SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended January 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number 33-12755
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code:
(415) 445-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 17, 2000 was $80,438,900
The number of shares of Common Stock, with $.01 par value,
outstanding on April 17, 2000 was 12,026,259 shares.
Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January 31, 2000 are incorporated by reference into Parts II and IV of this
Report. Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 12, 2000 are incorporated by reference into Part
III of this report.
1
<PAGE>
PART 1
This Annual Report on Form 10-K and the documents incorporated herein
by reference of Sharper Image Corporation (referred to as the "Company," "The
Sharper Image," "it," "we," "ours," and "us") contain forward-looking statements
that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by the Company's management.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," or variations of such words and similar expressions, are intended
to identify such forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual results may differ
materially from those expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein under
"Factors Affecting Future Operating Results" on pages 15 through 23, as well as
those noted in the documents incorporated herein by reference. Unless required
by law, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the statements set
forth in other reports or documents the Company files from time to time with the
Securities and Exchange Commission, particularly the Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K.
Item 1. Business
Overview
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. The Company offers a unique assortment of products,
in the electronics, recreation and fitness, personal care, houseware, travel,
toy, gift and other categories. The Company's merchandising philosophy focuses
on new and creative proprietary Sharper Image Design products, Sharper Image
private label products and branded products, a portion of which the Company
offers on a exclusive basis. The Company's products are marketed and sold
through three primary sales channels: The Sharper Image stores, The Sharper
Image catalog, and the Internet, primarily through its sharperimage.com Web
site. The Company also has business-to-business operations consisting of Sharper
Image Corporate Rewards & Incentives and wholesale operations. The Company
believes that its unique merchandising and creative marketing strategies have
made The Sharper Image one of the most widely recognized retail brand names in
the United States.
The Company's merchandising strategy emphasizes products that are
innovative and new-to-market. In recent years, the Company has focused
significant resources on the development and marketing of its Sharper Image
Design products and its Sharper Image private label products, which are
exclusive to The Sharper Image. Sharper Image Design products typically generate
higher gross margins than its other products and, the Company believes, broaden
its customer reach. The Company has increased the percentage of its sales
attributable to Sharper Image Design products to 29% for the year ending January
31, 2000
2
<PAGE>
(fiscal 1999) from 18% for the year ended January 31, 1999 (fiscal 1998) and 8%
for the year ended January 31, 1998 (fiscal 1997).
The Company markets and sells its merchandise through a variety of
sales channels, including The Sharper Image stores, The Sharper Image catalog
and the Internet, primarily through its sharperimage.com Web site. The Company
believes that this multi-channel approach provides it with significant
marketing, sales and operational synergies, and provides its customers with
enhanced shopping flexibility and superior customer service. The Company's store
operations generate the highest proportion of its sales, representing
approximately 64% of total revenues in fiscal 1999 and 67% in fiscal 1998. As of
January 31, 2000, the Company operated 89 The Sharper Image stores in 28 states
and the District of Columbia. The Sharper Image stores present an interactive
and entertaining selling environment that emphasizes the features and
functionality of its products and allows the customer to truly experience the
product while shopping. The Company's average store sales per square foot are
consistently above industry averages, and during 1999 the Company generated
average sales of $546 per square foot, an increase of 13% as compared with $484
per square foot for fiscal 1998.
The Company also offers its products through its award-winning The
Sharper Image catalog, a full-color monthly catalog that uses dramatic visuals
and creative product descriptions designed and produced by its 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 340 products during the Holiday shopping season, also currently serves as
the primary advertising vehicle for its stores. During fiscal 1999, the Company
mailed approximately 47.6 million The Sharper Image catalogs, to over 7.9
million individuals. Approximately 22% of the Company's total revenues were
generated by catalog operations in fiscal 1999 and 25%, excluding specialty
catalogs, in fiscal 1998. Catalog operations also include revenues generated by
single product mailings, print media (newspapers and magazines) and
infomercials.
Sharper Image products are also marketed through the Company's Internet
retail operations, including its own Web site, which the Company has 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. The
Company's Internet operations grew significantly in fiscal 1999 to $28.5
million, or approximately 10% of its total revenues, from $4.9 million or 2% of
total revenues for fiscal 1998. In addition to its Web site, the Company has
offered its products through Internet marketing partnerships with America
Online, Catalog City, Linkshare, Yahoo! Shopping, and others. The Company
believes that online retailing over the Internet presents The Sharper Image with
a significant opportunity for the marketing and sale of its products and will
enable it to significantly expand and diversify its existing customer base. The
Company believes that its Sharper Image Design products are particularly
well-positioned to be marketed and sold over the Internet. The Company plans to
significantly expand the resources dedicated to its Internet operations by
establishing additional strategic relationships with other online retail
partners and continuing to enhance the technical capabilities and presentation
of products on its Web site. The Company also operates an auction site where
consumers can bid to win products at less than retail prices, while allowing the
Company the opportunity to effectively manage its closeout products.
3
<PAGE>
The Company was founded in 1977 by Richard Thalheimer, who continues as
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. The Company's store operations
generate the highest proportion of its sales, representing approximately 64% of
total revenues for fiscal 1999 and 67% for fiscal 1998. As of January 31, 2000,
the Company operated 89 The Sharper Image stores in the United States and
licensees operated three stores internationally and two airport stores in the
United States. The typical Sharper Image store ranges from approximately 2,200
to 2,500 selling square feet in size, with several larger size stores having
3,000 to 5,000 selling square feet. The Sharper Image stores present an
interactive and entertaining selling environment that emphasizes the features
and functionality of its products and allows the customer to truly experience
the product while shopping. The Company also has three additional retail
formats, Sharper Image Design stores, Outlet stores and airport shops. These
formats are discussed under "Store Operations" and "Licensed Operations."
During fiscal 1999, the Company opened five new stores of The Sharper
Image format and closed three Sharper Image stores at the maturity of their
leases. The Company plans to open four to six new stores during the fiscal year
ending January 31, 2001 (fiscal 2000). Lease terms for several of the existing
The Sharper Image store locations will be maturing during fiscal 2000 and these
locations may be relocated, closed, or leases renegotiated. The Company employs
approximately 1,400 employees in twenty-eight states and the District of
Columbia.
The Company is known for its varied product mix and a merchandising
philosophy focusing on innovative, well-designed, high-quality products that are
developed by The Sharper Image, exclusive to The Sharper Image, or in limited
distribution. In product lines where the Company competes directly with other
retailers, it chooses to sell the best version of the product with the most
advanced features. The Company is frequently sought after by manufacturers and
inventors to launch technologically advanced products with features that are
unique and surprising.
During fiscal 1999, the Company continued the expansion of its in-house
Sharper Image Design product development function. As a result of the increased
resources devoted to proprietary Sharper Image Design products, creating the
highest number of new Sharper Image Design products, and the continuing
cumulative sales from Sharper Image Design products introduced in prior years,
the percentage of sales attributable to Sharper Image Design products increased
to 29 percent in fiscal 1999 from 18 percent in fiscal 1998. Since Sharper Image
Design products generally carry higher margins than branded products, this
increase was the primary reason that the gross margin percentage rate improved
by two percentage points in fiscal 1999.
The Company's business is seasonal, with sales peaks in June for
Father's Day and graduation gift giving, and the Holiday shopping season. See
"Seasonality".
In addition to its primary businesses, The Sharper Image leverages its
name and reputation through its Corporate Incentives and Rewards program,
wholesale sales of Sharper Image brand products, which include Sharper Image
Design proprietary products and private-labeled products, and a product
licensing program with selected businesses. Wholesale sales are made primarily
to fine department stores and to international retailers.
4
<PAGE>
Store Operations
The Sharper Image stores are located throughout the United
States-typically in densely populated downtown financial districts and business
centers, upscale shopping malls and drive-up suburban locations.
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. A few of the Company's high volume
stores are staffed with 11 to 15 associates. The Company's store managers have
an average tenure of over six years. The Company's store personnel are
compensated primarily through commissions. In order to maintain a high customer
service level, the Company's sales associates undergo considerable training on
its many new and often technically oriented products.
The Sharper Image stores are designed by the Company's visual design
staff at the Company's headquarters in San Francisco to standardize, where
possible, layout so as to simplify their operations. The stores are operated
according to standardized procedures for customer service, merchandise display
and pricing, product demonstration, inventory maintenance, personnel training,
administration and security. The Company's original Sharper Image stores
typically have 2,200 to 2,500 square feet of selling space and approximately
1,300 to 2,200 square feet of storage and administrative space. The cost of
leasehold improvements, before landlord contributions, but including fixtures
and pre-opening expenses, averages $300,000 to $500,000 per store. Initial
inventory for a new Sharper Image store has generally cost approximately
$100,000 to $200,000. Outlet stores are approximately half the cost of the
original Sharper Image stores. The Company also operates a second retail format
of Sharper Image Design stores which are approximately half the size of the
original store with between 1,000 to 1,200 of selling square feet, and feature
higher margin proprietary products in addition to other top selling merchandise.
At the end of fiscal 1999, the Company had 79 The Sharper Image stores, eight
Sharper Image Design stores, and two outlet locations.
In 1997 the Company decided to update the look and appeal of its 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 the
Company's proprietary products. The average cost of remodeling a store is
$300,000 to $500,000 subject to leasehold allowances. Utilizing the new format,
the Company opened four new stores and remodeled four stores during fiscal 1998,
and opened five new stores and remodeled two stores in fiscal 1999. The Company
intends to continue to selectively remodel stores utilizing the new store format
at the time of lease renewals.
The Sharper Image Catalog
The Sharper Image catalog is a full-color catalog that is mailed to an
average of approximately 3.2 million individuals each month. The Sharper Image
Catalog operations generated approximately 22% of its total revenues in fiscal
1999 and 25%, excluding specialty catalogs in fiscal 1998. The Company's 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 its retail stores and its online store. During fiscal
1999, the Company mailed approximately 47.6 million of The Sharper Image
catalogs
5
<PAGE>
to over 7.9 million 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 significantly for
Father's Day and the Holiday shopping season reflecting the seasonal nature of
the 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 340 products during the fourth quarter. The Sharper
Image catalog is designed and produced by the Company's in-house staff of
writers and production artists. This enables the Company to maintain quality
control and shorten the lead-time needed to produce the catalog. The monthly
production and distribution schedule permits frequent changes in the product
selection. During fiscal 1999, 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.
The Company has developed a proprietary customer database of over 11
million names which the Company uses regularly and rents periodically to a
highly selected group of companies. The Company collects customer names through
its catalog and online Web site order processing as well as electronic
point-of-sale registers in its retail stores. The names and associated sales
information are merged daily into its 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 its in-house mailing list without using customer
lists obtained from other catalogers, and identify its top purchasers. To
further enhance the effectiveness of its catalog mailings to individuals in the
Company's customer database, its in-house staff utilizes statistical evaluation
and selection techniques to determine which customer segments are likely to
contribute the greatest revenue per mailing. The Company has established a data
bank of top purchasers who receive preferred services, including invitations for
special sales events and enhanced customer service. To enhance the effectiveness
of the catalog, the Company's in-house staff utilizes statistical evaluation and
selection techniques to determine which segments of the in-house mailing list
are likely to contribute the greatest revenue per mailing.
In addition, from time to time, the Company has also produced certain
specialty catalogs to test new catalog concepts. During fiscal 1998, the Company
discontinued its mail test catalogs for The Sharper Image Home Collection
concept. The Company mailed over 3 million Sharper Image Home Collection
catalogs during fiscal 1998.
Internet Operations
The Sharper Image was an early entrant into Internet retailing. The
Company has participated in online shopping since 1994, and has maintained its
own Web site since 1995. Revenues from the Company's Internet operations have
increased to $28.5 million in fiscal 1999 from $4.9 million in fiscal 1998. The
Company achieved these results without significant incremental investment in
online advertising. The Company's online retailing operations benefit from its
brand name, customer base and unique product offerings, as well as its
multimedia approach to advertising. In addition, the Company is able to leverage
its catalog operational infrastructure for fulfillment and customer service
experience, providing it with a significant advantage over Internet retailers
who have not developed such capabilities. Shoppers on our Web site have the
convenience of exchanging or returning products purchased through the Internet
at our stores.
6
<PAGE>
The Company's goal is to make sharperimage.com a Web site that provides
its online customers with an interactive experience similar to its Sharper Image
stores. The Company is aggressively updating its site by incorporating advanced
technologies to improve its product presentations and making its site
increasingly customer friendly, while retaining its entertainment value. In
fiscal 1999, the Company implemented technology which allows it to display its
products using interactive 3D enriched presentations and sound; one-time
registration in a secure environment; express shopping enhancements to free
customers of redundant keying of information; multiple ship-to addresses; and
virtual electronic gift certificates. The Company believes that these
presentation features are a valuable tool for further increasing its brand
recognition and advertising its products, and will prove particularly useful in
reaching its goal of attracting a broader consumer base to its Web site.
In February 1999, the Company also established its online auction site.
The Company's 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. Most products purchased on the auction site have the same
warranty and return benefits that accompany full price products. The Company
believes that bidders have an enhanced level of confidence in its operations
since, unlike certain other retailers with auction sites, the Company is an
established retailer with an inventory of well-known products under warranty and
an established return policy. The auction site not only offers consumers the fun
of bidding and winning products at less than retail prices, it also allow the
Company the opportunity to effectively manage its closeout products.
The Company is pursuing additional steps to achieve continued growth of
its Internet operations. These steps include improvements that are
technological, ddramatic visual presentations, and for ease of use for consumers
of sharperimage.com with significant enhancements during fiscal 2000 and seeking
to establish strategic Internet marketing partnerships. The Company has
established relationships with America Online, Catalog City, Linkshare, Yahoo!
Shopping, and others.
Other Operations
In addition to its store, catalog and Internet operations, the Company
also has a business-to-business operation which includes Corporate Incentives
and Rewards program, wholesale, and licensing. The Company also derives revenues
from its list rental program.
In the Corporate Incentives and Rewards programs, the Company sells
incentive and 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. The Company's certificates are redeemable for Sharper
Image merchandise through its retail stores, by mail, or over the telephone
through the catalog telemarketing group. The Company is also developing the
Internet channel for this area of its business. Recently, the editors and
readers of Incentive magazine honored sharperimage.com as one of the incentive
industry's best Web sites. The Company records revenues and expenses for its
Corporate Incentives and Rewards program through its stores, catalog and
Internet operations.
The Company's Business Development department is the primary group
responsible for marketing to other retailers, including fine department stores
in the U.S. as well as
7
<PAGE>
retailers in other countries. Wholesale sales to these retailers increased
during fiscal 1999 primarily as result of new customers acquired prior to the
1999 Holiday season. This group's sales increased to $10.5 million in fiscal
1999 from $3.5 million in fiscal 1998. Certain of these customers were part of a
concept test program and may not generate repeat sales in fiscal 2000. Plans for
this group are to selectively increase its presence in the international
marketplace in 2000, and increase the number of Sharper Image brand products
offered to these customers. In addition, the Company rents its customer list to
a highly selected group of companies for a fee or in exchange for their customer
lists. List exchanges are not included in the Company's revenues.
The Company has exclusive licensing agreements in Japan and
Switzerland, as well as airport locations in the United States. Under the
international license agreements, the licensee is granted the right to use the
trademarked name, "The Sharper Image," in their country in connection with The
Sharper Image retail store and catalog operations. The Company will assist the
licensee by producing a foreign language edition of The Sharper Image catalog,
with economies of scale but at the expense of the licensees who then print and
distribute locally. There are currently three Sharper Image retail stores
operated by the foreign licensees in Switzerland. The Company receives royalties
on sales by the licensees. Licensees purchase products from the Company or
directly from manufacturers, maintain their own supply of inventory, and
establish their own product prices. The airport licensee is entitled to utilize
The Sharper Image trademark and trade dress in designated airport locations, the
design of which is subject to the approval of the Company. There are two
locations -- one at Dallas-Fort Worth and a second location at Detroit
Metropolitan. The Company continues to pursue additional licensing and wholesale
opportunities in foreign countries.
Merchandising, Product Selection and Development
Merchandising
The Company's merchandise mix emphasizes innovative products that are
new to market, and unique products which are proprietary, private label or
available exclusively through The Sharper Image, or branded products not
available in broad distribution. The Company chooses each product separately
because its sales are driven by individual products, and its marketing efforts
focus on each item's unique attributes, features and benefits. This approach
distinguishes the Company from other retailers who are more category or product
classification oriented. The Company adjusts its merchandise mix to reflect
market trends and customer buying habits. New products are selected or developed
and brought into the Company's merchandise mix based on criteria such as
anticipated popularity, gross margin, uniqueness, value, competitive
alternatives, exclusivity, quality and vendor performance. As a result of such
shifting emphasis among individual items, the mix of sales by category changes
from time to time. The effect, from year to year, can be to increase or decrease
the merchandise gross margin rates since some categories of merchandise sustain
traditionally higher margins and some traditionally sustain lower margin rates.
The Company's goal is to increase sales of Sharper Image Design proprietary
products and other exclusive private label products, as these products generally
carry higher margins than branded products. The popularity of these proprietary
products contributed to the two percentage point increase in the gross margin
rate for fiscal 1999, and should continue to have a positive impact on the
Company's gross margin rate.
8
<PAGE>
The Company's current merchandise strategy is to offer an assortment of
products with emphasis on Sharper Image Design and private label proprietary
products. The Company intends to focus on offering products in the $40 to $350
price range to appeal to a wide customer base. The Company also intends to
increase its proprietary product offerings. While these proprietary and
private-labeled products offer important sales and gross margin growth
opportunities for all the revenue generating areas of the Company, there are
certain risks associated with these internally developed products, such as
possible manufacturing constraints, delays in bringing these products to market
and cost increases. Products may also be subject to other regulation or
limitations. See "Factors Affecting Future Operating Results."
Sharper Image Design proprietary products are produced for the Company
on a contract basis primarily by manufacturers in Asia. The Company provides all
product specifications to the contract manufacturers. Development lead-time is
generally in the range of 12 to 18 months. However, certain product
introductions may require longer lead time.
The Company generates information daily on merchandise orders and
inventory, which is reviewed by the Company's buyers, its senior merchandising
staff and top management. The Company averages new offerings of approximately 50
to 100 products during the two peak selling seasons. The Company carefully
considers which products will not be offered in future months based upon
numerous factors, including revenues generated, gross margins, the cost of
catalog and store space devoted to each product, product availability and
quality.
Sourcing
The process of finding new products involves the Company's buyers
reviewing voluminous product literature, traveling extensively throughout North
America and Asia to attend trade shows and exhibitions, and meeting with
manufacturers. The Company enjoys relationships with many major manufacturers
who use The Sharper Image regularly to introduce their newest products in the
United States. See "Factors Affecting Future Operating Results".
The Company purchases merchandise from numerous foreign and domestic
manufacturers and importers. The Company had a single supplier that provided 14%
of the net merchandise purchases in fiscal 1999. Of the products offered by the
Company in recent catalogs, approximately 82% were manufactured in Asia,
approximately 12% were manufactured within the United States, approximately 3%
were manufactured in Europe, and approximately 2% were manufactured in Mexico
and Canada. The Company expects these percentages to vary as new products are
introduced. See "Factors Affecting Future Operating Results."
Product Development
In addition to finding new product ideas from outside sources, the
Company's product development group conceives, designs and produces Sharper
Image Design products. The product development group meets regularly with the
merchandising and sales 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, among others, the Ionic Breeze Silent Air
Purifier; Power
9
<PAGE>
Tower 100 Motorized CD Rack; Ionic Breeze Personal Air Purifier; Lightscape
Relaxation System; CD Radio/Alarm Clock with Sound Soother; Weebot Electronic
Pet; Personal Cooling System; Ionic Breeze Car Air Purifier; CD Shower
Companion; Turbo Groomer 2.0; Ionic Hair Wand II; Q Ball; Personal Warm-Cool
System; BioTouch Interactive Mood Light; Ionic Bath Pet Brush; Shower Companion
Plus; and the Ionic Breeze Quadra Silent Air Purifier.
The Company believes 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. The Company believes that the appeal of these
proprietary products also serves as a key driver in broadening its customer base
and enhancing its brand appeal. The Company's goal is to increase sales of these
proprietary products. However, there is no assurance that the Company will be
able to continue the growth of gross margin and sales related to these
proprietary products. See "Factors Affecting Future Operating Results".
Customer Service
The Company is committed to providing its customers with courteous,
knowledgeable, and prompt service. The Company's 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 or via e-mail
(servicing Internet customers) to request a catalog subscription, place an
order, or inquire about a product. The Company's customer service group is also
responsible for resolving customer problems promptly and to the customer's
complete satisfaction. The Company also contracts with third party call centers
for heavy volume periods and twenty-four hour coverage.
The Company seeks to hire and retain qualified sales and customer
service representatives in both its mail-order (including Internet) and store
operations and to train them thoroughly. Each new store manager undergoes an
intensive program during which the manager is trained in all aspects of the
Company's business. Sales personnel are trained during the first two weeks of
employment, or during the weeks before a new store opens and updated
periodically with on-going sales training sessions. Training focuses primarily
on acquiring a working knowledge of the Company's products and on developing
selling skills and an understanding of the Company's high customer service
standards. Each sales associate is trained to adhere to the Company's philosophy
of "taking ownership" of every customer service issue that may arise. The
Company has also developed ongoing programs conducted at each store and by
district that are designed to keep each salesperson up to date on each new
product offered.
Order Fulfillment and Distribution
The Company owns a single fulfillment and distribution facility in
Little Rock, Arkansas of approximately 110,000 square feet, and uses an
additional leased facility in Little Rock of approximately 32,000 square feet
and contract warehouse facilities for additional requirements. The Company also
contracts for mail order fulfillment overflow needs from a third party. The
Company's merchandise generally is delivered to the catalog and Internet
customers and to The Sharper Image stores directly from the Company's
distribution facilities. Certain 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.
10
<PAGE>
Each catalog order is received via remote terminal at the distribution facility
after the order has been approved for shipment. The Company's goal is to ship
catalog and Internet orders within 24-48 hours after the order is received.
Store customers generally take their purchases with them. The Company is
currently evaluating various alternatives to expand the capacity of its
distribution facilities to provide for planned business growth.
Sales and inventory information about store, catalog and Internet
operations is provided on an ongoing basis to the Company's merchandising staff
and to top management for review. The Company's stores are equipped with
electronic point-of-sale registers that communicate daily with the main computer
system at corporate headquarters, transmitting sales, inventory and customer
data as well as receiving data from the Company's headquarters. The sales,
inventory, and customer data enables sales and corporate personnel to monitor
sales by item on a daily basis, provides the information utilized by the
automatic replenishment system (ARS) and merchandising personnel for inventory
allocations, provides management with current inventory and merchandise
information, and enables the Company's in-house mailing list to be updated
regularly with customer names and activity.
The Company has developed a proprietary ARS which is used to maximize
sales with minimal inventory investment. Under this 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 the Company's
sales of each product. Under this system, the model stock is continually revised
based on this analysis. Recommended adjustments to model stock levels and
recommended shipment amounts are reviewed daily by a group of Company store
distributors and merchandising managers who are responsible for allocating
inventory to stores.
Advertising
While the catalog remained the Company's primary advertising vehicle
during fiscal 1999, the Company also broadened its customer base through
increased multimedia advertising, including: single product mailers; newspapers;
magazines; television; radio; infomercials; email marketing programs; online
advertising and marketing programs; and business-to-business trade publications.
These increased advertising initiatives were launched to realize the Company's
goal of acquiring new customers, which the Company believes will produce
additional sales in the stores, catalog, and Internet channels, and
business-to-business sales in the current and future periods. The Company
intends to continue the strategy of growing its customer base through aggressive
multimedia programs in fiscal 2000 with the objective of achieving an
appropriate return on investment. The Company continually reevaluates its
advertising strategies to maximize the effectiveness of its advertising
programs.
Information Systems
The Company maintains an integrated management information system for
order fulfillment, distribution and financial reporting. The Company believes
its system increases its productivity by providing extensive merchandise
information and inventory control. The Company continually evaluates and
enhances its computer systems and information technology in connection with
providing additional and improved management and financial
11
<PAGE>
information. In fiscal 1999 and 2000, technology development and enhancement
initiative for the Company's Internet Web site was and will be part of the key
objectives of its Information Systems Team.
The Company continually evaluates its computer systems and information
technology in connection with providing additional and improved management and
financial information. The Company is currently in the process of designing a
new POS system to be installed in its stores to expand its customer service
capabilities. The Company is currently developing improvements and intends to
introduce in fiscal 2000 significant enhancement to content, functionality, and
processing capabilities to its sharperimage.com Web site.
Competition
The Company operates in a highly competitive environment. The Company
principally competes 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
the Company. Many of the Company's competitors are larger companies with greater
financial resources, a wider selection of merchandise and a greater inventory
availability. Although the Company attempt to market products not generally
available elsewhere and have emphasized exclusive products in its merchandising
strategy, many of the Company's products or similar products can also be found
in other retail stores or through other catalogs or on-line. The Company offers
competitive pricing where other retailers market certain products identical to
the Company's at lower prices. In addition, a number of other companies have
attempted to imitate the presentation and method of operation of the Company's
catalog and stores, and the Company's proprietary designed products. The Company
competes principally on the basis of product exclusivity, selection, brand
recognition, quality and price of its products, merchandise presentation in the
catalog, stores, and on the Internet, its customer list, and the quality of its
customer service. The Company is committing additional resources to its internal
product development group to create and produce proprietary products exclusively
available from the Company. The Company believes that these proprietary products
provide a competitive advantage for it in its merchandising offering.
Trademark Licenses
The Company believes its registered service mark and trademark, "The
Sharper Image," and the brand name recognition that it has developed, are of
significant value. The Company actively protects its brand name and other
intellectual property rights to ensure that the quality of its brand and the
value of its proprietary rights are maintained. The Company currently licenses
the use of its trademarked name in connection with the production and
circulation of foreign language editions of The Sharper Image catalog in Japan
and Switzerland and in connection with The Sharper Image stores in Switzerland
in consideration for royalties and other fees. In addition to these
international licensees, the Company has also entered into a license for the
right to operate Sharper Image stores in domestic non-duty free airport
locations as well as various product license agreements which
12
<PAGE>
grant the right to licensees to manufacture and sell products bearing the
Company's trademark.
Seasonality
The Company's business is highly seasonal, reflecting the general
pattern associated with the retail industry of peak sales and earnings during
the Holiday season. The secondary peak period for the Company is June,
reflecting gift buying for Father's Day and graduations. A substantial
percentage of the Company's total revenues and all or most of the Company's net
earnings occur in its fourth fiscal quarter ending January 31. The Company
generally experiences lower revenues during the other quarters and, as is
typical in the retail industry, has incurred and may continue to incur losses in
these quarters. The results of these interim quarters may not be representative
of the results for the full fiscal year. In addition, like many retailers, the
Company makes merchandising and inventory decisions for the Holiday season well
in advance of the Holiday selling season. Accordingly, unfavorable economic
conditions and/or deviations from projected demand for products during the
fourth quarter could have a material adverse effect on the Company's results of
operations for the entire fiscal year. During fiscal years 1999 and 1998, the
Company's total revenues for the fourth quarter accounted for more than 45% of
total revenues. During fiscal 1999, the Company generated a profit for its
fiscal third quarter of $148,000, or $0.01 per share, as compared with a loss of
$1,460,000, or $0.17 per share for the same quarter of fiscal 1998.
Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have an adverse material effect on the Company's financial condition.
Employees
As of January 31, 2000, the Company employed approximately 1,400
associates, approximately 60% of whom were full-time. The Company considers its
employee relations to be good.
13
<PAGE>
Executive Officers of the Registrant
Set forth below is a list of the executive officers of the Company,
together with brief biographical descriptions.
Name Position Age
- ---- -------- ---
Richard Thalheimer Founder, 52
Chairman of the Board, and
Chief Executive Officer
Tracy Wan President and Chief Operating 40
Officer
Greg Alexander Senior Vice President, Management 38
Information Systems
Anthony Farrell Senior Vice President, Creative Services 50
Jeffrey Forgan Senior Vice President, Chief 42
Financial Officer, and Corporate Secretary
Robert Thompson Senior Vice President, Merchandising 55
Joe Williams Senior Vice President, Loss Prevention 50
Richard Thalheimer is the founder of the Company and has served as the
Chief Executive Officer and as a Director of the Company since 1978 and as
Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the
Company's President from 1977 through July 1993.
Tracy Wan has been the Company's President and Chief Operating Officer
since April 1999. Ms. Wan served as Executive Vice President, Chief Financial
Officer from August 1998 through April 1999; Senior Vice President, Chief
Financial Officer from February 1995 through August 1998; as Vice President,
Chief Financial Officer from September 1994 through February 1995; as Vice
President, Controller from November 1991 through September 1994; and as
Controller from July 1989 through November 1991. Ms. Wan is a certified public
accountant.
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.
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.
14
<PAGE>
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, serving as an audit partner during
1995. Mr. Forgan is a certified public accountant.
Robert Thompson has been our Senior Vice President of Merchandising
since August 1999. Mr. Thompson served as Vice President of Merchandising from
January 1998 through August 1999. Prior to that. Mr. Thompson served as Director
of Planning and Allocation for Natural Wonders from April 1991 to January 1998.
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.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995
(the "Act"), which became law in late December 1995, provide companies with a
"safe harbor" when making forward-looking statements. This "safe harbor"
encourages companies to provide prospective information about their companies
without fear of litigation. The Company wishes to take advantage of the "safe
harbor" provisions of the Act and is including this section in its Annual Report
on Form 10-K in order to do so. Statements that are not historical facts,
including statements about management's expectations for fiscal year 2000 and
beyond, are forward-looking statements and involve various risks and
uncertainties. Factors that could cause the Company's actual results to differ
materially from management's projections, forecasts, estimates and expectations
include, but are not limited to, the following:
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
15
<PAGE>
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 1999 and 1998
fiscal years, our total revenues for the fourth quarter ending January 31
accounted for more than 45% 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 possible 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.
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.
16
<PAGE>
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 Web site sharperimage.com as
well as through Internet marketing partnerships with America Online, Catalog
City, LinkShare, Yahoo! Shopping and others. This is a relatively new business
and marketing strategy for us and involves risks and uncertainties. We may not
succeed in increasing the sales of our products over the Internet. In addition,
our Internet strategy will require us to significantly increase our
technological development online marketing and human resources expenditures. If
these expenditures do not result in commensurate 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:
o the availability of attractive store locations;
o our ability to negotiate favorable lease terms;
o our ability to identify customer demand in different geographic areas;
o general economic conditions; and
o 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 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.
17
<PAGE>
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, restrictions placed by regulatory
agencies, 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, radio, and single product mailings, and are
planning to significantly increase advertising in fiscal 2000. 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:
o our ability to achieve adequate response rates to our mailings;
o our ability to continue to offer a merchandise mix that is attractive
to our mail order customers;
o our ability to cost-effectively add new customers; and
o 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 fiscal 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.
18
<PAGE>
Our catalog 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 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 82% of our products were manufactured in various countries
in Asia, primarily China, during fiscal 1999, any significant disruption in any
of these countries may impair our ability to obtain sufficient quantities of
products in a timely manner.
We face certain risks relating to customer service
Our ability to provide customer service depends, to a large degree, on
the efficient and uninterrupted operation of our call centers, our contracting
services with third party call centers and our sharperimage.com Web site. 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
19
<PAGE>
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 the majority of our distribution operations and all of our
catalog and Internet order processing fulfillment functions from the owned
facility in Little Rock, Arkansas, and uses an additional leased facility in
Little Rock. We also use contract fulfillment and warehouse facilities for
additional volume and 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.
Results for our comparable store sales may fluctuate
Our comparable store sales are affected by a variety of factors,
including, among others:
o customer demand in different geographic regions;
o our ability to efficiently source and distribute products;
o changes in our product mix;
o effects of competition; and
o general economic conditions.
Our comparable store sales have fluctuated significantly in the past and
we believe that such fluctuations may continue. Our historic comparable store
net sales changes were as follows:
Percentage
Fiscal Year Increase (Decrease)
----------- -------------------
1997 1.1
1998 5.3
1999 12.3
These historic 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 impact our future operating performance and cause the price of the 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
20
<PAGE>
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 (the specialty retail industry in
particular) and e-commerce sector are dynamic in nature and have 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:
o general business conditions;
o interest rates;
o taxation; and
o 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 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.
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.
21
<PAGE>
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.
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 $30 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.
We are controlled by a single stockholder
As of April 17, 2000, Richard Thalheimer beneficially owned
approximately 41% 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:
22
<PAGE>
o quarterly fluctuations in our comparable store sales;
o announcements by other accessory and gift item retailers;
o the trading volume of our common stock in the public market;
o general economic conditions; and
o 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.
Item 2. Properties
The Company occupies approximately 58,000 square feet of office space
for its corporate headquarters in San Francisco, CA. The Company signed a lease
extension in February 2000, extending the expiration date to January 2006.
As of January 31, 2000 the Company operates 89 The Sharper Image stores
under leases covering a total of approximately 206,000 square feet of net
selling space.
The Company owns and operates a 110,000 square foot distribution
facility located in Little Rock, Arkansas. Distribution functions are conducted
through this facility, a 32,000 square foot leased facility in Little Rock,
Arkansas and other seasonally occupied space rented by the Company in close
proximity thereto. Additional mail order fulfillment is conducted by a third
party.
Item 3. Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under "Note D -- Revolving Loan and Notes
Payable" in the Notes to Financial Statements on page 25 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
31 of the Sharper Image
23
<PAGE>
Corporation 1999 Annual Report to Stockholders is incorporated herein by
reference. As of April 17, 2000 there were 412 holders of record of the
Registrant's Common Stock.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
page 3 of the Sharper Image Corporation 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information set forth under the caption "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 14 to 19
of the Sharper Image Corporation 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information set forth under the caption "Quantitative and
Qualitative Disclosure About Market Risk" on page 19 of the Sharper Image
Corporation 1999 Annual Report to Stockholders is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and independent auditors' report set forth on
pages 20 through 31 of the Sharper Image Corporation 1999 Annual Report to
Stockholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Registrant is
incorporated herein by reference to the Registrant's 2000 Proxy Statement to
Stockholders, pages 2 through 3. Information with respect to the executive
officers of the Registrant is contained in Part I of this Annual Report on Form
10-K.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated
herein by reference to the Registrant's 2000 Proxy Statement, pages 14 to 15.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of beneficial owners
and management is incorporated herein by reference to the Registrant's 2000
Proxy Statement, pages 13 to 14.
24
<PAGE>
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)1. List of Financial Statements.
The following Financial Statements and Notes thereto set forth on pages 20
through 31 of the Sharper Image Corporation 1999 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:
Independent Auditor's Report
Statements of Operations for the years ended January 31, 2000, 1999, and 1998,
Balance sheets at January 31, 2000 and 1999,
Statements of Stockholders' Equity for the years ended January 31, 2000, 1999,
and 1998 Statements of Cash Flows for the years ended January 31, 2000, 1999,
and 1998.
Notes to Financial Statements.
(a)2. List of Financial Statement Schedule.
The following are filed as part of this Report:
Independent Auditors' Report on Schedule.
Schedule II - Valuation and Qualifying Accounts
Financial Data Schedule
Schedules other than those listed are omitted for the reason that they are
not required or are not applicable, or the required information is shown in
the financial statements or notes thereto, contained in, or incorporated by
reference into, this Report.
(a)3. List of Exhibits.
Incorporated herein by reference is a list of the Exhibits contained in
the Exhibit Index which begins on page 30 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the last quarter of the period covered by this Report.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHARPER IMAGE CORPORATION SHARPER IMAGE CORPORATION
By: /s/ Richard J. Thalheimer By: /s/ Jeffrey P. Forgan
---------------------------- ----------------------------
Richard J. Thalheimer Jeffrey P. Forgan
Chief Executive Senior Vice President, Chief
Officer, Chairman Financial Officer, Corporate
(Principal Executive Officer) Secretary (Principal Financial &
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Thalheimer and Jeffrey P. Forgan, and
each of them, as such person's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for such person and in such
person's name, place, and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard J. Thalheimer Chief Executive April 28, 2000
- ---------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Jeffrey P. Forgan Senior Vice President, April 28, 2000
- ---------------------------- Chief Financial Officer,
Jeffrey P. Forgan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Alan Thalheimer Director April 28, 2000
- ----------------------------
Alan Thalheimer
26
<PAGE>
/s/ Gerald Napier Director April 28, 2000
- ----------------------------
Gerald Napier
/s/ Morton David Director April 28, 2000
- ----------------------------
Morton David
/s/ George James Director April 28, 2000
- ----------------------------
George James
27
</TABLE>
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------
($000)
<CAPTION>
COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E
- --------------------------------------------------------------------------------------------------------------------
Balance at Additions Balance
Beginning Charged to at End of
DESCRIPTION of Period Costs & Exp. Deductions Period
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVENTORY
YEAR ENDED JANUARY 31, 2000:
Inventory Obsolescence $1,938 $2,079 $ 863 $3,154
YEAR ENDED JANUARY 31, 1999:
Inventory Obsolescence $1,486 $1,298 $ 846 $1,938
YEAR ENDED JANUARY 31, 1998:
Inventory Obsolescence $1,509 $ 678 $ 701 $1,486
OTHER
YEAR ENDED JANUARY 31, 2000:
Other $ 804 $ 265 $ 235 $ 834
YEAR ENDED JANUARY 31, 1999:
Other $ 508 $ 830 $ 534 $ 804
YEAR ENDED JANUARY 31, 1998:
Other $ 505 $ 321 $ 318 $ 508
28
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Board of Directors and Stockholders of
Sharper Image Corporation
We have audited the financial statements of Sharper Image Corporation as of
January 31, 2000 and 1999 and for each of the three years in the period ended
January 31, 2000, and have issued our report thereon dated March 24, 2000; such
financial statements and report are included in your 1999 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of Sharper Image Corporation, listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California
March 24, 2000
29
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-1 (Registration No.
33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
3.3 Form of Certificate of Designation of Series A Junior participating
Preferred Stock. (Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
4.1 Form of Rights Certificate. (Incorporated by reference to Exhibit
4.01 to Amendment No. 2 to the Registration Statement on Form S-2.)
4.2 Form of Rights Agreement dated June 7, 1999. (Incorporated by
reference to Exhibit 4.02 to Amendment No. 2 to the Registration
Statement on Form S-2.)
10.1 Amended and Restated Stock Option Plan. (Incorporated by reference
to Appendix to Form 14A for fiscal year ended January 31, 1999).
10.2 1994 Non-Employee Director Stock Option Plan, as amended, dated
October 7, 1994, as amended. (Incorporated by reference to Appendix
to Form 14A for 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 purchase pursuant to exercise of employee
stock options. (Incorporated by reference to Exhibit 10.4 to
Registration Statement on Form S-1 (Registration No. 33-12755).)
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating
to shares of Common Stock purchased pursuant to exercise of
employee stock options. (Incorporated by reference to Exhibit 10.5
to Registration Statement on Form S-1 (Registration No. 33-12755).)
30
<PAGE>
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 of 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 the Form 10-K for
the fiscal year ended January 31, 1995.)
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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
Form 10-K for the fiscal year ended January 31, 1997).
10.18 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 Form 10-K for the
fiscal year ended January 31, 1997).
10.19 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 Form 10-K for the fiscal year ended
January 31, 1997).
10.20 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 Form 10-K for the fiscal year ended
January 31, 1998).
31
<PAGE>
10.21 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 Form 10-K for the fiscal year ended January 31, 1998)
10.22 Amendment to the Financing Agreement dated March 23, 2000 between
the Company and The Cit Group/Business Credit Inc. (Attached
herewith).
10.23 Amendment to the Corporate Headquarters Office Lease Agreement
dated February 9, 2000 between the Company and its landlord,
CarrAmerica Realty Corporation. (Attached herewith).
11.1 Statement Re: Computation of Earnings per Share.
13.1 1999 Annual Report to Stockholders.
23.1 Independent Auditor's Consent.
27.0 Financial Data Schedule.
32
FIFTH AMENDMENT TO FINANCING AGREEMENT
This FIFTH AMENDMENT TO FINANCING AGREEMENT (this "Amendment"), dated
as of March 23, 2000, is entered into by and among SHARPER IMAGE CORPORATION, a
Delaware corporation (the "Borrower") and THE CIT GROUP/BUSINESS CREDIT, INC., a
New York corporation ("CITBC"), and amends that certain Financing Agreement
dated September 21, 1994 (as the same is in effect immediately prior to the
effectiveness of this Amendment, the "Existing Financing Agreement" and as the
same may be amended, supplemented or modified and in effect from time to time,
the "Financing Agreement"), by and between the Borrower and CITBC. Capitalized
terms used and not otherwise defined in this Amendment shall have the same
meanings in this Amendment as set forth in the Financing Agreement.
RECITAL
The Borrower has requested that CITBC amend various provisions of the
Existing Financing Agreement, and CITBC is willing to agree to so amend the
Existing Financing Agreement on the terms and subject to the conditions set
forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements set forth below and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties agree as
follows:
Section 1. Amendments. On the terms of this Amendment and subject to
the satisfaction of the conditions precedent set forth below in Section 2.
(a) The definition of "Availability" set forth in Section 1 of
the Financing Agreement is hereby amended by inserting the phrase "and Eligible
Ordered Inventory" immediately after the reference therein to "Eligible
Inventory".
(b) The definition of "Collateral Management Fee" set forth in
Section 1 of the Financing Agreement is hereby amended by deleting the reference
therein to "$35,000.00" and substituting "$20,000.00" in lieu thereof.
(c) The definition of "Early Termination Date" set forth in
Section 1 of the Financing Agreement is hereby amended to read in its entirety
as follows:
"Early Termination Date shall mean the date on which the Company
terminates this Financing Agreement or the Line of Credit, which date is prior
to the eighth Anniversary Date."
(d) The definition of "Early Termination Fee', set forth in
Section 1 of the Financing Agreement is hereby amended to read in its entirety
as follows:
"Early Termination Fee shall (a) mean the fee CITBC is entitled to
charge the Company in the event the Company terminates the Line of Credit or
this Financing Agreement
<PAGE>
on a date prior to the eighth Anniversary Date (except as otherwise provided in
Section 10 of this Financing Agreement) and (b) be determined by calculating the
sum of (i) the average daily balance of the Revolving Loans for the period from
the date of this Financing Agreement to the Early Termination Date, (ii) the
average daily undrawn face amount of the Letters of Credit outstanding from the
date of this Financing Agreement to the Early Termination Date and (iii) the
average daily balance of CAPEX Term Loans for the period from the effective date
of the CAPEX Term Loan Line of Credit to the Early Termination Date and
multiplying that sum by (x) one percent (1%) per annum if the Early Termination
Date occurs prior to the sixth Anniversary Date, (y) three-quarters of one
percent (0.75%) per annum if the Early Termination Date occurs on or after the
sixth Anniversary Date but prior to the seventh Anniversary Date; and (z)
one-half of one percent (0.50%) per annum if the Early Termination Date occurs
on or after the seventh Anniversary Date but prior to the eighth Anniversary
Date, in each case for the number of days from the Early Termination Date to the
eighth Anniversary Date."
(e) The definition of "Line of Credit" set forth in Section 1
of the Financing Agreement is hereby amended by inserting the following clauses
immediately after clause (e) thereof:
"(f) October 1 - December 31, 2003 $33,000,000.00
(g) October 1 - December 31, 2004 $33,000,000.00"
(f) The following definitions are hereby added to Section 1 of
the Financing Agreement:
"Eligible Ordered Inventory shall mean the gross amount of the
Company's Ordered Inventory less any reserves required by CITBC in its
reasonable judgment and without duplication. The amount of such reserves shall
be determined solely by CITBC in its reasonable business judgment using
standards consistently applied by CITBC. Such standards shall take into
consideration amounts representing, historically, the Company's reserves,
discounts, returns, claims, credits and allowances."
"Ordered Inventory shall mean all finished goods which have been
ordered but not yet received by the Company and as to which a documentary Letter
of Credit supporting the Company's purchase of such finished goods is
outstanding."
(g) Section 3, Paragraph 1 of the Financing Agreement is
hereby amended to read in its entirety as follows:
"CITBC agrees, subject to the terms and conditions of this Financing
Agreement from time to time, and within x) the Availability and y) the Line of
Credit, but subject to CITBC's right to make "Overadvances", to make loans and
advances to the Company on a revolving basis, and subject to the limitations set
forth herein, the Company may borrow, repay and re-borrow Revolving Loans. Such
loan and advances shall be in an aggregate amount not exceeding the sum of:
(a) (i) (i) for the period from January I to and including
September 30 of each year, the lower of (A) eighty percent (80%) of the
aggregate appraised orderly liquidation value of all Eligible Inventory and
Eligible Ordered Inventory which
2
<PAGE>
constitutes Proprietary Products Inventory and (B) fifty-five percent (55%) of
the aggregate cost of all Eligible Inventory and Eligible Ordered Inventor),
which constitutes Proprietary Products Inventory;
(ii) for the period from October 1 to and including
October 31 of each year, the lower of (A) eighty percent (80%) of the aggregate
appraised orderly liquidation value of all Eligible Inventory and Eligible
Ordered Inventory which constitutes Proprietary Products Inventory and (B) sixty
percent (60%) of the aggregate cost of all Eligible Inventory and Eligible
Ordered Inventory which constitutes Proprietary Products Inventory; and
(iii) for the period from November 1 to and including
December 31 of each year, the lower of (A) eighty percent (80%) of the aggregate
appraised orderly liquidation value of all Eligible Inventory and Eligible
Ordered Inventory which constitutes Proprietary Products Inventory and (B)
sixty-five percent (65%) of the aggregate cost of all Eligible Inventory and
Eligible Ordered Inventory which constitutes Proprietary Products Inventory;
plus
(b) (i) for the period from January 1 to and including
September 30 of each year, the lower of (A) ninety percent (90%) of the
aggregate appraised orderly liquidation value of all Eligible Inventory and
Eligible Ordered Inventory, other than Proprietary Products Inventory and (B)
fifty-five percent (55%) of the aggregate cost of all Eligible Inventory and
Eligible Ordered Inventory other than Proprietary Products Inventory,
(ii) for the period from October 1 to and including
October 31 of each year, the lower of (A) ninety percent (90%) of the aggregate
appraised orderly liquidation value of all Eligible Inventory and Eligible
Ordered Inventory, other than Proprietary Products Inventory and (13) sixty
percent (60%) of the aggregate cost of all Eligible Inventory and Eligible
Ordered Inventory other than Proprietary Products Inventory; and
(iii) for the period from November 1 to and including
December 31 of each year, the lower of (A) ninety percent (90%) of the aggregate
appraised orderly liquidation value of all Eligible Inventory and Eligible
Ordered Inventory, other than Proprietary Products Inventory and (B) sixty-five
percent (65%) of the aggregate cost of all Eligible Inventory and Eligible
Ordered Inventory other than Proprietary Products Inventory;
provided, that in no event shall (x) the aggregate amount of Proprietary
Products Inventory computed pursuant to clause (a) above exceed fifty percent
(50%) of the aggregate cost of all Eligible Inventory and Eligible Ordered
Inventory and (y) the aggregate amount of Eligible Ordered Inventory computed
pursuant to clauses (a) and (b) above exceed $6,500,000."
(h) Clause (i) of the first sentence of Section 4, Paragraph 1
of the Financing Agreement is hereby amended by increasing the limit on
documentary Letters of Credit from "$5,000,000" to $15,000,000".
3
<PAGE>
(i) Section 6, Paragraph 8, Subparagraph (c) of the Financing
Agreement is hereby increased by increasing the minimum Net Worth amount from
"$27,000,000" (or $24,000,000 for fiscal quarters ending in October) to
"$45,000,000".
(j) Section 6, Paragraph 12 of the Financing Agreement is
hereby amended to read in its entirety as follows:
"Without the prior written consent of CITBC, the
Company will not contract for, purchase, make expenditures for, lease pursuant
to a Capital Lease or otherwise incur obligations with respect to Capital
Expenditures (whether subject to a security interest or otherwise) during any
fiscal year in the aggregate amount in excess of $12,500,000; provided, that
such amount shall be increased by $9,000,000 solely for the fiscal year ending
January 3 1, 2001 so long as (i) the increased amount is used by the Company
solely to finance (a) an upgrade of its Internet web site and (b) the addition
of a distribution center, or the expansion of its current distribution center,
in Little Rock Arkansas and (ii) both before and after giving effect to the
making of each such proposed capital expenditure, no Default or Event of Default
exists. Notwithstanding the foregoing, if the Company, in any fiscal year,
spends less than the permitted Capital Expenditures for such year, then fifty
percent (50%) of such unused amount shall be added to the amount permitted
solely for the next succeeding fiscal year; provided, that any unused portion of
the $9,000,000 amount set forth in the proviso of the previous sentence may be
carried forward solely to the fiscal year ending January 31, 2002."
(k) The following sentences shall be inserted at the end of
Section 6, Paragraph 15 of the Financing Agreement:
"If at any time the average Availability is less than
$7,500,000 for more than two consecutive weeks, then CITBC may order an
appraisal of the Inventory, which appraisal shall be performed by an appraiser
satisfactory to CITBC in its sole discretion and shall be at the sole expense of
the Company. Without limiting the foregoing, CITBC may order an appraisal of the
Inventory once every three fiscal years, which appraisal shall be performed by
an appraiser satisfactory to CITBC in its sole discretion and shall be at the
sole expense of the Company."
(l) Section 7, Paragraph I (d)(i) of the Existing Financing
Agreement is hereby amended to read in its entirety as follows:
"i) The spread over the Chase Manhattan Bank Rate and the
Libor may be reduced or increased in accordance with the grid set forth below
from the rate set forth in subparagraphs (a) and (b) above, as applicable (as
such rate may be adjusted from, time to time hereunder) based on the EBITDA of
the Company for any period of four consecutive fiscal quarters:
4
<PAGE>
REVOLVING LOANS
- --------------------------------------------------------------------------------
EBITDA for the then most
recently ended four Chase Manhattan Bank
consecutive quarters Rate Margin Libor Margin
- -------------------- ----------- ------------
Less than $7,000,000 0.50% 2.25%
Greater than or equal to $7,000,000 0.25% 2.00%
but less than $10,000,000
Greater than or equal to $10,000,000 0.00% 1.75%
but less than $15,000,000
Greater than or equal to $15,000,000 0.00". 1.50%
- --------------------------------------------------------------------------------
CAPEX LOANS
- --------------------------------------------------------------------------------
EBITDA for the then most
recently ended four Chase Manhattan Bank
consecutive quarters Rate Margin Libor Margin
- -------------------- ----------- ------------
Less than $5,000,000 1.00% 3.00%
Greater than or equal to $5,000,000 0.75% 2.75%
but less than $6,500,000
Greater than or equal to $6,500,000 0.50% 2.50%
- --------------------------------------------------------------------------------
(m) Clause (ii) of Section 7, Paragraph 2 of the Financing
Agreement is hereby amended by decreasing the Letter of Credit Guaranty Fee for
documentary Letters of Credit from "one and one-half percent per annum" to "one
and one-quarter of one percent (1.25%) per annum".
(n) The first sentence of Section 10 of the Financing
Agreement is hereby amended by deleting the reference therein to "ninth or any
subsequent Anniversary Date" and substituting "tenth or any subsequent
Anniversary Date" in lieu thereof.
5
<PAGE>
(o) The proviso of the fourth sentence of Section 10 of the
Financing Agreement is hereby amended by deleting the reference therein to
"fifth Anniversary Date" and substituting "eighth Anniversary Date" in lieu
thereof.
Section 2. Conditions to Effectiveness. The amendments set forth in
Section I of this Amendment shall become effective only upon the satisfaction of
all of the following conditions precedent (the date of satisfaction of all such
conditions being referred to as the "Amendment Effective Date"):
(a) On or before the Amendment Effective Date, CITBC shall
have received this Amendment, duly executed and delivered by the Borrower.
(b) On or before the Amendment Effective Date, all corporate
and other proceedings taken or to be taken in connection with the transactions
contemplated by this Amendment, and all documents incidental thereto, shall be
reasonably satisfactory in form and substance to CITBC and its counsel, and
CITBC and such counsel shall have received all such counterpart originals or
certified copies of such documents as they may reasonably request.
(c) Each of the representations and warranties set forth in
this Amendment shall be true and correct as of the Amendment Effective Date.
Section 3. Representations and Warranties. In order to induce CITBC to
enter into this Amendment and to amend the Existing Financing Agreement in the
manner provided in this Amendment, the Borrower represents and warrants to CITBC
as of the Amendment Effective Date as follows:
(a) Power and Authority. The Borrower has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Existing
Financing Agreement as amended by this Amendment (hereafter referred to as the
"Amended Financing Agreement").
(b) Authorization of Agreements. The execution and delivery of
this Amendment by the Borrower and the performance of the Amended Financing
Agreement by the Borrower have been duly authorized by all necessary action, and
this Amendment has been duly executed and delivered by the Borrower.
(c) Enforceabilily. The Amended Financing Agreement
constitutes the legal valid and binding obligation of the Borrower enforceable
against the Borrower in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights in general. The enforceability of the obligations of the
Borrower hereunder is subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(d) No Conflict. The execution and delivery by the Borrower of
this Amendment and the performance by the Borrower of the Amended Financing
Agreement do not and will not (i) contravene, in any material respect, any
provision of any law, regulation, decree, ruling, judgment or order that is
applicable to the Borrower or its properties or other assets, (ii) result in a
breach of or constitute a default under the charter, bylaws; or other
organizational
6
<PAGE>
documents of the Borrower, or any material agreement, indenture, lease or
instrument binding upon the Borrower or its properties or other assets or (iii)
result in the creation or imposition of any liens on its properties other than
as permitted under the Financing Agreement.
(e) Governmental Consents. No authorization or approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required for the due execution, delivery and performance by
the Borrower of this Amendment.
(f) Representations and Warranties in the Financing Agreement.
The Borrower confirms that as of the Amendment Effective Date the
representations and warranties contained in Section 6 of the Financing Agreement
are (before and after giving effect to this Amendment) true and correct in all
material respects (except to the extent any such representation and warranty is
expressly stated to have been made as of a specific date, in which case it shall
be true and correct as of such specific date) and that no Default or Event of
Default has occurred and is continuing.
Section 4. Miscellaneous.
(a) Reference to and Effect on the Existing Financing
Agreement.
(i) Except as specifically amended by this Amendment
and the documents executed and delivered in connection herewith, the Existing
Financing Agreement shall remain in full force and effect and is hereby ratified
and confirmed.
(ii) The execution and delivery of this Amendment and
performance of the Amended Financing Agreement shall not, except as expressly
provided herein, constitute a. waiver of any Provision of, or operate as a
waiver of any right, power or remedy of CITBC under, the Existing Financing
Agreement or any agreement or document executed in connection therewith.
(iii) Upon the conditions precedent set forth herein
being satisfied, this Amendment shall be construed as one with the Existing
Financing Agreement, and the Existing Financing Agreement shall, where the
context requires, be read and construed throughout so as to incorporate this
Amendment.
(b) Fees and Expenses. The Borrower acknowledges that all
costs, fees and expenses incurred in connection with this Amendment will be paid
in accordance with Section 7, Paragraph 4 of the Existing Financing Agreement.
(c) Headings. Section and subsection headings in this
Amendment are included for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
(d) Counterparts. This Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument,
7
<PAGE>
(e) Governing Law. This Amendment shall be governed by and
construed according to the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first above written.
SHARPER IMAGE CORPORATION, a
Delaware corporation
By: /s/ Jeffrey P. Forgan
---------------------------------------------
Name: Jeffrey P. Forgan
-------------------------------------------
Title: Sr. Vice President/Chief Financial Officer
------------------------------------------
By: /s/ Tracy Wan
---------------------------------------------
Name: Tracy Wan
-------------------------------------------
Title: President/Chief Operating Officer
------------------------------------------
THE CIT GROUP/BUSINESS CREDIT, INC.,
a Delaware corporation
By: /s/ Adrian Avalos
--------------------------------------------
Name: Adrian Avalos
-------------------------------------------
Title: AVP
------------------------------------------
8
ELEVENTH AMENDMENT TO LEASE
THIS ELEVENTH AMENDMENT TO LEASE (this "Amendment") is dated February
9, 2000, for reference purpose only, by and between CARRAMERICA REALTY
CORPORATION, a Maryland corporation ("Landlord"), and SHARPER IMAGE CORPORATION,
a Delaware corporation ("Tenant").
RECITALS
A. Golden Gateway North, a limited partnership and Landlord's
predecessor in interest ("GGN") and The Thalheimer Company, a California
corporation and Tenant's predecessor in interest ("Thalheimer") entered into
that certain Office Lease and Addendum to Office Lease, both dated February 8,
1983 (the "Initial Lease"), pursuant to which GGN leased to Thalheimer and
Thalheimer leased from GGN premises in that certain building located at 650
Davis Street, San Francisco, California in the Golden Gateway Project.
B. The Initial Lease was subsequently amended by that certain Amendment
No. 1 to Office Lease between GGN and Thalheimer dated as of September 15, 1983
(the "First Amendment"), that certain Amendment No. 2 to Office Lease between
GGN and Thalheimer dated as of April 6, 1984 (the "Second Amendment"), that
certain Third Amendment to Lease between GGN and Thalheimer dated as of June 30,
1987 (the "Third Amendment"), that certain Amendment No. 4 to Office Lease
between GGN and Tenant dated as of July 2, 1987 (the "Fourth Amendment'), that
certain Fifth Amendment to Lease between GGN and Tenant dated as of March 4,
1988 (the "Fifth Amendment"), that certain Amendment No. 6 to Office Lease
between GGN and Tenant dated as of November 1, 1990 (the "Sixth Amendment"),
that certain Amendment No. 1 to Office Lease between GGN and Tenant dated as of
November 30, 1992 (the "Seventh Amendment"), that certain Amendment No. 8 to
Office Lease between GGN and Tenant dated as of June 1, 1993 (the "Eighth
Amendment") that certain Amendment No. 9 to Office Lease between Shorenstein
Realty Investors, L.P., a California limited partnership and Landlord's
predecessor in interest ("Shorenstein") and Tenant dated as of December 14, 1994
(the "Ninth Amendment") and that certain Amendment No. 10 to Office Lease
between Shorenstein and Tenant dated as of March 26, 1998 (the "Tenth
Amendment"). The Initial Lease, as amended by the First Amendment, the Second
Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the
Sixth Amendment, the Seventh Amendment, the Eight Amendment, the Ninth
Amendment, and the Tenth Amendment is defined herein as the "Original Lease").
C. GGN's interest in the Original Lease was subsequently assigned to
Shorenstein and Shorenstein's interest in the Original Lease was subsequently
assigned to Landlord.
D. Thalheimer's interest in the Original Lease was subsequently
assigned to Tenant.
E. Landlord and Tenant desire to amend the Original Lease to, among
other things, extend the term of the Original Lease on the terms and conditions
set forth herein.
1
<PAGE>
AMENDMENT
1. Incorporation of Recitals and Definitions. The foregoing recitals
are hereby incorporated herein by this reference. The Original Lease as amended
by this Amendment is hereinafter referred to as the "Lease". All terms which are
capitalized herein but which are not defined, shall have the same meanings given
such terms in the Original Lease. In the event of any conflict between the terms
set forth in the Original Lease and this Amendment, the terms of this Amendment
will control.
2. Term. The Lease is hereby amended to extend the term of the Lease
for an additional five (5) year period commencing on February 1, 2001 and
terminating on January 31, 2006 (the "Renewal Term").
3. Premises. Landlord and Tenant hereby agree that for the Renewal
Term, the "Premises" shall contain a total of 58,295 rentable square feet and be
comprised of the Second Floor Space, the Photography Studio and the First Floor
Retail Space (as such terms are defined below) at 650 Davis Street, San
Francisco, California (the "Building")
(a) "Second Floor Space" means the 48,328 rentable square feet
of the upper level of the Building, as shown on Exhibit C attached
hereto.
(b) "Photography Studio" means the 6,673 rentable square feet
located on the southeast comer of the lower level of the Building, as
shown on Exhibit C attached hereto.
(c) "First Floor Retail Space" means the 3,294 rentable square
feet on the lower level of the Building, as shown on Exhibit C attached
hereto.
<TABLE>
4. Base Rent For the Premises. As of February 1, 2001, the definition
of "Base Rent" is amended as follows:
<CAPTION>
Time Period Annual Base Rent Monthly Base Rent
----------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
February 1, 2001 - January 31, 2002: $2,404,668.72 $200,389.06
February 1, 2002 - January 31, 2003: $2,462,963.76 $205,246.98
February 1, 2003 - January 31, 2004: $2,521,258.80 $210,104.90
February 1, 2004 - January 31, 2005: $2,579,553.72 $214,962.81
February 1, 2005 - January 31, 2006: $2,637,848.76 $219,820.73
</TABLE>
With respect to the Renewal Term, Tenant has no other Base Rent payment
obligations (except for accrued but unpaid Rent obligations relating to the
period prior to the Renewal Term) and the foregoing Base Rent payments cover the
entire Premises, including, without limitation, the First Floor Retail Space.
5. Base Year/Operating Expenses/Property Taxes. As of February 1, 2001,
(a) the "Base Year" shall be amended to be calendar year 2001, (b) "Base
Operating Expenses" shall mean the Operating Expenses paid or incurred by
Landlord in calendar year 2001, and (c) "Base Property Taxes" shall mean the
Property Taxes paid or incurred by Landlord in calendar year
2
<PAGE>
2001. Effective as of February 1, 2001, Section 3(a)(3) of the Lease is amended
to read in its entirety as follows:
"Lessee shall pay Lessor as additional rent the sum of (i)
Lessee's percentage share of the total dollar increase, if
any, in Operating Expenses paid or incurred by Lessor in each
year subsequent to the Base Year over the Base Operating
Expenses and (ii) Lessee's percentage share of the total
dollar increase, if any, in Property Taxes paid or incurred by
Lessor in each year subsequent to the Base Year over the Base
Property Taxes."
6. Proportionate Share. Landlord and Tenant agree that "Lessee's
percentage share" of the Commercial Area is 62.22%.
7. Tenant Improvements. Landlord shall provide Tenant with a "Tenant
Improvement Allowance" in the total amount of $540,394.65, in accordance with
the terms and conditions of the "Tenant Improvement Agreement" attached hereto
as Exhibit A.
8. First Floor Retail Space. As of February 1, 2001, the Tenant may
convert the First Floor Retail Space to general office use; provided, however,
that (a) any alterations or improvements Tenant desires to make in the First
Floor Retail Space shall be subject to the terms and conditions of the Lease,
including the requirement that Tenant obtain Landlord's prior written approval
for any alterations, additions or improvements, which approval shall not be
unreasonably withheld, delayed or conditioned, (b) Tenant shall be responsible
for any improvements to the Building's common areas that are required as a
condition of obtaining the necessary permits and approvals for such First Floor
Retail Space conversion, and (c) with the exception of the Tenant Improvement
Allowance set forth above Landlord shall have no obligation to pay for any
alterations or improvements performed by Tenant in connection with such First
Floor Retail Space conversion.
Tenant is not obligated to pay "percentage rent", as defined in the
Eighth Amendment, with respect to the Renewal Term. Tenant has no obligation to
report Gross Sales with respect to the Renewal Term. Tenant has no obligation to
continuously operate its business in the First Floor Retail Space during the
Renewal Tom and effective as of February 1, 2001, Section 6(g) of the Eighth
Amendment is deleted from the Lease.
9. Janitorial Service. Tenant shall provide any janitorial service
required for the Premises during the Renewal Term. Landlord shall provide Tenant
with a janitorial credit in the amount of $9,000.00 per month (as set forth in
Section 3 of the Sixth Amendment) during the Renewal Term. Tenant shall recover
this janitorial credit by offset against the Base Rent payable each month.
10. Signage. Landlord hereby approves all existing Tenant signs
installed on the Project, except for the neon sign with the Tenant's name
located on the inside of the windows facing Broadway Street which Tenant hereby
agrees to remove as of the date Tenant executes this Amendment. Any new signs
Tenant proposes to install in the Project shall conform with Landlord's signage
standards, a copy of which is attached hereto as Exhibit B and shall be subject
to Landlord's prior written approval. In the event that (i) Tenant delivers
written notice
3
<PAGE>
to Landlord that provides all of the information Landlord requires to make a
decision to approve or disapprove a sign Tenant proposes to install at the
Premises (the "First Sign Request Notice"), (ii) Landlord does not approve or
disapprove such proposed sign within twenty five (25) days of Landlord's receipt
of the First Sip Request Notice, (iii) after such twenty five (25) day period
Tenant delivers written notice to Landlord specifying that Landlord has not
responded to the request (the "`Second Sign Request Notice"), and (iv) Landlord
does not approve or disapprove the proposed sign within fifteen (15) days of
Landlord's receipt of the Second Sign Request Notice, then Landlord shall be
deemed to have approved the proposed sign.
11. Option To Extend. Landlord and Tenant agree that Tenant exercised
its first option to extend the Lease Term as provided in Section 8(b)(1) of the
Sixth Amendment and amended by Section 8 of the Seventh Amendment, and that this
Amendment documents such extension. Landlord and Tenant further agree that
Tenant may exercise the second option to extend the Term of the Lease for a
period of five (5) years pursuant to the terms and conditions set forth in
Section 8 of the Sixth Amendment as amended by Section 8 of the Seventh
Amendment; provided, however, that Landlord and Tenant agree that this second
option is the final remaining option available to Tenant under the Lease to
extend the Term of the Lease,
12. Right of First Opportunity. Landlord and Tenant agree that Tenant
has (and shall continue to have during the Renewal Term) a Right of First
Opportunity subject to the tam and conditions set forth in Section 9 of the
Sixth Amendment, as amended by Section 9 of the Seventh Amendment.
13. Notices. Section 33 of the Lease is hereby amended to provide that
Landlord's new address for receipt of notices under the Lease is as follows:
CarrAmerica Realty Corporation
1810 Gateway Drive, Suite 150
San Mateo, CA 94404
Attention: Vice President - Market Officer
with a copy to:
CarrAmerica Realty Corporation
1850 K Street, N.W., Suite 500
Washington, D.C. 20006
Attention: Lease Administrator
14. Brokers. Landlord and Tenant represent and warrant to each other
that neither has dealt with any broker respecting this Amendment other than
Kenmark Commercial ("Tenant's Broker") and The CAC, Group ("CAC"). Each party
shall indemnify and hold the other harmless from any and all other claims by any
other broker, agent or person claiming a commission or other form of
compensation by virtue of this Amendment as a result of such party's dealing
with the party from whom indemnification is sought. Landlord shall pay a
commission in the total amount of $145,737.50 to Tenant's Broker; provided,
however, that Landlord shall pay Tenant's Broker half of the commission
($72,868.75) upon full execution of this Amendment by both Landlord and Tenant,
and half of the commission ($72,868.75) on February 1, 2001. In addition,
4
<PAGE>
Landlord shall pay the commission and any other compensation due to CAC in
connection with this Amendment and Landlord shall indemnify Tenant from any and
all claims by CAC claiming a commission or other form of compensation in
connection with this Amendment.
15. Attorneys' Fees. In any arbitration, quasi-judicial or
administrative proceedings or any action in any court of competent jurisdiction,
brought by either party to enforce any covenant or any of such party's rights or
remedies under this covenant or any of such party's rights or remedies under
this Amendment, including any action for declaratory relief, or any action to
collect any payments required under this Amendment or to quiet title against the
other party, the prevailing party shall be entitled to reasonable attorneys'
fees and all costs, expenses and disbursements in connection with such action,
including the costs of reasonable investigation, preparation and professional or
expert consultation, which sums may be included in any judgment or decree
entered in such action in favor of the prevailing party.
16. Successors. All terms and provisions of this Amendment shall be
binding upon, be enforceable by, and shall inure to the benefit of, the
respective assignees and successors of the parties hereof.
17. Time is of the Essence. Time is of the essence for each and every
provision of this Amendment.
5
<PAGE>
18. Confirmation of Lease. Except as amended by this Amendment, the
parties hereby agree and confirm that the Lease is in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the
day and year first above written,
"LANDLORD"
CARRAMERICA REALTY CORPORATION,
a Maryland corporation
By: /s/ Philip L. Hawkins
Name: Philip L. Hawkins
Title: Chief Operating Officer
By: /s/ Leah N. Segawa
Name: Leah N. Segawa
Title: Managing Director
"TENANT"
SHARPER IMAGE CORPORATION,
a Delaware corporation
By: /s/ Tracy Wan
Name: Tracy Y. Wan
Title: President C.O.O.
By: /s/ Jeffrey P. Forgan
Name: Jeffrey P. Forgan
Title: Senior Vice President and
Chief Financial Officer
6
<PAGE>
EXHIBIT A
TENANT IMPROVEMENT AGREEMENT
This Tenant Improvement Agreement ("Agreement") is an integral part of
the Eleventh Amendment to Lease dated as of February 9, 2000 between CarrAmerica
Realty Corporation and Sharper Image Corporation (the "Amendment") relating to
certain Premises described in the Amendment. Capitalized terms used in this
Amendment not otherwise defined herein shall have the meaning given such terms
in the Amendment Landlord and Tenant agree as follows with respect to the Tenant
Improvements, if any, to be installed in the Premises:
1. INITIAL TENANT IMPROVEMENTS.
A. Plans. Tenant shall cause to be performed certain remodeling work
(the "Tenant Improvements") in and about the Premises in accordance with plans
and specifications prepared by Tenant and approved by Landlord (the "Plans"),
which approvals shall not be unreasonably withheld, delayed or conditioned.
Tenant may perform the design and/or construction of the Tenant Improvements in
stages in order to accommodate the ongoing growth in the number of Tenant's
employees in the Premises, Tenant's on-going business operations and other
operational issues for Tenant, Tenant shall cause the Plans to be prepared, at
Tenant's cost, by a registered professional architect and mechanical and
electrical engineer(s). Landlord's Tenant Improvements Guidelines, attached
hereto as Exhibit A-1, which are attached for the purpose of informing Tenant of
Landlord's general design preferences and material specifications with respect
to any Tenant Improvements. Tenant agrees to use reasonable efforts to prepare
its plans and specifications in compliance with Landlord's Tenant Improvement
Guidelines to the extent applicable to the Tenant Improvements contemplated by
Tenant; provided, however, that Tenant must obtain Landlord's written approval
prior to the installation of any Tenant Improvements that deviate from the terms
and conditions set forth in Landlord's Tenant Improvement Guidelines. Tenant
shall furnish the initial draft of the Plans to Landlord for Landlord's review
and approval. In the event that (i) Tenant delivers a draft of the Plans which
includes all of the information Landlord requires to make a decision to approve
or disapprove the Plans (the "First Plans Request Notice"), (ii) Landlord does
not approve or disapprove such proposed Plans within twenty five (25) days of
Landlord's receipt of the First Plans Request Notice, (iii) after such twenty
five (25) day period Tenant delivers written notice to Landlord specifying that
Landlord has not responded to the request (the "Second Plans Request Notice"),
and (iv) Landlord does not approve or disapprove the proposed Plans within
fifteen (15) days of Landlord's receipt of the Second Plans Request Notice, then
Landlord shall be deemed to have approved the proposed Plans. If Landlord
provides Tenant with comments to the initial draft of the Plans, Tenant shall
provide revised Plans to Landlord incorporating Landlord's comments after
receipt of Landlord's comments. Landlord agrees to use commercially reasonable
efforts to respond promptly to revisions to Plans. Plans will be revised by
Tenant and reviewed by Landlord until the Plans have been finally approved by
Landlord. Tenant hereby agrees that the Plow for the Tenant Improvements shall
comply with all applicable Governmental Requirements. Landlord's approval of the
Plans shall be solely for the purposes of authorizing construction of the Tenant
Improvements, and shall not be deemed to be
1
<PAGE>
an approval of the technical merits of the Plans nor a verification that such
Tenant Improvements and/or the Plans comply with applicable Governmental
Requirements. Tenant shall be solely responsible for ensuring that the `Tenant
Improvements are designed and constructed in accordance with all applicable
Governmental Requirements.
B. Construction by Tenant. Tenant shall be solely responsible for
the construction of the Tenant Improvements in and about the Premises. Tenant
shall construct the Tenant Improvements in accordance with the approved Plans
and in accordance with all rules, regulations, codes, statutes, ordinances and
laws of all government and quasi-governmental authorities and in a good and
workmanlike manner, Landlord shall have no responsibility whatsoever for the
construction of the Tenant Improvements. The Tenant Improvements shall be
constructed with new materials of good quality and with adequately trained and
supervised labor using currently approved methods of their particular trade.
C. Contractor. Prior to commencement of construction, Tenant shall
select a general contractor which is reasonably acceptable to Landlord (whose
consent shall not be unreasonably withheld or delayed) ("Contractor") to
construct the Tenant Improvements. The Contractor shall be licensed by the State
of California and bondable. The construction contract ("Construction Contract")
for the Tenant Improvements shall be between Tenant (not Landlord) and
Contractor.
D. Construction Process. Tenant shall not commence the construction
of any Tenant Improvements until after Landlord and Tenant have agreed on the
approved Plans and selection of the Contractor. Thereafter, Tenant shall be
responsible for completing the construction of the Tenant Improvements in
accordance with the approved Plans.
E. Insurance. Tenant shall deliver to Landlord prior to Tenant or
Contractor's entry onto the Premises to commence construction of the Tenant
Improvements certificates evidencing the following insurance:
(1) Tenant, and any contractor of Tenant performing work on
the Premises, shall maintain insurance as follows.
(a) Commercial General Liability Insurance, including
premises operation, products operation, contractual liability coverage,
completed operations coverage, broad form property damage to afford protection
with limits, for each occurrence, of not less than One Million Dollars
($1,000,000) with respect to personal injury, death or property damage.
(b) Workers' compensation or similar insurance in
form and amounts required by law, and Employer's Liability with not less than
the following limits:
Each Accident $500,000
Disease - Policy Limit $500,000
Disease - Each Employee $500,000
2
<PAGE>
(2) Contractor's insurance shall contain a waiver of
subrogation provision in favor of Landlord and its agents. Tenant's contractor's
insurance shall be primary and not contributory to that carried by Tenant,
Landlord, their agents or mortgagees. Tenant and Landlord, and if any,
Landlord's building manager or agent, mortgagee or ground lessor shall be named
as additional insured on Tenant's contractor's liability insurance policies.
F. Compliance. The Tenant Improvements and all materials
incorporated therein shall comply with the approved Plans, as may be revised
from time to time pursuant to the terms of this Agreement, and shall be free
from all design, material and workmanship defects. Tenant and Contractor shall
comply with all applicable laws, regulations, permits and other approvals
applicable to construction of the Tenant Improvements.
G. Liens. Tenant shall defend and indemnify Landlord and hold it
harmless from any and all claims, losses, demands, judgments, settlements, costs
and expenses, including reasonable attorneys' fees, resulting from any act or
omission of Tenant or anyone claiming by, through, or under Tenant, in
connection with construction of the Tenant Improvements, for any mechanics' lien
or other lien filed against the Premises or any Building or against other
property of Landlord (whether or not the lien is valid or enforceable). Tenant
shall, at its own expense, (i) cause any such liens to be discharged of record,
or (ii) cause to be recorded a bond in compliance with CC Section 3143, within a
reasonable time, not to exceed thirty (30) days, after the later of (a) Tenant's
actual notice of the lien or (b) the date of filing.
H. Indemnity. Tenant shall indemnify, defend and hold Landlord
harmless from and against any and all suits, claims, actions, loss, cost or
expense (including claims for workers' compensation, reasonable attorneys' fees
and costs) based on personal injury or property damage caused in, or contract
claims (including, but not limited to claims for breach of warranty) arising
from, construction of the Tenant's Improvements, except to the extent caused by
Landlord's acts or omissions or Landlord's agents', employees' or contractors'
acts or omissions. Tenant shall repair or replace any portion of a Building or
item of Landlord's equipment or any of Landlord's real or personal property
damaged, lost or destroyed in construction of the Tenant Improvements, except to
the extent the damage, loss or destruction is the result of Landlord's acts or
omissions or Landlord's agents', employees' or contractors' acts or omissions.
Notwithstanding the foregoing, in the event Tenant fails to complete such repair
or replacement work within ten (10) days following Tenant's receipt of
Landlord's written notice therefor (or if the nature of such work is such that
more than ten (10) days is required, then in the event Tenant fails to commence
such work within such ten (10) days and thereafter diligently prosecute such
work to completion to the reasonable satisfaction of Landlord), then Landlord
may (but shall have no obligation to) cause such work to be performed and/or
completed at Tenant's sole cost and expense.
I. Project Management Fee. Landlord, or an agent of Landlord, shall
provide project management services in connection with the construction of the
Tenant Improvements and the Change Orders (hereinafter defined). Such project
management services shall be performed, at Tenant's cost, for a fee of three
percent (3%) of the Tenant Improvement Allowance.
3
<PAGE>
J. Notices. Tenant shall notify Landlord at least ten (5) business
days prior to the commencement of construction of any Tenant Improvements and
permit Landlord to post on the Premises such notices of nonresponsibility, and
such other notices to other tenants in the Project, as Landlord may deem
reasonable under the circumstances.
2. CHANGE ORDERS. Tenant shall not make any change to the approved
Plans without Landlord's prior approval, which approval shall not be
unreasonably withheld or delayed; provided, however, that Landlord may withhold
its consent if such requested change would negatively affect the structural
components or exterior appearance of the Buildings. Landlord agrees to use
commercially reasonable efforts to respond promptly to proposed change requests.
If Landlord does not approve of the plans and specifications for the change
order request, Landlord shall advise Tenant of the revisions required. Tenant
shall revise and redeliver the plans and specifications to Landlord within five
(5) business days of Landlord's advice or Tenant shall be deemed to have
abandoned its request for such change order request. Tenant shall pay for all
preparations and revisions of plans and specifications, and the construction of
all change order requests, subject to Tenant Improvement Allowance. All approved
change order requests to the approved Plans shall be in writing and shall be
signed by both Landlord and Tenant prior to the change being made.
3. TENANT IMPROVEMENT ALLOWANCE. Landlord shall contribute an amount up
to $540,394.65 ($9.27 per rentable square foot) (the "Tenant Improvement
Allowance") toward the costs incurred by Tenant in connection with the Tenant
Improvements, Change Orders, Landlord's project management fee and other work
related to the remodeling of the Premises, including without limitation, the
installation of work stations, partitions, wall and floor coverings and light
fixtures (collectively, "Remodeling Work") in accordance with and subject to the
provisions in this Agreement. Not sooner than the date on which the Remodeling
Work within the Premises has been commenced, Tenant may submit invoices to
Landlord for payment out of the Tenant Improvement Allowance to reimburse Tenant
for Remodeling Work. costs incurred for work actually performed within the
Premises. Following Landlord's receipt of such invoices, Landlord shall within
thirty (30) days thereafter pay Tenant for the amount requested in such invoice;
provided in no event shah Landlord be obligated to pay Tenant more than the
maximum amount of the Tenant Improvement Allowance. Any expenses incurred by
Tenant for the Remodeling Work in excess of the Tenant Improvement Allowance
shall be at Tenant's sole cost and expense. Landlord shall have no obligation to
disburse any portion of the Tenant Improvement Allowance which has not be
requested by Tenant pursuant to the terms hereof on or before February 28, 2002
and such amount shall be deemed forfeited by Tenant and shall not be applicable
against any other amounts (e.g., Rent) payable by Tenant under the Lease. In the
event that (i) Tenant has fully satisfied all of the terms and conditions as set
forth in this Agreement required for payment of a portion of the Tenant
Improvement Allowance, (ii) Landlord has failed to pay such portion when due,
and (iii) Landlord has not notified Tenant of a good faith dispute regarding the
portion to be paid, then Tenant may offset the amount overdue, together with
interest at the rate applicable to late Tenant payments under the Lease, against
ensuing Base Rent Unless notified by Landlord when Tenant requests Landlord's
approval for the Tenant Improvements that certain Tenant Improvements must be
removed upon the expiration or termination of the Lease (the "Designated Tenant
Improvements"), then except for those Designated Tenant Improvements, all other
Tenant Improvements whose cost is paid for or
4
<PAGE>
reimbursed by Landlord's payment of the Tenant Improvement Allowance shall
belong to Landlord upon the later of Landlord's payment or their installation in
the Premises.
4. AS-BUILTS. Upon completion of construction of the Tenant
Improvements, Tenant shall deliver to Landlord "as-built" drawings for the
completed Tenant Improvements.
5. MISCELLANEOUS. Terms used in this Exhibit A shall have the meanings
assigned to them in the Amendment. The terms of this Exhibit A are subject to
the terms of the Amendment.
Landlord hereby designates the following individual as
Landlord's representative for purposes of Tenant's communications with Landlord
regarding the Tenant Improvements:
Eric Dameron Drew
CarrAmerica Realty Corporation
150 Pacific Avenue
San Francisco, CA 94111
Phone: (415) 397-2760
Fax: (415) 397-6627
Tenant hereby designates the following individual as Tenant's
representative for purposes of Landlord's communications with Tenant regarding
the Tenant Improvements:
Mr. Glenn Dutcher
The Sharper Image
650 Davis Street
San Francisco, California 94111
Phone: (415) 445-6097
Fax: (415) 445-1515
5
<TABLE>
Exhibit 11.1
SHARPER IMAGE CORPORATION
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, January 31, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net Earnings ($000) $ 9,325 $ 4,602 $ 593
Average shares of common stock
outstanding during the period 10,516,358 8,532,588 8,303,425
=========== =========== ===========
Basic Income per Share $ 0.89 $ 0.54 $ 0.07
----------- ----------- -----------
Average shares of common stock
outstanding during the period 10,516,358 8,532,588 8,303,425
Add:
Incremental shares from assumed
exercise of stock options - diluted 841,646 540,244 233,607
----------- ----------- -----------
11,358,004 9,072,832 8,537,032
=========== =========== ===========
Diluted Income per Share $ 0.82 $ 0.51 $ 0.07
=========== =========== ===========
33
</TABLE>
THE
SHARPER
IMAGE
1999 Annual Report
<PAGE>
Corporate Profile
Sharper Image Corporation is a multi-channel specialty retailer and
product developer that is nationally and internationally renowned as a leading
source of new, innovative, high-quality products that make life eaiser and more
enjoyable.
The Sharper Image enjoys an exceptionally strong brand identity, with a
name that is synonymous with fun and entertainment, design and creativity,
uniqueness and technological innovation.
A key strength is the Company's ability to create exclusive proprietary
merchandise. These products, labeled Sharper Image Design(TM), are highly
marketable and form the foundation of the Company's success in diverse channels
of distribution.
The Company currently operates 90 stores nationwide, and generates
direct sales through its monthly Sharper Image print catalog and online at
sharperimage.com, the Company's Internet e-commerce Web site.
The Company also generates business-to-business revenues through its
corporate incentive and rewards programs and wholesale operations.
NET EARNINGS TOTAL REVENUES INTERNET REVENUES
($ THOUSANDS) ($ MILLIONS) ($ MILLIONS)
1997 1998 1999 1997 1998 1999 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ----
FISCAL FISCAL FISCAL
593 4,602 9,325 216.8 243.1 294.4 1.6 4.9 28.5
<PAGE>
Record Accomplishments
Record net earnings of $9.3 million, a 103 percent increase over the prior
fiscal year, and
Record total revenues of $294.4 million, a 21 percent increase
Record gross margin rate of 51.0 percent, a 2.0 percentage point increase
Record Internet sales of $28.5 million, a 479 percent increase
Record store sales of $188.4 million, a 16 percent increase, including 12
percent increase in comparable store sales.
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
(Fiscal 1999) (Fiscal 1998) (Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Revenues $ 294,365 $ 243,114 $ 216,815 $ 210,245 $ 204,184
Provision for loss on the closure
the SPA Collection division -- -- -- (8,000)(1) --
Earnings (loss) before income taxes 15,541 7,670 988 (7,241) 739
Net earnings (loss) 9,325 4,602 593 (4,345) 444
Net earnings (loss) per share - Basic 0.89(2) 0.54 0.07 (0.53) 0.05
Diluted $ 0.82(2) $ 0.51 $ 0.07 $ (0.53) $ 0.05
Balance Sheet Data
Working capital $ 54,644 $ 16,003 $ 11,633 $ 9,429 $ 17,233
Total assets 142,119 82,045 78,662 78,804 70,456
Long term notes payable 2,366 2,513 3,299 4,245 3,355
Stockholders' equity $ 77,123 $ 36,649 $ 29,156 $ 28,449 $ 32,758
Current ratio 1.93 1.40 1.27 1.22 1.56
Statistics
Number of stores at year end 89 87 85 82(3) 78(3)
Comparable store sales increase (decrease) 12.3% 5.3% 1.1% (2.1%) 3.3%
Annualized net sales per square foot $ 546 $ 484 $ 465 $ 458 $ 473
Number of catalogs mailed(4) 47,581,000 41,338,000 38,261,000 34,795,000 32,780,000
Average revenue per transaction:
Stores $ 106 $ 102 $ 104 $ 97 $ 106
Catalog(4) $ 145 $ 141 $ 160 $ 169 $ 122
Internet $ 97(5) $ 140 $ 111 $ 77 $ 77
Return on average stockholders' equity 16.4% 14.0% 2.1% N/A 1.4%
Book value per share $ 7.33 $ 4.30 $ 3.51 $ 3.44 $ 3.97
Weighted average number of shares
outstanding -
Basic 10,516,358 8,532,588 8,303,425 8,260,208 8,249,259
Diluted 11,358,004 9,072,832 8,537,032 8,260,208 8,682,078
</TABLE>
Dollars are in thousands except net earnings (loss) per share and statistics.
(1) The Company incurred a one-time charge related to the closure of the SPA
Collection division of $0.56 loss per share.
(2) The earnings per share for fiscal 1999 reflect the dilutive effect of the
additional 3.0 million shares generated from the July 1999 secondary
offering.
(3) Excludes six and four SPA Collection stores at January 31, 1997 and 1996.
(4) Based upon Sharper Image catalog - excludes other specialty and test
mailing catalogs.
(5) Includes results from auction site started in February 1999.
<PAGE>
To Our Shareholders
I'm delighted to report that 1999 was our best year ever. Annual revenues
reached a record $294.4 million - climbing 21 percent over last year's record
level. Our net earnings were the highest in our 23-year history, reaching $9.3
million, a 103 percent increase over the prior year's $4.6 million. Every sales
channel posted consistently impressive gains and outperformed our expectations.
Our comparable store sales increased 12 percent on top of last year's five
percent gain; total retail store sales increased 16 percent, to a record $188.4
million. The Sharper Image catalog posted sales of $65.6 million, a 12 percent
gain, as increased circulation help to drive sales in stores and online.
Internet sales surged 479 percent, to $28.5 million. Our business-to-business
operations also enjoyed excellent sales gains to record levels.
Most importantly, we achieved these outstanding financial results by having
a sound strategic vision that was consistently executed by an experienced team
of associates.
Sharper Image Design(TM)
Sharper Image is one of the most powerful brand names in retail, and our
sophisticated product development capability gives us a distinct advantage over
other retailers of hard goods. This year, Sharper Image Design(TM) products
accounted for an impressive 29 percent of sales - 11 percentage points over last
year's 18 percent. The popularity of both established and new proprietary
products exceeded our expectations. The Ionic Breeze(TM) Silent Air Purifier,
with exclusive patented electronics that propel air silently, was again the
year's top seller. In 1999, we extended the Ionic Breeze line to include a Car
Air Purifier, a Plug-In Air Purifier for small spaces, and a wearable Personal
Air Purifier - all top performers. We created the Q Ball(TM), an irreverent,
talking, high-tech version of a fortune-teller's crystal ball - our best-selling
novelty item ever. And we created the world's first and only shower CD stereo.
Sharper Image Design(TM) products, combined with private-label merchandise
from other manufacturers, accounted for 50 percent of sales in 1999 and helped
raise our gross margin to 51.0 percent, up 2.0 percentage points. As the
selection continues to expand, plans for 2000 target our own-label products to
account for up to 60% of sales.
Internet E-Commerce
We launched our Web site nearly half a decade ago. It's difficult to fully
characterize the dimensions of shifts in consumers' buying patterns, but one
story will tell: During the peak days of December 1999, we did more online
business in 72 hours than we did in all of 1997!
In 1999, innovations at our Web site included establishing an auction site;
adding 3D interactivity and sound to Web product presentations; creating
successful email campaigns to our Internet buyers; and enhancing the ease of use
with express shopping settings in a secure environment. E-commerce is a key
focus of our strategy, and we will continue to devote significant human and
financial resources to achieving high sales growth on the Web. The Internet is a
quicker and more economical way to reach a vast consumer base and it gives us
the best opportunity to realize our vision and become a much larger and more
profitable company.
Growth
This record year was the result of a unique business model and a great
strategy, well executed. Powerful brand. Proprietary products. Direct-marketing
know-how. Multi-channel synergy. Effective, aggressive multimedia advertising to
attract new customers. Innovative use of online technologies. Superior
merchandising and marketing. Solid operational infrastructure. We demonstrated
our ability to achieve excellent results, consistently. This strategy will
continue to be our focus in the next fiscal year and beyond. I want to express
my heartfelt gratitude to our entire team of associates. They worked very hard
all year and have enjoyed, with me, the satisfaction of achieving our goals. On
behalf of all of us, I thank you for your confidence and support.
Sincerely,
/s/ Richard
Richard Thalheimer
Chairman, Founder and
Chief Executive Officer
4
<PAGE>
FULL PAGE PHOTO
The CD Shower Companion(TM) was
created by Sharper Image Design(TM)
and is the world's first and only
stereo CD player made for use in
the Shower
<PAGE>
FULL PAGE COLOR PHOTO
<PAGE>
PHOTOS
IONIC HAIR WAND-PRO LIGHTSCAPE RELAXATION SYSTEM PERSONAL COOLING SYSTEM 2.0
SHARPER IMAGE DESIGN(TM)
Sharper Image Design" products are conceived, designed, engineered,
packaged, contract manufactured and marketed solely by the Company. Led by
founder and CEO Richard Thalheimer, and Sharper Image senior vice president,
Charles Taylor, our development team creates a wide range of innovative, high
quality items - from interactive toy robots to silent air purifiers. Our
"Invented Here" assortment is diverse, fresh, exciting, attractive and highly
marketable to a broad base of consumers. Many products incorporate patented
technologies that are unavailable elsewhere. Such items have no equal in the
marketplace, cannot be price shopped, and vet they represent clear value to
customers because of their imaginative, problem-solving usefulness. The higher
margins of our own brand allow us to broaden our customer reach through
increased multimedia advertising in our catalog and special single product
mailers; in print media; on television, radio, infomercials and online; with
email marketing programs; and in business-to-business trade publications. This
combination of brand, product and advertising drove Sharper Image Design(TM)
items to the top of our selling charts, accounting for 29 percent of sales to
consumers. With more extraordinary products to be launched in 2000, Sharper
Image Design" will continue to increase as a percentage of our growing sales.
PHOTOS
Powerflow Height-Enhancing Insoles
CD Radio/Alarm Clock with Sound Soother
Power Tower 100 Motorized CD Rack
PROPRIETARY PRODUCTS
(PERCENTAGE OF SALES)
FISCAL
1997 1998 1999
8% 18% 29%
<PAGE>
Sharper Image for Everyone
Nearly a quarter century of visionary merchandising and imaginative
marketing has made Sharper Image one of the most widely recognized and respected
brands - an enduring American icon that conveys genuine enthusiasm for well
designed, technologically innovative products that make life easier and more
enjoyable. We aim to build on our brand's strengths to reach a larger base of
consumers with proprietary Sharper Image Design(TM) products that are unique yet
broadly appealing, fun yet useful, sophisticated yet affordable. Our aggressive
multimedia advertising programs are designed to support the initiative to build
a larger customer base.
The Internet has fundamentally altered the business model for retailers.
Many companies are threatened. But established sellers with a clearly positioned
brand, exclusive products, multi-channel capability and direct-marketing
know-how are capitalizing on this change in the competitive arena. The Sharper
Image is among a select group of premier specialty retailers that, because of
the Internet, is poised to seize this extraordinary opportunity for significant,
profitable growth.
Sharper Image Stores
The mortar in our "click and mortar" formula finished fiscal 1999, during
the highest volume months, with five straight months of double-digit comparable
stores sales growth. For the year, comparable store sales increased 12 percent -
a clear signal that shopping in a store is still a vital and fun experience.
Synergistic use of multimedia advertising - increased catalog circulation, new
radio and TV campaigns, expanded newspaper coverage - helped our 89 stores to
set an enviable record sales pace. In 2000, a new POS system will be installed
in our stores to further enhance customer service capabilities. We're pleased
with the updated look of our new format for stores. This year we plan to remodel
up to eight stores and to open four to six new stores.
PHOTOS
Sharper Image stores in Palm Beach Gardens,
FLA, showcases our new design format.
8
<PAGE>
FULL PAGE PHOTO
Colorful, distinctive packaging is key
to the visual merchandising and marketing of our
Sharper Image Design(TM) brand in our stores.
9
<PAGE>
FULL PAGE PHOTO
<PAGE>
Internet Internet
Revenues Percentage of
($ Millions) Revenues
FISCAL FISCAL
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
1.6 4.9 28.5 0.7% 2.0% 9.7%
Internet
Our e-commerce site, sharperimage.com, is widely recognized as a great
place to visit, shop and buy. We're continuously improving our site's usability
and entertainment value. In 1999, we added 3D interactivity and sound to dozens
of product presentations using state-of-the-art 3D technology; rich media
technology to show off the fun of the Q Ball's(TM) sound effects; express
shopping enhancements to free customers from redundant keying of information;
multiple ship-to addresses; virtual electronic gift certificates for
"Last-Second Shopping!"(TM); online gift registry; email promotions; gift
guides; and a $2 incentive for catalog recipients to place orders online. Sales
surged nearly six-fold in 1999. Early in 2000, Forbes.com honored us as one of
only 33 Forbes Favorite Web sites - picking us as the best online store for
"perfect gifts." We also launched our own auction site for Sharper Image
merchandise and it was immensely popular right from the start. Our goals for
fiscal 2000 are to maintain a very high rate of growth, fueled by Sharper Image
Design(TM) products, increased advertising and dramatic site enhancements. Our
sales goal for fiscal 2000 is to at least double 1999's record Internet
revenues.
<PAGE>
Catalog & Direct Marketing
The Internet has revitalized the world of direct marketing - an arena where
Sharper Image is one of the most recognized and prestigious brands. The
industry's trade magazine, Catalog Age, last year named us as one of "The 10
Best Catalog Concepts Ever" - noting that The Sharper Image was "seminal in
creating and influencing the catalog business" by being the first direct
marketer "to make it cool for well-to-do, educated guys to buy by mail."
The Company has obviously grown and changed in 23 years; research shows
that two-thirds of our catalog buyers this holiday were women. What's more, our
unique product assortment is now driven by best-sellers that clean air, remove
carpet stains, address personal grooming needs and, in general, provide the
kinds of innovative solutions that consumers have always sought from direct
merchants.
In 1999, we tested a single-product "solo mailer" and enjoyed tremendous
success with several campaigns. These targeted solo mailers introduced our Ionic
Breeze(TM) Silent Air Purifier - and The Sharper Image - to an entire new
universe of consumers. This exceptionally profitable new program is expanding
this year, with additional products and greatly increased circulation.
To millions of loyal customers, our colorful monthly catalog is The Sharper
Image - the medium that built the brand. It remains our principle advertising
vehicle and, in 1999, we increased circulation 15 percent to its highest level
ever - 47.6 million catalogs. This year, boosted by the surging popularity of
our Sharper Image Design(TM) exclusive products and of online ordering, we plan
to continue to increase catalog circulation and other direct marketing
activities to attract new customers. The Company intends to continue the
strategy of growing its customer base through aggressive multimedia advertising
programs with the objective of achieving an appropriate return on investment.
<PAGE>
Business-to-Business
Sharper Image Corporate Incentives & Rewards have soared in popularity as
sales-driven companies compete to keep their increasingly valuable human
resources. The Sharper Image brand is widely recognized as one of the most
effective motivators in this thriving marketplace - few can match the prized
"trophy value" of a product award from The Sharper Image. What's more, our
programs are regarded as among the most innovative in the business. Recently,
the editors and online readers of Incentive magazine honored sharperimage.com as
one of the incentive industry's best Web sites. New online programs include
custom Web sites with major corporate customers, targeted emails as motivational
tools, and e-Awards(TM) for tiered, points-based online Sharper Image catalogs.
As part of our strategy to leverage our strong brand and exclusive
products, this area of business-to-business sales is targeted for continued high
growth in 2000.
Sharper Image Wholesale enhances our market presence and helps to establish
The Sharper Image as a premier source of innovative merchandise to a larger
universe of consumers. Taking advantage of our Company's vertical integration,
the wholesale sales force targets select department and specialty stores,
catalogs and Web sites with appropriate selections of Sharper Image Design(TM)
products. In 2000, this portion of our business is planned to selectively
increase its international presence.
PHOTOS
The Sharper Image is a leader in the incentives and rewards industry.
13
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
- --------------------------------------------------------------------------------
Sharper Image Corporation
Results of Operations
Percentage of Total Revenues
Fiscal Year Ended Jan. 31,
-----------------------------------------------
2000 1999 1998
(Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
-----------------------------------------------
Revenues:
Net store sales 64.0% 66.8% 69.9%
Net catalog sales 22.3 29.1 27.1
Net Internet sales 9.7 2.0 0.7
Net wholesale sales 3.5 1.4 1.5
List rental 0.4 0.5 0.5
Licensing 0.1 0.2 0.3
----- ----- -----
Total Revenues 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 48.8 50.6 53.3
Buying and occupancy 9.5 10.8 11.0
Advertising and promotion 12.9 11.2 10.5
General, selling, and
administrative 23.7 24.3 24.5
----- ----- -----
Operating Income 5.1 3.1 0.7
Other Income (Expense) 0.2 0.1 (0.2)
----- ----- -----
Earnings Before Income Tax 5.3 3.2 0.5
Income Tax 2.1 1.3 0.2
----- ----- -----
Net Earnings 3.2% 1.9% 0.3%
===== ===== =====
Revenues
Fiscal Year Ended Jan. 31,
-----------------------------------------------
2000 1999 1998
Dollars in thousands (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
-----------------------------------------------
Net store sales $188,416 $162,371 $151,589
Net catalog sales 65,617 70,750* 58,772*
Net Internet sales 28,495 4,922 1,633
Net wholesale sales 10,483 3,464 3,199
-------- -------- --------
Total Net Sales 293,011 241,507 215,193
List rental 1,129 1,088 982
Licensing 225 519 640
-------- -------- --------
Total Revenues $294,365 $243,114 $216,815
======== ======== ========
* Includes net sales from the Home Collection Catalog of $12,016,000 and
$9,647,000 for fiscal 1998 and 1997, respectively. The test mailings of the Home
Collection Catalog were terminated in late fiscal 1998 and accordingly those
sales are not recurring in net catalog sales for fiscal 1999.
Net sales for fiscal 1999 increased $51,504,000, or 21.3%, from the prior
fiscal year. Returns and allowances were 11.0% of sales for fiscal 1999, as
compared with 11.4% for fiscal 1998. The increase in fiscal 1999 Company net
sales compared to fiscal 1998 was attributable to increases in net sales from
Sharper Image stores of $26,045,000; increases in net sales from the Sharper
Image catalog (excluding Home Collection) of $6,883,000; and increases in net
sales from Internet operations of $23,573,000. The total Company increase in net
sales was partially offset by the decrease in net sales attributable to the
discontinuance of the test mailings of the Sharper Image Home Collection catalog
in fiscal 1998. Excluding the net sales of the Sharper Image Home Collection
catalog for fiscal 1998 for comparative purposes, Company net sales increased
$63,520,000, or 27.7%, respectively.
There were three key factors that contributed to the revenue growth. The
first was the continued popularity of Sharper Image Design proprietary products,
as well as private label products. The continuing development and introduction
of these new and popular products is an important factor in the Company's future
success. Sharper Image Design proprietary products increased from 18% of net
sales to consumers in fiscal 1998 to 29% in fiscal 1999. Private label products
increased from 11% of net sales to consumers in fiscal 1998 to 21% in fiscal
1999. Secondly, management believes the effectiveness of its increased
multimedia advertising initiatives in fiscal 1999 was also a significant
contributing factor in achieving record revenue levels and attracting new
customers and will be an important factor in future revenue growth, although
there can be no assurances of the continued success of these and future
advertising initiatives. Rounding out the factors, the surge in the popularity
of online shopping, and the Company's determined push to have a robust
e-commerce site, also contributed to the higher level of revenue growth.
For fiscal 1999, net store sales increased $26,045,000, or 16.0%, and
comparable store sales increased by 12.3%. The increase in net store sales for
fiscal 1999 reflects a 12.8% increase in total store transactions, with a 3.0%
increase in average revenue per transaction. Partially contributing to the
increased transactions is that several key stores were remodeled in 1998.
Although during the remodeling only a portion of the remodeled stores were open
for business, the appealing new store format increased store traffic in subse-
14
<PAGE>
Management's Discussion and Analysis of (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Revenues (continued)
quent months by reaching an expanded customer base with broad appeal products,
and enhanced visibility through additional advertising. The increase in net
store sales in fiscal 1999 is also attributable to the fiscal 1999 opening of
five new stores and annualized sales of four new stores opened in fiscal 1998
partially offset by three stores that closed at their lease maturity in fiscal
1999. Net sales per average square foot increased to $546 for fiscal 1999,
compared to $484 in fiscal 1998 and $465 in fiscal 1997. The Company's store
productivity continues to improve as sales per square foot increases and
compares favorably to the industry.
Net catalog sales for fiscal year 1999 decreased $5,133,000 or 7.3% from
fiscal 1998, which includes the decrease in the Sharper Image Home Collection
Catalog sales, due to the discontinuation of the test mailings of that catalog
in late fiscal 1998. Excluding the sales of the Home Collection Catalog in
fiscal 1998, net catalog sales increased $6,883,000, or 11.7% in fiscal 1999.
Excluding Home Collection Catalog operations, the fiscal 1999 increase in
Sharper Image Catalog net sales reflects an increase of 9.0% in transactions and
a 2.5% increase in average revenue per transaction, compared to the prior year.
Management believes the increase in Sharper Image catalog sales is partially
attributable to a 13.5% increase in Sharper Image Catalog pages circulated in
fiscal 1999 as compared to fiscal 1998, as well as the continued popularity of
Sharper Image Design proprietary and private label products. Management is
continually reviewing the number of catalogs and the pages circulated in its
efforts to optimize the revenues from catalog advertising and is currently
planning an increase in pages circulated for fiscal 2000. The Company intends to
continue the strategy of growing its customer base through aggressive multimedia
advertising programs, as well as marketing to these newly acquired customers.
The Company's fiscal 1999 Internet sales from sharperimage.com, which
includes the Sharper Image auction site, increased $23,573,000, or 478.9%, from
fiscal 1998. The fiscal 1999 increase in Internet net sales reflects an increase
of 736.4% in transactions. The Company's e-commerce site, sharperimage.com, was
enhanced with several new feature improvements from ease-of-use and technology
perspectives. 3D interactivity and sound technology was introduced along with
other rich media technologies to present products in fun and entertaining ways.
New features include express shopping settings, one time registration in a
secure environment, gift guides, virtual gift certificates, email marketing
promotions, multiple addresses stored securely for customer's gift lists, and $2
off ordering incentives for Internet purchases. The increase in transactions was
partially offset by a 30.8% decrease in average revenue per transaction,
compared to the prior year. The decrease in average revenue per transaction is
primarily attributable to the Internet auction activity, which began in the
Company's first quarter ended April 30, 1999. The auction site was launched to
further the Company's strategy of increasing its Internet business and
broadening its customer base, and has significantly increased total visits and
page views on the Company's Web site. The auction site not only offers consumers
the fun of bidding on and winning products at less than retail prices, it also
allows the Company the opportunity to effectively manage its closeout products.
Net wholesale sales for fiscal year 1999 increased $7,019,000, or 202.6%,
compared to fiscal 1998, primarily due to new customers acquired prior to the
1999 holiday season. Certain of these customers were part of a test concept
program and may not generate repeat sales in fiscal 2000.
Net sales of $241,507,000 for fiscal 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 fiscal 1998, compared to 12.2% for fiscal 1997. Net store sales
increased $10,782,000, or 7.1%, comparable store sales increased 5.3%, net
catalog sales increased $11,978,000, or 20.4%, net Internet sales increased
$3,289,000, or 201.5%, and net wholesale sales increased $265,000, or 8.3%, as
compared to fiscal 1997.
The increase in net store sales for fiscal 1998 was primarily attributable
to 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 fiscal 1998 opening of four new stores and annualized sales of six
stores opened in fiscal 1997, partially offset by the 1998 closing of two stores
at the maturity of the store leases.
Net catalog sales for fiscal 1998 were positively impacted by an increase
of 34.7% in total catalog orders partially offset by a 10.6% decrease in average
revenue per order. The increase in catalog orders was partially attributable to
advertising campaigns in major consumer magazines and newspapers. The Company
believes that the 8.0% increase in the number of catalogs circulated for
15
<PAGE>
Management's Discussion and Analysis of (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Revenues (continued)
Sharper Image catalog during fiscal 1998 also contributed to increases in net
store sales and comparable store sales.
The Company's Internet sales increased to $4.9 million in fiscal 1998 from
$1.6 million in fiscal 1997. Fiscal 1998 experienced a 139.1% increase in
Internet orders and a 26.1% increase in average revenue per transaction from
fiscal 1997. The threefold increase in sales reflects the increase in the number
of online shoppers and the Company's commitment to grow its e-commerce.
Net wholesale sales increased $264,000, or 8.3%, primarily due to increased
sales of the Company's Sharper Image Design proprietary products.
For the purpose of determining comparable store sales, comparable stores
are defined as those which were open during the entire comparable month of the
previous year and are compared monthly for purposes of this analysis.
Inflationary effects are not considered significant to the growth of sales.
Cost of Products
Cost of products for fiscal 1999 increased $20,551,000, or 16.7%, from
fiscal 1998. The increase in cost of products is due to the higher sales volume
compared to the prior year, partially offset by the reduced sales of The Sharper
Image Home Catalog Collection, which carried products with higher costs. The
gross margin rate for fiscal 1999 was 51.0%, which was 2.0 percentage points
better than the comparable prior year period. The higher gross margin rate
reflects an increase in sales of Sharper Image Design proprietary and private
label products, which generally carry higher margins than branded products. The
Sharper Image Design proprietary products percentage of net sales, exclusive of
wholesale, increased to 29% from 18%, in fiscal 1999 compared to fiscal 1998.
The private label products increased to 21% from 11% in fiscal 1999, compared to
the prior year.
Cost of products increased $7,596,000, or 6.6%, in fiscal 1998 from fiscal
1997. The increase was primarily related to increases 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 fiscal 1998. The gross
margin rate for fiscal 1998 was 49.0%, compared to 46.3% for fiscal 1997. The
higher gross margin rate reflected an increase in sales of Sharper Image Design
proprietary products to 18% of total sales to consumers from 8% for the prior
fiscal year.
The Company's gross margin rate fluctuates with the changes in its
merchandise mix, which is affected by new items available in various categories.
The variation in merchandise mix from category to category from year to year
reflects the characteristic that the Company is driven by individual products,
as opposed to general lines of merchandise. Additionally, the Company's
expanding auction site and other promotional activities will tend to in part
offset the rate of increase in our gross margin performance. It is impossible to
predict future gross margin rates, although the Company's goal is to continue to
increase sales of Sharper Image Design proprietary products and other exclusive
private label products, as these products generally carry higher margins than
branded products. The popularity of these proprietary products contributed to
the 2.0 percentage point increase in the gross margin rate for fiscal 1999, and
should continue to have a positive impact on the Company's gross margin rate.
Buying and Occupancy
Buying and occupancy costs for fiscal 1999 increased $1,689,000, or 6.5%,
from fiscal 1998. The increase primarily reflects a full year of occupancy costs
for four new stores opened in fiscal 1998 and the costs associated with the five
new stores opened in fiscal 1999, partially offset by the three stores that
closed at their lease maturity during fiscal 1999. Buying and occupancy costs as
a percentage of net sales decreased from 10.8% in fiscal 1998 to 9.5% in fiscal
1999.
Buying and occupancy expenses increased $2,249,000, or 9.4%, in fiscal 1998
from fiscal 1997. The increase primarily reflects a full year of occupancy cost
of six new stores opened during fiscal 1997 and the cost of four new stores
opened in fiscal 1998, partially offset by the 1998 closure of two stores at
their lease maturity. Buying and occupancy costs as a percentage of net sales
decreased from 11.1% in fiscal 1997 to 10.8% in fiscal 1998.
Advertising and Promotion
Advertising and promotion expenses for fiscal 1999 increased $10,596,000,
or 38.7%, from fiscal 1998. The increase in advertising and promotion expenses
was partially attributable to a 13.5% increase in Sharper Image catalog pages
circulated in fiscal 1999 and a seven percent increase in paper costs instituted
in the fourth quarter of
16
<PAGE>
Management's Discussion and Analysis of (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Advertising and Promotion (continued)
fiscal 1999. Although the Company does not anticipate significant paper cost
increases in fiscal 2000, if significant increases materialized, the Company's
circulation plans and/or advertising and promotion costs could be significantly
impacted. The increased cost related to circulation increases was partially
offset by the reduction in costs attributable to the discontinuance of The
Sharper Image Home Collection Catalog in fiscal 1998. In addition, the Company
deployed several advertising initiatives to broaden its customer base, including
radio advertising, television commercials, infomercials, direct response or
single product mailers, among others. These increased advertising initiatives
were launched to realize the Company's goal of acquiring new customers, which
the Company believes will produce additional sales in the stores, catalog and
Internet channels, and business to business sales in future periods. Advertising
and promotion expenses as a percentage of net sales increased from 11.3% in
fiscal 1998 to 13.0% in fiscal 1999.
Advertising and promotion expenses for fiscal 1998 increased $4,601,000, or
20.2%, from fiscal 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 fiscal 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 fiscal 1998. The increase was partially offset by the 51.3% decrease in
mailings of the test concept Sharper Image Home Collection catalog. Advertising
and promotion expenses as a percentage of net sales increased from 10.6% in
fiscal 1997 to 11.3% in fiscal 1998.
While the Sharper Image catalog serves as the primary source of advertising
for its retail stores, mail order and Internet business, the Company continually
reevaluates its advertising strategies and catalog circulation plans to maximize
the effectiveness of its advertising programs.
General, Selling, and Administrative
General, selling and administrative expenses for fiscal 1999 increased
$10,847,000, or 18.4%, from fiscal 1998. The increase was primarily due to
increases in variable expenses from increased net sales, expenses in the
Internet and proprietary product areas for improved and expanded operational
infrastructure, increased costs associated with attracting and retaining key
employees, and overall selling expenses related to the opening of five new
stores. The Company competes for employees in certain highly competitive market
segments. As a result, the Company's efforts to attract and retain certain
employees are becoming more difficult and therefore more expensive. The Company
is continually evaluating its salary, benefits, and stock option programs to
remain competitive in the marketplace. General, selling and administrative
expenses as a percentage of net sales decreased from 24.4% in fiscal 1998 to
23.8% in fiscal 1999.
General, selling, and administrative expenses for fiscal 1998 increased
$5,932,000, or 11.2%, from fiscal 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. General,
selling and administrative expenses as a percentage of net sales decreased from
24.7% in fiscal 1997 to 24.4% in fiscal 1998.
Other Income (Expense)
Other income, net, for fiscal 1999 increased $303,000 from fiscal 1998,
primarily due to the interest income earned during fiscal 1999 from higher
investment balances generated from improved operating results and the proceeds
of the secondary offering completed in July 1999.
Other income, net, for fiscal 1998 increased $761,000 from fiscal 1997,
reflecting primarily the gain on the sale of certain equipment.
Income Taxes
The effective tax rate for fiscal 1999, 1998, and 1997 was 40.0%. Income
taxes are accounted for using an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns. In estimating future tax consequences, all
expected future events then known to management are considered, other than
changes in the tax law or rates.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements
in fiscal 1999 with cash generated from operations, trade credit, and proceeds
from the secondary offering. During fiscal 1999, the Company's cash increased by
$47,068,000 to $55,457,000 primarily due to proceeds
17
<PAGE>
Management's Discussion and Analysis of (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Liquidity and Capital Resources (continued)
from the secondary offering and the highest annual revenues and earnings in the
Company's history.
On July 22, 1999, the Company completed an offering of 3.0 million shares
of its common stock, all of which shares were offered by the Company. The
proceeds from the offering, net of underwriters discount and offering expenses,
totaled $30.2 million. The Company intends to use the proceeds from this
offering for general corporate purposes, including investments in the Company's
Internet business, expansion of its distribution and fulfillment capacity, and
working capital. At January 31, 2000, the Company had no amounts outstanding on
its revolving loan credit facility. The highest amount of direct borrowings
under the revolving loan credit facility during fiscal 1999 was $3,873,000,
compared to $14,288,000 during fiscal 1998. Letter of credit commitments
outstanding under the credit facility at January 31, 2000 and 1999 were
$3,192,000 and $4,108,000, respectively.
The Company has a revolving secured credit facility which expires September
2003. The credit facility has been amended on several occasions and, as of
January 31, 2000, the agreement allows Company borrowings and letters of credit
up to a maximum of $31 million for the period from October 1, 2000 through
December 31, 2000, and up to $20 million at 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 determined by 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 period ended
January 31, 2000, the Company was in compliance with all covenants.
Subsequent to January 31, 2000, an amendment to the credit facility was
completed to set lower interest rates and to extend the expiration date to
September 2004. Borrowings under the credit facility will now bear interest at
either the prime rate per annum or at LIBOR plus 1.5% per annum determined by
financial performance. The credit facility allows seasonal borrowings of up to
$31 million for the period October 1 through December 31, 2000, increasing by $1
million for this period in each of the two subsequent years, and remaining at
$33 million for this period the following year.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $2.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
per annum or at LIBOR plus 2.50% per annum determined by financial performance.
Each Term Loan is to be repaid in 36 equal monthly principal installments. At
January 31, 2000, there were no amounts outstanding on the Term Loan facility.
At January 31, 2000, notes payable included a $2,513,000 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.
The Company's merchandise inventory at January 31, 2000, was approximately
21.6% higher than the prior fiscal year. The increase in inventory reflected the
Company's plan to bring inventory to the optimal level to support sales growth
trends currently being experienced by the Company.
The Company leases all of its offices, stores, and seasonal warehouse
space. During the fiscal year ended January 31, 2000, the Company opened five
stores located in Palm Desert, California; Tampa, Florida; Buford, Georgia;
Providence, Rhode Island; and Mission Viejo, California. During fiscal 1999, the
Company closed three stores located in Palm Springs, California; San Francisco,
California; and Philadelphia, Pennsylvania at the maturity of the leases.
In fiscal 2000, the Company plans include expanding its fulfillment and
distribution center capacity; updating the Company's e-commerce Web site for
sharperimage.com; opening four to six new stores and remodeling approximately
eight stores at lease maturity. These initiatives, combined with a recurring
level of capital expenditures, will result in significantly higher capital
expenditures in fiscal 2000 over fiscal 1999.
The Company is currently planning to open four to six new Sharper Image
stores during fiscal 2000. Total capital expenditures estimated for new and
existing stores, corporate headquarters and the distribution center for fiscal
2000 are between $15 million and $25 million. The Company believes it will be
able to fund its cash needs for fiscal 2000 through existing cash balances,
internally generated cash, trade credit, and the credit facility.
18
<PAGE>
Management's Discussion and Analysis of (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Quantitative and Qualitative Disclosure
About Market Risk
The Company is exposed to market risks, which include changes in interest
rates and, to a lesser extent, foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
The interest payable on the Company's 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 January 31, 2000, the Company's results from operations
and cash flows would not be materially affected. In addition, the Company has
fixed and variable income investments consisting of cash equivalents and
short-term investments, which are also affected by changes in market interest
rates. The Company does not use derivative financial instruments in its
investment portfolio.
The Company enters into a significant amount of purchase obligations
outside of the U.S. which are settled in U.S. dollars and, therefore, has only
minimal exposure to foreign currency exchange risks. The Company does not hedge
against foreign currency risks and believes that foreign currency exchange risk
is immaterial.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
holiday season. The secondary peak period for the Company is June, reflecting
gift buying for Father's Day and graduations. A substantial portion of the
Company's total revenues and all or most of the Company's net earnings occur in
the fourth quarter ending January 31. The Company generally experiences lower
revenues and earnings during the other quarters and, as is typical in the retail
industry, has incurred and may continue to incur losses in these quarters. The
results of operations for these interim periods are not necessarily indicative
of the results for the full fiscal year. Uncertainties and Risk
The foregoing discussion and analysis should be read in conjunction with
the Company's financial statements and notes thereto included with this report.
The foregoing discussion contains certain forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market
conditions in the overall economy and the retail industry, consumer demand, the
opening of new stores, actual advertising expenditures by the Company, the
success of the Company's advertising and merchandising strategy, availability of
products, and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
Company undertakes no obligations to revise these forward-looking statements to
reflect events or circumstances after the date hereof.
19
<PAGE>
Statements of Operations
- --------------------------------------------------------------------------------
Sharper Image Corporation
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
------------------------------------------------------
2000 1999 1998
Dollars in thousands except per share amounts (Fiscal 1999) (Fiscal 1998) (Fiscal 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sales $ 329,384 $ 272,721 $ 245,095
Less: returns and allowances 36,373 31,214 29,902
------------ ------------ ------------
Net Sales 293,011 241,507 215,193
List rental 1,129 1,088 982
Licensing 225 519 640
------------ ------------ ------------
294,365 243,114 216,815
------------ ------------ ------------
Costs and Expenses:
Cost of products 143,682 123,131 115,535
Buying and occupancy 27,842 26,153 23,904
Advertising and promotion 37,992 27,396 22,795
General, selling, and administrative 69,853 59,006 53,074
------------ ------------ ------------
279,369 235,686 215,308
------------ ------------ ------------
Other Income (Expense):
Interest income (expense) - net 603 (645) (564)
Other - net (58) 887 45
------------ ------------ ------------
545 242 (519)
------------ ------------ ------------
Earnings Before Income Tax 15,541 7,670 988
Income Tax 6,216 3,068 395
============ ============ ============
Net Earnings $ 9,325 $ 4,602 $ 593
============ ============ ============
Net Earnings Per Share - Basic $ 0.89 $ 0.54 $ 0.07
============ ============ ============
Net Earnings Per Share - Diluted $ 0.82 $ 0.51 $ 0.07
============ ============ ============
Weighted Average Number of Shares-Basic 10,516,358 8,532,588 8,303,425
============ ============ ============
Weighted Average Number of Shares-Diluted 11,358,004 9,072,832 8,537,032
============ ============ ============
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
Balance Sheets
- --------------------------------------------------------------------------------
Sharper Image Corporation
January 31,
-----------------------------
2000 1999
Dollars in thousands except per share amounts (Fiscal 1999) (Fiscal 1998)
- --------------------------------------------------------------------------------
Assets
Current Assets:
Cash and equivalents $ 55,457 $ 8,389
Accounts receivable, net of allowance for
doubtful accounts of $834 and $804 7,882 6,787
Merchandise inventories 39,652 32,598
Deferred catalog costs 3,079 2,454
Prepaid expenses and other 7,494 5,605
-------- --------
Total Current Assets 113,564 55,833
Property and Equipment, Net 23,961 22,513
Deferred Taxes and Other Assets 4,594 3,699
-------- --------
Total Assets $142,119 $ 82,045
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 20,307 $ 11,653
Accrued expenses 22,667 16,960
Deferred revenue 8,605 7,268
Income taxes payable 7,194 3,314
Current portion of notes payable 147 635
-------- --------
Total Current Liabilities 58,920 39,830
Notes Payable 2,366 2,513
Other Liabilities 3,710 3,053
Commitments and Contingencies -- --
-------- --------
Total Liabilities 64,996 45,396
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, 12,016,827 and 8,916,995 shares 120 89
Additional paid-in capital 43,707 12,589
Retained earnings 33,296 23,971
-------- --------
Total Stockholders' Equity 77,123 36,649
-------- --------
Total Liabilities and Stockholders' Equity $142,119 $ 82,045
======== ========
See Notes to Financial Statements.
21
<PAGE>
Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
Sharper Image Corporation
<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 31,1997 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
from secondary offering and
for stock options exercised
(net of income tax benefit) 3,099,832 31 31,118 31,149
Net earnings 9,325 9,325
----------- ----- -------- ------- --------
Balance at January 31, 2000 12,016,827 $ 120 $ 43,707 $33,296 $ 77,123
=========== ===== ======== ======= ========
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
Statements of Cash Flows
- --------------------------------------------------------------------------------
Sharper Image Corporation
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
----------------------------------------------
2000 1999 1998
Dollars in thousands (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net earnings $ 9,325 $ 4,602 $ 593
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,480 5,027 4,334
Deferred rent expense 170 78 151
Deferred income taxes (1,348) (1,459) 1,614
Gain on sale of equipment -- (840) --
Changes in operating assets and liabilities:
Accounts receivable (1,095) 1,402 (2,274)
Merchandise inventories (7,054) 1,936 (7,169)
Deferred catalog costs, prepaid expenses and other (2,061) 1,298 (1,571)
Accounts payable and accrued expenses 14,361 (5,822) 838
Deferred revenue, income taxes and other liabilities 5,704 3,568 1,308
-------- -------- --------
Cash Provided by (Used for) Operating Activities 24,482 9,790 (2,176)
======== ======== ========
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (8,039) (8,431) (4,437)
Proceeds from sale of equipment 111 1,736 53
-------- -------- --------
Cash Used for Investing Activities (7,928) (6,695) (4,384)
======== ======== ========
Cash was Provided by (Used for) Financing Activities:
Proceeds from issuance of common stock, including warrants
and stock options exercised (net of stock repurchases) 31,149 2,891 114
Proceeds from notes payable and revolving credit facility 11,955 46,921 27,761
Principal payments on notes payable and revolving credit facility (12,590) (48,019) (28,687)
-------- -------- --------
Cash Provided by (Used for) Financing Activities 30,514 1,793 (812)
======== ======== ========
Net Increase (Decrease) in Cash and Equivalents 47,068 4,888 (7,372)
Cash and Equivalents at Beginning of Period 8,389 3,501 10,873
-------- -------- --------
Cash and Equivalents at End of Period $ 55,457 $ 8,389 $ 3,501
======== ======== ========
Supplemental Disclosure of Cash Paid for:
Interest $ 403 $ 813 $ 771
Income Taxes $ 3,839 $ -- $ 409
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note A -- Summary of Significant Accounting Policies
The Company is a leading specialty retailer that 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: The Company recognizes revenue at the point of sale at its
retail stores and at the time of shipment to a customer for its mail order
sales, including Internet. The Company provides for an 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 $15,055,000, $4,470,000, and $3,580,000, for the fiscal years ended
January 31, 2000,1999 and 1998.
Start-Up Activities: All start-up and preopening costs are expensed as incurred.
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 10 years for office furniture and
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 seven to 18 years.
The Company manufactures its own proprietary products for sale. Costs incurred
for tooling,dies and package design are capitalized and amortized over the
estimated life of these products, which is generally two years. At January 31,
2000 and 1999, capitalized costs included in property and equipment, net of
related amortization, were $2,631,000 and $2,239,000, 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, 2000, no material adjustment was made to long-lived assets.
Income Taxes: Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events then known to management that
have been recognized in the Company's consolidated financial statements or tax
returns. In estimating future tax consequences, all expected future events then
known to management are considered other than changes in the tax law or rates.
Stock-Based Compensation: The Company accounts for stockbased 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 year of
10,516,358, and 8,532,588, and 8,303,425, for the fiscal years ended January 31,
2000, 1999 and 1998. 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 841,646, and
540,244, and 233,607 incremental shares assumed issued on the exercise of common
stock during the fiscal years ended January 31, 2000, 1999 and 1998.
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 $11.92, $6.66 and $3.56 for the fiscal
years ended January 31, 2000, 1999 and 1998, was 9,000, and 14,000 and 97,500,
respectively.
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 for the Company
for the years ended January 31, 2000, 1999 and 1998.
New Accounting Standards: In June 1999, the Financial Accounting Standards Board
("FASB") issued SFAS No. 137, "Accounting for Derivative Instruments." SEAS 137
extends the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or-
liabilities in the statement of financial position and measure those instruments
at fair value. As amended by SFAS 137, SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not to be applied retroactively. Management
has not vet determined the potential effects of SFAS No. 133 on the Company's
financial position or results of operations.
24
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note A -- Summary of Significant Accounting Policies (continued)
Reclassification: Certain reclassifications have been made to prior years'
financial statements in order to conform with the classifications of the January
31, 2000, financial statements.
Note B -- Property and Equipment
Property and equipment is summarized as follows:
Fiscal Year Ended January 31,
-------------------------------
2000 1999
Dollars in thousands (Fiscal 1999) (Fiscal 1998)
- ------------------------------------------------------------------------------
Leasehold improvements $25,494 $25,419
Office furniture and equipment 42,117 35,482
Land 53 53
Building 2,874 2,874
------- -------
70,538 63,828
Less accumulated depreciation
and amortization 46,577 41,315
------- -------
$23,961 $22,513
======= =======
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, 2000, and 1999 was $1,120,000 and $766,000,
respectively.
Note D -- Revolving Loan and Notes Payable
The Company has a revolving secured credit facility which expires September
2003. The credit facility has been amended on several occasions and, as of
January 31, 2000, the agreement allows Company borrowings and letters of credit
up to a maximum of $31 million for the period from October 1, 2000, through
December 31, 2000, 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 the prime rate plus 0.25% or at
LIBOR plus 2.25% per annum, but may change determined by 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 period ended
January 31, 2000 and 1999, the Company was in compliance with all covenants.
Subsequent to January 31, 2000, an amendment to the credit facility was
completed to set lower interest rates and to extend the expiration date to
September 2004. Borrowings under the credit facility will now bear interest at
either the prime rate per annum or at LIBOR plus 1.5% per annum determined by
financial performance. The credit facility allows seasonal borrowings of up to
$31 million for the period October 1 through December 31, 2000, increasing by $1
million for this period in each of the two subsequent years, and remaining at
$33 million for this period the following year. At January 31, 2000, and 1999,
the Company had no amounts outstanding on its revolving loan credit facility.
Letter of credit commitments as of January 31, 2000, and 1999 were $3,192,000
and $4,108,000, respectively.
In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $2.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
(9.0% at January 31, 2000) 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. At January 31, 1999, the balance of the Term Loan was
$500,000 which was paid off in fiscal 1999.
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, 2000, and 1999, the balance of this note
was $2,513,000 and $2,648,000, respectively.
Future minimum principal payments on notes payable at January 31, 2000, are as
follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2001 $ 147
2002 160
2003 173
2004 189
2005 205
Later years 1,639
------
Total notes payable $2,513
======
25
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note E -- Income Taxes
Fiscal Year Ended January 31,
---------------------------------------------
2000 1999 1998
Dollars in thousands (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
- --------------------------------------------------------------------------------
Currently payable (refundable):
Federal $ 6,430 $ 3,848 $(1,036)
State 1,135 679 (183)
------- ------- -------
7,565 4,527 (1,219)
Deferred:
Federal (1,147) (1,240) 1,372
State (202) (219) 242
------- ------- -------
(1,349) (1,459) 1,614
------- ------- -------
$ 6,216 $ 3,068 $ 395
======= ======= =======
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
Fiscal Year Ended January 31,
---------------------------------------------
2000 1999 1998
(Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
- --------------------------------------------------------------------------------
Federal tax rate 34.0% 34.0% 34.0%
State income tax,
less federal benefit 6.0 6.0 6.0
---- ---- ----
Effective tax rate 40.0% 40.0% 40.0%
==== ==== ====
Deferred taxes result from differences in the recognition of expense for income
tax and financial reporting purposes. Temporary differences which give rise to
deferred tax assets (liabilities) are as follows:
January 31,
------------------------------
2000 1999
Dollars in thousands (Fiscal 1999) (Fiscal 1998)
- --------------------------------------------------------------------------------
Current:
Nondeductible reserves $ 4,966 $ 4,123
Deferred catalog costs (1,232) (981)
State taxes (332) (755)
------- -------
Current -- net 3,402 2,387
======= =======
Noncurrent:
Deferred rent 1,049 1,198
Depreciation 3,474 2,967
Deductible software costs (1,168) (1,127)
Other -- net (157) (173)
------- -------
Noncurrent -- net 3,198 2,865
======= =======
Total $ 6,600 $ 5,252
======= =======
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, 2000, are as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2001 $15,775
2002 11,994
2003 11,625
2004 10,871
2005 9,618
Later years 18,658
-------
Total minimum lease commitments $78,541
=======
Many of the Company's leases contain predetermined fixed escalations of the
minimum rentals during the initial term. For these leases, the Company has
recognized the related rental expense on a straight-line basis and has recorded
the difference between the expense charged to income and amounts payable under
the leases as deferred rent which is included in Other Liabilities.
Some store leases contain renewal options for periods ranging up to five years.
Most leases also provide for payment of operating expenses, real estate taxes,
and for additional rent based on a percentage of sales.
Net rental expense for all operating leases was as follows:
Fiscal Year Ended January 31,
---------------------------------------------
2000 1999 1998
Dollars in thousands (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
- --------------------------------------------------------------------------------
Minimum rentals $16,146 $15,273 $13,812
Percentage rentals
and other charges 6,367 5,914 5,559
------- ------- -------
$22,513 $21,187 $19,371
======= ======= =======
26
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note G - Stockholders' Equity
On July 22, 1999, the Company completed an offering of 3.0 million shares of its
common stock, all of which shares were offered by the Company. The proceeds from
the offering, net of underwriters discount and offering expenses, totaled $30.2
million. The Company intends to use the proceeds from this offering for general
corporate purposes, including investments in the Company's Internet business,
expansion of its distribution and fulfillment capacity, and working capital.
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
January 31, 1998, the Company has repurchased a total of 186,100 shares at an
average price of $5.95 per share. No shares were repurchased in fiscal 1999 or
1998.
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 3,155,000 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. Nonemployee 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
amended and 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
250,000 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, 2000, the Company had reserved 124,785 shares and 187,000 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
from date of grant, six years in fiscal 1999, and five years in both fiscal 1998
and 1997; stock volatility, 57% in fiscal 1999, and 51 % in both fiscal 1998 and
1997; risk-free interest rates, 5.70% in fiscal 1999, 5.12% in fiscal 1998, and
6.10% in fiscal 1997; 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 years 1995 through 1999 awards had been amortized to expense over the
vesting period of the awards, pro forma net earnings would have been $8,324,490
($0.79 earnings per share -basic and $0.73 earnings per share diluted) in fiscal
1999, $4,338,715 ($0.51 earnings per share-basic and $0.48 earnings per share -
diluted) in fiscal 1998, and $383,000 ($0.05 earnings per share -basic and 50.04
earnings per share -diluted) in fiscal 1997. 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 1999, fiscal 1998 and fiscal 1997
pro forma adjustments are not necessarily indicative of future period pro forma
adjustments, when the calculation will apply to all future applicable stock
options.
27
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note G -- Stockholders' Equity (continued)
The following table reflects the activity under these plans:
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------------------------------
Balance at January 31, 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
Granted (weighted average fair value of $5.41) 1,228,100 9.28
Exercised (99,832) 4.11
Cancelled (167,385) 3.78
----------
Balance at January 31, 2000 2,105,988 $6.96
==========
Exercisable at January 31, 1998 591,000 $2.73
==========
Exercisable at January 31, 1999 379,000 $3.58
==========
Exercisable at January 31, 2000 531,391 $4.39
==========
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- ----------------------------
Number Weighted Average Weighted Number Weighted
Range of of Options Remaining Contractual Average of Options Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$ 1.16-$1.99 16,015 2.9 $ 1.88 16,015 $ 1.88
2.00-3.99 791,489 7.8 3.70 440,542 3.72
4.00-7.99 78,384 8.5 4.94 23,384 5.16
8.00-11.99 1,211,100 10.0 9.22 49,450 10.38
11.99-17.00 9,000 10.0 15.91 2,000 17.00
--------- -------
$ 1.16-$17.00 2,105,988 9.1 $ 6.96 531,391 $ 4.39
========= =======
</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 $152,000,
$73,000 and $77,000 for the fiscal years ended January 31, 2000, 1999 and 1998,
respectively.
Note I -- 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 or results
of operations.
28
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note J -- Segment Information
The Company classifies its business interests into three reportable segments:
retail stores, catalog and Internet. 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.
Financial information for the Company's business segments is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-------------------------------------------------
2000 1999 1998
Dollars in thousands (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Stores $ 188,416 $ 162,371 $ 151,589
Catalog 65,617 70,750 58,772
Internet 28,495 4,922 1,633
Other 11,837 5,071 4,821
--------- --------- ---------
Total Revenues $ 294,365 $ 243,114 $ 216,815
========= ========= =========
Operating Contributions
Stores $ 27,947 $ 19,405 $ 15,170
Catalog 9,134 9,632 4,090
Internet 3,193 659 160
Unallocated (24,733) (22,026) (18,432)
--------- --------- ---------
Earnings Before Income Tax $ 15,541 $ 7,670 $ 988
========= ========= =========
Depreciation and Amortization
Stores $ 3,534 $ 2,812 $ 2,516
Catalog -- -- --
Internet 14 1 --
Unallocated 2,932 2,214 1,818
--------- --------- ---------
Total Depreciation and Amortization $ 6,480 $ 5,027 $ 4,334
========= ========= =========
Capital Asset Expenditures
Stores $ 3,561 $ 5,988 $ 2,722
Catalog -- -- --
Internet 425 38 --
Unallocated 4,053 2,405 1,715
--------- --------- ---------
Total Capital Asset Expenditures $ 8,039 $ 8,431 $ 4,437
========= ========= =========
Assets
Stores $ 13,590 $ 13,673 $ 11,564
Catalog -- -- --
Internet 448 37 --
Unallocated 128,081 68,335 67,098
--------- --------- ---------
Total Assets $ 142,119 $ 82,045 $ 78,662
========= ========= =========
</TABLE>
29
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2000, 1999 and 1998
Note K -- Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Dollars in thousands except per share amounts Three Months Ended
-------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal Year Ended January 31, 2000 1999 1999 1999 2000
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 40,859 $ 57,704 $58,280 $137,522
Expenses
Cost of products 20,280 28,355 29,384 65,663
Buying and occupancy 6,748 6,887 6,934 7,273
Advertising and promotion 4,234 8,193 6,619 18,946
General, selling and administrative 12,413 14,332 15,286 27,822
Other income (expense) (36) (107) 190 498
Earnings (loss) before income tax (benefit) (2,852) (170) 247 18,316
Income tax (benefit) (1,141) (68) 99 7,326
Net earnings (loss) $ (1,711) $ (102) $ 148 $ 10,990
Net earnings (loss) per share - Basic(1) $ (0.19) $ (0.01)* $ 0.01* $ 0.92*
Diluted(2) $ (0.19) $ (0.01)* $ 0.01* $ 0.83*
Dollars in thousands except per share amounts Three Months Ended
-------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal Year Ended January 31, 1999 1998 1998 1998 1999
- ----------------------------------------------------------------------------------------------------------------
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>
* Includes the weighted average impact of 3.0 million shares of common stock
issued in connection with the secondary offering dated July 22, 1999.
(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.
30
<PAGE>
- --------------------------------------------------------------------------------
Sharper Image Corporation
Board of Directors
- --------------------------------------------------------------------------------
Richard Thalheimer Gerald Napier
Founder Retired President of
Chairman of the Board I. Magnin and Company
Chief Executive Officer
George James
Alan Thalheimer Retired Senior Vice President
Retired Business Executive and Chief Financial Officer,
Levi Strauss & Co.
Morton David
Retired Chairman, President, and
Chief Executive Officer,
Franklin Electronic Publishers, Inc.
Officers
- --------------------------------------------------------------------------------
Richard Thalheimer Robert Thompson
Founder Senior Vice President
Chairman of the Board Merchandising
Chief Executive Officer
Joe Williams
Tracy Wan Senior Vice President
President Loss Prevention
Chief Operating Officer
Roger Bensinger
Greg Alexander Vice President
Senior Vice President Business Development
Management Information Systems
William Feroe
Tony Farrell Vice President
Senior Vice President Merchandise Planning
Creative Services and Allocation
Jeff Forgan Tom Krysiak
Senior Vice President Vice President
Chief Financial Officer Sharper Image Design
Corporate Secretary
Robert Pintane
Barry Jacobsen Vice President
Senior Vice President Product Development
Distribution
Craig Trabeaux
Charles Taylor Vice President
Senior Vice President Stores
Sharper Image Design
Corporate Information
- --------------------------------------------------------------------------------
Corporate Headquarters SEC Form 10-K
650 Davis Street A copy of the Company's annual
San Francisco, CA 94111 report to the Securities and
Telephone (415) 445-6000 Exchange Commission of Form 10-K
FAX: (415) 445-1574 (exclusive of exhibits) is
available without charge upon
Transfer Agent and written request to:
Registrar Investor Relations
The Sharper Image
Chase Mellon Shareholder 650 Davis Street
Services LLC San Francisco, CA 94111
85 Challenger Road
Overbeck Center Annual Meeting
Ridgefield Park, NJ 07660 The Annual Meeting of Stockholders
of Sharper Image Corporation will
Corporate Counsel be held on Monday, June 12, 2000,
Brobeck, Phleger & Harrison LLP at 10 a.m. at the World Trade Club,
One Market Ferry Building,
Spear Street Tower San Francisco, California.
San Francisco, CA 94105
Independent Auditors
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105
Common Stock Market
Prices and Dividend Policy
- --------------------------------------------------------------------------------
The common stock of Sharper Image Corporation is traded in the Nasdaq National
Market under the symbol SHRP. The following table sets forth, for the periods
indicated, the range of high and low prices reported for the common stock.
The Company has not paid cash dividends to holders of its common stock.
Fiscal Year 1999 Fiscal Year 1998
High Low High Low
First Quarter 17 3/16 9 5/8 11 5/8 4 1/16
Second Quarter 12 1/2 8 8 3/8 4 11/16
Third Quarter 14 3/8 8 7/8 5 5/8 2 1/2
Fourth Quarter 23 1/2 8 3/4 25 3 3/4
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, 2000, and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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,
2000, and 1999, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
[Deloitte & Touche Logo]
San Francisco, California
March 24, 2000
31
<PAGE>
The Ionic Breeze(TM) Quadra Air Purifier
uses exclusive, patented electronics
to circulate air in total silence.
This top-seller was created by
Sharper Image Design.
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
www.sharperimage.com
(R)The Sharper Image is a registered trademark of Sharper Image Corporation.
(TM) Sharper Image Design is a trademark of Sharper Image Corporation.
Copyright (C) 2000 by Sharper Image Corporation. All rights reserved.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-12755, No. 33-80504 and No. 33-3327 of Sharper Image Corporation on Form S-8
of our reports dated March 24, 2000, appearing in and incorporated by reference
in this Annual Report on Form 10-K of Sharper Image Corporation for the year
ended January 31, 2000.
/s/ Deloitte & Touche LLP
San Francisco, California
April 28, 2000
34
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 55,457
<SECURITIES> 0
<RECEIVABLES> 8,716
<ALLOWANCES> (834)
<INVENTORY> 39,652
<CURRENT-ASSETS> 113,564
<PP&E> 70,538
<DEPRECIATION> 46,577
<TOTAL-ASSETS> 142,119
<CURRENT-LIABILITIES> 58,920
<BONDS> 2,366
0
0
<COMMON> 120
<OTHER-SE> 77,003
<TOTAL-LIABILITY-AND-EQUITY> 142,119
<SALES> 329,384
<TOTAL-REVENUES> 293,011
<CGS> 143,682
<TOTAL-COSTS> 279,369
<OTHER-EXPENSES> 58
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (603)
<INCOME-PRETAX> 15,541
<INCOME-TAX> 6,216
<INCOME-CONTINUING> 9,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,325
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.82
</TABLE>
