deloitte & Touche LLP who have certified certain financial
statements of the Company and its subsidiaries are independent public
accountants as required by the Securities Act;
(xix) the Company has filed all federal, state, local and foreign
tax returns which have been required to be filed and has paid all taxes
shown thereon and all assessments received by it to the extent that such
taxes have become due and are not being contested in good faith; and,
except as disclosed in the Registration Statement and the Prospectus,
there is no tax deficiency which has been or might reasonably be expected
to be asserted or threatened against the Company;
(xx) the Company has not taken nor will it take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock;
8
<PAGE> 9
[( ) each employee benefit plan, within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended,
("ERISA") that is maintained, administered or contributed to by the
Company or any of its affiliates for employees or former employees of the
Company and its affiliates has been maintained in compliance with its
terms and the requirements of any applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended, ("CODE"). No prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code has occurred
with respect to any such plan excluding transactions effected pursuant to
a statutory or administrative exemption. For each such plan which is
subject to the funding rules of Section 412 of the Code or Section 302 of
ERISA no "accumulated funding deficiency" as defined in Section 412 of the
Code has been incurred, whether or not waived, and the fair market value
of the assets of each such plan (excluding for these purposes accrued but
unpaid contributions) exceeded the present value of all benefits accrued
under such plan determined using reasonable actuarial assumptions; and]
[( ) the Company owns, possesses or has obtained the right to use
the Intellectual Property employed by it in connection with the business
conducted by it as of the date hereof.]
5. The Company covenants and agrees with each of the several Underwriters
as follows:
(i) to use its best efforts to cause the Registration Statement to
become effective at the earliest possible time and, if required, to file
the final Prospectus with the Commission within the time periods specified
by Rule 424(b) and Rule 430A under the Securities Act and to furnish
copies of the Prospectus to the Underwriters in New York City prior to
10:00 a.m., New York City time, on the Business Day next succeeding the
date of this Agreement in such quantities as the Representatives may
reasonably request;
(ii) to deliver, at the expense of the Company, to the
Representatives three signed copies of the Registration Statement (as
originally filed) and each amendment thereto, in each case including
exhibits and documents incorporated by reference therein, and to each
other Underwriter a conformed copy of the Registration Statement (as
originally filed) and each amendment thereto, in each case without
exhibits but including the documents incorporated by reference therein
and, during the period mentioned in Section 5(a)(v) below, to each of the
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Underwriters as many copies of the Prospectus (including all amendments
and supplements thereto) and documents incorporated by reference therein
as the Representatives may reasonably request;
(iii) before filing any amendment or supplement to the Registration
Statement or the Prospectus, whether before or after the time the
Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment or supplement for review
and not to file any such proposed amendment or supplement to which the
Representatives reasonably object;
(iv) to advise the Representatives promptly, and to confirm such
advice in writing (A) when the Registration Statement has become
effective, (B) when any amendment to the Registration Statement has been
filed or becomes effective, (C) when any supplement to the Prospectus or
any amended Prospectus has been filed and to furnish the Representatives
with copies thereof, (D) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for any additional information, (E) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus or the Prospectus or the initiation or
threatening of any proceeding for that purpose, (F) of the occurrence of
any event, within the period referenced in Section 5(a)(v) below, as a
result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, and (G) of the receipt by the Company of any
notification with respect to any suspension of the qualification of the
Shares for offer and sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and to use its best
efforts to prevent the issuance of any such stop order, or of any order
preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any order suspending any such qualification of the
shares, or notification of any such order thereof and, if issued, to
obtain as soon as possible the withdrawal thereof;
(v) if, during such period of time after the first date of the
public offering of the Shares as in the opinion of counsel for the
Underwriters a prospectus relating to the Shares is required by law to be
delivered in connection with sales by the Underwriters or any dealer, any
event shall occur as a result of which it is necessary to amend or
supplement the
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<PAGE> 11
Prospectus in order to make the statements therein, in light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the Prospectus to
comply with law, forthwith to prepare and furnish, at the expense of the
Company, to the Underwriters and to the dealers (whose names and addresses
the Representatives will furnish to the Company) to which Shares may have
been sold by the Representatives on behalf of the Underwriters and to any
other dealers upon request, such amendments or supplements to the
Prospectus as may be necessary so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so that
the Prospectus will comply with law;
(vi) to endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representatives
shall reasonably request and to continue such qualification in effect so
long as reasonably required for distribution of the Shares; provided that
the Company shall not be required to file a general consent to service of
process in any jurisdiction;
(vii) to make generally available to its security holders and to the
Representatives as soon as practicable an earnings statement covering a
period of at least twelve months beginning with the first fiscal quarter
of the Company occurring after the effective date of the Registration
Statement, which shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 of the Commission promulgated thereunder;
(viii) so long as the Shares are outstanding, to furnish to the
Representatives copies of all reports or other communications (financial
or other) furnished to holders of the Shares, and copies of any reports
and financial statements furnished to or filed with the Commission or any
national securities exchange;
(ix) for a period of 90 days after the date of the public offering
of the Shares not to (A) offer, pledge, announce the intention to sell,
sell, contract to sell, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any
shares of Stock or any securities convertible into or exercisable or
exchangeable for Stock or (B) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of
ownership of the Stock, whether any such transaction described in clause
(A) or (B) above is to be settled by delivery of Stock or such other
securities, in cash or otherwise
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<PAGE> 12
without the prior written consent of the Representatives, other than the
Shares to be sold by the Company hereunder and any shares of Stock of the
Company issued upon the exercise of options granted under existing
employee stock option plans;
(x) to use the net proceeds received by the Company from the sale of
the Shares by the Company pursuant to this Agreement in the manner
specified in the Prospectus under caption "Use of Proceeds";
(xi) to use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market (the "NASDAQ NATIONAL MARKET"); and
(xii) whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all costs and expenses incident to the performance of its obligations
hereunder, including without limiting the generality of the foregoing, all
costs and expenses (A) incident to the preparation, reregistration,
transfer, execution and delivery of the Shares, (B) incident to the
preparation, printing and filing under the Securities Act of the
Registration Statement, the Prospectus and any preliminary prospectus
(including in each case all exhibits, amendments and supplements thereto),
(C) incurred in connection with the registration or qualification of the
Shares under the laws of such jurisdictions as the Representatives may
designate (including fees of counsel for the Underwriters and its
disbursements), (D) in connection with the listing of the Shares on the
Nasdaq National Market, (E) related to the filing with, and clearance of
the offering by, the National Association of Securities Dealers, Inc., (F)
in connection with the printing (including word processing and duplication
costs) and delivery of this Agreement, the Preliminary and Supplemental
Blue Sky Memoranda and the furnishing to the Underwriters and dealers of
copies of the Registration Statement and the Prospectus, including mailing
and shipping, as herein provided, (G) any expenses incurred by the Company
in connection with a "road show" presentation to potential investors, (H)
the cost of preparing stock certificates and (I) the cost and charges of
any transfer agent and any registrar.
6. The several obligations of the Underwriters hereunder to purchase the
Shares on the Closing Date or the Additional Closing Date, as the case may be,
are subject to the performance by the Company of its obligations hereunder and
to the following additional conditions:
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<PAGE> 13
(a) the Registration Statement shall have become effective (or if a
post-effective amendment is required to be filed under the Securities Act,
such post-effective amendment shall have become effective) not later than
5:00 P.M., New York City time, on the date hereof; and no stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment shall be in effect, and no proceedings for such
purpose shall be pending before or threatened by the Commission; the
Prospectus shall have been filed with the Commission pursuant to Rule
424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Securities Act and in accordance with
Section 5(a)(i) hereof; and all requests for additional information shall
have been complied with to the satisfaction of the Representatives;
(b) the representations and warranties of the Company contained
herein are true and correct on and as of the Closing Date or the
Additional Closing Date, as the case may be, as if made on and as of the
Closing Date or the Additional Closing Date, as the case may be, and the
Company shall have complied with all agreements and all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing
Date or the Additional Closing Date, as the case may be;
(c) since the respective dates as of which information is given in
the Prospectus there shall not have been any change in the capital stock
or long-term debt of the Company or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, business, prospects, management, financial
position, stockholders' equity or results of operations of the Company,
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus, the effect of which in the judgment of the Representatives
makes it impracticable or inadvisable to proceed with the public offering
or the delivery of the Shares on the Closing Date or the Additional
Closing Date, as the case may be, on the terms and in the manner
contemplated in the Prospectus; and the Company has not sustained since
the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus;
(d) the Representatives shall have received on and as of the Closing
Date or the Additional Closing Date, as the case may be, a certificate of
an executive officer of the Company, with specific knowledge about the
Company's financial matters, satisfactory to the
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<PAGE> 14
Representatives to the effect set forth in Sections 6(a), 6(b), 6(c) and
6(d) (with respect to the respective representations, warranties,
agreements and conditions of the Company) and to the further effect that
there has not occurred any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company taken as a
whole from that set forth or contemplated in the Registration Statement;
(e) Brobeck, Phleger & Harrison LLP, counsel for the Company, shall
have furnished to the Representatives their written opinion, dated the
Closing Date or the Additional Closing Date, as the case may be, in form
and substance satisfactory to the Representatives, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as
described in the Prospectus;
(ii) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties, or conducts any business, so as to require such
qualification, other than where the failure to be so qualified or in
good standing would not have a material adverse effect on the
Company taken as a whole;
(iii) other than as set forth or contemplated in the
Prospectus, there are no legal or governmental investigations,
actions, suits or proceedings pending or, to the best of such
counsel's knowledge, threatened against or affecting the Company or
any of its respective properties or to which the Company is or may
be a party or to which any property of the Company is or may be the
subject which, if determined adversely to the Company, could
individually or in the aggregate have, or reasonably be expected to
have, a material adverse effect on the general affairs, business,
prospects, management, financial position, stockholders' equity or
results of operations of the Company taken as a whole; to the best
of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
and such counsel does not know of any statutes, regulations,
contracts or other documents that are required to be
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<PAGE> 15
described in the Registration Statement or Prospectus or to be filed
as exhibits to the Registration Statement that are not described or
filed as required;
(iv) this Agreement has been duly authorized, executed and
delivered by the Company;
(v) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the
Prospectus;
(vi) the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be sold by the Company
hereunder have been duly authorized and are validly issued, fully
paid and non-assessable;
(vii) the Shares to be issued and sold by the Company
hereunder have been duly authorized, and when delivered to and paid
for by the Underwriters in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable and
the issuance of the Shares is not subject to any preemptive or
similar rights;
(viii) the statements in the Prospectus under "[Shareholder
Rights Plan]", "Description of Capital Stock" and "Underwriting", in
the Prospectus and in the Registration Statement in Item 15, insofar
as such statements constitute a summary of the terms of the Stock,
legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such terms, legal
matters, documents or proceedings;
(ix) such counsel is of the belief that the Registration
Statement and the Prospectus and any amendments and supplements
thereto (other than the financial statements and related schedules
therein and other financial or statistical data, as to which such
counsel need express no belief) comply as to form in all material
respects with the requirements of the Securities Act and believes
that (other than the financial statements and related schedules
therein and other financial or statistical data, as to which such
counsel need express no belief) the Registration Statement and the
prospectus included therein at the time the Registration Statement
became effective did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated
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<PAGE> 16
therein or necessary to make the statements therein not misleading,
and that the Prospectus, as amended or supplemented, if applicable,
does not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading;
(x) the Company is not, or with the giving of notice or lapse
of time or both would not be, in violation of or in default under,
its Certificate of Incorporation or By-Laws or any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company is a party or
by which it or any of its respective properties is bound, except for
violations and defaults which individually and in the aggregate are
not material to the Company taken as a whole; the issue and sale of
the Shares being delivered on the Closing Date or the Additional
Closing Date, as the case may be, to be sold by the Company
hereunder and the performance by the Company of its obligations
under this Agreement and the consummation of the transactions
contemplated herein will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company
is a party or by which the Company is bound or to which any of the
property or assets of the Company is subject, nor will any such
action result in any violation of the provisions of the Certificate
of Incorporation or the By-Laws of the Company or any applicable law
or statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or
any of its respective properties;
(xi) no consent, approval, authorization, order, license,
registration or qualification of or with any court or governmental
agency or body is required for the issuance by the Company of the
Shares to be sold by it hereunder or the consummation by the Company
of the [other] transactions contemplated by this Agreement, except
such consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained under the
Securities Act and as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
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<PAGE> 17
(xii) the Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act;
(xiii) the documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by
the Company prior to the Closing Date or the Additional Closing
Date, as the case may be, (other than the financial statements and
related schedules therein and other financial or statistical data,
as to which such counsel need express no belief), when they were
filed with the Commission, complied as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder; and they have no reason to
believe that any of such documents, when such documents were so
filed, contained an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made when such documents were so filed, not misleading;
[( ) the Rights Agreement has been duly authorized, executed
and delivered by the Company; the Rights have been duly authorized
by the Company and, when issued upon issuance of the Shares, will be
validly issued, and the [poison pill security] has been duly
authorized by the Company and validly reserved for issuance upon the
exercise of the Rights and, when issued upon such exercise in
accordance with the terms of the rights Agreement, will be validly
issued, fully paid and non-assessable; and]
[( ) the Company owns, possesses or has the right to use the
Intellectual Property employed by it in connection with the business
conducted by it as of the date hereof.]
In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
the State of California, to the extent such counsel deems proper and to the
extent specified in such opinion, if at all, upon an opinion or opinions (in
form and substance reasonably satisfactory to Underwriters' counsel) of other
counsel reasonably acceptable to the Underwriters' counsel, familiar with the
applicable laws and (B) as to matters of fact, to the extent such counsel deems
proper, on certificates of responsible officers of the Company and certificates
or other written
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<PAGE> 18
statements of officials of jurisdictions having custody of documents respecting
the corporate existence or good standing of the Company. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
upon which they relied is in form satisfactory to such counsel and, in such
counsel's opinion, the Underwriters and they are justified in relying thereon.
With respect to the matters to be covered in Section 6(e)(x) above counsel may
state their opinion and belief is based upon their participation in the
preparation of the Registration Statement and the Prospectus and any amendment
or supplement thereto and review and discussion of the contents thereof but is
without independent check or verification except as specified.
The opinion of Brobeck, Phleger & Harrison LLP described above shall be
rendered to the Underwriters at the request of the Company and shall so state
therein.
(f) on the effective date of the Registration Statement and the
effective date of the most recently filed post-effective amendment to the
Registration Statement and also on the Closing Date or Additional Closing
Date, as the case may be, Deloitte & Touche LLP shall have furnished to
you letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, containing statements and information of
the type customarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus;
(g) the Representatives shall have received on and as of the Closing
Date or Additional Closing Date, as the case may be, an opinion of Davis
Polk & Wardwell, counsel to the Underwriters, with respect to the due
authorization and valid issuance of the Shares, the Registration
Statement, the Prospectus and other related matters as the Representatives
may reasonably request, and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass upon
such matters;
(h) the Shares to be delivered on the Closing Date or Additional
Closing Date, as the case may be, shall have been approved for listing on
the Nasdaq National Market, subject to official notice of issuance;
(i) on or prior to the Closing Date or Additional Closing Date, as
the case may be, the Company shall have furnished to the Representatives
such further certificates and documents as the Representatives shall
reasonably request; and
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<PAGE> 19
(j) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Stock or certain other securities, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing
Date or Additional Closing Date, as the case may be.
7. The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, the legal fees and other expenses incurred in connection with any
suit, action or proceeding or any claim asserted) caused by any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through the Representatives expressly for use therein.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement and each person who controls the Company within the meaning of Section
15 of the Securities Act and Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from the Company to each Underwriter, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through the Representatives expressly for use in
the Registration Statement, the Prospectus, any amendment or supplement thereto,
or any preliminary prospectus.
If any suit, action, proceeding (including any governmental or regulatory
investigation), claim or demand shall be brought or asserted against any person
in respect of which indemnity may be sought pursuant to the preceding paragraphs
of this Section 7, such person (the "INDEMNIFIED PERSON") shall promptly notify
the person or persons against whom such indemnity may be sought (each an
"INDEMNIFYING PERSON") in writing, and such Indemnifying Persons, upon request
of the Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Persons may designate in such proceeding and shall pay the fees
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<PAGE> 20
and expenses of such counsel related to such proceeding. In any such proceeding,
any Indemnified Person shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Person and not the Indemnifying Persons unless (i) the Indemnifying Persons and
the Indemnified Person shall have mutually agreed to the contrary, (ii) the
Indemnifying Persons has failed within a reasonable time to retain counsel
reasonably satisfactory to the Indemnified Person or (iii) the named parties in
any such proceeding (including any impleaded parties) include both an
Indemnifying Person and the Indemnified Person and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that no Indemnifying Person
shall, in connection with any proceeding or related proceeding in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Indemnified Persons, and that all
such fees and expenses shall be reimbursed as they are incurred. Any such
separate firm for the Underwriters and such control persons of Underwriters
shall be designated in writing by J.P. Morgan Securities Inc. and any such
separate firm for the Company, its directors, its officers who sign the
Registration Statement and such control persons of the Company shall be
designated in writing by the Company. No Indemnifying Person shall be liable for
any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff,
each Indemnifying Person agrees to indemnify any Indemnified Person from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an Indemnified Person
shall have requested an Indemnifying Person to reimburse the Indemnified Person
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, such Indemnifying Person agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
Indemnifying Person of the aforesaid request and (ii) such Indemnifying Person
shall not have reimbursed the Indemnified Person in accordance with such request
prior to the date of such settlement. No Indemnifying Person shall, without the
prior written consent of the Indemnified Person, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement includes an unconditional
release of such Indemnified Person from all liability on claims that are the
subject matter of such proceeding.
If the indemnification provided for in the first three paragraphs of this
Section 7 is unavailable to an Indemnified Person or insufficient in respect of
any losses, claims, damages or liabilities referred to therein, then each
Indemnifying Person under such paragraph, in lieu of indemnifying such
Indemnified Person
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<PAGE> 21
thereunder, shall contribute to the amount paid or payable by such Indemnified
Person as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand shall be deemed to be in the same
respective proportions as the net proceeds from the offering (before deducting
expenses) received by the Company and the total underwriting discounts and the
commissions received by the Underwriters, in each case as set forth in the table
on the cover of the Prospectus, bear to the aggregate public offering price of
the Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purposes) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses incurred by such Indemnified Person in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, in no event shall an
Underwriter be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
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<PAGE> 22
respective number of Shares set forth opposite their names in Schedule I hereto,
and not joint.
The remedies provided for in this Section 7 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
The indemnity and contribution agreements contained in this Section 7 and
the representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Underwriter or any person controlling any Underwriter or by or on behalf of
the Company, its officers or directors or any other person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
8. Notwithstanding anything herein contained, this Agreement (or the
obligations of the several Underwriters with respect to the Option Shares) may
be terminated in the absolute discretion of the Representatives, by notice given
to the Company, if after the execution and delivery of this Agreement and prior
to the Closing Date (or, in the case of the Option Shares, prior to the
Additional Closing Date) (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange or the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of or
guaranteed by the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York or California shall have been declared by either Federal
or New York State or California State authorities, or (iv) there shall have
occurred any outbreak or escalation of hostilities or any change in financial
markets or any calamity or crisis that, in the judgment of the Representatives,
is material and adverse and which, in the judgment of the Representatives, makes
it impracticable to market the Shares being delivered at the Closing Date or the
Additional Closing Date, as the case may be, on the terms and in the manner
contemplated in the Prospectus.
9. This Agreement shall become effective upon the later of (x) execution
and delivery hereof by the parties hereto and (y) release of notification of the
effectiveness of the Registration Statement (or, if applicable, any
post-effective amendment) by the Commission.
If on the Closing Date or the Additional Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares
which it or they have agreed to purchase hereunder on such date, and the
aggregate
22
<PAGE> 23
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Underwritten Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as the Representatives may specify,
to purchase the Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase on such date; provided that in no event shall
the number of Shares that any Underwriter has agreed to purchase pursuant to
Section 1 be increased pursuant to this Section 9 by an amount in excess of
one-tenth of such number of Shares without the written consent of such
Underwriter. If on the Closing Date or the Additional Closing Date, as the case
may be, any Underwriter or Underwriters shall fail or refuse to purchase Shares
which it or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares to be purchased on such date,
and arrangements satisfactory to the Representatives, and the Company for the
purchase of such Shares are not made within 36 hours after such default, this
Agreement (or the obligations of the several Underwriters to purchase the Option
Shares, as the case may be) shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date (or, in the case of
the Option Shares, the Additional Closing Date), but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement or any condition of the Underwriters' obligations cannot be fulfilled,
the Company agrees to reimburse the Underwriters or such Underwriters as have so
terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and expenses of its counsel)
reasonably incurred by the Underwriter in connection with this Agreement or the
offering contemplated hereunder.
11. This Agreement shall inure to the benefit of and be binding upon the
Company and the Underwriters, any controlling persons referred to herein and
their respective successors and assigns. Nothing expressed or mentioned in this
23
<PAGE> 24
Agreement is intended or shall be construed to give any other person, firm or
corporation any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision herein contained. No purchaser of Shares from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
12. Any action by the Underwriters hereunder may be taken by the
Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of the
Underwriters, and any such action taken by the Representatives jointly or by
J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be given to the
Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260 (telefax:______); Attention: Syndicate Department. Notices to the
Company shall be given to it at 650 Davis Street, San Francisco, California
94111, (telefax: (415) 445-1574); Attention: _______________.
13. This Agreement may be signed in counterparts, each of which shall be an
original and all of which together shall constitute one and the same instrument.
14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF
LAWS PROVISIONS THEREOF.
24
<PAGE> 25
If the foregoing is in accordance with your understanding, please sign and
return four counterparts hereof.
Very truly yours,
SHARPER IMAGE CORPORATION
By:
--------------------------------------
Name:
Title:
Accepted:_________, 1999
J.P. Morgan Securities Inc.
U.S. Bancorp Piper Jaffray Inc.
Acting severally on behalf of themselves
and the several Underwriters listed in
Schedule I hereto.
By: J.P. Morgan Securities Inc.
Acting on behalf of itself and the several
Underwriters listed in Schedule I
hereto.
By:
--------------------------------------
Title:
25
<PAGE> 26
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER TO BE PURCHASED
----------- ----------------
<S> <C>
J.P. Morgan Securities Inc......................
U.S. Bancorp Piper Jaffray Inc..................
Total
</TABLE>
<PAGE> 1
Exhibit 3.01
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
SHARPER IMAGE CORPORATION,
(Pursuant to Section 151 of the
Delaware General Corporation Law)
----------------------------------
SHARPER IMAGE CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the "Corporation"), hereby certifies that the following resolution was adopted
by the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on June 7, 1999;
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be Two Hundred Fifty Thousand (250,000). Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding plus
the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred Stock.
<PAGE> 2
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, each holder of a share of Series A
Preferred Stock, in preference to the holders of shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of the Corporation, and of any other
junior stock, shall be entitled to receive, when declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the last day of April, July, October and January in each year
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to, subject to the
provision for adjustment hereinafter set forth, One Thousand (1,000) times the
aggregate per share amount of all cash dividends, and One Thousand (1,000) times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of a share or fraction of Series A
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
shares of Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Distribution Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1,000 per share
of Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding share of Series A Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such share of Series A
Participating Preferred Stock, unless the date of issue of such share is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such share shall begin to accrue from the date of issue of such
share, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly
<PAGE> 3
Dividend Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to One
Thousand (1,000) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up)
<PAGE> 4
with the Series A Preferred Stock, except dividends paid ratably on the shares
of Series A Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (1) to the holders of shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received One Thousand Dollars ($1,000) per
share, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment (the "Series A
Liquidation Preference"), provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock (the "Common Adjustment"), or (2) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except distributions made ratably
on the Series A Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
<PAGE> 5
liquidation, dissolution or winding up. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event ("Adjustment Number").
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) In the event the Corporation shall at any time after June 22, 1999
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the Adjustment
Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to One Thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
<PAGE> 6
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
<PAGE> 1
Exhibit 4.01
Form of Rights Certificate
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER JUNE 6, 2009 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT THE OPTION OF THE
COMPANY AT $0.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN
THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY
OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND
ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE
RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY
OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE
OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SUCH AGREEMENT.]*
Rights Certificate
SHARPER IMAGE CORPORATION
This certifies that _____________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of June 7, 1999 (the "Rights Agreement"), between Sharper
Image Corporation, a Delaware corporation (the "Company"), and ChaseMellon
Shareholder Services, LLC (the "Rights Agent"), to purchase from the Company at
any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., California time, on June 6, 2009 at the
office of the Rights Agent designated for such purpose, or at the office of its
successor as Rights Agent, one one-thousandth (a "Unit") of a fully paid
non-assessable share of Series A Junior Participating Preferred Stock, par value
$0.01 per share (the "Series A Preferred Stock") of the Company, at a purchase
price of $47.00 per Unit of Series A Preferred Stock (the "Purchase Price"),
upon presentation and surrender of this Rights Certificate with the Form of
Election to Purchase duly executed. The number of Rights evidenced by this
Rights Certificate (and the number of Units of Series A Preferred Stock which
may be purchased upon exercise hereof) set forth above, and the Purchase Price
set forth above, are the number and Purchase Price as of June 7, 1999 based on
the Series A Preferred Stock as constituted at such date. As provided in the
Rights Agreement, the Purchase Price and the number of Units of Series A
Preferred Stock which may
- ---------------------
* The portion of the legend in bracket shall be inserted only if applicable
and shall replace the preceding sentence.
<PAGE> 2
be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights Certificates.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the office of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of Series A Preferred Stock as the Rights
evidenced by the Rights Certificate or Rights Certificates surrendered shall
have entitled such holder to purchase. If this Rights Certificate shall be
exercised in part, the holder shall be entitled to receive upon surrender hereof
another Rights Certificate or Rights Certificates for the number of whole Rights
not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at a redemption
price of $0.001 per Right.
No fractional shares of Series A Preferred Stock will be issued
upon the exercise of any Rights or Rights evidenced hereby (other than fractions
which are integral multiples of one one-thousandth of a share of Series A
Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts), but in lieu thereof a cash payment will be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled
to vote or receive dividends or be deemed for any purpose the holder of Units of
Series A Preferred Stock or of any other securities of the Company which may at
any time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Rights or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
<PAGE> 3
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the signature of the proper officers of the Company and
its corporate seal. Dated as of June 7, 1999.
ATTEST: SHARPER IMAGE CORPORATION
By: By:
-------------------------------- -----------------------------------
Name: Name:
-------------------------- -----------------------------
Title: Title:
-------------------------- -----------------------------
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES, LLC
as Rights Agent
By:
--------------------------------
Authorized Signatory
Name:
--------------------------
Title:
--------------------------
<PAGE> 4
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer the Rights Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells,
assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
DATED: ,
------------ -----
---------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities
Transfer Association Inc. recognized signature guarantee medallion program.
<PAGE> 5
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by
this Rights Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
---------------------------------------
Signature
--------------------------------
NOTICE
The signature in the foregoing Form of Assignment must conform to
the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment is not completed, the Company and the Rights Agent will deem the
beneficial owner of the Rights evidenced by this Rights Certificate to be an
Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights
Agreement) and such Assignment will not be honored.
<PAGE> 6
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Rights Certificate.)
To Sharper Image Corporation
The undersigned hereby irrevocably elects to exercise ___________
Rights represented by this Rights Certificate to purchase the Units of Series A
Preferred Stock issuable upon the exercise of such Rights and requests that
certificates for such Series A Preferred Stock be issued in the name of:
Please insert social security
or other identifying number
----------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
----------------------------------------------------
(Please print name and address)
DATED: ,
------------ -----
---------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities
Transfer Association Inc. recognized signature guarantee medallion program.
<PAGE> 7
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by
this Rights Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
---------------------------------------
Signature
-----------------------------
NOTICE
The signature in the foregoing Form of Election to Purchase must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Election to Purchase, as the case may be, is not completed, the Company and the
Rights Agent will deem the beneficial owner of the Rights evidenced by this
Rights Certificate to be an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and such Election to Purchase will
not be honored.
<PAGE> 1
EXHIBIT 4.02
SHARPER IMAGE CORPORATION
AND
CHASEMELLON SHAREHOLDER SERVICES, LLC
(RIGHTS AGENT)
FORM OF RIGHTS AGREEMENT
DATED AS OF JUNE 7, 1999
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TABLE OF CONTENTS
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PAGE
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Section 1. Certain Definitions........................................................ 1
Section 2. Appointment of Rights Agent................................................ 5
Section 3. Issue of Rights Certificates............................................... 5
Section 4. Form of Rights Certificates................................................ 7
Section 5. Countersignature and Registration.......................................... 7
Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates................... 8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.............. 9
Section 8. Cancellation and Destruction of Rights Certificates........................ 10
Section 9. Reservation and Availability of Preferred Stock............................ 11
Section 10. Preferred Stock Record Date................................................ 12
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights......... 12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares................. 20
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power....... 20
Section 14. Fractional Rights and Fractional Shares.................................... 23
Section 15. Rights of Action........................................................... 24
Section 16. Agreement of Rights Holders................................................ 25
Section 17. Rights Certificate Holder Not Deemed a Stockholder......................... 25
Section 18. Concerning the Rights Agent................................................ 25
Section 19. Merger or Consolidation or Change of ChaseMellon Shareholder Services, LLC. 26
Section 20. Duties of Rights Agent..................................................... 27
Section 21. Change of Rights Agent..................................................... 29
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i.
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Section 22. Issuance of New Rights Certificates........................................ 29
Section 23. Redemption and Termination................................................. 30
Section 24. Exchange................................................................... 31
Section 25. Notice of Certain Events................................................... 32
Section 26. Notices.................................................................... 33
Section 27. Supplements and Amendments................................................. 33
Section 28. Successors................................................................. 34
Section 29. Determinations and Actions by the Board of Directors....................... 34
Section 30. Benefits of This Agreement................................................. 34
Section 31. Severability............................................................... 35
Section 32. Governing Law.............................................................. 35
Section 33. Counterparts............................................................... 35
Section 34. Descriptive Headings....................................................... 35
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EXHIBITS
Exhibit A Form of Certificate of Designation of Series A Junior Participating
Preferred Stock
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights to Purchase Shares of Series A Preferred Stock
ii.
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RIGHTS AGREEMENT
RIGHTS AGREEMENT (the "Agreement"), dated as of June 7, 1999,
between Sharper Image Corporation, a Delaware corporation (the "Company"), and
ChaseMellon Shareholder Services, LLC, a ______ banking corporation (the "Rights
Agent").
WHEREAS, effective June 7, 1999 (the "Rights Dividend Declaration
Date"), the Board of Directors authorized and declared a distribution of one
Right (each, a "Right") for each share of Common Stock (as hereinafter defined)
of the Company outstanding as of the Close of Business (as hereinafter defined)
on June 22, 1999 (the "Record Date"), each Right initially representing the
right to purchase one one-thousandth of a share (a "Unit") of Preferred Stock
(as hereinafter defined) upon the terms and subject to the conditions herein set
forth, and has further authorized and directed the issuance of one Right with
respect to each share of Common Stock that shall become outstanding between the
Record Date and the earliest of the Distribution Date, the Redemption Date or
the Final Expiration Date (as such terms are hereinafter defined).
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions.
For purposes of this Agreement, the following terms have the
meanings indicated:
"Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 15% or more of the shares of
Common Stock of the Company then outstanding, but shall not include (1) the
Company, any Subsidiary (as such term is hereinafter defined) of the Company,
any employee benefit plan of the Company or any Subsidiary of the Company, or
any entity holding shares of Common Stock for or pursuant to the terms of any
such plan, or (2) Richard J. Thalheimer (the "Permitted Investor"), any of his
Affiliates or Associates or any trust the beneficiaries of which are the
children of Richard J. Thalheimer (collectively with the Permitted Investor, the
"Investor Group"). Notwithstanding the foregoing:
(i) no Person shall become an "Acquiring Person" as the
result of an acquisition of shares of Common Stock by the Company which,
by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 15%
or more of the shares of Common Stock of the Company then outstanding;
provided, however, that if a Person shall become the Beneficial Owner of
15% or more of the shares of Common Stock of the Company then
outstanding by reason of share purchases by the Company and shall, after
such share purchases by the Company, become the Beneficial Owner of any
additional shares of Common Stock of the Company, then such Person shall
be deemed to be an "Acquiring Person" hereunder; and
(ii) if the Board of Directors of the Company determines in good
faith that a Person who would otherwise be an "Acquiring Person" as
defined pursuant to the foregoing provisions of this paragraph (a), has
become such inadvertently, and such
1.
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Person divests as promptly as practicable a sufficient number of shares
of Common Stock so that such Person would no longer be an "Acquiring
Person" (as defined pursuant to the foregoing provisions of this
paragraph (a)), then such Person shall not be deemed to be an "Acquiring
Person" for any purpose of this Agreement.
"Adjustment Shares" has the meaning set forth in Section
11(a)(ii).
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act (as such term is hereinafter defined).
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of
Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any
comparable or successor law or regulation); or
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire
(whether such right is exercisable immediately or only after the passage
of time) pursuant to any agreement, arrangement or understanding
(whether or not in writing, other than customary agreements with and
between underwriters and selling group members with respect to a bona
fide public offering of securities), or upon the exercise of conversion
rights, exchange rights, rights (other than the Rights), warrants or
options, or otherwise; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, securities
tendered pursuant to a tender or exchange offer made by or on behalf of
such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange; or (B) the
right to vote pursuant to any agreement, arrangement or understanding;
provided further, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," any security under this
subparagraph (ii) as a result of an agreement, arrangement or
understanding to vote such security if such agreement, arrangement or
understanding: (x) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to, and
in accordance with, the applicable provisions of the Exchange Act and
the Exchange Act Regulations, and (y) is not reportable by such Person
on Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding, (whether or not in writing,
other than customary agreements with and between underwriters and
selling group members with respect to a bona fide public offering of
securities), for the purpose of acquiring, holding, voting (except to
the extent contemplated by the proviso to (B) of subparagraph (ii)
above) or disposing of any securities of the Company; provided, however,
that in no case shall an officer or director of the Company be deemed
(A) the Beneficial Owner of any securities beneficially owned by another
officer or director of
2.
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the Company solely by reason of actions undertaken by such persons in
their capacity as officers or directors of the Company or (B) the
Beneficial Owner of securities held of record by the trustee of any
employee benefit plan of the Company or any Subsidiary of the Company
for the benefit of any employee of the Company or any Subsidiary of the
Company, other than the officer or director, by reason of any influence
that such officer or director may have over the voting of the securities
held in the plan;
Notwithstanding anything in this definition of "Beneficial Owner" and
"beneficially own" to the contrary, the phrase "then outstanding," when used
with reference to a Person who is the Beneficial Owner of securities of the
Company, shall mean the number of such securities then issued and outstanding
together with the number of such securities not then actually issued and
outstanding which such Person would be deemed to beneficially own hereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in the State of California or the
state in which the principal office of the Rights Agent is located are
authorized or obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M.,
California time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., California time, on the next succeeding
Business Day.
"Common Stock" when used with reference to the Company shall mean
the shares of common stock, par value $0.01, of the Company. "Common Stock" when
used with reference to any Person other than the Company shall mean the capital
stock (or other equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
"Company" shall have the meaning set forth in the recitals to
this Agreement.
"current per share market price" shall have the meaning set forth
in Section 11(d)(i) hereof.
"Current Value" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Distribution Date" shall have the meaning set forth in Section
3(a) hereof.
"equivalent preferred shares" shall have the meaning set forth in
Section 11(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Act Regulations" shall mean the General Rules and
Regulations under the Exchange Act.
"Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
"Expiration Date" shall have the meaning set forth in Section
7(a) hereof.
3.
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"Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
"NASDAQ" shall have the meaning set forth in Section 11(d)
hereof.
"Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
"Preferred Stock" shall mean shares of Series A Preferred Stock,
par value $0.01, of the Company having the rights and preferences set forth in
the Form of Certificate of Designation attached to this Agreement as Exhibit A.
"preferred stock equivalents" shall have the meaning set forth in
Section 11(a)(iii) hereof.
"Purchase Price" shall have the meaning set forth in Section 7(b)
hereof.
"Record Date" shall have the meaning set forth in the recitals to
this Agreement.
"Redemption Date" shall have the meaning set forth in Section
7(a) hereof.
"Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
"Right" shall have the meaning set forth in the recitals to this
Agreement.
"Rights Agent" shall have the meaning set forth in the recitals
to this Agreement.
"Rights Certificate" shall have the meaning set forth in Section
3(a) hereof.
"Rights Dividend Declaration Date" shall have the meaning set
forth in the recitals to this Agreement.
"Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii)(A), (B) or (C) hereof.
"Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in Section 11(a)(iii) hereof.
"Section 13 Event" shall mean any event described in clause (x),
(y) or (z) of Section 13(a) hereof.
"Section 24(a) Exchange Ratio" has the meaning set forth in
Section 24(a) hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the
Company or an Acquiring Person that an Acquiring Person has become such.
4.
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"Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person.
"Summary of Rights" shall have the meaning set forth in Section
3(b) hereof.
"Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.
"Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company in accordance with the
terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the Close of Business on the Shares
Acquisition Date and (ii) the Close of Business on the tenth Business Day (or
such later date as may be determined by action of the Company's Board of
Directors prior to such time as any Person becomes an Acquiring Person and of
which the Company will give the Rights Agent prompt written notice) after the
date that a tender or exchange offer by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding shares of Common Stock for or
pursuant to the terms of any such plan) is first published or sent or given
within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any
successor rule or of the first public announcement of the intention of any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding shares of Common Stock for or pursuant to the terms of any such plan) to
commence, a tender or exchange offer, if upon consummation thereof such Person
would be the Beneficial Owner of 15% or more of the shares of Company Common
Stock then outstanding (the earlier of (i) and (ii) above being the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for shares of Common
Stock registered in the names of the holders thereof (which certificates shall
also be deemed to be Rights Certificates) and not by separate Rights
Certificates, and (y) the right to receive Rights Certificates will be
transferable only in connection with the transfer of shares of Common Stock. As
soon as practicable after the Distribution Date, the Company will notify the
Rights Agent thereof and the Company will prepare and execute, the Rights Agent
will countersign, and the Company will send or cause to be sent (and the Rights
Agent will, if requested, send) by first-class, insured, postage-prepaid mail,
to each record holder of shares of Common Stock as of the Close of Business on
the Distribution Date, at the address of such holder shown on the records of the
Company, a Rights Certificate, in substantially the form of Exhibit B hereto (a
"Rights Certificate"), evidencing one Right for each share of Common Stock so
held. As of the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates.
5.
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(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in
substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of shares of Common
Stock as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to certificates for
shares of Common Stock outstanding as of the Record Date, until the Distribution
Date, the Rights will be evidenced by such certificates registered in the names
of the holders thereof together with a copy of the Summary of Rights attached
thereto. Until the Distribution Date (or the Expiration Date), the surrender for
transfer of any certificate for shares of Common Stock outstanding on the Record
Date, with or without a copy of the Summary of Rights attached thereto, shall
also constitute the transfer of the Rights associated with the shares of Common
Stock represented thereby.
(c) Certificates for shares of Common Stock which become
outstanding (including, without limitation, reacquired shares of Common Stock
referred to in the last sentence of this paragraph (c)) after the Record Date
but prior to the earlier of the Distribution Date and the Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them the
following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Sharper
Image Corporation, and ChaseMellon Shareholder Services, LLC,
dated as of June 7, 1999 (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of
which is on file at the principal executive offices of Sharper
Image Corporation. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate.
Sharper Image Corporation will mail to the holder of this
certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights
issued to any Person who becomes an Acquiring Person (as defined
in the Rights Agreement), whether currently held by or on behalf
of such person or by any subsequent holder, may become null and
void.
With respect to such certificates containing the foregoing legend, until the
earlier of the Distribution Date and the Expiration Date, the Rights associated
with the shares of Common Stock represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
shares of Common Stock represented thereby. In the event that the Company
purchases or acquires any shares of Common Stock after the Record Date but prior
to the Distribution Date, any Rights associated with such shares of Common Stock
shall be deemed cancelled and retired so that the Company shall not be entitled
to exercise any Rights associated with the shares of Common Stock which are no
longer outstanding.
6.
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Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to
purchase Units of Preferred Stock and of assignment to be printed on the reverse
thereof) shall be substantially the same as Exhibit B hereto and may have such
marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or transaction
reporting system on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of Section 11 and Section 22 hereof,
the Rights Certificates shall entitle the holders thereof to purchase the number
of Units of Preferred Stock as shall be set forth therein at the price per Unit
of Preferred Stock set forth therein, but the number of such Units of Preferred
Stock and the Purchase Price shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant hereto that represents
Rights beneficially owned by: (i) an Acquiring Person or any Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
such Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect avoidance of Section 7(e) hereof shall
contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement between Sharper
Image Corporation, and ChaseMellon Shareholder Services, LLC as
Rights Agent, dated as of June 7, 1999 (the "Rights Agreement").
Accordingly, this Rights Certificate and the Rights represented
hereby may become null and void in the circumstances specified in
Section 7(e) of the Rights Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President, any of its Vice Presidents
or its Chief Financial Officer, either manually or by facsimile signature, shall
have affixed thereto the Company's seal or a facsimile thereof, and shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Rights Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be
7.
<PAGE> 11
countersigned by the Rights Agent and issued and delivered by the Company with
the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep
or cause to be kept, at its office designated for such purpose, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the date of each of the Rights Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Sections 4(b), 7(e) and 14
hereof, at any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the Expiration Date, any Rights Certificate
or Rights Certificates may be transferred, split up, combined or exchanged for
another Rights Certificate or Rights Certificates, entitling the registered
holder to purchase a like number of Units of Preferred Stock (or, following a
Triggering Event, other securities, cash or other assets, as the case may be) as
the Rights Certificate or Rights Certificates surrendered then entitled such
holder to purchase. Any registered holder desiring to transfer, split up,
combine or exchange any Rights Certificate or Rights Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Rights Certificates to be transferred, split up, combined
or exchanged at the office of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Sections 4(b), 7(e) and 14 hereof, countersign and
deliver to the person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
8.
<PAGE> 12
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Except as provided in Sections 23(c) and 7(e), the registered
holder of any Rights Certificate may exercise the Rights evidenced thereby
(except as otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase and certification on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated for
such purpose, together with payment of the Purchase Price for each Unit of
Preferred Stock as to which the Rights are exercised, at or prior to the
earliest of (i) the Close of Business on the tenth anniversary hereof (the
"Final Expiration Date"), (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at
which such Rights are exchanged as provided in Section 24 hereof (the earlier of
(i), (ii) and (iii) being the "Expiration Date").
(b) The Purchase Price for each Unit of Preferred Stock pursuant
to the exercise of a Right shall initially be $47.00, shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the number of Units of Preferred Stock (or
other securities or property, as the case may be) to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of such
Rights Certificate in accordance with Section 9 hereof in cash, or by certified
check or cashier's check payable to the order of the Company, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the Preferred Stock (or make available, if the Rights
Agent is the transfer agent for the Preferred Stock) a certificate or
certificates for the number of Units of Preferred Stock to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests or (B) if the Company shall have elected to deposit the total number of
Units of Preferred Stock issuable upon exercise of the Rights hereunder with a
depositary agent, requisition from the depositary agent of a depositary receipt
or depositary receipts representing such number of Units of Preferred Stock as
are to be purchased (in which case certificates for the Units of Preferred Stock
represented by such receipt or receipts shall be deposited by the transfer agent
with the depositary agent) and the Company hereby directs the depositary agent
to comply with such request, (ii) when appropriate, requisition from the Company
the amount of cash to be paid in lieu of issuance of fractional shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder and (iv) when appropriate, after receipt
thereof, deliver such cash to or upon the order of the registered holder of such
Rights Certificate. The payment of the Purchase Price (as such amount may be
reduced (including to zero) pursuant to Section 11(a)(iii) hereof) may be made
in cash or by certified bank check or bank draft payable to the order of the
Company. In the event that the Company is obligated to issue other securities of
the Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate.
9.
<PAGE> 13
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing a number of Rights equivalent to the number of Rights remaining
unexercised shall be issued by the Rights Agent to the registered holder of such
Rights Certificate or to such registered holder's duly authorized assigns,
subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of a Triggering Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of this Section 7(e) or
(iv) any subsequent transferee shall become null and void without any further
action and no holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to ensure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
shall have no liability to any holder of Rights Certificates or to any other
Person as a result of its failure to make any determinations with respect to an
Acquiring Person or any of such Acquiring Person's Affiliates, Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Cancellation and Destruction of Rights Certificates. All Rights
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Rights Certificates to the Company, or shall, at the written request
of the Company, destroy such cancelled Rights Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
10.
<PAGE> 14
Section 9. Reservation and Availability of Preferred Stock.
(a) The Company covenants and agrees that it will use its best
efforts to cause to be reserved and kept available out of and to the extent of
its authorized and unissued Units of Preferred Stock not reserved for another
purpose that will be sufficient to permit the exercise in full of all
outstanding Rights. Upon the occurrence of any events resulting in an increase
in the aggregate number of shares of Preferred Stock (or other equity securities
of the Company) issuable upon exercise of all outstanding Rights above the
number then reserved, the Company shall make appropriate increases in the number
of shares so reserved.
(b) If the Units of Preferred Stock to be issued and delivered
upon the exercise of the Rights are at any time listed on a national securities
exchange or included for quotation on any transaction reporting system, the
Company shall during the period from the Distribution Date to the Expiration
Date use its best efforts to cause all shares reserved for such issuance to be
listed on such exchange or included for quotation on any such transaction
reporting system upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon
as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event in which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as is required by law following the
Distribution Date, as the case may be, a registration statement under the
Securities Act, with respect to the securities purchasable upon exercise of the
Rights on an appropriate form, (ii) cause such registration statement to become
effective as soon as practicable after such filing and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the earlier of (A) the
date as of which the Rights are no longer exercisable for such securities and
(B) the Expiration Date. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction, unless the requisite qualification
in such jurisdiction shall have been obtained, or an exemption therefrom shall
be available and until a registration statement has been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Units of Preferred Stock (and,
following the occurrence of a Triggering Event, any other securities that may be
delivered upon exercise of Rights) shall, at the time of delivery of the
certificates for such Units of Preferred Stock (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
non-assessable.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates or of any Units of Preferred Stock upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Rights Certificates to a
person other than, or the issuance or delivery of certificates or depositary
receipts for Units of Preferred Stock in a name other than that of, the
registered holder of the Rights Certificate evidencing Rights
11.
<PAGE> 15
surrendered for exercise or to issue or to deliver any certificates or
depositary receipts for Units of Preferred Stock upon the exercise of any Rights
until any such tax shall have been paid (any such tax being payable by the
holder of such Rights Certificate at the time of surrender) or until it has been
established to the Company's reasonable satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose
name any certificate for Units of Preferred Stock (or, following the occurrence
of a Triggering Event, other securities) is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Units of Preferred Stock (or, following the occurrence of a Triggering Event,
other securities) represented thereby on, and such certificate shall be dated,
the date upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Stock (or, following the occurrence
of a Triggering Event, other securities) transfer books of the Company are
closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Stock transfer books of the Company are open; provided
further, however, that if delivery of Units of Preferred Stock is delayed
pursuant to Section 9(c), such Persons shall be deemed to have become the record
holders of such Units of Preferred Stock only when such Units first become
deliverable. Prior to the exercise of the Rights evidenced thereby, the holder
of a Rights Certificate shall not be entitled to any rights of a stockholder of
the Company with respect to securities for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a holder
of a Unit of Preferred Stock for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. The Purchase Price, the number and kinds of securities covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after
the date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
shares of Preferred Stock, (C) combine the outstanding Preferred Stock
into a smaller number of shares Preferred Stock or (D) issue any shares
of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving
corporation), except as otherwise provided in this Section 11(a), the
Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of capital stock
issuable on such date, shall be proportionately adjusted so that the
holder of any Rights exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which,
if such Rights had been
12.
<PAGE> 16
exercised immediately prior to such date and at a time when the
Preferred Stock transfer books of the Company were open, such holder
would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification;
provided, however, that in no event shall the consideration to be paid
upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one
Right. If an event occurs which would require an adjustment under both
this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for
in this Section 11(a)(i) shall be in addition to, and shall be made
prior, to any adjustment required pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event
that (A) any Acquiring Person or any Associate or Affiliate of any
Acquiring Person, at any time after the date of this Agreement, directly
or indirectly, shall (1) merge into the Company or otherwise combine
with the Company and the Company shall be the continuing or surviving
corporation of such merger or combination and shares of Company Common
Stock shall remain outstanding and unchanged, (2) in one transaction or
a series of transactions, transfer any assets to the Company or any of
its Subsidiaries in exchange (in whole or in part) for shares of Company
Common Stock, for other equity securities of the Company or any such
Subsidiary, or for securities exercisable for or convertible into shares
of equity securities of the Company or any of its Subsidiaries (whether
shares of Company Common Stock or otherwise) or otherwise obtain from
the Company or any of its Subsidiaries, with or without consideration,
any additional shares of such equity securities or securities
exercisable for or convertible into such equity securities other than
pursuant to a pro rata distribution to all holders of shares of Company
Common Stock, (3) sell, purchase, lease, exchange, mortgage, pledge,
transfer or otherwise acquire or dispose of, in one transaction or a
series of transactions, to, from or with the Company or any of its
Subsidiaries or any employee benefit plan maintained by the Company or
any of its Subsidiaries or any trustee or fiduciary with respect to such
plan acting in such capacity, assets (including securities) on terms and
conditions less favorable to the Company or such Subsidiary or plan than
those that could have been obtained in arm's-length negotiations with an
unaffiliated third party, other than pursuant to a transaction set forth
in Section 13(a) hereof, (4) sell, purchase, lease, exchange, mortgage,
pledge, transfer or otherwise acquire or dispose of, in one transaction
or a series of transactions, to, from or with the Company or any of its
Subsidiaries or any employee benefit plan maintained by the Company or
any of its Subsidiaries or any trustee or fiduciary with respect to such
plan acting in such capacity (other than transactions, if any,
consistent with those engaged in, as of the date hereof, by the Company
and such Acquiring Person or such Associate or Affiliate), assets
(including securities or intangible assets) having an aggregate fair
market value of more than $5,000,000, other than pursuant to a
transaction set forth in Section 13(a) hereof, (5) receive, or any
designee, agent or representative of such Acquiring Person or any
Affiliate or Associate of such Acquiring Person shall receive, any
compensation from the Company or any of its Subsidiaries other than
compensation for full-time employment as a regular employee at rates in
accordance with the Company's (or its Subsidiaries') past practices, or
(6) receive the benefit, directly or indirectly (except proportionately
as a holder of shares of Company Common Stock or as required by law or
governmental regulation), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax advantages
provided by the
13.
<PAGE> 17
Company or any of its Subsidiaries or any employee benefit plan
maintained by the Company or any of its Subsidiaries or any trustee or
fiduciary with respect to such plan acting in such capacity; or (B) any
Person shall become an Acquiring Person, unless the event causing the
Person to become an Acquiring Person is a transaction set forth in
Section 13(a); or (C) during such time as there is an Acquiring Person,
there shall be any reclassification of securities (including any reverse
stock split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or any other
transaction or series of transactions involving the Company or any of
its Subsidiaries, other than a transaction or transactions to which the
provisions of Section 13(a) apply (whether or not with or into or
otherwise involving an Acquiring Person), which has the effect, directly
or indirectly, of increasing by more than 1% the proportionate share of
the outstanding shares of any class of equity securities of the Company
or any of its Subsidiaries that is directly or indirectly beneficially
owned by any Acquiring Person or any Person or any Associate or
Affiliate of any Acquiring Person;
then promptly following the occurrence of an event described in Section
11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii) Event"), proper provision shall
be made so that each holder of a Right, except as provided in Section 7(e)
hereof, shall thereafter have the right to receive for each Right, upon exercise
thereof in accordance with the terms of this Agreement and payment of the
then-current Purchase Price, in lieu of the number of Units of Preferred Stock
for which a Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event, such number of Units of Preferred Stock as shall equal
the result obtained by multiplying the then-current Purchase Price by the then
number of Units of Preferred Stock for which a Right was exercisable (or would
have been exercisable if the Distribution Date had occurred) immediately prior
to the first occurrence of a Triggering Event, and dividing that product by 50%
of the current per share market price (determined pursuant to Section 11(d)
hereof) for shares of Common Stock on the date of occurrence of the Triggering
Event (such number of Units of Preferred Stock being hereinafter referred to as
the "Adjustment Shares").
(iii) In the event that the number of Units of Preferred
Stock which are authorized by the Company's Restated Certificate of
Incorporation but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights are not sufficient to permit the
exercise in full of the Rights, or if any necessary regulatory approval
for such issuance has not been obtained by the Company, the Company
shall, in lieu of issuing Units of Preferred Stock in accordance with
Section 11(a)(ii) hereof: (A) determine the excess of (1) the value of
the Units of Preferred Stock issuable upon the exercise of a Right (the
"Current Value") over (2) the Purchase Price (such excess being referred
to as the "Spread") and (B) with respect to each Right, make adequate
provision to substitute for such Units of Preferred Stock, upon exercise
of the Rights, (1) cash, (2) a reduction in the Purchase Price, (3)
other equity securities of the Company (including, without limitation,
Common Stock or shares or units of shares of any series of preferred
stock which the Board of Directors of the Company has deemed to have the
same value as the Units of Preferred Stock (such shares or units of
preferred stock are herein called "preferred stock equivalents")),
except to the extent that the Company has not obtained any necessary
regulatory approval for such issuance, (4) debt securities of the
Company, except to the extent that the Company has not obtained any
necessary regulatory approval
14.
<PAGE> 18
for such issuance, (5) other assets or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value, where
such aggregate value has been determined by the Board of Directors of
the Company based upon the advice of a nationally recognized investment
banking firm selected by the Board of Directors of the Company;
provided, however, if the Company shall not have made adequate provision
to deliver value pursuant to clause (B) above within thirty (30) days
following the later of (x) occurrence of a Section 11(a)(ii) Event, and
(y) the date on which the Company's right of redemption pursuant to
Section 23(a) expires (the later of (x) and (y) being referred to herein
as the "Section 11(a)(iii) Trigger Date"), then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, Units of Preferred
Stock (to the extent available), except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance,
and then, if necessary, cash, which Units and/or cash have an aggregate
value equal to the Spread.
(b) In the event that the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Units of Preferred
Stock entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or purchase Units of Preferred Stock (or shares
having the same rights, privileges and preferences as the Preferred Stock
("equivalent preferred stock")) or securities convertible into Units of
Preferred Stock or equivalent preferred stock at a price per Unit of Preferred
Stock or equivalent preferred share (or having a conversion price per share, if
a security convertible into Units of Preferred Stock or equivalent preferred
stock) less than the then current per share market price of a Unit of Preferred
Stock (as determined pursuant to Section 11(d)) on such record date, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of Units of Preferred
Stock outstanding on such record date plus the number of Units of Preferred
Stock which the aggregate offering price of the total number of Units of
Preferred Stock and/or equivalent preferred stock so to be offered (and/or the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the denominator of
which shall be the number of Units of Preferred Stock outstanding on such record
date plus the number of additional Units of Preferred Stock and/or equivalent
preferred stock to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible). In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holders of the Rights. Units of
Preferred Stock owned by or held for the account of the Company shall not be
deemed outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in the
event that such rights, options or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price which would then be in effect
if such record date had not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Units of Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of
15.
<PAGE> 19
evidences of indebtedness, cash (other than a regular quarterly cash dividend),
assets (other than a dividend payable in Units of Preferred Stock but including
any dividend payable in equity securities other than Preferred Stock) or
subscription rights or warrants (excluding those referred to in Section 11(d)
hereof), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the then current per
share market price (as determined pursuant to Section 11(d)) of the Preferred
Stock on such record date, less the fair market value (as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holder of rights) of the cash, assets or evidences of
indebtedness to be distributed or of such subscription rights or warrants
distributable in respect of a share of Preferred Stock and the denominator of
which shall be such current per share market price (as determined pursuant to
Section 11(d)) of a share of Preferred Stock. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the
purpose of this Section 11(d)(i)) on any date shall be deemed to be the
average of the daily closing prices per share of such Security for the
thirty (30) consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date; provided, however, that in the
event that the "current per share market price" of the Security is
determined during a period following the announcement by the issuer of
such Security of (A) a dividend or distribution on such Security payable
in shares of such Security or securities convertible into such shares,
or (B) any subdivision, combination or reclassification of such Security
and prior to the expiration of thirty (30) Trading Days after the
ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in each
such case, the "current per share market price" shall be appropriately
adjusted to reflect the "current market price" per share equivalent of
such Security. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
Nasdaq National Market System ("NASDAQ") or, if the Security is not
listed or admitted to trading on the NASDAQ, as reported in the
principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which
the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
NASDAQ or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors of
the Company. If on any such date no market maker is making a market in
the Security, the "current per share market price" of such Security on
such date as determined in good faith by the Board of Directors of the
Company as provided for above shall be used. The term "Trading Day"
shall mean a day on which the principal
16.
<PAGE> 20
national securities exchange on which the Security is listed or admitted
to trading is open for the transaction of business or, if the Security
is not listed or admitted to trading on any national securities
exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Stock shall be
determined in accordance with the method set forth in Section 11(d)(i).
If the "current per share market price" of the Preferred Stock cannot be
determined in the manner provided above or if the Preferred Stock is not
publicly held or listed or traded in a manner described in clause (i) of
this Section 11(d), the "current per share market price" of the
Preferred Stock shall be conclusively deemed to be an amount equal to
$1,000 (as such amount may be appropriately adjusted for such events as
stock splits, stock dividends and recapitalizations with respect to
shares of Company Common Stock occurring after the date of this
Agreement) multiplied by the current market price per share of Company
Common Stock. If shares of neither the Company Common Stock nor
Preferred Stock is publicly held or so listed or traded, "current per
share market price" of the Preferred Stock shall mean the fair value per
share as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. For all purposes of this Agreement, the "current
market price" of a Unit of Preferred Stock shall be equal to the
"current market price" of one share of Preferred Stock divided by 1000.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided, however, that any adjustments which by reason of this
Section 11(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
11 shall be made to the nearest cent or to the nearest one one-thousandth of a
share of Preferred Stock or one one-hundredth of any other share or security as
the case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) hereof, the holder of any Rights thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than Units
of Preferred Stock, thereafter the number of such other shares so receivable
upon exercise of any Rights and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Section 11(a), (b), (c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock
purchasable from time to time hereunder upon exercise of the Rights, all subject
to further adjustment as provided herein.
17.
<PAGE> 21
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
Units of Preferred Stock (calculated to the nearest one-millionth of a share of
Preferred Stock) obtained by dividing (i) the product obtained by multiplying
(x) the number of Units of Preferred Stock covered by a Right immediately prior
to this adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price by, (ii) the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of Units of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of the
number of Rights shall be exercisable for the number of Units of Preferred Stock
for which a Right was exercisable immediately prior to such adjustment. Each
Right held of record prior to such adjustment of the number of Rights shall
become that number of Rights (calculated to the nearest one one-thousandth)
obtained by dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect immediately
after adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates to be so distributed shall be issued, executed
and countersigned in the manner provided for herein and shall be registered in
the names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of Units of Preferred Stock issuable upon the exercise of
the Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per Unit and the number of Units of
Preferred Stock which were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then par value of the number of Units of
Preferred Stock issuable upon exercise of the Rights, the Company shall take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
number of Units of Preferred Stock at such adjusted Purchase Price.
18.
<PAGE> 22
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Rights exercised after such record date
of that number of Units of Preferred Stock and other capital stock or securities
of the Company, if any, issuable upon such exercise over and above the Units of
Preferred Stock and other capital stock or securities of the Company, if any,
issuable upon such exercise on the basis of the Purchase Price in effect prior
to such adjustment; provided, however, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares (fractional or otherwise) upon the occurrence
of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Stock, (ii)
issuance wholly for cash of any Unit of Preferred Stock at less than the current
market price, (iii) issuance wholly for cash of Preferred Stock or securities
which by their terms are convertible into or exchangeable for Preferred Stock,
(iv) dividends on Preferred Stock payable in Preferred Stock or (v) issuance of
rights, options or warrants referred to in this Section 11, hereafter made by
the Company to holders of Units of its Preferred Stock shall not be taxable to
such stockholders.
(n) The Company shall not, at any time after the Distribution
Date, (i) consolidate with any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o)), (ii) merge with or
into any other Person (other than a Subsidiary of the Company in a transaction
which complies with Section 11(o)), or (iii) sell or transfer (or permit any
Subsidiary to sell or transfer), in one transaction, or a series of
transactions, assets or earning power aggregating more than 50% of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company and/or any of its Subsidiaries
in one or more transactions each of which complies with Section 11(o)), if (x)
at the time of or immediately after such consolidation, merger or sale there are
any rights, warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger or sale, the
Person which constitutes, or would constitute the "Principal Party" for purposes
of Section 13(a) shall have distributed or otherwise transferred to its
stockholders or other persons holding an equity interest in such Person Rights
previously owned by such Person or any of its Affiliates and Associates;
provided, however, this Section 11(n) shall not affect the ability of any
Subsidiary of the Company to consolidate with, merge with or into, or sell or
transfer assets or earning power to, any other Subsidiary of the Company.
(o) After the Distribution Date, the Company shall not, except as
permitted by Section 23 or Section 26, take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably foreseeable that
such action will diminish substantially or otherwise eliminate the benefits
intended to be afforded by the Rights.
19.
<PAGE> 23
(p) In the event that, at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on outstanding shares of Common Stock payable in shares of
Common Stock or (ii) effect a subdivision, combination or consolidation of the
Common Stock (by reclassification or otherwise than by payment of dividends in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in any such case the number of Units of Preferred Stock purchasable
after such event upon proper exercise of each Right shall be determined by
multiplying the number of Units of Preferred Stock so purchasable immediately
prior to such event by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately before such event and the
denominator of which is the number of shares of Common Stock outstanding
immediately after such event. The adjustments provided for in this Section 11(p)
shall be made successively whenever such a dividend is declared or paid or such
a subdivision, combination or consolidation is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Sections 11 and 13 hereof,
the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the shares of
Common Stock or Units of Preferred Stock a copy of such certificate and (c) mail
a brief summary thereof to each holder of a Rights Certificate in accordance
with Section 25 hereof. Notwithstanding the foregoing sentence, the failure by
the Company to make such certification or give such notice shall not affect the
validity of or the force or effect of the requirement for such adjustment. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment contained therein and shall not be deemed to have knowledge of
such adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power.
(a) Except as provided in Section 13(b) hereof, in the event
that, following a Shares Acquisition Date, directly or indirectly, (x) the
Company shall consolidate with, or merge with and into, any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o)), and the Company shall not be the continuing or surviving corporation of
such consolidation or merger, (y) any Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o)) shall consolidate
with the Company, or merge with and into the Company and the Company shall be
the continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the shares of
Common Stock shall be changed into or exchanged for stock or other securities of
any other Person or cash or any other property, or (z) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer) to any Person or Persons (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o)), in one or more transactions,
directly or indirectly, assets or earning power aggregating 50% or more of the
assets or earning power of the Company and its Subsidiaries (taken as a whole),
(any such event being a "Section 13 Event"), then, and in each such case, proper
provision shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e), shall thereafter have the right to receive, upon the exercise
thereof at the then current Purchase Price, such number of validly authorized
and issued, fully paid and non-
20.
<PAGE> 24
assessable shares of Common Stock of the Principal Party (as such term is
hereinafter defined), which shares shall not be subject to any liens,
encumbrances, rights of first refusal, transfer restrictions or other adverse
claims, as shall be equal to the result obtained by (1) multiplying the then
current Purchase Price by the number of Units of Preferred Stock for which a
Right is exercisable immediately prior to the first occurrence of a Section 13
Event (or, if a Section 11(a)(ii) Event has occurred prior to the first
occurrence of a Section 13 Event, multiplying the number of such Units of
Preferred Stock for which a Right would be exercisable hereunder but for the
occurrence of such Section 11(a)(ii) Event by the Purchase Price which would be
in effect hereunder but for such first occurrence) and (2) dividing that product
(which, following the direct occurrence of a Section 13 Event, shall be the
"Purchase Price" for all purposes of this Agreement) by 50% of the current per
share market price (determined pursuant to Section 11(d)) of the shares of
Common Stock of such Principal Party on the date of consummation of such Section
13 Event; (ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and duties of
the Company pursuant to this Agreement; (iii) the term "Company" shall, for all
purposes of this Agreement, thereafter be deemed to refer to such Principal
Party, it being specifically intended that the provisions of Section 11 shall
apply only to such Principal Party following the first occurrence of a Section
13 Event; (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common
Stock) in connection with the consummation of any such transaction as may be
necessary to ensure that the provisions of this Agreement shall thereafter be
applicable to its shares of Common Stock thereafter deliverable upon the
exercise of the Rights; and (v) the provisions of Section 11(a)(ii) shall be of
no further effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x)
or (y) of the first sentence of Section 13(a), (A) the Person that is
the issuer of any securities into which shares of Company Common Stock
are converted in such merger or consolidation, or, if there is more than
one such issuer, the issuer of shares of Common Stock that has the
highest aggregate current market price (determined pursuant to Section
11(d)) and (B) if no securities are so issued, the Person that is the
other party to such merger or consolidation, or, if there is more than
one such Person, the Person the Common Stock of which has the highest
aggregate current market price (determined pursuant to Section 11(d));
and
(ii) in the case of any transaction described in clause
(z) of the first sentence of Section 13(a), the Person that is the party
receiving the largest portion of the assets or earning power transferred
pursuant to such transaction or transactions, or, if each Person that is
a party to such transaction or transactions receives the same portion of
the assets or earning power transferred pursuant to such transaction or
transactions or if the Person receiving the largest portion of the
assets or earning power cannot be determined, whichever Person the
Common Stock of which has the highest aggregate current market price
(determined pursuant to Section 11(d)); provided, however, that in any
such case, (1) if the Common Stock of such Person is not at such time
and has not been continuously over the preceding twelve-month period
registered under Section 12 of the Exchange Act ("Registered Common
Stock"), or such Person is not a corporation,
21.
<PAGE> 25
and such Person is a direct or indirect Subsidiary of another Person
that has Registered Common Stock outstanding, "Principal Party" shall
refer to such other Person; (2) if the Common Stock of such Person is
not Registered Common Stock or such Person is not a corporation, and
such Person is a direct or indirect Subsidiary of another Person but is
not a direct or indirect Subsidiary of another Person which has
Registered Common Stock outstanding, "Principal Party" shall refer to
the ultimate parent entity of such first-mentioned Person; (3) if the
Common Stock of such Person is not Registered Common Stock or such
Person is not a corporation, and such Person is directly or indirectly
controlled by more than one Person, and one or more of such other
Persons has Registered Common Stock outstanding, "Principal Party" shall
refer to whichever of such other Persons is the issuer of the Registered
Common Stock having the highest aggregate current per share market price
(determined pursuant to Section 11(d)); and (4) if the Common Stock of
such Person is not Registered Common Stock or such Person is not a
corporation, and such Person is directly or indirectly controlled by
more than one Person, and none of such other Persons has Registered
Common Stock outstanding, "Principal Party" shall refer to whichever
ultimate parent entity is the corporation having the greatest
stockholders' equity or, if no such ultimate parent entity is a
corporation, shall refer to whichever ultimate parent entity is the
entity having the greatest net assets.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13, and unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and further providing that the Principal Party will:
(i) (A) file on an appropriate form, as soon as
practicable following the execution of such agreement, a registration
statement under the Securities Act with respect to the shares of Common
Stock that may be acquired upon exercise of the Rights, (B) cause such
registration statement to remain effective (and to include a prospectus
complying with the requirements of the Securities Act) until the
Expiration Date, and (C) as soon as practicable following the execution
of such agreement take such action as may be required to ensure that any
acquisition of such shares of Common Stock upon the exercise of the
Rights complies with any applicable state securities or "blue sky" laws;
and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which
comply in all respects with the requirements for registration on Form 10
under the Exchange Act.
(d) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or Bylaws or other
instrument governing its corporate affairs, which provision would have the
effect of (i) causing such Principal Party to issue, in connection with, or as a
consequence of, the consummation of a transaction referred to in this Section
13, shares of Common Stock of such Principal Party at less than the then current
market price per share
22.
<PAGE> 26
(determined pursuant to Section 11(d)) or securities exercisable for, or
convertible into, shares of Common Stock of such Principal Party at less than
such then current marker price (other than to holders of Rights pursuant to this
Section 13) or (ii) providing for any special payment, tax or similar provisions
in connection with the issuance of the shares of Common Stock of such Principal
Party pursuant to the provisions of this Section 13, then, in such event, the
Company shall not consummate any such transaction unless prior thereto the
Company and such Principal Party shall have executed and delivered to the Rights
Agent a supplemental agreement providing that the provision in question of such
Principal Party shall have been cancelled, waived or amended, or that the
authorized securities shall be redeemed, so that the applicable provision will
have no effect in connection with, or as a consequence of, the consummation of
the proposed transaction.
(e) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that a Section 13 Event shall occur at any time after the occurrence of a
Section 11(a)(ii) Event, the Rights which have not theretofore been exercised
shall thereafter become exercisable in the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights or to distribute Rights Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for any
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the NASDAQ
or, if the Rights are not listed or admitted to trading on the NASDAQ, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Directors. If on any
such date no such market maker is making a market in the Rights, the fair value
of the Rights on such date as determined in good faith by the Board of Directors
of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Stock (other than fractions which are integral multiples of one
one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Stock (other than
fractions which are integral multiples of one one-thousandth of a share of
Preferred Stock). Fractions of Preferred Stock in integral multiples of one
one-
23.
<PAGE> 27
thousandth of a share of Preferred Stock may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it; provided, however, that such
agreement shall provide that the holders of such depositary receipts shall have
all the rights, privileges and preferences to which they are entitled as
beneficial owners of the Preferred Stock represented by such depositary
receipts. In lieu of fractional shares of Preferred Stock that are not integral
multiples of one one-thousandth of a share of Preferred Stock, the Company shall
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one a share of Preferred Stock as determined pursuant to
Section 11(d).
(c) The holder of a Right by the acceptance of the Right
expressly waives such holder's right to receive any fractional Rights or any
fractional shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of
this Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
certificates representing shares of Common Stock); and any registered holder of
any Rights Certificate (or, prior to the Distribution Date, a certificate
representing shares of Common Stock), without the consent of the Rights Agent or
of the holder of any other Rights Certificate (or, prior to the Distribution
Date, of a certificate representing shares of Common Stock), may, in such
holder's own behalf and for such holder's own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, such holder's right to exercise the
Rights evidenced by such Rights Certificate in the manner provided in such
Rights Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations hereunder, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right,
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of shares of the Company's
Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer;
(c) subject to Sections 6(a) and 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or
24.
<PAGE> 28
writing on the Rights Certificates or the associated Common Stock certificate
made by anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Units of Preferred
Stock or any other securities of the Company which may at any time be issuable
upon the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 25 hereof), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
gross negligence, or willful misconduct on the part of the Rights Agent, for any
action taken, suffered or omitted by the Rights Agent in connection with the
execution, acceptance and administration of this Agreement and the exercise and
performance hereunder of its duties, including the costs and expenses of
defending against and appealing any claim of liability in the premises. The
indemnity provided herein shall survive the termination of this Agreement and
the expiration of the Rights. The costs and expenses incurred in enforcing this
right of indemnification shall be paid by the Company.
The Rights Agent may conclusively rely upon and shall be
protected and shall incur no liability for, or in respect of any action taken,
suffered or omitted by it in connection with, its administration of this
Agreement and the exercise and performance of its duties hereunder in reliance
upon any Rights Certificate or certificate for Units of Preferred Stock or
shares of Common Stock or for other securities of the Company, instrument of
assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed
25.
<PAGE> 29
and, where necessary, verified or acknowledged, by the proper person or persons,
or otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of ChaseMellon
Shareholder Services, LLC.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stock transfer or corporate trust business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of the predecessor Rights Agent and deliver such
Rights Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions and no implied duties or obligations shall be read into this
Agreement against the Rights Agent, by all of which the Company and the holders
of Rights Certificates, by their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, it may
consult with legal counsel of its choice (who may be legal counsel for the
Company), and the advice or opinion of such counsel shall be full and complete
authorization and protection to the Rights Agent as to any action taken,
suffered or omitted by it in good faith and in accordance with such advice or
opinion.
(b) Whenever in the administration, exercise and performance of
its duties under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company prior
to taking, suffering or omitting any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically
26.
<PAGE> 30
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, or the Chief Financial Officer of
the Company and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken, suffered or omitted
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and
any other Person only for its own gross negligence or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any liability or
responsibility in respect of the legality, validity or enforceability of this
Agreement or the execution and delivery hereof (except the due execution hereof
by the Rights Agent) or in respect of the legality, validity or enforceability
or the execution of any Rights Certificate (except its countersignature thereof
and has actual knowledge of such change or adjustment); nor shall it be liable
or responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Rights Certificate; nor shall it be
responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after receipt
of the certificate described in Section 12 hereof or has actual knowledge of
such change or adjustment); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any
Units of Preferred Stock to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any Preferred Stock will, when issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the administration, exercise and performance of its
duties hereunder from any one of the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President or the Secretary of the Company, and
to apply to such officers for advice or instructions in connection with its
duties, and it shall not be responsible or liable for any action taken, suffered
or omitted by it in good faith in accordance with instructions of any such
officer or for any delay in acting while waiting for those instructions. Any
application by the Rights Agent for written instructions from the Company may,
at the option of the Rights Agent, set forth in writing any action proposed to
be taken or omitted by the Rights Agent under this Agreement and the date on
27.
<PAGE> 31
and/or after which such action shall be taken or such omission shall be
effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in any such
application on or after the date specified in such application (which date shall
not be less than five (5) Business Days after the date any officer of the
Company actually received such application, unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such action
(or the effective date in the case of an omission), the Rights Agent shall have
received written instructions in response to such application specifying the
action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(i) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its rights
if the Rights Agent in good faith believes that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(j) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise, transfer, split up, combination or exchange, the
certification on the form of assignment or form of election to purchase, as the
case may be, that the Rights evidenced by the Rights Certificate are not owned
by an Acquiring Person, or an Affiliate or Associate thereof, has either not
been completed or in any manner indicates any other response thereto, the Rights
Agent shall not take any further action with respect to such requested exercise,
transfer, split up, combination or exchange, without first consulting with the
Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company and to
each transfer agent of the Common Stock or Preferred Stock (as to which the
Rights Agent has received prior written notice) by registered or certified mail,
and the Company shall mail notice thereof to the holders of the Rights
Certificates by first-class mail. The Company may remove the Rights Agent or any
successor Rights Agent upon thirty (30) days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Stock or Preferred Stock (as to which the Rights Agent has
received prior written notice) by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. If the Rights Agent
shall
28.
<PAGE> 32
resign or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the Rights Agent. If the Company shall fail to make
such appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit such holder's Rights
Certificate for inspection by the Company), then the registered holder of any
Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be a corporation organized and doing
business under the laws of the United States or of any state of the United
States, in good standing, authorized under such laws to exercise corporate trust
or stock transfer powers, and subject to supervision or examination by federal
or state authority and which has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Stock or Preferred Stock, and mail a
notice thereof in writing to the registered holders of the Rights Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the Expiration Date, the Company (a) shall, with respect to
shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee benefit plan or arrangement or upon the exercise,
conversion or exchange of securities of the Company currently outstanding or
issued at any time in the future by the Company and (b) may, in any other case,
if deemed necessary or appropriate by the Board of Directors of the Company
issue Rights Certificates representing the appropriate number of Rights in
connection with such issuance or sale; provided, however, that (i) no such
Rights Certificate shall be issued and this sentence shall be null and void ab
initio if, and to the extent that, such issuance or this sentence would create a
significant risk of or result in material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued or would
create a significant risk of or result in such options' or employee plans' or
arrangements' failing to qualify for otherwise available special tax treatment
and (ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
29.
<PAGE> 33
Section 23. Redemption and Termination.
(a) The Company may, at its option, upon approval by the Board of
Directors, at any time on or prior to the Close of Business (or such later date
as may be determined by the Board of Directors) on the earlier of (i) the Shares
Acquisition Date or (ii) the Final Expiration Date redeem all but not less than
all the then outstanding Rights at a redemption price of $0.001 per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"), and the Company may, at its
option, pay the Redemption Price either in cash, shares of Common Stock (based
on the current per share market price thereof (as determined pursuant to Section
11(d) hereof) at the time of redemption), or any other form of consideration
deemed appropriate by the Board of Directors. The redemption of the Rights by
the Board of Directors may be made effective at such time on such basis and with
such conditions as the Board of Directors in its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and shall mail a notice of redemption to all the holders of
the then outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Stock. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the method
by which the payment of the Redemption Price will be made. Neither the Company
nor any of its Affiliates or Associates may redeem, acquire or purchase for
value any Rights at any time in any manner other than that specifically set
forth in this Section 23 or in Section 24 hereof, and other than in connection
with the purchase of shares of Common Stock prior to the Distribution Date.
(c) Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any
time when the Rights are redeemable hereunder.
Section 24. Exchange.
(a) The Company, at its option, upon approval by the Board of
Directors, at any time after any Person becomes an Acquiring Person, may
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to the provisions of Section
7(e) hereof) for Units of Preferred Stock at an exchange ratio equal to, subject
to adjustment to reflect stock splits, stock dividends and similar transactions
occurring after the date hereof, that number obtained by dividing the Purchase
Price by the then current per share market price per Unit of Preferred Stock on
the earlier of (i) the date on which any Person becomes an Acquiring Person and
(ii) the date on which a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan maintained by
the Company or any of its Subsidiaries or any trustee or
30.
<PAGE> 34
fiduciary with respect to such plan acting in such capacity) is first published
or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act
Regulations or any successor rule, if upon consummation thereof such Person
would be the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding (such exchange ratio being hereinafter referred to as the "Section
24(a) Exchange Ratio"). Notwithstanding the foregoing, the Company may not
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan maintained by the Company
or any of its Subsidiaries, or any trustee or fiduciary with respect to such
plan acting in such capacity), together with all Affiliates and Associates of
such Person, becomes the Beneficial Owner of 50% or more of the shares of Common
Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Units of Preferred Stock equal
to the number of such Rights held by such holder multiplied by the Section 24(a)
Exchange Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of Units of Preferred Stock for Rights
will be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become void pursuant to
the provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In the event that the number of shares of Preferred Stock
which are authorized by the Company's Certificate of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit any exchange of Rights as contemplated
in accordance with this Section 24, the Company shall take all such action as
may be necessary to authorize additional shares of Preferred Stock for issuance
upon exchange of the Rights or make adequate provision to substitute (1) cash,
(2) Company Common Stock or other equity securities of the Company, (3) debt
securities of the Company, (4) other assets, or (5) any combination of the
foregoing, having an aggregate value equal to the Adjustment Spread, where such
aggregate value has been determined by the Board of Directors. To the extent
that the Company determines that some action need be taken pursuant to
subsection (a) of this Section 24, the Board of Directors may temporarily
suspend the exercisability of the Rights for a period of up to sixty (60) days
following the date on which the event described in Section 24(a) shall have
occurred, in order to seek any authorization of additional shares of Preferred
Stock and/or to decide the appropriate form of distribution to be made pursuant
to the above provision and to determine the value thereof. In the event of any
such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended.
31.
<PAGE> 35
(d) The Company shall not be required to issue fractions smaller
than or to distribute certificates which evidence fractions smaller than one
one-thousandth of a share of Preferred Stock. In lieu thereof, the Company shall
pay to the registered holders of the Rights Certificates with regard to which
such fractional Units would otherwise be issuable an amount in cash equal to the
same fraction of the current market value (as determined pursuant to Section
11(d)(i) hereof) of one Unit of Preferred Stock.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend
payable in stock of any class to the holders of its Preferred Stock or to make
any other distribution to the holders of its Preferred Stock (other than a
regular quarterly cash dividend), (ii) to offer to the holders of its Preferred
Stock rights or warrants to subscribe for or to purchase any additional Units of
Preferred Stock or shares of stock of any class or any other securities, rights
or options, (iii) to effect any reclassification of its Preferred Stock (other
than a reclassification involving only the subdivision of outstanding Preferred
Stock), (iv) to effect any consolidation or merger into or with any other Person
(other than a Subsidiary of the Company in a transaction which complies with
Section 11(o)), or to effect any sale or other transfer (or to permit one or
more of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Stock payable in shares of Common Stock or to effect
a subdivision, combination or consolidation of the shares of Common Stock (by
reclassification or otherwise than by payment of dividends in shares of Common
Stock), then, in each such case, the Company shall give to each holder of a
Rights Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Common Stock and/or shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least ten (10) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least ten (10) days prior to the date of the taking of such proposed action or
the date of participation therein by the holders of the shares of Common Stock
and/or shares of Preferred Stock, whichever shall be the earlier.
(b) In case any of the events set forth in Section 11(a)(ii)
hereof shall occur, then the Company shall as soon as practicable thereafter
give to each holder of a Rights Certificate, in accordance with Section 26
hereof, a notice of the occurrence of such event, which notice shall describe
such event and the consequences of such event to holders of Rights under Section
11(a)(ii) hereof. In the event any Person becomes an Acquiring Person, the
Company will promptly notify the Rights Agent thereof.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
32.
<PAGE> 36
Sharper Image Corporation
650 Davis Street
San Francisco, California 94111
Attention: Chief Financial Officer
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sent by registered or
certified mail and shall be deemed given upon receipt and addressed (until
another address is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, LLC
-------------------------------------
-------------------------------------
Attention:
--------------------------
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution
Date, the Company may supplement or amend this Agreement in any respect, without
the approval of any holders of Rights, by action of its Board of Directors, and
the Rights Agent shall, if the Company so directs, execute such supplement or
amendment. From and after the Distribution Date, the Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Rights, by action of its Board of Directors in order (i) to cure any ambiguity,
(ii) to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provisions herein, (iii) to shorten or
lengthen any time period hereunder or (iv) to change or supplement the
provisions hereunder in any manner which the Company may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Affiliate or Associate
of an Acquiring Person), including, without limitation, to change the Purchase
Price, the Redemption Price, any time periods herein specified, and any other
term hereof, any such supplement or amendment to be evidenced by a writing
signed by the Company and the Rights Agent; provided, however, that from and
after such time as any Person becomes an Acquiring Person, this Agreement shall
not be amended in any manner which would adversely affect the interests of the
holders of Rights. Upon receipt of a certificate from an appropriate officer of
the Company that the proposed supplement or amendment is consistent with this
Section 27 and, after such time as any Person has become an Acquiring Person,
that the proposed supplement or amendment does not adversely affect the
interests of the holders of Rights, the Rights Agent shall execute such
supplement or amendment.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
33.
<PAGE> 37
Section 29. Determinations and Actions by the Board of Directors.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the Exchange Act. The Board of
Directors of the Company shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors, or the Company, or as may be necessary or
advisable in the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing), which are done or made by the
Board of Directors in good faith, shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Rights Certificates and all
other parties and (y) not subject the Board of Directors to any liability to the
holders of the Rights.
Section 30. Benefits of This Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, shares of Common Stock) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, shares
of Common Stock).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the tenth Business Day following
the date of such determination by the Board of Directors of the Company.
Section 32. Governing Law. This Agreement and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
34.
<PAGE> 38
Section 34. Descriptive Headings. Descriptive headings of the
several sections of this Agreement are inserted or convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
35.
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and attested, all as of the day and year first above
written.
ATTEST: SHARPER IMAGE CORPORATION
By: By:
-------------------------------- -----------------------------------
Name: Name:
-------------------------- -----------------------------
Title: Title:
-------------------------- -----------------------------
ATTEST: CHASEMELLON SHAREHOLDER SERVICES, LLC
By: By:
-------------------------------- -----------------------------------
Name: Name:
-------------------------- -----------------------------
Title: Title:
-------------------------- -----------------------------
36.
<PAGE> 40
Exhibit A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
SHARPER IMAGE CORPORATION,
(Pursuant to Section 151 of the
Delaware General Corporation Law)
----------------------------------
SHARPER IMAGE CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the "Corporation"), hereby certifies that the following resolution was adopted
by the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on June 7, 1999;
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be Two Hundred Fifty Thousand (250,000). Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding plus
the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred Stock.
A-1
<PAGE> 41
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, each holder of a share of Series A
Preferred Stock, in preference to the holders of shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of the Corporation, and of any other
junior stock, shall be entitled to receive, when declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the last day of April, July, October and January in each year
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to, subject to the
provision for adjustment hereinafter set forth, One Thousand (1,000) times the
aggregate per share amount of all cash dividends, and One Thousand (1,000) times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of a share or fraction of Series A
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
shares of Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Distribution Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1,000 per share
of Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding share of Series A Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such share of Series A
Participating Preferred Stock, unless the date of issue of such share is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such share shall begin to accrue from the date of issue of such
share, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly
A-2
<PAGE> 42
Dividend Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to One
Thousand (1,000) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up)
A-3
<PAGE> 43
with the Series A Preferred Stock, except dividends paid ratably on the shares
of Series A Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (1) to the holders of shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received One Thousand Dollars ($1,000) per
share, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment (the "Series A
Liquidation Preference"), provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock (the "Common Adjustment"), or (2) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except distributions made ratably
on the Series A Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
A-4
<PAGE> 44
liquidation, dissolution or winding up. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event ("Adjustment Number").
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) In the event the Corporation shall at any time after June 22, 1999
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the Adjustment
Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to One Thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
A-5
<PAGE> 45
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
A-6
<PAGE> 46
IN WITNESS WHEREOF, this Certificate of Designation is executed
on behalf of the Corporation by its ___________ and its corporate seal attested
by its ____________ this __th day of June, 1999.
ATTEST: SHARPER IMAGE CORPORATION
By: By:
-------------------------------- -----------------------------------
Name: Name:
-------------------------- -----------------------------
Title: Title:
-------------------------- -----------------------------
A-7
<PAGE> 47
Exhibit B
Form of Rights Certificate
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER JUNE 6, 2009 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT THE OPTION OF THE
COMPANY AT $0.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN
THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY
OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND
ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE
RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY
OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE
OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SUCH AGREEMENT.]*
Rights Certificate
SHARPER IMAGE CORPORATION
This certifies that _____________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of June 7, 1999 (the "Rights Agreement"), between Sharper
Image Corporation, a Delaware corporation (the "Company"), and ChaseMellon
Shareholder Services, LLC (the "Rights Agent"), to purchase from the Company at
any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., California time, on June 6, 2009 at the
office of the Rights Agent designated for such purpose, or at the office of its
successor as Rights Agent, one one-thousandth (a "Unit") of a fully paid
non-assessable share of Series A Junior Participating Preferred Stock, par value
$0.01 per share (the "Series A Preferred Stock") of the Company, at a purchase
price of $47.00 per Unit of Series A Preferred Stock (the "Purchase Price"),
upon presentation and surrender of this Rights Certificate with the Form of
Election to Purchase duly executed. The number of Rights evidenced by this
Rights Certificate (and the number of Units of Series A Preferred Stock which
may be purchased upon exercise hereof) set forth above, and the Purchase Price
set forth above, are the number and Purchase Price as of June 7, 1999 based on
the Series A Preferred Stock as constituted at such date. As provided in the
Rights Agreement, the Purchase Price and the number of Units of Series A
Preferred Stock which may
B-1
- ---------------------
* The portion of the legend in bracket shall be inserted only if applicable
and shall replace the preceding sentence.
<PAGE> 48
be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights Certificates.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the office of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of Series A Preferred Stock as the Rights
evidenced by the Rights Certificate or Rights Certificates surrendered shall
have entitled such holder to purchase. If this Rights Certificate shall be
exercised in part, the holder shall be entitled to receive upon surrender hereof
another Rights Certificate or Rights Certificates for the number of whole Rights
not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at a redemption
price of $0.001 per Right.
No fractional shares of Series A Preferred Stock will be issued
upon the exercise of any Rights or Rights evidenced hereby (other than fractions
which are integral multiples of one one-thousandth of a share of Series A
Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts), but in lieu thereof a cash payment will be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled
to vote or receive dividends or be deemed for any purpose the holder of Units of
Series A Preferred Stock or of any other securities of the Company which may at
any time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Rights or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
B-2
<PAGE> 49
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the signature of the proper officers of the Company and
its corporate seal. Dated as of June 7, 1999.
ATTEST: SHARPER IMAGE CORPORATION
By: By:
-------------------------------- -----------------------------------
Name: Name:
-------------------------- -----------------------------
Title: Title:
-------------------------- -----------------------------
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES, LLC
as Rights Agent
By:
--------------------------------
Authorized Signatory
Name:
--------------------------
Title:
--------------------------
B-3
<PAGE> 50
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer the Rights Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells,
assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
DATED: ,
------------ -----
---------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities
Transfer Association Inc. recognized signature guarantee medallion program.
B-4
<PAGE> 51
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by
this Rights Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
---------------------------------------
Signature
--------------------------------
NOTICE
The signature in the foregoing Form of Assignment must conform to
the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment is not completed, the Company and the Rights Agent will deem the
beneficial owner of the Rights evidenced by this Rights Certificate to be an
Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights
Agreement) and such Assignment will not be honored.
B-5
<PAGE> 52
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Rights Certificate.)
To Sharper Image Corporation
The undersigned hereby irrevocably elects to exercise ___________
Rights represented by this Rights Certificate to purchase the Units of Series A
Preferred Stock issuable upon the exercise of such Rights and requests that
certificates for such Series A Preferred Stock be issued in the name of:
Please insert social security
or other identifying number
----------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
----------------------------------------------------
(Please print name and address)
DATED: ,
------------ -----
---------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities
Transfer Association Inc. recognized signature guarantee medallion program.
B-6
<PAGE> 53
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by
this Rights Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
---------------------------------------
Signature
-----------------------------
NOTICE
The signature in the foregoing Form of Election to Purchase must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Election to Purchase, as the case may be, is not completed, the Company and the
Rights Agent will deem the beneficial owner of the Rights evidenced by this
Rights Certificate to be an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and such Election to Purchase will
not be honored.
B-7
<PAGE> 54
Exhibit C
SHARPER IMAGE CORPORATION
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF SERIES A PREFERRED STOCK
On June 7, 1999 the Board of Directors of Sharper Image
Corporation (the "Company") declared a dividend of one preferred share purchase
right (a "Right") for each outstanding share of Common Stock (the "Common
Stock"), par value $0.01 per share, of the Company. The dividend is payable on
June 22, 1999 (the "Record Date") to the stockholders of record on that date.
Each Right entitles the registered holder to purchase from the Company one
one-thousandth of a share (a "Unit") of Series A Junior Participating Preferred
Stock, par value $0.01 per share (the "Series A Preferred Stock"), of the
Company at a price of $47.00 per Unit (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of June 7, 1999 (the "Rights Agreement") between the Company
and ChaseMellon Shareholder Services, LLC, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) the close of business on the
first date of a public announcement that a person or group of affiliated or
associated persons, other than Richard J. Thalheimer, the Founder, Chairman and
Chief Executive Officer and a significant stockholder of the Company and his
affiliates and associates (an "Acquiring Person") have acquired beneficial
ownership of 15% or more of the outstanding Common Stock or (ii) 10 business
days (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of such outstanding Common Stock
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Stock certificates
outstanding as of the Record Date, by such Common Stock certificate with a copy
of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date,
the Rights will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Stock certificates issued after the Record Date, upon transfer or new
issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Stock, outstanding as of the Record Date, even without such notation or a
copy of this Summary of Rights being attached thereto, will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the Common Stock as of the Close of Business on the
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire at the close of business on June 6, 2009 (the "Final
Expiration Date"), unless the Final Expiration
C-1
<PAGE> 55
Date is extended or unless the Rights are earlier redeemed or exchanged by the
Company, in each case as described below.
The Purchase Price payable, and the number of Units of Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) upon the grant to holders of the Units of Preferred Stock
of certain rights or warrants to subscribe for or purchase Units of Preferred
Stock at a price, or securities convertible into Units of Preferred Stock with a
conversion price, less than the then current market price of the Units of
Preferred Stock or (iii) upon the distribution to holders of the Units of
Preferred Stock of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Units of Preferred Stock) or of subscription rights or warrants
(other than those referred to above).
The number of outstanding Rights and the number of Units of
Preferred Stock issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Units of Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each Unit of Preferred Stock will be entitled to a
dividend equal to any dividend declared per share of Common Stock. In the event
of liquidation, each Unit of Preferred Stock will be entitled to a payment equal
to any payment made per share of Common Stock. Each Unit of Preferred Stock will
have one vote, voting together with the Common Stock. Finally, in the event of
any merger, consolidation or other transaction in which shares of Common Stock
are exchanged, each Unit of Preferred Stock will be entitled to receive an
amount equal to the amount received per share of Common Stock. These rights are
protected by customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting
rights, the value of each Unit of Preferred Stock purchasable upon exercise of
the Rights should approximate the value of one share of Common Stock.
In the event that, after the Rights become exercisable, the
Company is acquired in a merger or other business combination transaction with
an Acquiring Person or an affiliate thereof, or 50% or more of its consolidated
assets or earning power are sold to an Acquiring Person or an affiliate thereof,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon exercise thereof at the then current exercise
price of the Rights, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value of two
times the exercise price of the Rights.
In the event that any person or group of affiliated or associated
persons becomes the beneficial owner of 15% or more of the outstanding shares of
Common Stock, proper provision shall be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive
C-2
<PAGE> 56
upon exercise that number of shares of Common Stock or Units of Preferred Stock
(or cash, other securities or property) having a market value of two times the
exercise price of the Rights.
At any time after the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 15% or more of the
outstanding shares of Common Stock and prior to the acquisition by such person
or group of 50% or more of the outstanding Common Stock, the Board of Directors
of the Company may exchange all or part of the Rights (other than Rights owned
by such person or group which have become void) for Units of Preferred Stock at
an exchange ratio (subject to adjustment) which shall equal, subject to
adjustment to reflect stock splits, stock dividends and similar transactions
occurring after the date hereof, that number obtained by dividing the Purchase
Price by the then current per share market price per Unit of Preferred Stock on
the earlier of (i) the date on which any Person becomes an Acquiring Person and
(ii) the date on which a tender or exchange offer is announced by any Person, if
upon consummation thereof such Person would be the Beneficial Owner of 15% or
more of the shares of Company Common Stock then outstanding.
With certain exceptions, no adjustment in the Purchase Price will
be required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Preferred Stock will be issued
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock, which may, at the election of the Company, be
evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash
will be made based on the market price of the Units of Preferred Stock on the
last trading day prior to the date of exercise.
At any time before the close of business on the date a person or
group of affiliated or associated persons acquire beneficial ownership of 15% or
more of the outstanding Common Stock or within ten (10) business days after the
announcement of a tender or exchange offer (unless the Board of Directors extend
such ten-day period), the Board of Directors of the Company may redeem the
Rights in whole, but not in part, at a price of $0.001 per Right (the
"Redemption Price"). The redemption of the rights may be made effective at such
time on such basis and with such conditions as the Board of Directors in its
sole discretion may establish. Immediately upon any redemption of the Rights,
the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price. The Rights are also
redeemable under other circumstances as specified in the Agreement.
The terms of the Rights may be amended by the Board of Directors
of the Company without the consent of the holders of the Rights except that from
and after a Distribution Date no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors, except
pursuant to an offer conditioned on a substantial number
C-3
<PAGE> 57
of rights being acquired. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors because the Rights
may be redeemed by the Company at the Redemption Price prior to the occurrence
of a Distribution Date.
A copy of the Rights Agreement has been filed with the Securities
and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A
copy of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is hereby
incorporated herein by reference.
C-4
<PAGE> 1
EXHIBIT 5.01
[LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP]
June 16, 1999
Sharper Image Corporation
650 Davis Street
San Francisco, California 94111
Re: Sharper Image Corporation
Registration Statement on Form S-2 for 3,450,000 Shares of
Common Stock
Ladies and Gentlemen:
We have acted as counsel to Sharper Image Corporation, a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 3,450,000 shares of the Company's Common Stock (the
"Shares") pursuant to the Company's Registration Statement on Form S-2 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the
requirements of Item 16 of Form S-2 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review, we are of the opinion that the Shares
have been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
<PAGE> 2
Sharper Image Corporation
Page 2
This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
[DELOITTE & TOUCHE LETTERHEAD]
EXHIBIT 15.1
June 15, 1999
Sharper Image Corporation
San Francisco, California
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of the Sharper Image Corporation for the periods ended April 30,
1999 and 1998, as indicated in our report dated June 7, 1999; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our reports referred to above, which were included in your
Quarterly Reports on Form 10-Q for the quarter ended April 30, 1999, are being
used in this Registration Statement.
We also are aware that the aforementioned reports, pursuant to Rule 436(c)
under the Securities Act of 1933, are not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
San Francisco, California
<PAGE> 1
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement (No.
333-79211) of the Sharper Image Corporation on Pre-Effective Amendment No. 1 to
Form S-2 of our reports dated March 26, 1999 included and incorporated by
reference in the Annual Report on Form 10-K of Sharper Image Corporation for the
year ended January 31, 1999 and to the use of our report dated March 26, 1999,
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the references to us under the heading "Summary Financial Data
and Operating Statistics", "Selected Financial Data" and "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
San Francisco California
June 15, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF DIRECTOR NOMINEE
Sharper Image Corporation
650 Davis Street
San Francisco, California 94111
Attention: Board of Directors
I, George James, hereby consent to be named in the Registration
Statement on Form S-2 of Sharper Image Corporation relating to the sale of
2,500,000 shares of Sharper Image Corporation's common stock.
/s/ George James
-----------------------------
George James
San Francisco, California
May 21, 1999
