-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SosHylJQPOortgtlo60WVrHjlqkmHyLbTJjRFN//b4b3f6CQ95OP8Xj/wMk+skz6 X0BqZ68mnlKAeUdobkt60w== 0000950005-96-000209.txt : 19960429 0000950005-96-000209.hdr.sgml : 19960429 ACCESSION NUMBER: 0000950005-96-000209 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960426 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARPER IMAGE CORP CENTRAL INDEX KEY: 0000811696 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 942493558 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15827 FILM NUMBER: 96551896 BUSINESS ADDRESS: STREET 1: 650 DAVIS ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4154456000 MAIL ADDRESS: STREET 2: 650 DAVIS STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-K 1 FORM 10-K 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 (FEE REQUIRED) For the Fiscal Year Ended January 31, 1996 or /_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to _______ Commission File Number 33-12755 SHARPER IMAGE CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-2493558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 Davis Street, San Francisco, California 94111 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (415) 445-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /_/ Yes XX No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 15,1996 was $10,875,134 The number of shares of Common Stock, with $.01 par value, outstanding on April 15, 1996 was 8,254,980 shares. Documents incorporated by reference: Portions of Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 1996 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 10, 1996 are incorporated by reference into Part III of this report. PART 1 Item 1. Business Overview Sharper Image Corporation (referred to as the "Company" or "The Sharper Image") is a specialty retailer of unique products and original gifts, sold through The Sharper Image stores and monthly mail-order catalog, and other marketing channels. In the past year, the Company also tested two new concepts. Sharper Image SPA was tested both by mail-order and stores, while The Sharper Image Home Collection had its initial mail-order test in January 1996. The Company was founded in 1977 by Richard Thalheimer, who continues as Chairman and Chief Executive Officer. First mailed in 1981, The Sharper Image Catalog found success in the growing field of mail-order shopping. Expansion of The Sharper Image concept to retail stores began in 1984, and as of January 31, 1996, the Company operated 78 The Sharper Image and 4 Sharper Image SPA stores in the United States and licensees operate 5 stores internationally and 2 airport stores in the United States. The Company's aggregate sales from its stores have grown substantially since the beginning of fiscal 1984 and have increased from 3% of total revenues in fiscal 1983 to 71% of total revenues for the fiscal year ended January 31, 1996 (fiscal 1995). The Sharper Image stores range from approximately 2,200 to 5000 square feet in size. During fiscal 1994 the Company introduced two new retail formats, Sharper Image Design stores and an airport shop. These formats are discussed under "Store Operations" and "Licensed Operations". During fiscal 1995, the Company opened two new stores of the original The Sharper Image concept and format, three new Sharper Image Design stores and one outlet store. One airport location was added during fiscal 1995 and two Sharper Image stores were closed at the maturity of their leases. During the second half of fiscal 1995, the Company also opened four Sharper Image SPA stores to test this retail concept after test mailings of the Sharper Image SPA Catalog were first launched in February 1995. The Company is planning to open four to six new stores during the fiscal year ending January 31, 1997 (fiscal 1996), including two more test stores for the Sharper Image SPA concept. Lease terms for certain of the existing The Sharper Image store locations will be maturing during fiscal 1996 and such locations may be relocated or closed. The Company employs over 1,200 employees in twenty-seven states. In addition to serving as the primary advertising vehicle for the Company's stores, The Sharper Image Catalog generated almost $47 million in mail-order sales (approximately 23% of total revenues) in fiscal 1995. The monthly color catalog, ranged from 88 to 172 pages in fiscal 1995, is recognized for creative excellence within the catalog industry. Worldwide, the Company mailed approximately 33 million of The Sharper Image Catalogs in fiscal 1995. The Company launched the test mailings of the Sharper Image SPA Catalog in February 1995, with a total of about 9 million catalogs circulated in fiscal 1995. The Sharper Image SPA Catalog generated approximately $7 million in mail-order revenues (approximately 3.5% of total revenues). The Sharper Image Catalog and the Sharper Image SPA Catalog together generated about $54 million in mail-order sales. In addition, The Sharper Image Home Collection Catalog had its initial test mailing in January 1996. The Company is known for its varied product mix and a merchandising philosophy focusing on unique, innovative and useful items that are developed by The Sharper Image, exclusive to The Sharper Image, or in limited distribution. In product lines where the Company competes directly with other retailers, it chooses to sell the best version of the product--maximizing features, uniqueness, and value. The Company's business is highly seasonal, with sales peaks at the holiday periods of Father's Day and Christmas. Historically, the typical Sharper Image demographic mix has been upper income, approximately 65% male, 35% female. Price points for the most popular items range from $50 to $300 while the spectrum goes from $10 to $5,000, appealing to shoppers in a wide range of income levels. In addition to its primary businesses, The Sharper Image leverages its name and reputation through a corporate marketing program, wholesale sales of Sharper Image brand products, which included Sharper Image Design proprietary products and private-labeled products, and a product licensing program with selected manufacturers. Wholesale sales are made primarily to fine department stores and to international retailers. Another exciting marketing opportunity for the Company is the presentation of The Sharper Image Catalog on the Internet. Starting in early 1995, the Company began selling via American Online and CD-ROM electronic catalogs, and by October 1995, introduced its home-page catalog on the World Wide Web. Although it is too early to tell the potential of this sales medium and there is no guarantee of the possibility of success, the Company is at the fore-front of this electronic marketplace and hope to be a leader when this market begins to reach full acceptance. The Sharper Image has sold products through QVC and continues to explore additional opportunities in television. During fiscal 1995, the Company continued the development of an in-house new product development function along with a wholesale sales group to market its proprietary Sharper Image Design and other Sharper Image brand products to fine department stores nationwide and internationally. While still in its early stage and a small part of the total revenues, the wholesale sales group made impressive gains by generating approximately $3.1 million in revenues in fiscal 1995, a substantial increase from the approximately $2 million for fiscal 1994. The development of the proprietary and private-labeled products, and wholesales sales opportunities will continue to be an integral part of the Company's growth. The Sharper Image Catalog/Retail Advertising The Sharper Image Catalog is a full-color catalog that is mailed to an average of approximately 2.5 million individuals each month. The catalog is also the primary source of advertising for the Company's retail stores. During fiscal 1995, the Company mailed approximately 33 million of The Sharper Image Catalogs to over 5 million different individuals. Circulation of The Sharper Image Catalog increased by approximately 4% while the number of pages circulated increased about 7% from the prior fiscal year. The mailings increase at Father's Day and Christmas reflecting the seasonal nature of the Company's business. In fiscal 1995, the Company has experienced a significant increase in advertising and promotion expenses due to the increased cost of paper and postage resulting from the industry-wide rate increases in paper and a one-time postal rate increase in January 1995. Although paper costs have started to level off from the highest point experienced during fiscal 1995, the Company expects the rate increases in paper that took place in fiscal 1995 to continue to have a upward impact on advertising expense for the first half of fiscal 1996. The Company has implemented ways to lower the costs of producing the catalog to lessen the impact of the paper and postage increases experienced in fiscal 1995, including trimming the dimensions of the catalogs and using a lighter weight of paper. The Company continues to review the cost and effectiveness of its advertising effort. At the present time the Company is planning to decrease advertising and promotion expense by decreasing the circulation and number of catalog pages mailed in fiscal 1996. Although it is impossible to predict, management currently believes that the planned decrease in advertising and promotion expenses would more than offset the effect of the possible decrease in revenues caused by the reduced advertising on a full fiscal year basis. Interim results may vary from this belief. The Sharper Image Catalog is created and produced by the Company's in-house staff of writers and production artists. The Company utilizes free-lance photographers on an as needed basis. The catalog is electronically produced in-house on a network of computers using the latest desktop publishing software. This enables the Company to maintain quality control and shorten the lead time needed to produce the catalog. The monthly production and distribution schedule permits frequent changes in the product selection. During fiscal 1995, The Sharper Image Catalog typically contained from 88 to 132 pages for non-peak months and between 140 and approximately 172 pages for the peak seasons of Father's Day and Christmas. The catalogs typically feature between 300 and 700 products, of which approximately 10% to 25% are new each month. During 1995, the Company also utilized newspaper and airline magazine inserts to advertise specific products. The Company believes these advertisements generate store sales as well as mail-order sales. The Company plans to continue them in 1996. In addition, from time to time, the Company has also produced certain specialty catalogs to test new catalog concepts. During fiscal 1994, the Company tested a "lifestyle segmentation" catalog focusing on health and fitness. Based on the results of the test catalog, the Company has developed a Sharper Image SPA catalog, the first issue of the SPA catalog was mailed in February 1995. The Sharper Image SPA catalog is designed to capture the female counterpart of the Company's customer profile, marketing products to the "look better, feel better, live better" lifestyles of today's woman and their families. During fiscal 1995, the Company had ten mailings of the Sharper Image SPA Catalog, totaling about 9 million catalogs. The Sharper Image SPA Catalog typically contained 72 pages during fiscal 1995. Current plans are to continue to test this concept during fiscal 1996 by producing and mailing the Sharper Image SPA Catalogs with a range of 52 to 64 pages, although the actual number of pages for each catalog may vary from this range, depending on the number of products and the catalog space devoted to each product. The number of catalogs to be mailed is planned at lower levels than fiscal 1995 since the Company has gained experience for this concept through prospecting results and has accumulated a meaningful list of customers from the 1995 mailings. To enhance the effectiveness of the catalog, the Company's in-house staff utilizes statistical evaluation and selection techniques to determine which segments of the in-house mailing list are likely to contribute the greatest revenue per mailing. This evaluation has provided the Company with the ability to quickly increase circulation to responsive segments and to scale back circulation to non-responsive segments thus reducing the effective cost of advertising. For the Sharper Image SPA Catalog, the Company also utilizes a strategy of producing core pages of the catalog for use in two or more successive monthly catalogs and designs a new cover along with a number of new pages of new products each month to "wrap" around the core pages. This approach provides a fresh look each month while generating cost savings from the economies of designing and producing fewer new pages. The Company prints and mails catalogs with different page counts. The catalog containing the larger number of pages (the "big book") features a majority of the Company's active products, while the catalog with fewer pages (the "small book" or "Retail Mailer") generally contains a greater mix of the new offerings and is targeted to retail customers. The small books, ranging from 68 to 76 pages during fiscal 1995, are generally mailed into store trading areas to customers who have, based on data collected by the Company through the point-of-sale registers, recently made a purchase in the store but who had not purchased by mail or who have not made a recent purchase. This strategy is intended to direct the customer to the nearest store or to retain the customer with a more moderate advertising expenditure. The Company increased the page counts of both the big and small books during fiscal 1995 based on results achieved in fiscal 1994 through increased circulation of the number of pages. The Company makes the decision about where to offer new products based on evaluation of the suitability of the product for mail order, store sales, or both. The Company tests certain new products by offering them on an "exclusively by mail-order" basis. This strategy provides two primary benefits: 1) the new products provide the catalog with leading edge products which may be in limited supply or not considered appropriate for stores due to their size or limited appeal, and 2) the Company is able to test new products which it otherwise may view as being a high risk investment without making a substantial investment in inventory. Certain of the products introduced by the catalog will be carried in the stores if proven successful. Additionally, the Company utilizes selected retail stores to test the appeal of certain new products before the product is rolled out to all stores or offered in the catalog. If the test product achieves a preset rate of sale during the test period, the Company will then be able to make the inventory investment more intelligently. During fiscal 1995 the Company continued the strategy of presenting an increased number of familiar products per page in combination with an emphasis on big and bold presentations for proprietary and exclusive products as well as best sellers. During fiscal 1996, due to the Company's efforts to reduce advertising and promotion expense, the number of pages in each monthly catalog as well as the total number of pages circulated is planned to decrease. As a result, there may be a modest decrease in the number of products featured in each catalog and strategically reduced amount of space devoted for certain products. The Company's current plan is to offer more products in its stores only while not advertising such products in The Sharper Image Catalog in an effort to partially offset the impact of the significantly lower number of pages and the moderate decrease in the number of catalogs to be mailed during fiscal 1996. In January 1996, the Company mailed its initial test catalog for The Sharper Image Home Collection concept. This catalog features home furnishings and accessories in an upscale presentation. The initial responses to this mailing is encouraging and the Company is planning on two additional test mailings during fiscal 1996. The Company collects customer names through the electronic point-of-sale registers in its retail stores. The names and associated sales information are merged daily into the Company's customer master file. This daily merge process provides a constant source of current information useful to assess the effectiveness of the catalog as a form of retail advertising, identify what new customers can be added to the in-house mailing list without the traditional list rental "prospecting" costs, and identify the "best customers." The Company's addition of names to the in-house mailing list enhances its value for list rental purposes. Periodically, the Company mails promotional material to these best customers which is designed to produce incremental sales. Store Operations. The Sharper Image stores are located throughout the United States generally in downtown financial districts and business centers, upscale shopping malls or drive-up suburban locations, all of which are areas that typically have a high population density. Each store is generally staffed with approximately 6 to 8 employees, including a manager, an assistant manager, a senior sales associate, sales associates, and other support staff. A few of the Company's high volume stores, such as the stores in Honolulu, Manhattan and Miami are staffed with 11 to 15 associates. The Company's President and Chief Operating Officer currently oversees store operations. The retail store network is divided into 8 districts, each under the supervision of a district manager who is responsible for 9 to 16 stores. Store personnel compensation structure is based largely on commission and is closely monitored in relation to sales. The Company expends considerable effort to train its sales associates on the many new and frequently technically oriented items in order to maintain a high customer service level. The Company frequently utilizes sales demonstrator programs in the stores for specific products to focus customers' attention to the features of the new product. The Sharper Image stores are designed by the Company's design staff at the Company's headquarters in San Francisco to standardize, where possible, layout so as to simplify their operations. The stores are operated according to standardized procedures for customer relations, merchandise display and pricing, product demonstration, inventory maintenance, personnel training, administration and security. The Company's original Sharper Image concept stores typically have 2,200 to 2,500 square feet of selling space and approximately 1,300 to 2,200 square feet of storage and administrative space. The cost of leasehold improvements, fixtures and other equipment associated with the opening of a new Sharper Image store has averaged approximately $300,000 to $500,000. Initial inventory for a new Sharper Image store has generally cost approximately $250,000. Outlet stores are approximately half the cost of the original Sharper Image stores. In September 1994 the Company introduced a new retail format and opened the first Sharper Image Design store in Palo Alto, CA. The Sharper Image Design store is approximately half the size of the original store and features higher margin proprietary products in addition to other top selling merchandise. The Company converted two existing locations, Maui, HI and Carmel, CA to Sharper Image Design stores. During 1995, the Company opened six The Sharper Image stores, including two original format stores, three Sharper Image Design stores, and one outlet location. Based on the initial catalog results and response of the Sharper Image SPA Catalog which was first mailed in February 1995, the Company opened its first Sharper Image SPA store in August 1995 in Walnut Creek, California. Three additional test stores were opened during the fourth quarter of fiscal 1995. The Company plans to open two additional test stores during fiscal 1996. Management currently believes that this store concept will take a period of about three years to reach its potential. The costs of leasehold improvements, fixtures and other equipment for these Sharper Image SPA test stores are between $500,000 to $600,000. Initial inventory costs are between $125,000 to $200,000. The Company's retail stores' product presentation includes bold eye-catching displays designed to draw customers to new or top-selling products. Product presentations are organized into distinct categories such as health and massage, travel, home and safety, recreation and fitness, and the newest in electronics. Merchandising, Product Selection and Development The Company's merchandise mix emphasizes unique products which are proprietary, available exclusively through The Sharper Image, or which are not available in broad distribution. The Company is an "item" business, focusing on offering pre-selected items which represent newness, value, features, or innovation as distinguished from offering broad assortments of categories of merchandise. The Company groups its products into categories in the catalog and stores in order to add cohesiveness to the presentation. As individual items come to market or are developed internally by the Company which fit the criteria of newness, usefulness, value or features, the Company's buying and merchandise mix will change to emphasize those products. As a result of such shifting emphasis among individual items, the mix of sales by category changes from time to time. The effect, from year to year, can be to increase or decrease the merchandise gross margin rates since some categories of merchandise sustain traditionally higher margins (personal care, for example) and some traditionally sustain lower margin rates (such as electronics). The Company attempts to moderate this movement in margin rates due to merchandise mix changes by designing and producing more Sharper Image Design proprietary and private-labeled products which generally have higher margins. The Company's current merchandise strategy is to offer an assortment of approximately 700 products. The Company offers products at price levels ranging from $10 to over $5,000. The Company intends to keep expanding the offering of products in the $50 to $500 price range to appeal to the Company's customer base. The Company intends to continue to develop Sharper Image Design proprietary and private-labeled products to utilize its marketing knowledge in the categories of hand held electronics, massage products, sound soothers, and travel to develop unique products with a high likelihood of consumer acceptance. 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 and delays in bringing these products to market and cost increases. Products may also be subject to other imitations. The process of finding new products involves the Company's buyers reviewing voluminous product literature, traveling extensively throughout the United States, Europe and the Far East to attend trade shows and exhibitions, and meeting with manufacturers. The Company enjoys relationships with many major manufacturers who use The Sharper Image regularly to introduce their newest products in the United States. In addition to finding new products from outside sources, the Company's new product development group develops and produces Sharper Image Design proprietary products. The new product development group meets regularly with the merchandising staff to review new product opportunities, product quality issues, and customer feedback. From these creative sessions product ideas are put into development, design and productivity. Successful product introductions during the past two years include the Memo Manager, Keycorder, Heart & Sound Soother, Soundscape Environment, Fingertip Pulse Massager, Pulse Action Face Massager, and Safety Companion. In addition the Company also makes improvements to products the Company has had prior sales experience with, such as the Snore Control with Silent Alarm and Ultrasonic Jewelry Cleaner. The proprietary products which the Company develops internally are intended to reflect newness, usefulness, value and features. The Company strives to increase its purchase commitments to the manufacturers of its proprietary products in order to obtain favorable volume pricing. The addition of a "manufacturing margin" contributed to the continued growth in the Company's gross margins during fiscal 1995 . The gross margin contribution percentage to total gross margin for Sharper Image Design and private-labeled products increased from 7% in fiscal 1993 to 16% in fiscal 1994 to 18% in fiscal 1995, reflecting the increased sales volume and improvement in the gross margin. Purchase commitments for proprietary products will reflect expected sales requirements for the Company's retail stores and catalog, wholesale customers, foreign and domestic licensees. The Company believes that this new product development function, in addition to increasing its sales and gross margins and adding incremental wholesale sales, will favorably impact the Company by increasing the flow of unique and exclusive products in The Sharper Image stores and catalog and enhancing its brand name extension. However, there is no assurance that the Company will be able to continue the growth of gross margin and the proportionate sales related to these proprietary products. Proprietary products are introduced under the name "Sharper Image Design", while private-labeled products are marketed under the Company's tradenames. The Company expanded this internal new product development function during fiscal 1994 and continued into fiscal 1995 in terms of commitment of financial resources for tooling and development costs, personnel, and advertising. Working in conjunction with the Sharper Image Design group, the Company's merchandising staff influence the design and manufacturing of products generating approximately 20% to 30% of the Company's total sales. Although there can be no assurances, this increased level of design and manufacturing influence is believed to be obtainable with a relatively small design staff and modest commitment to tooling by sharing some of the design effort with existing vendor/manufacturers. The Company's product offerings, by broad category, and the gross margin contribution percentage to total gross margin for fiscal 1995 were approximately: Sharper Image Design 18% Personal Care, Home Furnishings, and Housewares 27% Electronics 20% Games, Luggage and Gift Items 16% Health and Fitness 15% Apparel and Footwear 3% Jewelry, Gemstones, and Other 1% --- Total 100% --- The Company purchases merchandise from numerous foreign and domestic manufacturers and importers. None of the suppliers accounted for more than 10% of the dollar amount of the Company's purchases during fiscal 1995. Of the products offered by the Company in recent catalogs, approximately 65% were manufactured in the Far East, approximately 26% were manufactured within the United States, approximately 8% were manufactured in Europe, and approximately 1% were manufactured in South America or Australia. The Company expects these percentages to vary as new products are introduced. Sharper Image Design proprietary products are produced for the Company on a contract basis by manufacturers in the Far East. The Company provides all product specifications to the contract manufacturers. Delivery lead time is generally in the range of 3 to 6 months. However, certain products introductions may require longer lead time. The lower cost associated with the proprietary products is a key element in the Company being able to operate on lower inventory levels while supporting higher levels of sales. The Company generates information on merchandise orders and inventory, which is reviewed daily by the Company's buyers, its senior merchandising staff and top management. Each month, the Company generally replaces approximately 10% to 25% of its product offerings each month. The Company carefully considers which products will not be offered in future months based upon numerous factors, including revenues generated, gross margins, the cost of catalog and store space devoted to each product, product availability and the frequency of returns The Company has developed a proprietary automatic replenishment system (ARS) which is based on the "just-in-time" inventory management concept. Under ARS, information on merchandise inventory and sales by each store location are generated and reviewed daily. Sales information by product and location are systematically compared daily to each product's "model stock" to determine store shipment quantities and frequency. The ARS computes any adjustments to the model stock level based on factors such as sales history by location in relation to total Company sales of each product. Under this system, the model stock is continually revised based on this analysis. Recommended adjustments to model stock levels and recommended shipment amounts are reviewed daily by the Company's group of store planners and merchandising managers who are responsible for allocating inventory to stores. One of the benefits resulting from the utilization of the ARS is that the Company has been able to run with lower model stocks by increasing the frequency of shipments to stores and maintaining a higher proportion of the inventory at the distribution center with the overall result of operating on lower inventories on a comparable basis. Corporate Marketing During fiscal 1995, the Company's Corporate Marketing unit issued approximately $10.4 million, or 58%, more incentive and gift merchandise certificates than the fiscal 1994. The incentive and gifting programs are designed by the Corporate Marketing unit to be used by client companies to increase their sales, or to motivate and reward their high achievers utilizing The Sharper Image stores and catalog as the primary means of offering and delivering the incentives and gifts. The Company sells the incentive and gift merchandise certificates to the client companies who in turn distribute them under their programs. The certificates are redeemable for Sharper Image merchandise through its retail stores, by mail, or over the telephone through the catalog telemarketing group. This activity adds new customers, adds incremental sales from the sale of the certificates and from sales to the certificate redeemer who usually augments their purchase beyond the certificate face value. The Company believes that these corporate marketing programs generate positive public relations, introduce new customers to The Sharper Image, and add to the in-house customer mailing lists without any "prospecting" costs. The Company will continue to invest time and energy in growing this segment of its business in future years. Recent representative corporate clients of the corporate marketing group have included American Express, Sprint, Nissan, HBO, and Chase Manhattan. Wholesale Operations The Company's Business Development department is the primary group responsible for marketing to other retailers, including fine department stores domestically as well as retailers in other countries. This group's sales grew from about $400,000 in fiscal 1993 to $3.1 million in fiscal 1995. Plans for this group are to continue to increase the number of wholesale customers in the U.S. and abroad, and the number of Sharper Image brand products offered to these customers. New wholesale customers added during fiscal 1995 include Saks Fifth Avenue, Macy's and Dayton Hudson. Negotiations with other major department stores are on-going. By choosing to feature Sharper Image brand products, these wholesale department store customers can sell proven products with positive sales appeal. Licensed Operations The Company has exclusive licensing agreements in Japan, Switzerland, South Korea and Australia, as well as in the United States for non-duty free airport locations. In fiscal 1995, the Company entered a licensing agreement with its Korean licensee. The new Korean licensee opened its The Sharper Image in Seoul in December 1995. 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 retail store and catalog operations. The Company will assist the licensee by producing a foreign language edition of The Sharper Image catalog, typically quarterly, with economies of scale but at the expense of the licensees who then print and distribute locally. 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. The first airport location is Dallas-Fort Worth which opened in July, 1994. A second airport location at Detroit opened in May 1995. There are currently five Sharper Image retail stores operated by the foreign licensees, two in Japan, and one each in Switzerland, Australia, and Korea. 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 Company has exclusive master distributor agreements for distribution of the Company's propriety products in Italy, The United Kingdom and Indonesia. The agreement allows the distributors to market proprietary products through retail stores, television and radio advertising and infomercials. The Company continues to pursue additional licensing and wholesale opportunities in foreign countries. Product Licensing/The Sharper Image Trademark The Company currently has several product license agreements through its licensing agent, Univex. The Company controls the selection of the licensees and retail distribution channels for the products in order to maintain the quality associated with The Sharper Image name. Under each of these agreements, the licensee is granted the right to use the trademarked name, "The Sharper Image," in connection with the manufacture and sale of certain products. In consideration for the rights granted to the licensee, the Company receives royalties on the licensees' net sales, subject, in certain cases, to a periodic minimum royalty. The current product license agreements cover a range of products including: laser pointers, luggage, contact lenses, leather accessories and apparel. The Company believes that product licensing presents opportunities to further leverage the value of The Sharper Image as a brand name. Customer Service The Company seeks to hire and retain qualified sales and customer service representatives in both its mail-order catalog and store operations and to train them thoroughly. Each new store manager undergoes an intensive program during which the manager is trained in all aspects of the Company's business. Sales personnel are trained during the first two weeks of employment, or during the weeks before a new store opens. Training focuses primarily on acquiring a working knowledge of the Company's products and on developing selling skills and an understanding of the Company's high customer service standards. Each sales associate is trained to adhere to the Company's philosophy of "taking ownership" of every customer service issue that may arise. The Company has also developed ongoing programs conducted at each store that are designed to keep each salesperson up to date on each new product offered. Store managers are compensated on a base salary plus commission basis. Sales associates are compensated largely on a commission basis with a draw against commission. The Company's Customer Service group at the corporate headquarters provides personal attention to customers who call toll free to request a catalog subscription, place an order, or inquire about a product. The Company's Customer Service group is also responsible for resolving customer problems promptly and to the customer's complete satisfaction. The Company is committed to provide courteous, knowledgeable, and prompt service to its customers. Catalog Order Fulfillment and Distribution The Company has a single distribution facility in Little Rock, Arkansas. This facility was expanded during fiscal 1995, increasing the space from approximately 50,000 square feet to about 110,000 square feet. The Company's merchandise generally is delivered to the catalog customer and to The Sharper Image stores directly from the Company's distribution facility. The Company has increased the number of products which are shipped directly from the vendor to the customer or to the stores. The shipment of products directly from vendors to the stores and customers reduces the level of inventory required to be carried at the distribution center, freight costs, and the lead time required to receive the products. Each catalog order is received via remote terminal at the distribution facility after the order has been approved for shipment. The Company's goal is to ship catalog orders within 48 hours after the order is received. The Company generally delivers products by second day Federal Express to its customers. Store customers may take their purchase with them or have it delivered upon request. Sales and inventory information about catalog and store operations is provided on an ongoing basis to the Company's merchandising staff and to top management for review. The Company's proprietary automatic replenishment system (ARS) enables the company to maintain high in-stock inventory positions , while reducing the overall inventory requirement. The Company's stores are equipped with electronic point-of-sale registers that communicate daily with the main computer system at corporate headquarters, transmitting sales, inventory and customer data as well as receiving data from the Company's headquarters. The sales, inventory, and customer data enables sales and corporate personnel to monitor sales by item on a daily basis, provides the information utilized by the ARS for inventory allocations, provides management with current inventory and merchandise information, and enables our in-house mailing list to be updated regularly with customer names and activity. The Company continually evaluates its computer systems and information technology in connection with providing additional and improved management and financial information. Competition The Company operates in a highly competitive environment. The Company principally competes with a variety of department stores, sporting goods stores, discount stores, specialty retailers and other catalogs that offer products similar to or the same as some of those offered by the Company. Many of the Company's competitors are larger companies with greater financial resources, a wider selection of merchandise and a greater inventory availability. Although the Company attempts to market products not generally available elsewhere and has emphasized exclusive products in its merchandising strategy, many of its products or similar products can also be found in other retail stores or through other catalogs. Other retailers market certain products similar to the Company's at lower prices. In addition, a number of other companies have attempted to copy the presentation and method of operation of the Company's catalog and stores, and the Company's proprietary designed products. The Company competes principally on the basis of product exclusivity, selection, quality and price of its products, merchandise presentation in both the catalog and stores, its customer list, name recognition, and the quality of its customer service. The Company is committing additional resources to its internal product development group to create and produce proprietary products exclusively available from the Company. The Company is also testing additional retail concepts in it's efforts to grow revenues and net earnings in the long-term. Trademark Licenses In the opinion of management, the Company's registered service mark and trademark, "The Sharper Image," and the name recognition that it has developed, is of significant value. The Company currently licenses the use of its trademarked name in connection with the production and circulation of foreign language editions of The Sharper Image catalog in Japan and Switzerland and in connection with The Sharper Image stores in Japan, Switzerland, Australia and Korea in consideration for royalties and other fees. In addition to these international licensees, the Company has also entered into a license for the right to operate Sharper Image stores in domestic non-duty free airport locations as well as various product license agreements which grant the right to licensees to manufacture and sell products bearing the Company's trademark. The Company is also expanding its efforts to develop international wholesale customers. The Company has recently received the approval for its trademark Sharper Image SPA for its new test retail concept. Seasonality The Company's business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Christmas season. In addition, as the proportion of the Company's revenues derived from store sales has grown, the impact of seasonal fluctuations on the Company's sales and earnings has increased. As a result, a substantial percentage of the Company's total revenues and all or most of the Company's net earnings occur in its fourth fiscal quarter ending January 31. The Company generally experiences lower revenues during the other quarters and, as is typical in the retail industry, has incurred and may continue to incur losses in these quarters. The results of these interim quarters may not be representative of the results for the full fiscal year. During the fiscal years 1995 and 1994, the Company's total revenues for the fourth quarter were approximately 40% of total revenues. Employees As of January 31, 1996, the Company employed more than 1,200 associates, approximately 75% of whom were full-time. The Company considers its employee relations to be good. Executive Officers Set forth below is a list of the executive officers of the Company, together with brief biographical descriptions. Name Position Age ---- -------- --- Richard Thalheimer Founder, 48 Chairman of the Board, and Chief Executive Officer Craig Womack President, 45 Chief Operating Officer Vincent Barriero Senior Vice President, 47 Chief Information Officer, and Assistant Corporate Secretary Shannon King Senior Vice President, 40 Merchandising Sydney Klevatt Senior Vice President, 60 Marketing Tracy Wan Senior Vice President, 36 Chief Financial Officer, and Corporate Secretary Richard Thalheimer is the founder of the Company and has served as the Chief Executive Officer and as a Director of the Company since 1978 and as Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the Company's President from 1977 through July 1993. Craig Womack has been the Company's President and Chief Operating Officer since July 1993. From December 1989 to July 1993, Mr. Womack served as the Company's Executive Vice President and Chief Operating Officer. Vincent Barriero has been the Company's Senior Vice President, Chief Information Officer since February 1995. Mr. Barriero served as the Company's Senior Vice President, Management Information Systems from August 1992 through February 1995 and as Vice President, Management Information Systems from August 1989 through August 1992. Shannon King has been the Company's Senior Vice President, Merchandising, since February 1995. Ms. King served as the Company's Vice President, Merchandising from March 1993 through February 1995, and as Director of Merchandising from July 1988 through March 1993. Sydney Klevatt has been the Company's Senior Vice President, Marketing since January 1991. From April 1982 through September 1990, Mr. Klevatt was the Executive Vice President of Hanover Direct, Inc., with responsibilities in the general corporate management and direction of the company including catalog merchandising, marketing, creative and public and legal relations. Tracy Wan has been the Company's Senior Vice President, Chief Financial Officer since February 1995. Ms. Wan served as Vice President, Chief Financial Officer from September 1994 through February 1995, as Vice President, Controller from November 1991 through September 1994, and as Controller from July 1989 through November 1991. Ms. Wan is a certified public accountant. Item 2. Properties The Company occupies approximately 50,000 square feet of office space for its corporate headquarters in San Francisco, CA, under a lease scheduled to expire on January 31, 2001, with an option to extend for two additional five-year periods. The Company currently operates 78 The Sharper Image and 4 Sharper Image SPA stores under leases covering a total of approximately 184,000 square feet of net selling space. The Company's distribution facility is located in Little Rock, Arkansas. The Company completed the addition of the 60,000-square-foot phase one expansion of the distribution center in October 1995. The expanded distribution center now has about 110,000 square feet of space. The costs for phase one expansion were approximately $3.2 million. The Company is currently in phase two of the expansion which involve the installment of pallet racking and the mail-order conveying system. All of the Company's distribution functions are through this facility and other seasonally occupied space rented by the Company in close proximity thereto. With the expanded building, the Company plans to reduce its usage of seasonal overflow storage facility. Item 3. Legal Proceedings The Company is party to various legal proceeding arising from normal business activities. In the opinion of management, resolution of these matters will not have a material adverse effect on the Company's financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information set forth under "Note D -- Revolving Loan and Notes Payable" in the Notes to Financial Statements on page 22 and the information set forth under the caption "Common Stock Market Prices and Dividend Policy" on page 27 of the Sharper Image Corporation 1995 Annual Report to Stockholders is incorporated herein by reference. As of April 15, 1996 there were 542 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 1995 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 11 to 15 of the Sharper Image Corporation 1995 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 16 through 26 of the Sharper Image Corporation 1995 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 1996 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 1996 Proxy Statement, pages 5 to 6. 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 1996 Proxy Statement, page 4. Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions is incorporated herein by reference to the Registrant's 1996 Proxy Statement, page 13. PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a)1. List of Financial Statements. The following Financial Statements and Notes thereto set forth on pages 16 through 26 of the Sharper Image Corporation 1995 Annual Report to Stockholders are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K: Statements of Operations for the years ended January 31, 1996, 1995 and 1994. Balance sheets at January 31, 1996 and 1995. Statements of Stockholders' Equity for the years ended January 31, 1996, 1995 and 1994. Statements of Cash Flows for the years ended January 31, 1996, 1995 and 1994. Notes to Financial Statements. (a)2. List of Financial Statement Schedule. The following are filed as part of this Report: Independent Auditors' Report on Financial Statement Schedule. Schedule II - Valuation and Qualifying Accounts Financial Data Schedule Schedules other than those listed are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto, contained in, or incorporated by reference into, this Report. (a)3. List of Exhibits. Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on page 19 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed with the Securities and Exchange Commission during the last quarter of the period covered by this Report. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of the expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered on the Form S-8 identified below, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. The preceding undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 (Registration No. 33-12755). SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHARPER IMAGE CORPORATION SHARPER IMAGE CORPORATION By: /s/ Richard J. Thalheimer By: /s/ Tracy Y. Wan ---------------------------- -------------------------------------- Richard J. Thalheimer Tracy Y. Wan Chief Executive Senior Vice President, Officer, Chairman Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Thalheimer and Tracy Wan, and each of them, as such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person's name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Richard J. Thalheimer - ------------------------- Chief Executive April 25, 1996 Richard J. Thalheimer Officer, Chairman (Principal Executive Officer) /s/ Tracy Y. Wan - ------------------------- Senior Vice President, April 25, 1996 Tracy Y. Wan Chief Financial Officer Corporate Secretary (Principal Financial and Accounting Officer) /s/ Elyse Eng Thalheimer - ------------------------- Director April 25, 1996 Elyse Eng Thalheimer /s/ Alan Thalheimer - ------------------------- Director April 25, 1996 Alan Thalheimer /s/ Lawrence Feldman - ------------------------- Director April 25, 1996 Lawrence Feldman /s/ Maurice Gregg - ------------------------- Director April 25, 1996 Maurice Gregg /s/ J. Gary Shansby - ------------------------- Director April 25, 1996 J. Gary Shansby EXHIBIT INDEX 3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (Registration No. 33-12755).) 3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 33-12755).) 10.1 Amended and Restated Stock Option Plan. (Incorporated by reference to Registration Statement on Form S-8 filed on January 19, 1996 (Registration No. 33-3327).) 10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994. (Incorporated by reference to Registration Statement on Form S-8 filed on January 19, 1996 (Registration No. 33-3327).) 10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 (Registration No. 33-12755).) 10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by reference to Exhibit 10.15 to Form 10-K for fiscal year ended January 31, 1988.) 10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by reference to Exhibit 10.16 to Form 10-K for fiscal year ended January 31, 1988.) 10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares of Common Stock purchased pursuant to exercise of employee stock options. (Incorporated by reference to Exhibit 10.3 to Registration Statement on Form S-1 (Registration No. 33-12755).) 10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to shares of Common Stock purchase pursuant to exercise of employee stock options. (Incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1 (Registration No. 33-12755).) 10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to shares of Common Stock purchased pursuant to exercise of employee stock options. (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1 (Registration No. 33-12755).) 10.9 Form of Director Indemnification Agreement. (Incorporated by reference to Exhibit 10.42 to Registration Statement on Form S-1 (Registration No. 33-12755).) 10.10 Real Estate Installment Note and Mortgage dated October 4, 1993 among the Company and Lee Thalheimer, Trustee for the Alan Thalheimer Trust. (Incorporated by reference to Exhibit 10.20 to Form 10-K for fiscal year ended January 31, 1994) 10.11 Financing Agreement dated September 21, 1994 between the Company and CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit 10.12 to Form 10-Q for the quarter ended October 31, 1994) 10.12 The Sharper Image 401(K)Savings Plan (Incorporated by reference to Exhibit 10.21 to Registration Statement of Form S-8 (Registration No. 33-80504) dated June 21, 1994)) 10.15 Form of 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.) 10.16 Form of Annual Report for the Sharper Image 401(K) Savings Plan (incorporated by reference to Form 11-K (Registration No. 33-80504) for the plan year ended December 31, 1995.) 10.17 Form of Split-Dollar Agreement between the Company and Mr. R. Thalheimer, its Chief Executive Officer dated October 13, 1995 and effective May 17, 1995. 10.18 Form of Assignments of Life Insurance Policy as Collateral, both dated October 13, 1995 and effective May 17, 1995. 11.1 Statement Re: Computation of Earnings per Share. 13.1 1995 Annual Report to Stockholders. (pages 11-27) 24.1 Independent Auditors Report. 24.2 Independent Auditor's Consent 27.0 Financial Data Schedule. SHARPER IMAGE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS -------------------------------------- ($000) 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 - -------------------------------------------------------------------------------- INVENTORY YEAR ENDED JANUARY 31, 1996: Inventory Obsolescence $ 891 $2,109 $1,551 $1,449 YEAR ENDED JANUARY 31, 1995: Inventory Obsolescence $1,140 $1,630 $1,879 $ 891 YEAR ENDED JANUARY 31, 1994: Inventory Obsolescence $1,168 $1,022 $1,050 $1,140 OTHER YEAR ENDED JANUARY 31, 1996: Other $ 291 $ 462 $ 292 $ 461 YEAR ENDED JANUARY 31, 1995: Other $ 196 $ 371 $ 276 $ 291 YEAR ENDED JANUARY 31, 1994: Other $ 84 $ 352 $ 240 $ 196 FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended January 31, ----------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 Operating Results Revenues .................................... $ 204,184 $ 188,535 $ 147,441 $ 149,995 $ 142,592 Earnings (loss) before income taxes ......... 739 6,139 2,939 598 (5,164) Net earnings (loss) ......................... 444 3,683 1,763 359 (3,356) Net earnings (loss) per share ............... $ 0.05 $ 0.41 $ 0.20 $ 0.04 $ (0.41) Balance Sheet Data Working capital ............................. $ 17,233 $ 23,011 $ 19,488 $ 15,426 $ 12,618 Total assets ................................ 70,456 64,036 55,095 53,739 53,077 Notes payable ............................... 3,355 838 987 648 1,027 Stockholders' equity ........................ 32,758 32,792 29,868 28,025 27,648 Current ratio ............................... 1.56 1.85 1.94 1.75 1.62 Statistics Number of stores at year end ................ 82 74 73 74 74 Comparable store sales growth ............... 3.3% 17.8% (4.1%) 4.8% (26.6%) Annualized net sales per selling square foot $ 850 $ 832 $ 726 $ 796 $ 752 Number of catalogs mailed ................... 42,080,000(1) 31,522,000 25,879,000 23,413,000 25,479,000 Number of catalog orders .................... 536,000 426,000 252,000 248,000 231,000 Average revenue per order: Stores ................................. $ 106 $ 102 $ 95 $ 89 $ 96 Catalog ................................ $ 122 $ 116 $ 120 $ 112 $ 113 Returns on average stockholder's equity ..... 1.4% 11.8% 6.1% 1.3% N/A Book value per share ........................ $ 3.97 $ 3.96 $ 3.61 $ 3.40 $ 3.36 Weighted average number of shares outstanding 8,682,078 8,899,289 8,683,929 8,652,178 8,220,516 Dollars are in thousands except Net earnings (loss) per share and Statistics. (1) Includes 9,300,000 of the Sharper Image SPA(R) catalogs mailed.
3 MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------------------- Sharper Image Corporation RESULTS OF OPERATIONS
Fiscal Year Ended ---------------------------------------------------------- Jan. 31, 1996 Jan. 31, 1995 Jan. 31, 1994 (Fiscal 1995) (Fiscal 1994 (Fiscal 1993) ---------------------------------------------------------- PERCENTAGE OF TOTAL REVENUES Net store sales ................................... 71.1% 71.7% 78.2% Net catalog sales ................................. 26.6 26.2 20.2 Net wholesale sales .............................. 1.5 1.0 0.3 Net rental ........................................ 0.5 0.8 0.8 Licensing ......................................... 0.3 0.3 0.5 -------- -------- --------- TOTAL REVENUES .................................... 100.0 100.0 100.0 COSTS AND EXPENSES: Cost of products .................................. 50.3 51.1 52.2 Buying and occupancy .............................. 10.5 10.4 13.4 Advertising and promotion ......................... 15.5 11.3 8.0 General, selling, and administrative .............. 23.5 23.5 23.8 Loss due to store closures and earthquake ......... -- 0.3 0.6 -------- -------- --------- Operating income .................................. 0.2 3.4 2.0 Other Income (Expense) ............................ 0.2 (0.1) -- -------- -------- --------- Earnings Before Income Taxes ...................... 0.4 3.3 2.0 Income Taxes ...................................... 0.2 1.3 0.8 -------- -------- --------- Net Earnings ...................................... 0.2% 2.0% 1.2% -------- -------- --------- REVENUES Fiscal Year Ended ---------------------------------------------------------- Jan. 31, 1996 Jan. 31, 1995 Jan. 31, 1994 (Fiscal 1995) (Fiscal 1994) (Fiscal 1993) Dollars in thousands ---------------------------------------------------------- Net store sales .................................... $145,095 $135,203 $115,299 Net catalog sales .................................. 54,160 49,462 29,746 Net wholesale sales ................................ 3,145 1,912 421 -------- --------- -------- TOTAL NET SALES .................................... 202,400 186,577 145,466 List rental ........................................ 1,102 1,442 1,159 Licensing .......................................... 682 516 816 -------- --------- -------- TOTAL REVENUES ..................................... $204,184 $188,535 $147,441 -------- --------- --------
11 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Revenues (continued) Net sales of $202,400,000 for fiscal 1995 increased $15,823,000, or 8.5%, from the prior fiscal year. Returns and allowances as a percentage of sales were 12.2% for 1995, compared to 12.3% for 1994. Net store sales increased $9,892,000, or 7.3%, comparable store sales increased 3.3%, net catalog sales increased $4,698,000, or 9.5% and net wholesale sales increased $1,233,000, or 64.5%. The increase in net store sales and comparable store sales in 1995 reflected a 5.4% increase in total store transactions and an increase in average revenue per order from $102 to $106. Net sales per average selling square foot were $850 for 1995, compared to $832 in 1994 and $726 in 1993. The increase in net store sales was partially attributable to the addition of ten new stores opened during the year, four of which are Sharper Image SPA(R) test stores. The Sharper Image SPA(R) store and catalog test concept is designed to tap into the female consumers market, offering a product mix with a theme of "look better, feel better, live better." The increase in net catalog sales in 1995 reflected a 4.2% increase in total catalog orders, an increase in average revenue per order from $116 to $122, and was primarily attributable to the sales related to the test mailings of the Sharper Image SPA(R) catalogs, partially offset by a slight decrease in net catalog sales related to The Sharper Image(R) Catalog. The Company believes that the increase in the number of catalogs and catalog pages circulated for The Sharper Image(R) Catalog. The Company believes that the increase in the number of catalogs and catalog pages circulated for The Sharper Image(R) Catalog during the first half of fiscal 1995, as well as the higher demand for the Company's merchandise assortment, particularly the Company's proprietary and private label products, personal care products and fitness equipment, also contributed to the increase in net store sales and comparable store sales. The increase in wholesale sales was primarily attributable to the increase in the number of wholesale customers both in the U.S. and internationally, and to the increase in the number of Sharper Image brand products offered to these wholesale customers. Net sales of $186,577,000 for fiscal 1994 increased $41,111,000, or 28.3%, from the prior fiscal year. Returns and allowances as a percentage of sales were 12.3% for 1994, compared to 11% for 1993. Net store sales increased $19,904,000, or 17.3%, comparable store sales increased 17.8%, net catalog sales increased $19,716,000, or 66.2%, and net wholesale sales increased $1,491,000 or 354.2%. The increase in net store sales and comparable store sales in 1994 reflected an 8.9% increase in total store transactions and an increase in average revenue per order from $95 to $102. The increase in net catalog sales in 1994 reflected a 69% increase in total catalog orders, which was partially offset by a decrease in average revenue per order from $120 to $116. The Company believes that the increases in net store sales, comparable store sales, and net catalog sales primarily reflected strong demand for the Company's merchandise assortment, the Company's emphasis on its proprietary products through broad-based advertising in in-flight and other magazines, and in newspapers such as The Wall Street Journal, and the significant increase in advertising and promotion expenses due to the increase in the number of catalogs and catalog pages circulated. The increase in wholesale sales was primarily attributable to the increase in the number of wholesale customers in the U.S., the increase in the number of Sharper Image brand products offered to these wholesale customers, and to the Company's first organized effort in the development of this marketing channel. Comparisons of financial data reflect reclassification of certain revenue items. The Company continually evaluates the profitability of each store location to determine whether or not to expand, remodel, relocate, or close stores. For the purpose of determining comparable store sales, comparable stores are defined as those which were open during the entire comparable month of the previous year and are compared monthly for purposes of this analysis. Inflationary effects are not considered significant to the growth of sales. 12 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Cost of Products Cost of products increased $6,415,000, or 6.7% in 1995 from 1994. This increase primarily reflected the increase in cost of products related to increases in net sales. The gross margin rate for 1995 was 49.1%, compared to 48.2% for 1994. The higher gross margin rate for 1995 as compared to 1994 primarily reflected the positive impact of the Company's merchandise mix during 1995, which included a number of high-margin proprietary products, private label and exclusive products, and improved margins on the balance of the merchandise mix. Cost of products increased $19,327,000, or 25.1% in 1994 from 1993. This increase primarily reflected the increase in cost of products related to increases in net sales. The gross margin rate for 1994 was 48.2%, compared to 46.8% for 1993. The higher gross margin rate for 1994 as compared to 1993 primarily reflected the positive impact of the Company's strategy of emphasizing and expanding its line of proprietary products which have higher margins, and the effect of lower margins associated with a promotion of apparel, footwear and other seasonal items in the prior 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 movement in merchandise mix from category to category from year to year reflects the fact that the Company is an "item" business, as opposed to general lines of merchandise. However, it is impossible to predict future gross margin rates. Buying and Occupancy Buying and occupancy expenses increased $1,763,000 or 9.0% in 1995 from 1994. The increase primarily reflected the occupancy costs associated with the ten new stores opened during 1995, and partially to the increase in store rents due to the expiration of certain negotiated rent concessions. Buying and occupancy costs for 1994 were comparable to 1993. Advertising and Promotion Advertising and promotion expenses for 1995 increased $10,317,000, or 48.2%, from 1994. The increase in advertising and promotion expense was primarily due to higher catalog costs related to the significant increases in paper costs and partially due to a postage rate increase in January 1995. The increases in paper and postage costs have had a significant effect on the Company. Management estimates that about $5.2 million (on a pre-tax basis) of the increase in advertising and promotion expense was attributable to these higher costs. Another significant factor for the increase in advertising and promotion expense was the costs related to the test mailings of the Sharper Image SPA(R) catalogs. The catalogs mailed under this test concept have generated satisfactory results and the Company plans to continue the test mailings in fiscal 1996. The higher catalog costs also reflect the increase of approximately 4% in the circulation and 7% in the number of pages mailed for The Sharper Image(R) Catalog. These higher catalog costs were partially offset by the Company's efforts to reduce these expenses, which included the trimming of the catalog dimensions by fractions of an inch, and the use of a lighter weight of paper. Advertising and promotion expenses for 1994 increased $9,535,000, or 80.4%, from 1993. The increases in advertising and promotion expenses were primarily due to an increase in net catalog costs as a result of an increase of 22% in the number of catalogs circulated, and an increase of 105% in the number of catalog pages circulated. The increase can also be attributed to an increase in in-flight and other magazines, and newspaper advertising specifically promoting the Company's proprietary and exclusive products, the testing of the Sharper Image SPA(R) catalog (the first mailing had a working title of Sharper Image Healthy Living(R)), and the increase in paper and postage costs. While The Sharper Image(R) Catalog serves as the primary source of advertising for its retail stores and mail order business, the Company continually evaluates its advertising strategies to maximize the effectiveness of its advertising programs. In the continuing effort to partially offset higher paper costs, the Company's current plan for fiscal 1996 is to reduce advertising and promotion expenses by reducing catalog pages and the number of catalogs mailed. Although it is impossible to predict, management currently believes that the planned decrease in advertising and promotion expenses would more than offset the effect of the possible decrease in revenues caused by the reduced advertising on a full fiscal year basis. 13 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation General, Selling and Administrative General, selling and administrative (G S & A) expenses for 1995 increased $3,761,000, or 8.5% from 1994, primarily due to increases in overall selling expenses related to the increase in net sales. The increase in G S & A expenses also included increases in personnel costs to support the higher sales volume, an increase in store expenses related to ten new stores opened during 1995, and an increase in net delivery expense related to the increase in mail-order sales. Total G S & A expenses as a percentage of total revenues were 23.5% in 1995 and 1994, and 23.8% in 1993. General, selling and administrative (G S & A) expenses for 1994 increased $9,213,000, or 26.3% from 1993, primarily due to increases in overall selling expenses related to the increase in net sales, and an increase in expense related to the development of proprietary products. The increase in G S & A expenses also includes an increase in net delivery expense related to a mail-order program, which offers two-day express delivery to mail-order customers at no extra charge. Loss Due to Store Closures and Earthquake The Company continually evaluates the profitability of each store location in order to determine whether or not to close stores. The costs related to the closing of stores for 1995 were $62,000. Currently the Company intends to close one or two stores in fiscal 1996, which should not have a material impact on the Company's financial results. The costs related to the closing of stores for 1994 and 1993 were $539,000 and $400,000. The Company also closed its store in Sherman Oaks, California, which was damaged by the January 1994 Southern California earthquake. The loss related to the earthquake was approximately $500,000. Other Income (Expense) Other income (expense) for 1995 increased $730,000 from 1994. The increase in other income (expense) is primarily due to a decrease in interest expense, an increase in interest income from available cash, and the commissions earned from The Sharper Image(R) affinity credit card. Other income (expense) for 1994 decreased $290,000 from 1993. The decrease in other income (expense) is primarily due to non-recurring credits which included interest on a tax refund, credit for a telephone service agreement, and an increase in interest expense, which was partially offset by increased investment income from available cash. Income Taxes The effective tax rate for 1995 and 1994 was 40%. 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 are considered other than changes in the tax law or rates. Liquidity and Capital Resources At January 31, 1996, the Company had cash and equivalents of $12,476,000, a decrease of $5,717,000, as compared to $18,193,000 at January 31, 1995. During 1995, the Company met its short-term liquidity needs and its capital requirements with available cash, cash flow provided by operations, trade credit, and the revolving loans. The decrease in cash was primarily due to the increases in property and equipment expenditures related to new and remodeled store merchandise inventory, deferred catalog costs, and the repurchase of common stock. At January 31, 1996, the Company had no amounts outstanding on its revolving loan credit facility. The highest amount of direct borrowing under the credit facility during 1995 was $11,000,000 compared with $2,000,000 in 1994. Letters of credit comments outstanding at January 31, 1996, were $395,000. 14 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Liquidity and Capital Resources (continued) In September 1994, the Company entered into a five-year revolving secured credit facility with The CIT Group/Business Credit, Inc., a New York corporation. The credit facility allows the Company to borrow and issue letters of credit up to $20,000,000 based upon inventory levels. The credit facility is secured by the Company's inventory, accounts receivable, general intangibles and certain other assets. Borrowings under the credit facility bear interest at either prime plus 0.75% per annum, or LIBOR plus 2.75% per annum. The credit facility contains certain financial covenants pertaining to fixed-charge coverage ratio, leverage ratio, working capital and net worth. The credit facility has limitations on operating leases, other borrowings, dividend payments and stock repurchases. In November 1994, ING Capital, a former lender, exercised its rights to purchase 413,000 shares of the Company's common stock under the warrant agreement. The Company repurchased all of the outstanding shares owned by ING Capital through the exercise of the warrant. The net cash expended by the Company as a result of the exercise of the warrant by ING Capital and the subsequent repurchase of the shares by the Company was $1,000,000. The Company's merchandise inventory at January 31, 1996, was approximately 3.2% higher than the prior fiscal year while supporting an increase of 8.5% in net sales. The Company's inventory reflects incremental amounts for the support of ten new stores opened during 1995,the new Sharper Image SPA(R) catalog concept, and the expanding wholesale business. The Company leases all of its offices, stores, and seasonal warehouse space. The Company opened ten new stores in 1995, including two original. The Sharper Image(R) stores located in White Plains, New York (March 1995) and St. Louis, Missouri (June 1995), one outlet store located in Milpitas, California (November 1995), and three Sharper Image Design(tm) stores located in Kahului, Hawaii (June 1995), Aspen, Colorado (July 1995), and Reno, Nevada (October 1995). The Company also opened four Sharper Image SPA(R) stores located in Walnut Creek, California (August 1995), St. Louis, Missouri (October 1995), Short Hills, New Jersey (November 1995), and Skokie, Illinois (December 1995). The Sharper Image SPA(R) store is a new test concept the Company launched during fiscal 1995 to target female customers. Eleven existing Sharper Image(tm) stores were remodeled to increase the selling square footage to improve sales productivity, as well as to provide an updated appeal. With favorable terms from the lessors, three stores were relocated within the same shopping mall. One existing location is currently being reconfigured and will re-open as a Sharper Image Design(tm) store. The Company closed two stores in 1995 as the leases expired, and one store in 1994. The Company also expanded its existing distribution center, located in Little Rock, Arkansas, from 50,000 square feet to approximately 110,000 square feet. The expansion costs of the distribution center were financed with a $3 million mortgage loan, which was funded in December 1995. The Company is currently planning to open four to six new stores during fiscal 1996. Total capital expenditures estimated for new and existing stores, including the remodel and the relocation of a number of existing stores, corporate headquarters, and the distribution center for fiscal 1996 are between $6.0 to $8.0 million. Seasonality The Company's business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Christmas season. The secondary peak period for the Company is June, reflecting the gifting for Father's Day and graduations. A substantial portion of the Company's total revenues and all or most of the Company's net earnings occur in the fourth quarter ending January 31. The Company generally experiences lower revenues and earnings during the other quarters and, as is typical in the retail industry, has incurred and may continue to incur losses in these quarters. The results of operations for these interim periods are not necessarily indicative of the results for the full fiscal year. General The forward looking statements contained in this annual report are only our predictions and objectives. Actual events or results may differ materially. We refer you to the documents that the Company files with the SEC, such as our Form 10-Q and Form 10-K reports. These documents identify important factors that could cause our actual results to differ from our current expectations and the forward looking statements contained in this annual report. 15 Independent Auditors' Report - -------------------------------------------------------------------------------- Sharper Image Corporation Board of Directors Sharper Image Corporation San Francisco, California We have audited the accompanying balance sheets of Sharper Image Corporation as of January 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an option on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Sharper Image Corporation as of January 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP San Francisco, California March 22, 1996 16 STATEMENTS OF OPERATIONS - ----------------------------------------------------------------------------- Sharper Image Corporation
Fiscal Year Ended January 31, -------------------------------------- Dollars in thousands except per share amounts 1996 1995 1994 - ----------------------------------------------------------------------------------------- Revenues: Sales ..................................... $ 230,410 $ 212,785 $ 163,474 Less: returns and allowances .............. 28,010 26,208 18,008 ----------- ----------- ----------- Net Sales ................................. 202,400 186,577 145,466 List rental ............................... 1,102 1,442 1,159 Licensing ................................. 682 516 816 ----------- ----------- ----------- 204,184 188,535 147,441 ----------- ----------- ----------- Costs and Expenses: Costs of products ......................... 102,728 96,313 76,986 Buying and occupancy ...................... 21,314 19,551 19,661 Advertising and promotion ................. 31,710 21,393 11,858 General, selling and administrative ....... 48,010 44,249 35,036 Loss due to store closures and earthquake.. 62 539 900 ----------- ----------- ----------- 203,824 812,045 144,441 ----------- ----------- ----------- Other Income (Expense): Interest income (expense)--net ............ 220 (164) (415) Other--net ................................ 159 (187) 354 ----------- ----------- ----------- 379 (351) (61) ----------- ----------- ----------- Earnings Before Income Taxes ................. 739 6,139 2,939 Income Taxes ................................. 295 2,456 1.176 ----------- ----------- ----------- Net Earnings ................................. $ 444 $ 3,683 $ 1.763 ----------- ----------- ----------- Net Earnings Per Share ....................... $ .05 $ .41 $ .20 ----------- ----------- ----------- Weighted Average Number of Shares ............ 8,682,078 8,899,289 8,683,929 ----------- ----------- ----------- See Notes to Financial Statements.
17 BALANCE SHEETS - -------------------------------------------------------------------------------- Sharper Image Corporation January 31, --------------------- Dollars in thousands except per share amounts 1996 1995 - -------------------------------------------------------------------------------- Assets Current Assets: Cash and equivalents ................................. $12,476 $18,193 Accounts receivable, net of allowance for doubtful accounts of $461 and $291 ............. 4,436 3,234 Merchandise inventories .............................. 24,313 23,555 Deferred catalog costs ............................... 4,135 3,022 Prepaid expenses and other ........................... 2,576 2,097 ------- ------- Total Current Assets ................................... 47,936 50,101 Property and Equipment, Net ............................ 20,726 12,694 Deferred Taxes and Other Assets ........................ 1,794 1,241 ------- ------- Total Assets ......................................... $70,456 $64,036 ------- ------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable ..................................... $13,994 $ 9,443 Accrued expenses ..................................... 11,230 11,640 Deferred revenue ..................................... 4,893 3,612 Income taxes payable ................................. 363 2,246 Current portion of notes payable ..................... 223 149 ------- ------- Total Current Liabilities .............................. 30,703 27,090 Notes Payable .......................................... 3,355 838 Other Liabilities ...................................... 3,640 3,316 ------- ------- Total Liabilities ...................................... 37,698 31,244 Stockholders' Equity Preferred stock, $0.01 par value: Authorized, 3,000,000 shares: Issued and outstanding, none Common stock, $0.01 par value: Authorized, 25,000,000 shares: Issued and outstanding, 8,250,980 and 8,283,140 shares ........ 82 83 Additional paid-in capital ........................... 9,555 10,032 Retained earnings .................................... 23,121 22,677 -------- -------- Total Stockholders' Equity ............................. 32,758 32,792 -------- -------- Total Liabilities and Stockholders' Equity ........... $70,456 $64,036 -------- -------- See Notes to Financial Statements. 18 STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Sharper Image Corporation
Additional Common Stock Paid-in Retained Dollars in thousands Shares Amount Capital Earnings Total - --------------------------------------------------------------------------------------------------------------- Balance at January 31, 1993 ......... 8,239,000 $ 82 $10,712 $17,231 $28,025 Issuance of common stock for stock options ................. 42,470 1 79 80 Net income .......................... 1,763 1,763 ---------- ------- -------- ------- ------- Balance at January 31, 1994 ......... 8,282,370 83 10,791 18,994 29,868 Issuance of common stock for stock options and warrant (including tax benefit) ........... 470,070 5 1,773 1,778 Repurchase of common stock .......... (469,300) (5) (2,532) (2,537) Net income .......................... 3,683 3,683 ---------- ------- -------- ------- ------- Balance at January 31, 1995 ......... 8,283,140 83 10,032 22,677 32,792 Issuance of common stock for stock options ................. 62,640 1 127 128 Repurchase of common stock .......... (94,800) (2) (604) (606) Net income 444 444 ---------- ------- -------- ------- ------- Balance at January 31, 1996 ......... 8,250,980 $ 82 $ 9,555 $23,121 $32,758 ---------- ------- -------- ------- ------- See Notes to Financial Statements.
19 STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------- Sharper Image Corporation
Fiscal Year Ended January 31, --------------------------------------- Dollars in thousands 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Cash was Provided by (Used for) Operating Activities: Net earnings ............................................ $ 444 $ 3,683 $ 1,763 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation and amortization ......................... 3,461 3,269 3,352 Deferred rent expense ................................. 69 (3) (146) Deferred income taxes ................................. (127) (63) (92) Change in operating assets and liabilities: Accounts receivable ................................... (1,202) 581 (546) Merchandise inventories ............................... (758) 1,806 (2,986) Deferred catalog costs, prepaid expenses and other .... (2,018) (743) 101 Accounts payable and accrued expenses ................. 4,141 4,953 (177) Deferred revenue and other liabilities ................ (347) 1,235 561 -------- ------- ------- Cash Provided by Operating Activities ..................... 3,663 14,718 1,830 -------- ------- ------- Cash was Provided by (Used for) Investing Activities: Property and equipment expenditures ..................... (11,507) (2,655) (2,060) Disposals of equipment .................................. 14 191 44 -------- ------- ------- Cash Used for Investing Activities ........................ (11,493) 2,464) (2,016) -------- ------- ------- Cash was Provided by (Used for) Financing Activities: Issuance of common stock for stock options and warrant... 128 1,778 80 Repurchase of common stock .............................. (606) (2,537) -- Proceeds from notes payable and revolving loan .......... 14,000 2,000 6,783 Principal payments on notes payable and revolving loan... (11,409) (2,168) (6,656) -------- ------- ------- Cash Provided by (Used for) Financing Activities .......... 2,113 (927) 207 -------- ------- ------- Net Increase (Decrease) in Cash and Equivalents ........... (5,717) 11,327 21 Cash and Equivalents at Beginning of Period ............... 18,193 6,866 6,845 -------- ------- ------- Cash and Equivalents at End of Period ..................... $ 12,476 $18,193 $ 6,866 -------- ------- ------- Supplemental Disclosure of Cash Paid for: Interest ................................................ $ 312 $ 288 $ 247 Income Taxes ............................................ $ 1,971 $ 1,008 $ 419 See Notes to Financial Statements.
20 Notes to Financial Statements - ------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1996, 1995, and 1994 Note A--Summary of Significant Accounting Policies The Company is a specialty retailer which creates and sells a unique assortment of original gifts and entertaining products through its retail stores, catalogs, and other marketing channels throughout the United States. The Company also has stores and catalog operations internationally through licensees. Additional revenue is derived from rental of the Company's Mailing list and from licensing activities relating to the Company's trade name. Revenue Recognition: Catalog sales are recorded when merchandise is shipped. Deferred revenue represents unfilled cash orders and merchandise certificates outstanding 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 maturities of three months or less. Deferred Catalog and Advertising Costs: Direct costs incurred for the production and distribution of catalogs are capitalized. Capitalized catalog costs are amortized, once the catalog is mailed, over the expected sales period which is generally three months. Other advertising costs are expensed as incurred and amounted to $3,807,000, $3,019,000, and $1,754,000 for the fiscal years ended January 31, 1996, 1995, and 1994. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the various assets which range from three to ten years for office furniture and equipment, and transportation equipment, and 40 years for the building. Leasehold improvements are amortized using the straight-line method over the lesser of their estimated useful lives or the term of the applicable lease which ranges from 7 to 18 years. Income Taxes: Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than changes in the tax law or rates. Earnings Per Share: Earnings per share are based on weighted average common shares outstanding which include common stock equivalents (stock options and stock warrant). Reclassification: Certain reclassifications have been made to prior years' financial statements in order to conform with the classifications of January 31, 1996 financial statements. New Accounting Standards: In 1997, the Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 121. "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS No. 121 establishes recognition and measurement criteria for impairment losses when the Company no longer expects to recover the carrying value of a long-lived asset. The effect of adopting SFAS No. 121, while not yet determined, is not expected to be material. The Company is required to adopt Statement of Financial Accounting Standards No. 123. "Accounting for Stock-Based Compensation" in the fiscal year ending January 31, 1997. SFAS No. 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. Under SFAS No. 123, the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the disclosure requirements of SFAS No. 123; therefore such adoption will have no effect on the Company's net earnings or cash flows. 21 Notes to Financial Statements (continued) - ------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1996, 1995, and 1994 Note B--Property and Equipment Property and equipment is summarized as follows: Fiscal Year Ended January 31, -------------------- Dollars in thousands 1996 1995 - -------------------------------------------------------------------------------- Leasehold improvements ................................. $22,542 $18,875 Office furniture and equipment ......................... 23,264 18,929 Transportation ......................................... 2,266 1,927 Land ................................................... 53 53 Building ............................................... 2,873 227 ------- ------- 50,998 39,911 Less accumulated depreciation and amortization ......... 30,272 27,217 ------- ------- $20,726 $12,694 ------- ------- Note C--Other Assets In May 1995, the Company entered into an agreement, under which the Company will advance the premiums on a split-dollar life insurance policy for its Chairman of the Board, Founder, and Chief Executive Officer. The Company has an interest in the insurance benefits equal to the amount of the premiums advanced. The amount receivable for premiums advanced as of January 31, 1996 was $196,000. Note D--Revolving Loan and Notes Payable In September 1994, the Company entered into a five-year revolving secured credit facility with The CIT Group/Business Credit, Inc., a New York corporation. The credit facility allows the Company to borrow and issue letters of credit up to $20,000,000 based upon inventory levels. The credit facility is secured by the Company's inventory, accounts receivable, general intangibles and certain other assets. Borrowings under the credit facility bear interest at either prime plus 0.75% per annum, or at LIBOR plus 2.75% per annum. The credit facility contains certain financial covenants pertaining to fixed charge coverage ratio, leverage ratio, working capital and net worth. The credit facility has limitations on operating leases, other borrowings, dividend payments and stock repurchases. At January 31, 1996 and 1995, the Company had no amounts outstanding on its revolving loan credit facility. Letters of credit commitments as of January 31, 1996 were $395,000. Notes payable included two mortgage loans collateralized by certain property and equipment. In connection with the expansion of the Company's distribution center which was completed in October 1995, the Company refinanced the mortgage loan collateralized by the distribution center and paid off the existing mortgage (Note G). The new note in the amount of $3 million was funded in December 1995, bears interest at a fixed rate of 8.40%, provides for monthly payments of principal and interest in the amount of $29,367, and matures in January 2011. The other note bears interest at a variable rate equal to the rate on 30-day commercial paper plus 3.82%, provides for monthly payments of principal and interest in the amount of $14,320, and matures in January 2000. Future minimum principal payments on notes payable are as follows: Dollars in thousands - ------------------------------------------------------------------------------- Year ending January 31, 1997 ............................................................ $ 223 1998 ............................................................ 259 1999 ............................................................ 279 2000 ............................................................ 287 2001 ............................................................ 147 Later years ..................................................... 2,383 ------- Total notes payable.............................................. $3,578 ------- 22 Notes to Financial Statements (continued) - ------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1996, 1995, and 1994 Note E--Income Taxes Fiscal Year Ended January 31, ---------------------------------------- Dollars in thousands 1996 1995 1994 - -------------------------------------------------------------------------------- Currently payable: Federal ................ $ 359 $ 2,144 $ 1,038 State .................. 63 375 230 ------- ------- ------- 422 2,519 1,268 Deferred: Federal ................ (107) (54) (79) State .................. (20) (9) (13) ------- ------- ------- (127) (63) (92) ------- ------- ------- $ 295 $ 2,456 $ 1,176 ------- ------- ------- 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, ------------------------------ 1996 1995 1994 ------------------------------ 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, January 31 Dollars in thousands 1996 1995 - -------------------------------------------------------------------------------- Current Nondeductible reserves ................. $ 2,844 $ 2,471 Deferred catalog costs ................. (1,654) (1,209) State taxes ............................ (522) (411) Valuation allowance .................... -- -- ------- ------- Current--net ................................... 668 851 ------- ------- Noncurrent Deferred rent .......................... 1,251 1,185 Depreciation ........................... 1,248 831 Deductible software costs .............. (800) (667) Other--net ............................. (148) (108) Valuation allowance .................... -- -- ------- ------- Noncurrent--net ................................ 1,551 1,241 ------- ------- Total .......................................... $ 2,219 $ 2,092 ------- ------- 23 Notes to Financial Statements (continued) - ------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1996, 1995, and 1994 Note F--Leases The Company leases its offices, retail facilities, and equipment under operating leases for terms expiring at various dates from 1997 to 2009. 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, 1996, are as follows: Operating Dollars in thousands Leases - ---------------------------------------------------------------- Year Ending January 31, 1997 .............................................. $12,416 1998 .............................................. 12,163 1999 .............................................. 11,378 2000 .............................................. 10,961 2001 .............................................. 9,184 Later years........................................ 20,846 ------- Total minimum lease commitments.................... $76,948 ------- Many of the Company's leases contain predetermined fixed escalations of the minimum rentals during the initial term. For these leases, the Company has recognized the related rental expense on a straight-line basis and has recorded the difference between the expense charged to income and amounts payable under the leases as deferred rent which is included in Other Liabilities. Some store leases contain renewal options for periods ranging up to five years. Most leases also provide for payment of operating expenses, real estate taxes, and for additional rent based on a percentage of sales. Net rental expense for all operating leases was as follows: Fiscal Year Ended January 31, ------------------------------- Dollars in thousands 1996 1995 1994 - -------------------------------------------------------------------------------- Minimum rentals ............................ $11,917 $11,094 $11,280 Percentage rentals and other charges ....... 5,093 4,540 4,262 ------- ------- ------- $17,010 $15,634 $15,542 ------- ------- ------- Note G--Related Party Transactions The Company purchased, for resale, gemstones and jewelry of $255,000 for the fiscal year ended January 31, 1994, from a vendor controlled by a minority stockholder and director of the Company. The purchase arrangement was terminated during 1993. In October 1993, the Company refinanced one of its existing mortgage loans with a loan of $300,000 from this minority stockholder and director. This loan balance of $256,000 was paid in full in December 1995. During 1993, the Company acquired the rights to manufacture certain products along with related tooling and equipment from a former director of the Company. A payment of $301,000 was made at the time of the agreement. The agreement provided for ongoing manufacturing assistance based on sales of certain products with a minimum fee of $25,000 per month through January 31, 1995, and a maximum total to be paid of $1,000,000. Under the agreement, the Company paid $640,000 and $260,000 for the fiscal years ended January 31, 1995 and 1994. In October 1994, the Company negotiated for the early settlement of all amounts and obligations due under this agreement, and no further payments are required. 24 Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1996, 1995, and 1994 Note H--Stockholders' Equity Under the Company's stock repurchase program, the Company is authorized by its Board of Directors to repurchase up to $1,600,000 of common stock. During 1995 and 1994, the Company repurchased 94,800 shares for $606,000 and 56,300 shares for $378,000 under this stock repurchase program. Through January 31, 1996, the Company has repurchased a total of 151,100 shares at an average price of $6.54 per share. In November 1994, ING Capital, a former lender, exercised its rights to purchase 413,000 shares of the Company's common stock under a warrant agreement at $2.80 per share, which represented the fair market value of the Company's stock at the date of the warrant issuance, plus an amount equal to 15% of the excess of the current market value of the Company's stock at the time of exercise over $5.00 per share. Under a separate resolution, the Board approved the repurchase of the outstanding shares owned by ING Capital. The net cash expended by the Company as a result of the exercise of the warrant and the subsequent repurchase of the shares was $1,000,000. Under the Company's 1985 Stock Option Plan, as amended, non-qualified options to purchase common stock are granted to officers, key employees and consultants. Options generally vest over a four to six year period from the date of the grant and are priced at fair market value at the date of the grant. During 1995, with stockholders' approval, the Company amended the 1985 Stock Option Plan to increase the number of shares of its common stock reserved for the issuance of additional stock options by 750,000 shares, limit the maximum number of shares any one individual may be granted per fiscal year, expand the eligibility provisions to allow individuals owning more than 25% of the Company's common stock to receive stock options and render the non-employee members of the Board ineligible to receive stock option grants under this plan. In 1995, the Company also implemented the 1994 Non-Employee Directors Stock Option Plan, as approved by stockholders, to allow for stock option grants of common stock to the non-employee members of the Board of Directors. Options will be immediately exercisable, vest over one year of Board service from the date of the grant, and are priced at fair market value at the date of the grant. Any shares purchased under the option will be subject to repurchase by the Company upon the optionee's cessation of Board service prior to vesting. At January 31, 1996, the Company has reserved 809,610 shares and 36,000 shares, under the 1985 Stock Option Plan and the 1994 Non-Employee Directors Stock Option Plan, respectively, for the granting of additional stock options. As of January 31, 1996 and 1995, total options exercisable under all plans were 624,000 and 569,000. The following table reflects the activity under these plans: 1994 Non-Employee Directors 1985 Stock Option Plan Stock Option Plan ---------------------- --------------------------- Options Average Price Options Average Price Outstanding Per Share Outstanding Per Share - -------------------------------------------------------------------------------- Balance at January 31, 1993 749,910 $1.96 Granted 104,500 $2.02 Exercised (42,470) $1.88 Cancelled (55,350) $1.75 -------- Balance at January 31, 1994 756,590 $1.99 Granted 370,100 $6.73 8,000 $6.88 Exercised (57,070) $1.94 Cancelled (113,950) $1.98 -------- ------ Balance at January 31, 1995 955,670 $3.85 8,000 $6.88 Granted 624,100 $5.65 6,000 $5.96 Exercised (62,640) $2.06 Cancelled (352,860) $6.80 -------- ------ Balance at January 31, 1996 1,164,270 $4.00 14,000 $6.55 --------- ------ 25 Notes to Financial Statements (continued) - ------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1996, 1995, and 1994 Note I--Loss Due to Store Closures and Earthquake The Company continually evaluates the profitability of each store location in order to determine whether or not to close stores. The costs related to the closing of stores which includes lease commitment buyouts and the write-off of leasehold improvements, for the fiscal year ended January 31, 1996, 1995, and 1994 were $62,000, $539,000, and $400,000. In fiscal year ended January 31, 1994, the Company closed its store in Sherman Oaks, California which was damaged by the Southern California earthquake, and recorded a loss of approximately $500,000. Note J--Commitments and Contingencies The Company is party to various legal proceedings arising from normal business activities. Management believes that the resolution of these matters will not have an adverse material effect on the Company's financial condition. Note K--Quarterly Financial Information (Unaudited)
Three Months Ended ----------------------------------------------- April 30, July 31, October 31, January 31, Dollars in thousands except per share amounts 1995 1995 1995 1995 - ------------------------------------------------------------------------------------------------ Revenues $ 37,696 $ 45,764 $ 41,335 $ 79,389 Expenses Cost of products 19,166 22,614 20,582 40,366 Buying and occupancy 4,903 5,199 5,370 5,842 Advertising and promotion 5,604 8,757 5,860 11,489 General, selling and administration 9,791 11,838 10,847 16,034 Loss due to store closures 62 Other income (expense) 213 213 (67) 20 Earnings (loss) before income tax (credit) (1,555) (1,931) (1,391) 5,616 Income taxes (credit) (622) (772) (556) 2,245 Net earnings (loss) $ (933) $ (1,159) $ (835) $ 3,371 Net earnings (loss per share(1) $ (0.11) $ (0.14) $ (0.10) $ 0.39
Three Months Ended ----------------------------------------------- April 30, July 31, October 31, January 31, Fiscal year ended January 31, 1995 1994 1994 1994 1994 - ------------------------------------------------------------------------------------------------ Revenues $ 30,716 $ 41,027 $ 39,225 $ 77,567 Expenses Cost of products 16,167 20,796 20,283 39,067 Buying and occupancy 4,771 4,778 4,791 5,211 Advertising and promotion 2,769 5,376 4,504 8,744 General, selling and administration 8,567 9,512 10,111 16,059 Loss due to store closures 427 112 Other income (expense) (94) (262) (256) 261 Earnings (loss) before income tax (credit) (1,652) 303 (1,147) 8,635 Income taxes (credit) (661) 122 (459) 3,454 Net earnings (loss) $ (991) $ 181 $ (688) $ 5,181 Net earnings (loss per share $ (0.12) $ (0.02) $ (0.08) $ 0.59 (1) Net earnings per share for the fiscal year and for quarters with net earnings are computed based on weighted average common shares outstanding which include common stock equivalents (stock options and stock warrant). Net loss per share for quarters with net losses is computed based solely on weighted average common shares outstanding. Therefore the net earnings (loss) per share for each quarter do not sum up to the earnings per share for the full fiscal year.
26 Corporate Data - ------------------------------------------------------------------------------- Sharper Image Corporation Board of Directors Corporate Information - ----------------------------------------------- ------------------------------- Richard Thalheimer Maurice Gregg Corporate Headquarters Founder Retail Financial 650 Davis Street Chairman of the Board Consultant San Francisco, CA 94111 and Chief Executive Telephone (415) 445-6000 Officer Lawrence Feldman FAX: (415) 445-1574 Chairman Emeritus Elyse Eng Thalheimer San Francisco Mart Transfer Agent and Registrar Alan Thalheimer J. Gary Shansby First Interstate Bank Retired Business Founder 345 California Street Executive The Shansby Group San Francisco, California 94104 Corporate Counsel Officers Brobeck, Phleger & Harrison LLP - ---------------------------------------------- Richard Thalheimer Greg Hickey One Market Plaza Founder Vice President Spear Street Tower Chairman of the Board Management San Francisco, California 94105 and Chief Executive Information Systems Officer Certified Public Accountants Deloitte & Touche LLP Craig Womack Barry Jacobsen 50 Fremont Street President Vice President San Francisco, CA 94105 Chief Operating Officer Distribution SEC Form 10-K Vincent Barriero Mary MacKenzie A copy of the Company's annual Senior Vice President Vice President report to the Securities and Chief Information Officer Human Resources Exchange Commission of Form Assistant Corporate 10-K (exclusive of exhibits) is Secretary Richard Mueller available without charge upon Vice President written request to: Shannon King Merchandising Investor Relations Senior Vice President The Sharper Image Merchandising Woodrow Nelson 650 Davis Street Vice President San Francisco, CA 94111 Sydney Klevatt Creative Services Senior Vice President Annual Meeting Marketing Charles Taylor Annual Meeting of Stockholders Vice President of The Sharper Image will be Tracy Wan TSI Design held on Monday, June 10, 1996, Senior Vice President at 2 pm at the World Trade Chief Financial Officer Joe Williams Center, Ferry Building, Yerba Vice President Buena Room, San Francisco, Jennifer Grellman Loss Prevention California Vice President Corporate Marketing - -------------------------------------------------------------------------------- Common Stock Market Prices and Dividend Policy The common stock of Sharper Image Fiscal Year 1995 High Low Corporation is traded in the Nasdaq First Quarter 7-5/8 5-1/2 National Market under the symbol SHRP. The Second Quarter 7-1/2 5-1/2 following table sets forth, for the Third Quarter 7-5/8 5-1/2 periods indicated, the range of high and Fourth Quarter 6-5/8 4-5/8 low prices reported for the common stock. The Company has not paid cash dividends to holders of its common stock. 27 EX-10.17 2 SPLIT DOLLAR AGREEMENT SPLIT-DOLLAR AGREEMENT THIS AGREEMENT is executed on this 13th day of October, 1995, effective as of May 17, 1995, by and among Sharper Image Corporation, a Delaware Corporation, with principal offices in the State of California (hereafter referred to as the "Corporation"), Richard J. Thalheimer, (hereafter referred to as the "Employee"), and Alan Thalheimer, Trustee of the Richard and Elyse Thalheimer Irrevocable Trust of 1995 (hereafter referred to as the "Owner"). (The Corporation, the Employee, and the Owner are hereafter collectively referred to as the "Parties" and individually as a "Party".) WHEREAS, the Employee is employed by the Corporation; and WHEREAS, the Employee wishes to provide life insurance protection for his family in the event of his death, under policies of life insurance (hereafter referred to collectively as the "Policies" and individually as a "Policy"), insuring his life and the life of his wife (hereafter jointly referred to as the "Insureds"), which Policies are described in Exhibit A. One of the Policies was issued by John Hancock Variable Life Insurance Company and the other was issued by The Manufacturer's Life Insurance Company of America (which companies hereafter are collectively referred to as the "Insurers" and individually as an "Insurer"); and WHEREAS, the Corporation is willing to pay a portion of the premiums due on the Policies as an additional employment benefit for the Employee, on the terms and conditions set forth in this agreement; and WHEREAS, the Owner is the owner of the Policies and, as such, possesses all incidents of ownership in and to the Policies; and WHEREAS, the Corporation wishes to have the Policies collaterally assigned to it by the Owner, in order to secure the repayment of the amounts that it will pay toward the premiums on the Policies; and WHEREAS, the parties intend by the collateral assignments that the Corporation shall receive only the right to such repayment, with the Owner retaining all other ownership rights in the Policies, as specified in this agreement. NOW, THERETOFORE, in consideration of the mutual promises contained in this agreement, the Parties agree as follows: 1. Purchase of Policies. The Owner has purchased the Policies from the Insurers in the total face amount of $20,000,000. The Parties have taken all necessary action to cause the Insurers to issue the Policies, and shall take any further action that may be necessary to cause the Policies to conform to the provisions of this Agreement. The Parties -1- agree that the Policies shall be subject to the terms and conditions of this Agreement and of the collateral assignments filed with the Insurers relating the Policies. 2. Ownership of Policies a. Owner is Sole and Absolute Owner. The Owner shall be the sole and absolute owner of each of the Policies. Except as otherwise provided in this agreement, the Owner may exercise all ownership rights granted by the terms of a Policy to its owner. b. Sole Right of Corporation is to be Repaid. It is the intention of the parties to this agreement and to the collateral assignments executed by the Owner to the Corporation in connection with this agreement that the Owner shall retain all rights that the Policies grant to the owner of the Policies and that the sole right of the Corporation shall be to be repaid the amounts that it has paid toward the premiums on the Policies. Specifically, but without limitation, the Corporation shall neither have nor exercise any right as collateral assignee of either or both of the Policies that could in any way defeat or impair the Owner's right to receive the cash surrender value or the death proceeds of either or both of the Policies in excess of the amounts due the Corporation under this agreement. All provisions of this agreement and of the collateral assignments shall be construed so as to carry out this intention. 3. Payment of Premiums a. Owner's Required Contribution. Thirty days before the due date of each Policy premium, the Corporation shall notify the Owner and the Employee of the exact amount due from the Owner under this agreement (hereafter the "Owner's Required Contribution"), which shall be an amount equal to the annual cost of current life insurance protection on the joint lives of the Insureds, measured by the U.S. Life Table 38, while both are alive and thereafter measured by the lower of the PS 58 rate, set forth in Revenue Ruling 55-747 (or the corresponding applicable provision of any future Revenue Ruling), or the current published premium rate of the Insurer that issued that Policy for annually renewable term insurance for standard risks. Either the Owner or the Employee, on behalf of the Owner, shall pay the Owner's Required Contribution to the Corporation before the premium due date. If neither the Owner nor the Employee makes a timely payment of the Owner's Required Contribution, the Corporation, in its sole discretion, may elect to pay the Owner's Required Contribution, which shall be recovered by the Corporation as provided herein. b. Payment of Premium by Corporation. On or before the due date of each Policy premium, or within the grace period provided in that Policy, the Corporation shall pay the full amount of the premium to the Insurer that issued that Policy, the Corporation shall pay the full amount of the premium to the Insurer that issued that Policy, and shall, upon request, promptly furnish the Owner and Employee evidence of timely payment of the premium. Except with written consent of the Owner, the Corporation shall not pay less than the planned periodic premium, but may, in its discretion, pay more than the planned periodic premium or make other premium payments on a Policy, subject to acceptance of -2- that payment by the Insurer. The Corporation shall annually furnish the Employee a statement of the amount of income reportable by the Employee for federal and state income tax purposes, if any, as a result of the insurance protection provided the Owner as the Policy beneficiary. For purposes of computing the amount to be repaid to the Corporation under this agreement, the Corporation shall not be treated as having paid any portion of a premium that is paid to the Corporation by the Owner or the Employee pursuant to the preceding paragraph. c. Maximum Annual Payment by Corporation. Despite anything in the preceding paragraph to the contrary, in no event shall the Corporation be required to pay in any year total premiums in excess of the sum of Two Hundred Eighty Five Thousand Dollars ($285,000) plus the total amounts paid to the Corporation in that year under this agreement by the Owner or the Employee, or both. 4. Collateral Assignment. To secure the repayment to the Corporation of the amount of the Policy premiums paid by it under this agreement, the Owner has, on the date of this agreement, assigned each of the Policies to the Corporation as collateral. The collateral assignments specifically provide that the sole right of the Corporation thereunder is to be repaid the amounts it has paid towards premiums on the Policies. Repayment shall be made from the cash surrender value of a Policy (as defined in that Policy) if this agreement is terminated or if the Owner surrenders or cancels that Policy, or from the death proceeds of that Policy if both Insureds should die while that Policy and this agreement remain in force. In no event shall the Corporation have any right to borrow against or make withdrawals from either or both of the Policies, to surrender or cancel either or both of the Policies, nor to take any other action that would impair or defeat the rights of the Owner in either or both of the Policies. The collateral assignments of the Policies to the Corporation under this agreement shall not be terminated, altered, or amended by the Owner while this agreement is in effect. The Parties agree to take all action necessary to cause the collateral assignments to conform to the provisions of this Agreement. 5. Rights in Policies a. Owner May Not Jeopardize Corporation's Right to be Repaid. Except as otherwise provided in this agreement, the Owner shall take no action with respect to either or both of the Policies that would in any way compromise or jeopardize the Corporation's right to be repaid the amounts it has paid toward premiums on the Policies while this agreement is in effect. b. Borrowing by Owner. The Owner may pledge or assign either or both of the Policies, subject to the terms and conditions of this agreement, in order to secure a loan from an Insurer or from a third party in an amount that shall not exceed the cash surrender value of that Policy (as defined in that Policy) as of the date to which premiums have been paid, less the amount paid toward the premiums on that Policy by the Corporation. -3- Interest charges on any such loan shall be the responsibility of and shall be paid by the Owner. c. Choice of Investment Options. The Owner shall have the sole authority to direct the manner in which the policy amount established pursuant to the terms of a Policy shall be allocated among the various investment options available from time to time under that Policy and to change the allocation from time to time, as provided for in that Policy. d. Gift of Interest in Policy. The Owner may give either or both of the Policies, or any undivided portion thereof, to one or more donees, subject to the Corporation's right to be repaid the amounts due it under this agreement and the collateral assignments of the Policies as security. e. Right to Surrender. The Owner shall have the sole right to surrender or cancel a Policy, and to receive the full cash surrender value of a Policy directly from the Insurer. Upon the surrender or cancellation of a Policy, the Corporation shall have the unqualified right to receive a portion of the cash surrender value equal to the total amount of the premiums paid by it under this agreement. Immediately upon receipt of the cash value of a Policy from an Insurer, the Owner shall pay to the Corporation the portion of the cash value to which it is entitled under this agreement, shall retain the balance, if any, and this agreement shall terminate. 6. Collection of Death Benefit a. Cooperation in Collection of Death Benefit. Upon the death of the survivor of the Insureds, the Corporation and the Owner shall cooperate to take whatever action is necessary to collect the death benefit provided under the Policies. When that benefit has been collected and paid in accordance with the provisions of this agreement, this agreement shall terminate. b. Interests of Corporation and Owner in Death Benefit. Upon the death of the survivor of the Insureds, with respect to each Policy, the Corporation shall have the unqualified right to receive a portion of the death benefit of that Policy equal to the total amount of the premiums paid by it with respect to that Policy. The balance of the death benefit provided under each Policy, if any, shall be paid directly to the Owner, in the manner and in the amount or amounts provided in the beneficiary designation provision of that Policy. In no event shall the amount payable to the Corporation under this agreement with respect to any Policy exceed the proceeds of that Policy payable as a result of the maturity of that Policy as a death claim. No amount shall be paid from the death benefit of a Policy to the Owner until the full amount due the Corporation under this agreement with respect to that Policy has been paid. The Parties agree that the beneficiary designation provisions of the Policies shall conform to the provisions of this agreement. -4- c. Interests of Corporation and Owner in Refund of Premiums. Despite any provision of this agreement to the contrary, in the event that, for any reason whatsoever, no death benefit is payable under a Policy upon the death of the survivor of the Insureds and in lieu thereof the Insurer refunds all or any part of the premiums paid for that Policy, the Corporation and the Owner shall have the unqualified right to share such premiums based on their respective cumulative contributions thereto. 7. Termination of Agreement During Lifetime of Insureds a. Events Causing Termination. This agreement shall terminate, while either of the Insureds is living, without notice, upon the occurrence of any of the following events: (1) total cessation of the Corporation's business; (2) bankruptcy, receivership or dissolution of the Corporation; (3) termination of the Employee's employment by the Corporation, other than by reason of his death; or (4) failure of both the Owner and the Employee to timely pay to the Corporation the Owner's Required Contribution unless the Corporation elects to make such payment on behalf of the Owner, as provided in this agreement. b. Termination at Option of Owner. In addition, the Owner may terminate this agreement, while either of the Insureds is living and while no premium under any Policy is overdue, by written notice to the other Parties. Such termination shall be effective as of the date of the notice. 8. Disposition of Policies on Termination of Agreement During Lifetime of Insureds a. Option of Owner to Obtain Release of Collateral Assignments. For 60 days after the date of the termination of this agreement during the lifetime of the Insureds, the Owner shall have the option of obtaining the Corporation's release of the collateral assignments of either or both of the Policies. To obtain such release with respect to a Policy, the Owner shall repay to the Corporation the total amount of the premium payments made by the Corporation under this agreement with respect to that Policy. Upon receipt of that amount, the Corporation shall release the collateral assignment of that Policy, by executing and delivering an appropriate instrument of release. b. Rights of Corporation if Owner Does Not Exercise Option. If the Owner fails to exercise its option with respect to a Policy within the 60 day period, then the Corporation shall have the right to: (1) Receive that Policy, which right shall be exercised by the Corporation, by written notice to the Owner. Upon receipt of the Corporation's written notice, the Owner shall execute any document or documents required by the Insurer to transfer the interest of the Owner in the Policy to the Corporation; or -5- (2) Enforce its right to be repaid the total amount of the premium payments made by the Corporation under this agreement with respect to that Policy (the "Repayment Amount") from the cash surrender value of that Policy under the collateral assignment of that Policy, which right shall be exercised by the Corporation, if at all, in accordance with the terms of the collateral assignment. If the Repayment Amount is greater than the cash surrender value of that Policy, then, upon receipt of written notice of that fact, the Owner shall be liable to and shall pay to the Corporation an amount equal to the difference. If for any reason whatsoever the Owner fails to pay to the Corporation the entire difference between the Repayment Amount and the cash surrender value, the Employee shall be liable to and shall pay to the Corporation any amount of the difference between the Repayment Amount and the cash surrender value that is not paid to the Corporation by the Owner. If the cash surrender value of that Policy exceeds the Repayment Amount, the excess shall be paid to the Owner. Upon the Corporation's receipt of a Policy or the Repayment Amount, whichever is applicable, and upon the Owner's receipt of any excess of the cash surrender value of a Policy over the Repayment Amount, if applicable, all interest in that Policy of the Owner and the Owner's successors, assigns or beneficiaries under the terms of that Policy or under this agreement, or both, shall terminate. 9. Insurers Not Parties. Each Insurer shall be fully discharged from its obligations under the Policy issued by it by payment of the death benefit of that Policy to the beneficiary or beneficiaries named in that Policy, subject to the terms and conditions of that Policy. In no event shall any Insurer be considered a party to this agreement, or any modification or amendment of this agreement. No provision of this agreement, nor of any modification or amendment of this agreement, shall in any way be construed as enlarging, changing, varying, or in any other way affecting the obligations of any Insurer as expressly provided in the Policy issued by that Insurer, except to the extent that the provisions of this agreement are made a part of that Policy by the collateral assignment executed by the Owner and filed with that Insurer in connection with this agreement. 10. Named Fiduciary, Determination of Benefits, Claims Procedure and Administration a. Corporation is Named Fiduciary. The Corporation is hereby designated as the named fiduciary under this agreement. The named fiduciary shall have authority to control and manage the operation and administration of this agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this agreement. b. Claims Procedure (1) A person who believes that he or she is being denied a benefit to which he or she is entitled under this Agreement (hereafter referred to as a "Claimant") -6- may file a written request for that benefit with the Corporation, setting forth his or her claim. The request must be addressed to the Secretary of the Corporation at its then principal place of business. (2) Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within 90 days and shall deliver that reply within that period. The Corporation may, however, extend the reply period for an additional ninety days for reasonable cause. (3) If the claim is denied in whole or in part, the Corporation shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) the specific reason or reasons for the denial; (b) the specific reference to pertinent provisions of this agreement on which the denial is based; (c) a description of any additional material or information necessary for the Claimant to perefect his or her claim and an explanation why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under paragraph 10.b.(4) and for review under paragraph 10.b.(5). (4) Within 60 days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Secretary of the Corporation review the determination of the Corporation. The request must be addressed to the Secretary of the Corporation at its principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the claimant does not request a review by the Secretary of the Corporation's determination within that 60 day period, the Claimant shall be barred and estopped from challenging the Corporation's determination. (5) Within 60 days after the Secretary's receipt of a request for review, he or she will review the Corporation's determination. After considering all materials presented by the Claimant, the Secretary will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this agreement on which the decision is based. If special circumstances require that the 60 day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than 120 days after receipt of the request for review. 11. Amendment. This agreement may not be amended, altered, or modified, except by a document signed by the Parties, or their respective successors or assigns, and may not otherwise be terminated except as provided in this agreement. -7- 12. Binding Effect. This agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns, and the Employee, the Owner, and their respective successors, assigns, heirs, executors, administrators and beneficiaries. 13. Notice. Any notice, consent or demand required or permitted to be given under the provisions of this agreement shall be in writing, and shall be signed by the Party giving or making the notice, consent or demand. If that notice, consent or demand is mailed to a Party, it shall be sent by United States certified mail, postage prepaid, addressed to that Party's last known address as shown on the records of the Corporation. The date of such mailing shall be deemed the date of notice, consent, or demand. 14. Governing Law. This agreement, and the rights of the Parties under this agreement, shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Parties have executed multiple original copies of this agreement on the date written in the introductory paragraph. Sharper Image Corporation By: /s/ Tracy Y. Wan --------------------------- Secretary /s/ Richard J. Thalheimer --------------------------- Richard J. Thalheimer /s/ Alan Thalheimer --------------------------- Alan Thalheimer, Trustee of the Richard and Elyse Thalheimer Irrevocable Trust of 1995 EX-10.18 3 ASSIGNMENTS OF LIFE INSURANCE EXHIBIT A The following life insurance policies are subject to the attached Split-Dollar Agreement 1. Insurer: John Hancock Variable Life Insurance Company Insured: Richard J. Thalheimer and Elyse E. Thalheimer Policy Number: 2002937 Face Amount: $10,000,000 Date of Issue: May 18, 1995 1. Insurer: The Manufacturers Life Insurance Company of America Insured: Richard J. Thalheimer and Elyse E. Thalheimer Policy Number: 5723961-8 Face Amount: $10,000,000 Date of Issue: May 25, 1995 ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL A. FOR VALUE RECEIVED, Alan Thalheimer, as Trustee of the Richard and Elyse Thalheimer Irrevocable Trust of 1995, (hereinafter the "Owner") hereby assigns, transfers and sets over to Sharper Image Corporation, a Delaware corporation, with principal offices in the State of California, its successors and assigns (hereinafter the "Assignee"), the following specific rights (and only those specific rights) in and to policy number 5723961-8 issued by The Manufacturers Life Insurance Company of America (hereinafter the "Insurer") and any supplementary contract or contracts issued in connection therewith (said policy and any such contracts hereinafter the "Policy"), insuring the lives of Richard J. Thalheimer and Elyse E. Thalheimer, (hereinafter the "Insureds"), subject to all the terms and conditions of the Policy and to all superior liens, if any, which the Insurer may have against the Policy. The Owner, by this Assignment, and the Assignee, by acceptance of the assignment of the Policy to it hereunder, agree to the terms and conditions contained herein. B. This assignment is made, and the Policy is to be held as collateral security for, all liabilities of the Owner to the Assignee, now existing or hereafter arising under and pursuant to that certain Split-Dollar Agreement, by and between the Owner, the Assignee, and Richard J. Thalheimer, dated May 17, 1995 (hereinafter the "Agreement"). The Owner reserves all rights and powers in and to the Policy, except those specific, limited rights granted in the Policy to the Assignee hereby, as security for the liabilities of the Owner to the Assignee under the Agreement. C. It is expressly agreed that the Assignee's interest in the Policy under and by virtue of this Assignment shall be limited to the following specific rights, and no others; (a) the right to be paid the amount due it under the Agreement by recovering said amount directly from the Insurer out of the net death proceeds of the Policy upon the death of the Insured; and (b) the right to be paid the amount due it under the Agreement by recovering said amount from the net cash surrender proceeds of the Policy in the event the Policy is surrendered or canceled by the Owner. The Assignee shall have no other rights or powers in and to the Policy as a result of the assignment to it hereunder, and specifically shall not have the right or power to borrow against or obtain loans or advances on the Policy, make withdrawals from the Policy, nor cancel or surrender the Policy. D. Notwithstanding this Assignment, the Owner shall specifically retain all incidents of ownership in and to the Policy, including, but not limited to: (a) the sole right to cancel or surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; (b) the sole right to exercise any and all options contained in the Policy with respect thereto; (c) the sole right to exercise all non-forfeiture rights permitted by the terms of the Policy or allowed by the Insurer and to receive all benefits and advantages derived therefrom; (d) the sole right to designate and change the beneficiary of the Policy (for any amount in excess of the amount due the Assignee under the Agreement); (e) the sole right to elect any optional mode of -1- settlement permitted by the Policy or allowed by the Insurer; (f) the sole right to borrow against, obtain loans or advances on, or make withdrawals from the Policy; (g) the sole right to assign the Policy (subject to this Assignment and the Agreement); (h) the sole right to elect and to change the investment options of the Policy; and (i) the sole right to collect directly from the Insurer that portion of the net death proceeds of the Policy in excess of those proceeds payable to the Assignee under the Agreement; provided, however, that all of the foregoing rights retained by the Owner in the Policy shall be subject to the terms and conditions of the Agreement. E. The Assignee agrees with the Owner as follows: (a) any balance of any amount received by the Assignee hereunder from the Insurer remaining after payment of the then existing liabilities of the Owner to the Assignee under the Agreement shall be paid by the Assignee to the persons entitled thereto under the terms of the Policy had this Assignment not been executed; and (b) if the Policy is in the possession of the Assignee, the Assignee will, upon request, forward the Policy to the Insurer, without unreasonable delay, for endorsement of any designation or change of beneficiary, any election of optional mode of settlement, or the exercise of any other right reserved by the Owner hereunder. F. Notwithstanding anything in this Assignment to the contrary, the Insurer shall be under no obligation to monitor the obligation of the Assignee hereunder to pay to the persons entitled thereto any amounts received from the Insurer remaining after payment of the then existing liabilities of the owner to the Assignee under the Agreement; the Insurer shall have no obligation or liability to any person to entity if the Assignee fails to pay such amounts as required hereunder. G. The Insurer is hereby authorized to recognize, and is protected in recognizing, the Assignee's claims to amounts due it hereunder without investigating the validity of its claim thereto, the reason for any action taken by the Assignee, the validity or accuracy of the amount of any of the liabilities of the Owner to the Assignee under the Agreement, the existence of any default therein, the giving of any notice required herein, or the application to be made by the Assignee of any amounts to be paid to the Assignee. The sole receipt of the Assignee for any amounts received by it shall be a full discharge and release therefor to the Insurer. H. The Assignee shall be under no obligation to the Insurer to pay any premium on the Policy or the principal of or interest on any loans or advances on the Policy, whether or not obtained by the Assignee, or any other charges on the Policy. I. The Insurer shall be fully protected in recognizing the request made by the Owner for cancellation or surrender of the Policy, with or without the consent of the Assignee, and upon such cancellation or surrender, the Policy shall be terminated and be of no further force or effect. -2- J. Upon the full payment of the liabilities of the Owner to the Assignee pursuant to the Agreement, the Assignee shall promptly release this Assignment and thereby reassign to the Owner all specific rights in the policy included herein. K. The Assignee may take or release other security, may grant extensions, renewals or indulgences with respect to the obligations of the Owner to the Assignee under the Agreement, or may apply the proceeds of the Policy hereby assigned or any amount received on account of the Policy by the exercise of any right permitted under this assignment, without resorting to or regard to other security for such obligations, if any. L. In the event of any conflict between the provisions of this Assignment and the provisions of the Agreement with respect to the Policy or the Assignee's rights therein, the provisions of this Assignment shall prevail. M. The Owner declares that no proceedings in bankruptcy are pending against the Owner, and that the Owner's property is not subject to any assignment for the benefit of the creditors of the Owner. Executed this 13th day of October, 1995. /s/ Alan Thalheimer ----------------------------------------- Alan Thalheimer, Trustee of the Richard and Elyse Thalheimer Irrevocable Trust of 1995 -3- ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL A. FOR VALUE RECEIVED, Alan Thalheimer, as Trustee of the Richard and Elyse Thalheimer Irrevocable Trust of 1995, (hereinafter the "Owner") hereby assigns, transfers and sets over to Sharper Image Corporation, a Delaware corporation, with principal offices in the State of California, its successors and assigns (hereinafter the "Assignee"), the following specific rights (and only those specific rights) in and to policy number 20002937 issued by John Hancock Variable Life Insurance Company (hereinafter the "Insurer") and any supplementary contract or contracts issued in connection therewith (said policy and any such contracts hereinafter the "Policy"), insuring the lives of Richard J. Thalheimer and Elyse E. Thalheimer, (hereinafter the "Insureds"), subject to all the terms and conditions of the Policy and to all superior liens, if any, which the Insurer may have against the Policy. The Owner, by this Assignment, and the Assignee, by acceptance of the assignment of the Policy to it hereunder, agree to the terms and conditions contained herein. B. This assignment is made, and the Policy is to be held as collateral security for, all liabilities of the Owner to the Assignee, now existing or hereafter arising under and pursuant to that certain Split-Dollar Agreement, by and between the Owner, the Assignee, and Richard J. Thalheimer, dated May 17, 1995 (hereinafter the "Agreement"). The Owner reserves all rights and powers in and to the Policy, except those specific, limited rights granted in the Policy to the Assignee hereby, as security for the liabilities of the Owner to the Assignee under the Agreement. C. It is expressly agreed that the Assignee's interest in the Policy under and by virtue of this Assignment shall be limited to the following specific rights, and no others; (a) the right to be paid the amount due it under the Agreement by recovering said amount directly from the Insurer out of the net death proceeds of the Policy upon the death of the Insured; and (b) the right to be paid the amount due it under the Agreement by recovering said amount from the net cash surrender proceeds of the Policy in the event the Policy is surrendered or canceled by the Owner. The Assignee shall have no other rights or powers in and to the Policy as a result of the assignment to it hereunder, and specifically shall not have the right or power to borrow against or obtain loans or advances on the Policy, make withdrawals from the Policy, nor cancel or surrender the Policy. D. Notwithstanding this Assignment, the Owner shall specifically retain all incidents of ownership in and to the Policy, including, but not limited to: (a) the sole right to cancel or surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; (b) the sole right to exercise any and all options contained in the Policy with respect thereto; (c) the sole right to exercise all non-forfeiture rights permitted by the terms of the Policy or allowed by the Insurer and to receive all benefits and advantages derived therefrom; (d) the sole right to designate and change the beneficiary of the Policy (for any amount in excess of the amount due the Assignee under the Agreement); (e) the sole right to elect any optional mode of -1- settlement permitted by the Policy or allowed by the Insurer; (f) the sole right to borrow against, obtain loans or advances on, or make withdrawals from the Policy; (g) the sole right to assign the Policy (subject to this Assignment and the Agreement); (h) the sole right to elect and to change the investment options of the Policy; and (i) the sole right to collect directly from the Insurer that portion of the net death proceeds of the Policy in excess of those proceeds payable to the Assignee under the Agreement; provided, however, that all of the foregoing rights retained by the Owner in the Policy shall be subject to the terms and conditions of the Agreement. E. The Assignee agrees with the Owner as follows: (a) any balance of any amount received by the Assignee hereunder from the Insurer remaining after payment of the then existing liabilities of the Owner to the Assignee under the Agreement shall be paid by the Assignee to the persons entitled thereto under the terms of the Policy had this Assignment not been executed; and (b) if the Policy is in the possession of the Assignee, the Assignee will, upon request, forward the Policy to the Insurer, without unreasonable delay, for endorsement of any designation or change of beneficiary, any election of optional mode of settlement, or the exercise of any other right reserved by the Owner hereunder. F. Notwithstanding anything in this Assignment to the contrary, the Insurer shall be under no obligation to monitor the obligation of the Assignee hereunder to pay to the persons entitled thereto any amounts received from the Insurer remaining after payment of the then existing liabilities of the owner to the Assignee under the Agreement; the Insurer shall have no obligation or liability to any person to entity if the Assignee fails to pay such amounts as required hereunder. G. The Insurer is hereby authorized to recognize, and is protected in recognizing, the Assignee's claims to amounts due it hereunder without investigating the validity of its claim thereto, the reason for any action taken by the Assignee, the validity or accuracy of the amount of any of the liabilities of the Owner to the Assignee under the Agreement, the existence of any default therein, the giving of any notice required herein, or the application to be made by the Assignee of any amounts to be paid to the Assignee. The sole receipt of the Assignee for any amounts received by it shall be a full discharge and release therefor to the Insurer. H. The Assignee shall be under no obligation to the Insurer to pay any premium on the Policy or the principal of or interest on any loans or advances on the Policy, whether or not obtained by the Assignee, or any other charges on the Policy. I. The Insurer shall be fully protected in recognizing the request made by the Owner for cancellation or surrender of the Policy, with or without the consent of the Assignee, and upon such cancellation or surrender, the Policy shall be terminated and be of no further force or effect. -2- J. Upon the full payment of the liabilities of the Owner to the Assignee pursuant to the Agreement, the Assignee shall promptly release this Assignment and thereby reassign to the Owner all specific rights in the policy included herein. K. The Assignee may take or release other security, may grant extensions, renewals or indulgences with respect to the obligations of the Owner to the Assignee under the Agreement, or may apply the proceeds of the Policy hereby assigned or any amount received on account of the Policy by the exercise of any right permitted under this assignment, without resorting to or regard to other security for such obligations, if any. L. In the event of any conflict between the provisions of this Assignment and the provisions of the Agreement with respect to the Policy or the Assignee's rights therein, the provisions of this Assignment shall prevail. M. The Owner declares that no proceedings in bankruptcy are pending against the Owner, and that the Owner's property is not subject to any assignment for the benefit of the creditors of the Owner. Executed this 13th day of October, 1995. /s/ Alan Thalheimer ----------------------------------------- Alan Thalheimer, Trustee of the Richard and Elyse Thalheimer Irrevocable Trust of 1995 -3- EX-11.1 4 EXHIBIT 11.1 Exhibit 11.1 SHARPER IMAGE CORPORATION STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended January 31, 1996 January 31, 1995 January 31, 1994 ---------------- ----------------- ---------------- Net Earnings ($000) $ 444 $ 3,683 $ 1,763 ========== ========== ========== Average Shares of Common Stock Outstanding During the Period 8,249,259 8,294,378 8,248,159 Add: Incremental Shares from Assumed Exercise of Stock Options (primary) 432,819 604,911 435,770 ---------- ---------- ---------- 8,682,078 8,899,289 8,683,929 ========== ========== ========== Primary Earnings Per Share $ 0.05 $ 0.41 $ 0.20 ========== ========== ========== Average Shares of Common Stock Outstanding During the Period 8,249,259 8,294,378 8,248,159 Add: Incremental Shares from Assumed Exercise of Stock Options (fully-diluted) 432,819 622,236 527,678 ---------- ---------- ---------- 8,682,078 8,916,614 8,775,837 ========== ========== ========== Fully-Diluted Earnings Per Share $ 0.05 $ 0.41 $ 0.20 ========== ========== ==========
EX-24.1 5 INDEPENDENT AUDITOR'S REPORT Deloitte & Touche LLP - ----------- -------------------------------------------------------------- 50 Fremont Street Telephone: (415) 247-4000 San Francisco, California 94105-2230 Facsimile: (415) 247-4329 INDEPENDENT AUDITORS' REPORT ON SCHEDULE Board of Directors and Stockholders of Sharper Image Corporation: We have audited the financial statements of Sharper Image Corporation as of January 31, 1996 and 1995, and for each of the three years in the period ended January 31, 1996, and have issued our report thereon dated March 22, 1996; such financial statements and report are included in your 1995 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Sharper Image Corporation, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP March 22, 1996 - ----------------- Deloitte Touche Tohmatsu International - ----------------- EX-24.2 6 INDEPENDENT AUDITORS' CONSENT Deloitte & Touche LLP - ----------- -------------------------------------------------------------- 50 Fremont Street Telephone: (415) 247-4000 San Francisco, California 94105-2230 Facsimile: (415) 247-4329 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 133-17255 and No. 33-80504 of Sharper Image Corporation on Forms S-8 of our report dated March 22, 1996, appearing in this Annual Report on Form 10-K of Sharper Image Corporation for the year ended January 31, 1996. /s/ Deloitte & Touche LLP April 25, 1996 - ----------------- Deloitte Touche Tohmatsu International - ----------------- EX-27 7 FINANCIAL DATA SCHEDULE
5 0000811696 SHARPER IMAGE CORPORATION 1,000 US DOLLARS 12-MOS JAN-31-1996 FEB-01-1995 JAN-31-1996 1 12,476 0 4,436 0 24,313 47,936 50,998 (30,272) 70,456 30,703 0 82 0 0 32,676 70,456 202,400 204,184 102,728 101,096 (159) 0 (220) 739 295 444 0 0 0 444 0.05 0.05
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