-----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, PBqI6a7AynMundfcfFAhs3hd7DtJZOrl2JR3GXRDesCLmsnJdtBu7dY6gyRpvkY+ qNueVHjqoPrQYXUdLS1Jnw== 0000950005-97-000472.txt : 19970502 0000950005-97-000472.hdr.sgml : 19970502 ACCESSION NUMBER: 0000950005-97-000472 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970430 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: 97592530 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 For the Fiscal Year Ended January 31, 1997 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______ Commission File Number 33-12755 SHARPER IMAGE CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-2493558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 Davis Street, San Francisco, California 94111 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (415) 445-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by non-affiliates of the Registrant as of April 14,1997 was $10,057,621 The number of shares of Common Stock, with $.01 par value, outstanding on April 14, 1997 was 8,266,940 shares. Documents incorporated by reference: Portions of Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 1997 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 9, 1997 are incorporated by reference into Part III of this report. 1 PART 1 This Annual Report on Form 10-K and the documents incorporated herein by reference of Sharper Image Corporation (referred to as the "Company" or "The Sharper Image") contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by the Company's management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions, are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Factors Affecting Future Operating Results" on pages 12 through 14, as well as those noted in the documents incorporated herein by reference. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the statements set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. Item 1. Business Overview Sharper Image Corporation is a specialty retailer which introduces and sells quality, innovative and entertaining products through The Sharper Image stores and monthly mail-order catalog, and other marketing channels. In the past year, the Company also marketed through two new concepts. The Sharper Image Home Collection had its initial mail-order test in January 1996, and the Sharper Image SPA Collection concept was marketed through mail-order and stores. As discussed below, after critical evaluation of the operating results and future prospects of the SPA Collection division, management made the decision to close the SPA Collection division. 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, 1997, the Company operated 82 The Sharper Image stores in the United States and licensees operate 5 stores internationally and 2 airport stores in the United States. The Company's aggregate sales from its stores have grown substantially since the beginning of fiscal 1984 and have increased from 3% of total revenues in fiscal 1983 to 71% of total revenues for the fiscal year ended January 31, 1997 (fiscal 1996). The typical Sharper Image stores range from approximately 2,200 to 2,500 selling square feet in size, with several larger size stores that have 3,000 to 5,000 selling square feet. The Company also has two additional retail formats, Sharper Image Design stores and airport shops. These formats are discussed under "Store Operations" and "Licensed Operations". During fiscal 1996, the Company opened 3 new stores of The Sharper Image concept and format and 3 new Sharper Image Design stores. Two under-performing Sharper Image stores were closed. The Company is planning to open one to three new stores during the fiscal year ending January 31, 1998 (fiscal 1997). Management's goal is to grow the number of stores by 10% to 15% during the next two fiscal years. However, there can be no assurances that the Company will meet this goal. See "Factors Affecting Future Operating Results." Lease terms for certain of the existing The Sharper Image store locations will be maturing during 2 fiscal 1997 and such locations may be relocated or closed. The Company employs over 1,200 employees in twenty-eight states. In addition to serving as the primary advertising vehicle for the Company's stores, The Sharper Image Catalog generated about 80% of its total mail-order sales (approximately 26% of total revenues) in fiscal 1996. The monthly color catalog which ranged from 68 to 124 pages in fiscal 1996, is recognized for creative excellence within the catalog industry. Worldwide, the Company mailed approximately 35 million of The Sharper Image Catalogs in fiscal 1996. The Company launched the test mailing of the Sharper Image Home Collection catalog in January 1996. Management plans to focus its efforts in growing this concept in fiscal 1997 and will continue to evaluate the operating results and potential of this concept. The Company is known for its varied product mix and a merchandising philosophy focusing on quality products which are unique, innovative, entertaining, and useful that are developed by The Sharper Image, exclusive to The Sharper Image, or in limited distribution. In product lines where the Company competes directly with other retailers, it chooses to sell the best version of the product--maximizing features, uniqueness, and value. The Company is frequently sought after by manufacturers and inventors to launch technologically-advanced and fun products. The Company's business is highly seasonal, with sales peaks at the holiday periods of Father's Day and Christmas. See "Seasonality". Historically, the typical Sharper Image demographic mix has been upper income, approximately 65% male, 35% female. In addition to its primary businesses, The Sharper Image leverages its name and reputation through a corporate marketing program, wholesale sales of Sharper Image brand products, which included Sharper Image Design proprietary products and private-labeled products, and a product licensing program with selected businesses. Wholesale sales are made primarily to fine department stores and to international retailers. The most leading-edge marketing opportunity for the Company is the Internet. The Company's The Sharper Image Catalog is on the World Wide Web at http://www.sharperimage.com. Other electronic medium include America Online's Marketplace and Time-Warner's Dreamshop at http://www.dreamshop.com. Although it is too early to predict the potential of this sales medium and there is no guarantee of the possibility of success, the Company is at the forefront of this electronic marketplace and hopes to be a leader when this market begins to reach full acceptance. See "Factors Affecting Future Operating Results". During fiscal 1996, 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 this sales channel is still in its early stage and a small part of total revenues, the wholesale sales group made sales gains in fiscal 1996. 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 Company launched the test mailings of the Sharper Image SPA Collection (SPA) catalog in February 1995. During the second half of fiscal 1995, the Company also opened four SPA stores to test this retail concept. During fiscal 1996, in its second year of operations, the Company mailed more than 7 million SPA catalogs and opened two additional SPA stores. In late fiscal 1996, management reviewed the operating results for the two-year period, and the future potential of this concept, and determined that it would be prudent for the Company to re-direct resources to the higher growth opportunities of the core business of The Sharper Image. As a result, the decision was made to close the operations of the SPA catalog and the six SPA stores. See "Factors Affecting Future Operating Results". 3 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 1996, the Company mailed approximately 35 million of The Sharper Image Catalogs to over 5 million different individuals. Circulation and number of pages of The Sharper Image Catalog is under continual review to balance the costs of mailing the catalogs with the revenues generated. The mailings increase at Father's Day and Christmas reflecting the seasonal nature of the Company's business. In fiscal 1995, the Company 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 rate increases in paper that took place in fiscal 1995 continued to have an upward impact on advertising expense for the first half of fiscal 1996. The Company has experienced lower paper prices since July 1996. The Company has implemented certain actions designed to lower the costs of producing the catalog to lessen the impact of the paper and postage increases, including reducing the number of pages per catalog, trimming the dimensions of the catalogs and using a lighter weight of paper. As a result of these changes, advertising and promotion expenses for fiscal 1996 were substantially lower than for fiscal 1995. There have been two moderate paper price increases since the beginning of fiscal 1997. The Company continually reviews the cost and effectiveness of its advertising efforts. See "Factors Affecting Future Operating Results". 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 1996, The Sharper Image Catalog typically contained from 68 to 76 pages for non-peak months and between 84 and 124 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. In October 1996, the Company re-designed The Sharper Image catalog to update the look of the catalog to distinguish the Company from other specialty retailers. The new catalog design uses dramatic visuals and humorous and clever product descriptions. The new catalog design features products more prominently, but includes a fewer number of products, which ranged between 200 to 350 products in the fourth quarter of fiscal 1996. During fiscal 1996, 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 fiscal 1997. In addition, from time to time, the Company has also produced certain specialty catalogs to test new catalog concepts. To enhance the effectiveness of the catalog, the Company's in-house staff utilizes statistical evaluation and selection techniques to determine which segments of the in-house mailing list are likely to contribute the greatest revenue per mailing. This evaluation has provided the Company with the ability to quickly increase circulation to responsive segments and to scale back circulation to non-responsive segments thus reducing the effective cost of advertising. In January 1996, the Company mailed its initial test catalog for The Sharper Image Home Collection concept. This catalog features high quality, luxury home furnishings and accessories. The responses to this mailing during its first year is encouraging and the Company plans to continue to invest in the development of this concept. 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 4 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 are staffed with 11 to 15 associates. The Company's President and Chief Administrative Officer currently oversees store operations. Store personnel compensation structure is based largely on commission and is closely monitored in relation to sales. The Company expends considerable effort to train its sales associates on the many new and frequently technically oriented items in order to maintain a high customer service level. The Sharper Image stores are designed by the Company's design staff at the Company's headquarters in San Francisco to standardize, where possible, layout so as to simplify their operations. The stores are operated according to standardized procedures for customer relations, merchandise display and pricing, product demonstration, inventory maintenance, personnel training, administration and security. The Company's original Sharper Image stores typically have 2,200 to 2,500 square feet of selling space and approximately 1,300 to 2,200 square feet of storage and administrative space. The cost of leasehold improvements, fixtures and other equipment associated with the opening of a new Sharper Image store has averaged approximately $300,000 to $500,000. Initial inventory for a new Sharper Image store has generally cost approximately $250,000. Outlet stores are approximately half the cost of the original Sharper Image stores. The Company also operates a second retail format of Sharper Image Design stores which are approximately half the size of the original store with between 1,000 to 1,200 of selling square feet, and features higher margin proprietary products in addition to other top selling merchandise. At the end of fiscal 1996, the Company had 70 The Sharper Image stores, 8 Sharper Image Design stores, and 4 outlet locations. 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 innovative products that are new to market, and unique products which are proprietary, available exclusively through The Sharper Image, or are not available in broad distribution. The Company's sales are driven by individual products, focusing on offering pre-selected items which represent quality, innovation, and entertainment, as distinguished from offering broad assortments of categories of merchandise. As individual items come to market or are developed internally by the Company which fit the criteria for new products, the Company's buying and merchandise mix will change to emphasize those products. As a result of such shifting emphasis among individual items, the mix of sales by category changes from time to time. The effect, from year to year, can be to increase or decrease the merchandise gross margin rates since some categories of merchandise sustain traditionally higher margins and some traditionally sustain lower margin rates. 5 The Company's current merchandise strategy is to offer a narrower assortment in its stores and catalogs. The Company offers products at price levels ranging from $10 to over $5,000. The Company intends to keep expanding the offering of products in the $50 to $500 price range to appeal to the Company's customer base. The Company also intends to continue to develop Sharper Image Design proprietary and private-labeled products to utilize its marketing knowledge built from 20 years of retailing experience. While these proprietary and private-labeled products offer important sales and gross margin growth opportunities for all the revenue generating areas of the Company, there are certain risks associated with these internally developed products, such as possible manufacturing constraints, delays in bringing these products to market and cost increases. Products may also be subject to other imitations. See "Factors Affecting Future Operating Results". The process of finding new products involves the Company's buyers reviewing voluminous product literature, traveling extensively throughout the United States, Europe and the Far East to attend trade shows and exhibitions, and meeting with manufacturers. The Company enjoys relationships with many major manufacturers who use The Sharper Image regularly to introduce their newest products in the United States. See "Factors Affecting Future Operating Results". In addition to finding new products from outside sources, the Company's new product development group develops and produces Sharper Image Design proprietary products. The new product development group meets regularly with the merchandising staff to review new product opportunities, product quality , and customer feedback. From these creative sessions product ideas are put into development, design and productivity. Successful product introductions during the past two years include the Memo Manager Executive, KeySeeker, Shower Companion, Keycorder, and the Heart & Sound Soother. The Company believes that this new product development function, in addition to increasing its sales and gross margins and adding incremental wholesale sales, will favorably impact the Company 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. See "Factors Affecting Future Operating Results". The Company purchases merchandise from numerous foreign and domestic manufacturers and importers. None of the suppliers accounted for more than 10% of the dollar amount of the Company's purchases during fiscal 1996. Of the products offered by the Company in recent catalogs, approximately 69% were manufactured in the Far East, approximately 18% were manufactured within the United States, approximately 10% were manufactured in Europe, and approximately 3% were manufactured in Mexico and Canada. The Company expects these percentages to vary as new products are introduced. See "Factors Affecting Future Operating Results". Sharper Image Design proprietary products are produced for the Company on a contract basis by manufacturers in the Far East. The Company provides all product specifications to the contract manufacturers. Delivery lead time is generally in the range of 6 to 12 months. However, certain products introductions may require longer lead time. The Company generates information on merchandise orders and inventory, which is reviewed daily by the Company's buyers, its senior merchandising staff and top management. 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 quality. 6 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. Corporate Marketing During fiscal 1996, the Company's Corporate Marketing continued to grow. The incentive and gifting programs are designed by the Corporate Marketing unit to be used by client companies to increase their sales, or to motivate and reward their high achievers and customers utilizing The Sharper Image stores and catalog as the primary means of offering and delivering the incentives and gifts. The Company sells 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. The Company will continue to grow this area of its business. 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 $3.1 million in fiscal 1995 to about $4.0 million in fiscal 1996. Plans for this group are to continue to increase the number of wholesale customers in the U.S. and abroad, and the number of Sharper Image brand products offered to these customers. Negotiations to add other major department stores are on-going. By choosing to feature Sharper Image brand products, these fine department stores can sell proven products with positive sales appeal. Licensed Operations The Company has exclusive licensing agreements in Japan, Switzerland, South Korea, Australia and Saudi Arabia, as well as in the United States for non-duty free airport locations. In fiscal 1996, the Company entered into a licensing agreement with its Saudi Arabia licensee. The new Saudi Arabia licensee opened its first The Sharper Image store in Riyadh in December 1996. Under the international license agreements, the licensee is granted the right to use the trademarked name, "The Sharper Image," in their country in connection with The Sharper Image retail store and catalog operations. The Company will assist the licensee by producing a foreign language edition of The Sharper Image catalog, typically quarterly, with economies of scale but at the expense of the licensees who then print and distribute locally. There are currently five Sharper Image retail stores operated by the foreign licensees, one each in Japan, Switzerland, Australia, Korea and Saudi Arabia. The Company receives royalties on sales by the licensees. Licensees purchase products from the Company or directly from manufacturers, maintain their own supply of inventory, and establish their own product prices The airport licensee is entitled to utilize The Sharper Image trademark and trade dress in designated airport locations, the design of which is subject to the approval of the Company. There are two locations -- one at Dallas-Fort Worth which opened in July 1994, and a second location at Detroit Metropolitan which opened in May 1995. The Company continues to pursue additional licensing and wholesale opportunities in foreign countries. 7 Product Licensing/The Sharper Image Trademark The Company also has product license agreements with various businesses. The Company controls the selection of the licensees and retail distribution channels for the products in order to maintain the quality associated with The Sharper Image name. Under each of these agreements, the licensee is granted the right to use the trademarked name, "The Sharper Image," in connection with the manufacture and sale of certain products. In consideration for the rights granted to the licensee, the Company receives royalties on the licensees' net sales, subject, in certain cases, to a periodic minimum royalty. The Company believes that product licensing presents opportunities to further leverage the value of The Sharper Image as a brand name. Customer Service The Company seeks to hire and retain qualified sales and customer service representatives in both its mail-order catalog and store operations and to train them thoroughly. Each new store manager undergoes an intensive program during which the manager is trained in all aspects of the Company's business. Sales personnel are trained during the first two weeks of employment, or during the weeks before a new store opens. Training focuses primarily on acquiring a working knowledge of the Company's products and on developing selling skills and an understanding of the Company's high customer service standards. Each sales associate is trained to adhere to the Company's philosophy of "taking ownership" of every customer service issue that may arise. The Company has also developed ongoing programs conducted at each store that are designed to keep each salesperson up to date on each new product offered. The Company's Customer Service group at the corporate headquarters 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. A number of products are shipped directly from the vendor to the customer or to the stores. The shipment of products directly from vendors to the stores and customers reduces the level of inventory required to be carried at the distribution center, freight costs, and the lead time required to receive the products. Each catalog order is received via remote terminal at the distribution facility after the order has been approved for shipment. The Company's goal is to ship catalog orders within 48 hours after the order is received. The Company generally delivers products by second day air service to its customers. Store customers take their purchase with them. In fiscal 1996, the Company established a telemarketing center located at the Littler Rock distribution facility to augment the telemarketing team at the corporate offices. Sales and inventory information about catalog and store operations is provided on an ongoing basis to the Company's merchandising staff and to top management for review. The Company's stores are equipped with electronic point-of-sale registers that communicate daily with the main computer system at corporate headquarters, transmitting sales, inventory and customer data as well as receiving data from the Company's headquarters. The sales, inventory, and customer data enables sales and corporate personnel to monitor sales by item on a daily basis, provides the information utilized by the ARS for inventory allocations, provides management with current inventory and merchandise information, and enables our in-house mailing list to be updated regularly with customer names and activity. 8 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. The Company offers competitive pricing where other retailers market certain products similar to the Company's at lower prices. In addition, a number of other companies have attempted to imitate the presentation and method of operation of the Company's catalog and stores, and the Company's proprietary designed products. The Company competes principally on the basis of product exclusivity, selection, quality and price of its products, merchandise presentation in both the catalog and stores, its customer list, name recognition, and the quality of its customer service. The Company is committing additional resources to its internal product development group to create and produce proprietary products exclusively available from the Company. The Company is also testing additional retail concepts in 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, Korea and Saudi Arabia in consideration for royalties and other fees. In addition to these international licensees, the Company has also entered into a license for the right to operate Sharper Image stores in domestic non-duty free airport locations as well as various product license agreements which grant the right to licensees to manufacture and sell products bearing the Company's trademark. Seasonality The Company's business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Christmas season. In addition, as the proportion of the Company's revenues derived from store sales has grown, the impact of seasonal fluctuations on the Company's sales and earnings has increased. As a result, a substantial percentage of the Company's total revenues and all or most of the Company's net earnings occur in its fourth fiscal quarter ending January 31. The Company generally experiences lower revenues during the other quarters and, as is typical in the retail industry, has incurred and may continue to incur losses in these quarters. The results of these interim quarters may not be representative of the results for the full fiscal year. In addition, like many retailers, the Company makes merchandising and inventory decisions for the Christmas season well in advance of the Holiday selling season. Accordingly, unfavorable economic conditions and/or deviations from projected demand for products during the fourth quarter could have a material adverse affect on the Company results of operations for the entire fiscal year. During the fiscal years 1996 and 1995, the Company's total revenues for the fourth quarter accounted for more than 40% of total revenues. 9 Employees As of January 31, 1997, the Company employed more than 1,200 associates, approximately 62% 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, 49 Chairman of the Board, and Chief Executive Officer Barry Gilbert Vice Chairman, 46 Chief Operating Officer Craig Womack President, 46 Chief Administrative Officer Vincent Barriero Senior Vice President, 48 Chief Information Officer, and Assistant Corporate Secretary Shannon King Senior Vice President, 41 Merchandising Sydney Klevatt Senior Vice President, 61 Marketing Tracy Wan Senior Vice President, 37 Chief Financial Officer, and Corporate Secretary Richard Thalheimer is the founder of the Company and has served as the Chief Executive Officer and as a Director of the Company since 1978 and as Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the Company's President from 1977 through July 1993. Barry Gilbert has been the Company's Vice Chairman and Chief Operating Officer since December 1996. Prior to joining the Company, Mr. Gilbert was with Warner Bros. Studio Stores, where he served as Senior Vice President of International Franchise Operations from 1994 to 1996, and as Senior Vice President of Stores from 1990 to 1994. Craig Womack has been the Company's President and Chief Administrative Officer since December 1996. Mr. Womack served as the Company's President and Chief Operating Officer from July 1993 to December 1996, and as the Company's Executive Vice President and Chief Operating Officer from December 1989 to July 1993. 10 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. Factors Affecting Future Operating Results The provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), which became law in late December 1995, provide companies with a "safe harbor" when making forward-looking statements. This "safe harbor" encourages companies to provide prospective information about their companies without fear of litigation. The Company wishes to take advantage of the new "safe harbor" provisions of the Act and is including this section in its Annual Report on Form 10-K in order to do so. Statements that are not historical facts, including statements about management's expectations for fiscal year 1997 and beyond, are forward-looking statements and involve various risks and uncertainties. Factors that could cause the Company's actual results to differ materially from management's projections, forecasts, estimates and expectations include, but are not limited to, the following: (a) The ability to offer an attractive selection of merchandise, including the ability to locate and offer new, innovative, and high quality products that satisfy its customers' demands and to acquire merchandise in sufficient quantities and on a timely basis. (b) The ability to design and develop proprietary products that satisfy its customers' demands and to have such products manufactured cost-effectively and in sufficient quantities and delivered to the Company on a timely basis. (c) The ability to successfully open new stores, which depends on a variety of factors, including, without limitation, the identification of new markets with sufficient customer demand, the selection and availability of suitable locations, the negotiation of acceptable store leases, the ability to hire and train additional store management and sales associates, and the availability of adequate capital resources on acceptable terms. (d) The ability to successfully and cost-effectively advertise and market its products through The Sharper Image catalog and other advertising vehicles, including new media such as television shopping services and the Internet. 11 (e) Future increases in postage, paper or shipping costs that increase the cost of producing and distributing the Company's catalogs or merchandise. (f) The success of new businesses that the Company may either develop or acquire from time to time. In late fiscal 1996, the Company made the decision to close its SPA Collection division as a result of its lack of profitability and anticipated future performance. (g) The highly seasonal nature of the Company's business - See "Seasonality". (h) Changes in merchandise mix. (i) The ability to maintain sufficient inventory levels of its products, particularly during peak selling seasons. (j) The ability to compete effectively in the Company's highly competitive industry with existing and potential competitors, many of which have substantially greater financial and other resources than the Company. (k) Changes in consumer preferences and customer demand for the Company's products, which fluctuates based on a variety of factors, including, without limitation, general or local economic conditions, buying trends, and the retail sales environment. (l) Changes in general or local economic conditions, including conditions affecting the level of consumer spending on merchandise offered by the Company and the general demand for products of stores located adjacent to the Company's stores, particularly in malls. (m) The political, social, legal and economic risks in foreign countries where the Company purchases a significant amount of merchandise from foreign vendors. (n) Fluctuations in comparable store sales results, which have fluctuated significantly and have decreased in the past from period to period. (o) The ability to hire and retain the services of management and other key employees, particularly its senior management, including, without limitation, Richard Thalheimer, the Company's Founder, Chairman and Chief Executive Officer. (p) Any significant increase in merchandise returns. (q) The quality of merchandise purchased by the Company. (r) The ability of the Company's single distribution facility located in Little Rock, Arkansas to distribute the Company's inventory merchandise to its stores and customers on a cost-effective and timely basis, and the ability to provide superior customer service and efficiently fulfill customer orders. A disruption in operations of the distribution facility may significantly increase the Company's distribution costs. (s) The ability to have its merchandise manufactured and delivered by the Company's vendors and manufacturers in sufficient quantities and on a cost-effective and timely basis. (t) Changes in the availability of capital expenditure and working capital financing, including the availability of long-term financing to support development of retail stores. 12 (u) The imposition of new restrictions or regulations regarding the sale of the Company's products or changes in tax rules and regulations applicable to the Company, particularly with regard to state sales and use taxes. (v) Adverse results in significant litigation matters. The United States retail industry, and the specialty retail industry in particular, are dynamic by nature and have undergone significant changes over the past several years. The Company's ability to anticipate and successfully respond to continuing challenges is critical to achieving its expectations. Item 2. Properties The Company occupies approximately 50,000 square feet of office space for its corporate headquarters in San Francisco, CA, under a lease scheduled to expire on January 31, 2001, with an option to extend for two additional five-year periods. The Company currently operates 82 The Sharper Image stores under leases covering a total of approximately 185,000 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. During fiscal 1996, the Company completed phase two of the expansion which involve the installation 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 reduced 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 1996 Annual Report to Stockholders is incorporated herein by reference. As of April 14, 1997 there were 530 holders of record of the Registrant's Common Stock. 13 Item 6. Selected Financial Data The information set forth under the caption "Financial Highlights" on page 3 of the Sharper Image Corporation 1996 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 1996 Annual Report to Stockholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk None. 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 1996 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 1997 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 1997 Proxy Statement, pages 6 to 7. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to security ownership of beneficial owners and management is incorporated herein by reference to the Registrant's 1997 Proxy Statement, pages 4 to 5. Item 13. Certain Relationships and Related Transactions None. 14 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a)1. List of Financial Statements. The following Financial Statements and Notes thereto set forth on pages 17 through 27 of the Sharper Image Corporation 1996 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, 1997, 1996 and 1995. Balance sheets at January 31, 1997 and 1996. Statements of Stockholders' Equity for the years ended January 31, 1997, 1996 and 1995. Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995. 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 21 of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed with the Securities and Exchange Commission during the last quarter of the period covered by this Report. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows: 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 15 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). 16 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 30, 1997 - --------------------------- Officer, Chairman Richard J. Thalheimer (Principal Executive Officer) /s/ Tracy Y. Wan Senior Vice President, April 30, 1997 - --------------------------- Chief Financial Officer Tracy Y. Wan Corporate Secretary (Principal Financial and Accounting Officer) /s/ Elyse Eng Thalheimer Director April 30, 1997 - --------------------------- Elyse Eng Thalheimer 17 /s/ Alan Thalheimer Director April 30, 1997 - --------------------------- Alan Thalheimer /s/ Lawrence Feldman Director April 30, 1997 - --------------------------- Lawrence Feldman /s/ Maurice Gregg Director April 30, 1997 - --------------------------- Maurice Gregg /s/ Gerald Napier Director April 30, 1997 - --------------------------- Gerald Napier /s/ J. Gary Shansby Director April 30, 1997 - --------------------------- J. Gary Shansby 18 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, 1997: Inventory Obsolescence $1,449 $1,681 $1,621 $1,509 YEAR ENDED JANUARY 31, 1996: Inventory Obsolescence $ 891 $2,109 $1,551 $1,449 YEAR ENDED JANUARY 31, 1995: Inventory Obsolescence $1,140 $1,630 $1,879 $ 891 OTHER YEAR ENDED JANUARY 31, 1997: Other $ 461 $ 351 $ 307 $ 505 YEAR ENDED JANUARY 31, 1996: Other $ 291 $ 462 $ 292 $ 461 YEAR ENDED JANUARY 31, 1995: Other $ 196 $ 371 $ 276 $ 291
19 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)) 10.13 Chief Executive Officer Compensation Plan dated February 3, 1995. (Incorporated by reference to Exhibit 10.24 to the Form 10-K for the fiscal year ended January 31, 1995.) 20 10.14 Annual Report for the Sharper Image 401(K) Savings Plan (Incorporated by reference to Form 11-K (Registration No. 33-80504) for the plan year ended December 31, 1995.) 10.15 Split-Dollar Agreement between the Company and Mr. R. Thalheimer, its Chief Executive Officer dated October 13, 1995, effective as of May 17, 1995 (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year ended January 31, 1996). 10.16 Assignments of Life Insurance Policy as Collateral, both dated October 13, 1995, effective May 17, 1995 (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year ended January 31, 1996). 10.17 Amendment to the Financing Agreement dated May 15, 1996 between the Company and The CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit 10.19 to the Form 10-Q for the quarter ended April 30, 1996). 10.18 Warrant to Purchase Common Stock Agreement dated May 15, 1996 between the Company and The CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit 10.20 to the Form 10Q for the quarter ended April 30, 1996). 10.19 CAPEX Term Loan Promissory note dated October 15, 1996 between the Company and The CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit 10.21 to the Form 10-Q for the quarter ended October 31, 1996). 10.20 Employment Agreement between the Company and Mr. Barry Gilbert, its Vice Chairman and Chief Operating Officer dated and effective December 2, 1996. 10.21 Amendment to the Financing Agreement dated February 13, 1997 between the Company and The CIT Group/Business Credit Inc. 10.22 Warrant to Purchase Common Stock Agreement dated February 13, 1997 between the Company and The CIT Group/Business Credit Inc. 10.23 Amendment to the Financing Agreement dated March 24, 1997 between the Company and The CIT Group/Business Credit Inc. 11.1 Statement Re: Computation of Earnings per Share. 13.1 1996 Annual Report to Stockholders. 23.1 Independent Auditor's Report. 23.2 Independent Auditor's Consent. 27.0 Financial Data Schedule. 21 EX-10.20 2 EMPLOYMENT AGREEMENT BARRY GILBERT EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") has been entered into, effective as of the second day of December 1996, between SHARPER IMAGE CORPORATION, a Delaware corporation (the "Company"), and BARRY GILBERT ("Executive") to provide for the employment of Executive on the terms and conditions set forth herein. WHEREAS, the Company wishes to employ Executive as the Company's Vice Chairman and to assure itself of the continued employment efforts of Executive for the period provided in this Agreement, and Executive is willing to continue to serve in the employ of the Company on a full-time basis in such position for such period upon the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements herein contained, intending to be legally bound, the Company and Executive agree as follows: 1. Employment. The Company hereby employs Executive, and Executive hereby accepts such employment by the Company, upon the terms and conditions herein provided. 2. Term of Employment. Executive's employment with the Company pursuant to this Agreement shall commence on December 2, 1996 and shall continue through January 31, 1999, unless such employment is sooner terminated or subsequently extended as hereinafter provided. Unless earlier terminated, this Agreement shall continue in effect after January 31, 1999, unless either the Company or Executive elects to terminate this Agreement by providing not less than thirty (30) days prior written notice to the other party. The period during which this Agreement continues in effect shall constitute the "Employment Period". In the event of a termination of this Agreement, Executive shall be entitled to receive severance benefits in accordance with Section 7 hereof. 3. Positions and Responsibilities. (a) Position. During the Employment Period, Executive shall serve as the Company's Vice Chairman and shall be responsible for the general management of the business and affairs of the Company, reporting directly to the Chairman of the Board and Chief Executive Officer ("CEO") and the Board of Directors of the Company (the "Board"). (b) Duties. During the Employment Period, and subject to the control of the Board, Executive shall oversee all functional heads of the organization, and will lead and motivate the management team. Executive shall work with the CEO to develop overall strategy and ensure that sales and profit goals are achieved. Executive shall have full profit and loss responsibility for the Company, including all sales, operations, merchandising, marketing, human resources, systems, finance, stores and administration. In addition, Executive shall perform such other executive and/or administrative duties consistent with the office of Vice Chairman as from time to time may be assigned to Executive by the Board, but subject to the conditions in this Agreement. Executive shall devote Executive's full business time and attention to, and exert Executive's best efforts in, the performance of Executive's duties hereunder, so as to promote the business of the Company. Executive's principal place of business shall be at the Company's corporate offices in San Francisco, California. (c) Death or Incapacity of Chief Executive Officer. In the event of the death or incapacity of the CEO during the Employment Period, Executive shall be automatically promoted to serve as the Company's CEO, subject to the review and discretion of the Board. 4. Compensation. For all services rendered by Executive pursuant to this Agreement, the Company shall pay Executive, and Executive agrees to accept, the salary, bonuses and other benefits described below in this Section 4. (a) Salary. The Company shall pay Executive an annual base salary ("Base Salary") as determined by the Board in accordance with this Section 4, payable at periodic intervals in accordance with the Company's payroll practices for salaried employees. Executive's Base Salary shall be Three Hundred Twenty-Five Thousand Dollars ($325,000.00) for the period from the commencement of Executive's employment through the last day of the pay period ending after December 6, 1998. Commencing on the first day of the first pay period of the Company following December 6, 1998, Executive's Base Salary shall be increased to Three Hundred Fifty Thousand Dollars ($350,000). In accordance with Section 4(c) hereof, the amount of the Base Salary shall be reviewed by the Board on at least an annual basis for the fiscal year ending January 31, 2000 and all future years, and any modifications will be effective as of the date determined appropriate by the Board. (b) Bonuses. In addition to Base Salary, Executive shall be entitled to receive a bonus payment of Fifty Thousand Dollars ($50,000.00) on December 5, 1998 in the event Executive is employed by the Company on that date. In addition Executive shall be entitled to receive an annual bonus ("Bonus") for each fiscal year of the Company ending with or within the Employment Period in which the earnings per share for that fiscal year have increased fifteen percent (15%) over the prior fiscal year. For these purposes, earnings per share shall be calculated after deducting all management bonuses. The amount of the Bonus shall be calculated at the end of each fiscal year according to the following formula: the Bonus shall equal the earnings per share for such fiscal year multiplied by Two Hundred Thousand (200,000). (c) Annual Compensation Review. Notwithstanding anything herein to the contrary, Executive's compensation, consisting of salary, bonus and stock option grants, shall be reviewed not less than annually by the Board of Directors. 2. (d) Health Care. During the Employment Period, Executive shall be eligible to participate in any health insurance programs and medical plans available to officers or employees of the Company. (e) Participation in Benefit and Equity Compensation Plans. During the Employment Period, Executive shall be eligible to receive all benefits, including those under equity participation and bonus programs, to which key employees are or become eligible under such plans or programs as may be established by the Board. (f) Stock Option Grants. In addition to the other benefits to which the Executive shall be entitled to under this Agreement, upon commencement of the Employment Period, the Company shall grant to Executive two stock options under the Company's Stock Option Plan (the "Plan"). Both options shall be governed under the terms of the Plan. The first option grant (the "First Option") shall be for One Hundred Fifty Thousand (150,000) shares of the Company's common stock that will vest according to the following schedule: Fifty Thousand (50,000) shares on February 1, 1997, Fifty Thousand (50,000) shares on February 1, 1998, and Fifty Thousand (50,000) shares on February 1, 1999. Such shares will vest only if Executive is employed by the Company on such dates and shall vest in accordance with the terms of the Plan and the First Option. The second option grant (the "Second Option") shall be for One Hundred Fifty Thousand (150,000) shares of the Company's common stock. The Second Option shall vest entirely upon the Executive's completion of seven (7) years of continuous employment with the Company. However, the vesting of the Second Option shall accelerate by the following specified amounts in the event that any of the following conditions are satisfied: (i) in the event that the Company's earnings per share for the fiscal year ending January 31, 2000 equals or exceeds $.89 or the closing price of the Company's common stock has equalled or exceeded Eight Dollars ($8.00) per share for each of the twenty (20) trading days immediately preceding January 31, 2000, then Fifty Thousand (50,000) shares of the Second Option shall vest on January 31, 2000; (ii) in the event that the Company's earnings per share for the fiscal year ending January 31, 2001 equals or exceeds $1.05 or the closing price of the Company's stock has exceeded Ten Dollars ($10.00) per share for each of the twenty (20) trading days immediately preceding January 31, 2001, then Fifty Thousand (50,000) shares of the Second Option shall vest on January 31, 2001; (iii) in the event that the Company's earnings per share for the fiscal year ending January 31, 2002 equals or exceeds $1.25 or the closing price of the Company's common stock has equalled or exceeded Twelve Dollars ($12.00) per share for each of the twenty (20) trading days immediately preceding January 31, 2002, then Fifty Thousand (50,000) shares of the Second Option shall vest on February 1, 2002. The shares subject to the Second Option shall vest only if Executive is employed by the Company on said dates. The vesting of the First Option and the Second Option shall be accelerated in accordance with the terms of the Plan; provided, however, that the vesting of the Second Option shall be accelerated only if the change of control 3. event causing such acceleration has occurred following June 2, 1997. The First Option and the Second Option shall be ten year grants and shall contain and be subject to all other standard terms applicable to the other stock option grants under the Plan. Promptly following the commencement of the Employment Period, the Company will prepare and execute the appropriate stock option agreements for the Executive to reflect the two option grants described in this Section 4(f). (g) 401(k) Plan Benefits. In addition to the other benefits to which Executive shall be entitled to under this Agreement, Executive shall be entitled to participate in the Company's 401(k) Plan and shall be entitled to receive the full benefit of contributions to be made by the Company for the benefit of Executive under the terms of the 401(k) Plan. 5. Vacation. During the Employment Period, Executive shall be entitled to vacation in accordance with the Company policy in effect for executive officers. 6. Indemnification. The Company shall maintain indemnification of Executive pursuant to the provisions of the Company's Certificate of Incorporation and Bylaws to the fullest extent of Delaware law and all other applicable law, and shall provide Executive with indemnification pursuant to the Company's standard indemnification agreement and any director's and officer's liability insurance policy maintained by the Company. 7. Severance Benefits. (a) Termination of Employment. In the event Executive's employment terminates for any reason then Executive shall be entitled to receive severance benefits as follows: (i) Voluntary Resignation. If Executive's employment terminates by reason of Executive's voluntary resignation (and such termination is not an Involuntary Termination or a termination for Cause), then Executive shall not be entitled to receive severance benefits under this Agreement. (ii) Involuntary Termination Other Than For Cause. If Executive's employment is terminated as a result of an Involuntary Termination other than for Cause, then the following severance benefits shall be paid or otherwise provided to Executive: (A) if such termination occurs during the first two years of the Employment Period, Executive shall be entitled to receive severance payments, in the form of monthly cash payments in accordance with the Company's payroll policies, for the remainder of the initial two-year Employment Term under this Agreement at the Base Salary rate in effect at the time of termination, but in no event shall Executive receive fewer than twelve (12) monthly payments at such Base Salary rate following termination; (B) if the termination occurs following the completion of two years of the Employment Period, Executive shall be entitled to receive twelve (12) monthly payments at the Base Salary rate for the period following 4. termination until Executive accepts any position with another employer, at which time Executive shall receive no further payments. (iii) Termination for Cause. If Executive's employment is terminated for Cause, then Executive shall not be entitled to receive any severance payments or other severance benefits under this Section 8. Executive's benefits will be continued under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination. (b) Benefit Reduction. Should any of Executive's severance benefits under this Section 8 (including any severance payments and any accelerated vesting of outstanding options or shares of stock) be deemed to be parachute payments under Code Section 280G, then, first, the dollar amount of any severance payment and, secondly, the accelerated vesting of any options or shares of stock, will be reduced to the extent (and only to the extent) necessary to provide Executive with the maximum after-tax benefit available, after taking into account any parachute excise tax which might otherwise be payable by Executive under Code Section 4999 and any analogous State income tax provision. 8. Noncompetition and Confidential Information. While employed by the Company, Executive will not directly or indirectly manage, operate, participate in, be employed by, perform consulting services for, or otherwise be connected in any manner with, any firm, person, corporation, or enterprise which would be competitive with the business of the Company. Executive will not at any time disclose to others any confidential information relating to the Company or to the business of the Company and confirms that such information constitutes the exclusive property of the Company. The foregoing shall not preclude Executive's investment in any such firm, corporation or enterprise provided that at any one time Executive and members of Executive's immediate family do not own more than one percent (1%) of any voting securities of any such entity. 9. Failure to Comply. If for any reason Executive shall cease to render services as required by this Agreement without the written consent of the Company, or if Executive shall breach the provisions of Section 8 hereof, then, except as provided in Section 7 hereof, Executive will thereby relinquish all rights to any benefits hereunder (other than vested stock options or other vested benefits), and the Company shall reserve whatever rights, if any, it may have against Executive under this Agreement or otherwise. 10. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and shall perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. 5. 11. Notices. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to Executive shall be addressed to Executive at the home address from which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notice shall be directed to the attention of its Secretary. 12. Miscellaneous Provisions. (a) Definition of Terms. The capitalized terms in this Agreement shall have the meanings set forth in this Agreement or in Appendix A hereto. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer or representative of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision of another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity of unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (f) Arbitration. Any dispute or controversy arising under or in connection with this Agreement may be settled by arbitration in the County of San Francisco, California, in accordance with the rules of the American Arbitration Association then in effect. Such arbitration proceedings shall be nonbinding and any claim with respect to this Agreement, whether or not previously the subject of an arbitration proceeding, may be brought in any court of competent jurisdiction. 6. (g) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (h) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company; provided, however, that if there is any such assignment, the Company will guarantee all payments and the performance of all obligations under this Agreement. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation or other entity that actually employs Executive. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this day and year first above written. SHARPER IMAGE CORPORATION EXECUTIVE By: /s/ Richard Thalheimer /s/ Barry Gilbert ------------------------- --------------------- Richard Thalheimer Barry Gilbert Chairman of the Board and Chief Executive Officer 7. APPENDIX A Definitions Cause. "Cause" shall mean (i) the material breach by Executive of one or more of Executive's obligations under this Agreement which are not otherwise corrected within ten (10) days following the Company's written notice to Executive of such breach, (ii) conviction of a felony, (iii) repeated unexplained or unjustified absence, (iv) willful breach of fiduciary duty under this Agreement or (v) gross negligence or willful misconduct where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries. Involuntary Termination. "Involuntary Termination" shall mean termination by the Company of Executive's employment for any reason other than for Cause, and shall include Executive's voluntary resignation following (i) the material breach by the Company of one or more of its obligations under this Agreement which are not otherwise corrected within ten (10) days following Executive's written notice to the Company of such breach, or (ii) the occurrence of any of the following events without Executive's express prior written consent: (A) a change in Executive's position with the Company which materially reduces Executive's level of responsibilities, (B) a relocation of Executive's place of employment by more than twenty (20) miles from the Company's current executive offices without Executive's prior consent, or (c) the assignment of additional material job responsibilities or a reduction in job responsibilities inconsistent with Executive's position with the Company and Executive's prior responsibilities. 1. EX-10.21 3 EXHIBIT 10.21 Exhibit 10.21 The CIT Group/ Business Credit, Inc. 3rd Floor 300 South Grand Avenue Los Angeles, CA 90071 Tel: 213-613-2575 Fax: 213-613-2588 [LOGO] February 13, 1997 Sharper Image Corporation 650 Davis Street San Francisco, CA 94111 Gentlemen: Reference is made to the Financing Agreement between us dated September 21, 1994, as amended (the "Financing Agreement"). Capitalized terms used herein shall have the same meanings as specified in the Financing Agreement unless otherwise specifically defined herein. Effective immediately, pursuant to mutual understanding, the Financing Agreement shall be, and hereby is, amended as follows: (A) The definitions of Fixed Charge Coverage Ratio and Line of Credit shall be, and each hereby is, amended in its entirety to read as follows: "Fixed Charqe Coverage Ratio shall mean a ratio determined as of the relevant calculation date by dividing EBITDA by the sum of i) Capital Expenditures and ii) Interest Expenses, for the relevant period, provided, however that if Availability (which, notwithstanding any provision to the contrary contained in this Financing Agreement, shall for the purposes of this definition of Fixed Charge Coverage Ratio be computed at all times based upon advance percentages of (x) twenty percent (20%) with respect to Eligible Proprietary Products Inventory and (y) forty-five percent (45%) with respect to all other Eligible Inventory) upon the close of business on each Friday during the ninety (90) day period immediately preceding and ending on any calculation date equaled or exceeded $2,000,000, Capital Expenditures will be excluded from the calculation of this ratio." "Line of Credit shall mean the commitment of CITBC to make Revolving Loans under Section 3 hereof, make CAPEX Term Loans under Section 3A hereof and issue Letter of Credit Guaranties under Section 4 hereof, all pursuant to and in accordance with Sections 3, 3A and 4 of this Financing A company of Dai-Ichi Kangyo Bank and Chase Manhattan Corporation Agreement, in the aggregate amount of (a) $29,500,000 for the period from October 1, 1997 through and including December 31, 1997 and (b) $24,500,000 at all other times, provided that (i) such amount shall be automatically and without any further act by CITBC or the Company reduced by an amount equal to the aggregate amount of all drawdowns of CAPEX Term Loans made by CITBC to the Company hereunder and (ii) the aggregate outstanding balance of Revolving Loans and Letters of Credit shall not exceed (x) $25,000,000 for the period from October 1, 1997, through and including December 31, 1997 and (y) $20,000,000 at all other times." (B) Section 3, Paragraph 1 shall be, and hereby is, amended by amending the second sentence thereof in its entirety to read as follows: "Such loans and advances shall be in amounts up to the sum of: (a) twenty percent (20%) of the aggregate value of the Company's Eligible Inventory which is Proprietary Products Inventory plus (b) (i) fifty percent (50%) for the period from August 1, 1997 through and including August 31, 1997, (ii) fifty-five percent (55%) for the period from September 1 1997 through and including October 31, 1997, (iii) sixty percent (60%) for the period from November 1, 1997 through and including December 31, 1997 and (iv) forty-five percent (45%) at all other times, of the aggregate value of the Company's other Eligible Inventory provided that in no event shall the aggregate amount of Eligible Inventory computed pursuant to the clause (a) above exceed twenty-five percent (25%) of the total of all Eligible Inventory." (C) Section 6, Paragraphs 8, 10, 11 and 12 of the Financing Agreement shall be, and each hereby is, amended as follows: (i) The Net Worth covenant set forth in Paragraph 8 of Section 6 shall be, and hereby is, amended by amending the Net Worth amount for the fiscal quarter ending on October 31, 1997 to be "$24,000,000". Such covenant shall remain unchanged for all other fiscal quarters and periods. (ii) The Working Capital Covenant set forth in Paragraph 10 of Section 6 shall be, and hereby is, amended by amending the Working Capital amount for the fiscal quarters ending July 31, 1997 and October 31, 1997 to be $9,500,000" (for July 31, 1997) and "$7,500,000" (for October 31, 1997), respectively. Such covenant shall remain unchanged for all other fiscal quarters and periods. (iii) The Fixed Charge Coverage Ratio set forth in Paragraph 11 of Section 6 shall be, and hereby is, amended by amending the Ratio solely for the four (4) consecutive quarters ending July 31, 1997 and October 31, 1997 to be ".40 to 1" (for July 31, 1997) and ".50 to 1" (for October 31, 1997), respectively, provided that such Ratio shall remain 1.0 to 1 for all other periods computed for the four (4) consecutive quarters then ending, all as more fully provided in said Paragraph 11 of Section 6. (iv) The Leverage Ratio set forth in Paragraph 12 of Section 6 shall be, and hereby is, amended by amending the ratio for the fiscal quarter ending October 31, 1997 to be "2.50 to 1" Such ratio shall remain unchanged for all other fiscal quarters and periods. (D) The Effectiveness of all of the amendments set forth above shall be, and hereby is, subject to the fulfillment to CITBC's satisfaction of each of the Conditions Precedent. The "Conditions Precedent" shall mean: (i) The Company shall pay all Out-of-Pocket Expenses incurred by CITBC in connection with the agreement and all the documents and transactions contemplated hereby (including, without limitation, the reasonable fees and expenses of CITBC's outside legal counsel in connection with the warrant referred to in clause (iii) below). All such expenses may be charged to your Revolving Loan Account on the respective due dates thereof. (ii) CITBC's receipt of a secretary's certificate certifying Board of Directors Resolutions authorizing the execution, delivery and performance by the Company of this Agreement and all documents and transactions contemplated hereby. (iii) The Company shall enter into a warrant agreement (in form and substance satisfactory to CITBC) and take all other actions necessary to grant to CITBC or its assigns a warrant to purchase up to 50,000 shares of its voting common stock at $3.50 per share. Except to the extent set forth herein, no other change in any of the terms, provisions or conditions of the Financing Agreement is intended or implied. If the foregoing is in accordance with your understanding of our agreement kindly so indicate by signing and returning the enclosed copy of this letter. Very truly yours, THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Bonnie Schain ------------------------------------ Title: Assistant Vice President Read and Agreed to: SHARPER IMAGE CORPORATION By: /s/ Craig P. Womack ------------------------------------------ Title: President, Chief Administrative Officer By: /s/ Tracy Y. Wan ------------------------------------------- Title: Sr. V.P., Chief Financial Officer EX-10.22 4 EXHIBIT 10.22 Exhibit 10.22 THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE UPON EXEMPTIONS PROVIDED UNDER THE SECURITIES ACT. ACCORDINGLY, THIS WARRANT MAY NOT BE SOLD, TRANSFERRED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION, THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED EXCEPT AS PROVIDED HEREIN. THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO REPURCHASE BY THE COMPANY ON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN. SHARPER IMAGE CORPORATION WARRANT TO PURCHASE COMMON STOCK Dated February 13, 1997 SHARPER IMAGE CORPORATION (the "Company") certifies that, for valuable consideration, receipt of which is hereby acknowledged, the Holder is entitled to purchase from the Company a number of shares of the Company's Common Stock set forth in Section 1(h) hereof (the "Shares") at the purchase price set forth in Section 1(e) hereof. This Warrant and the Common Stock issuable upon exercise hereof are subject to the terms and conditions hereinafter set forth: 1. Definitions. As used in this Warrant, the following terms shall have the following meanings: (a) "Common Stock" - Common Stock, par value $.01 per share, of the Company; (b) "Company" - Sharper Image Corporation, a Delaware corporation; (c) "Effective Date" - February 13, 1997; (d) "Holder" - The CIT Group/Business Credit, Inc. or any transferee thereof; 1. (e) "Purchase Price" - $3.50 per share, subject to adjustments pursuant to Section 3 hereof; (f) "Subscription Form" - the form attached to this Warrant as Exhibit "A"; (g) "Warrant" - this Warrant and any warrants delivered in substitution or exchange therefor as provided herein; (h) "Shares" - up to 50,000 Shares, subject to adjustments pursuant to Section 3 hereof; and (i) "Expiration Date" - five (5) years from the Effective Date. 2. Exercise. (a) Time of Exercise. This Warrant may be exercised in whole but not in part (and not as to a fractional share) at the office of the Company, at any time, commencing on the Effective Date; provided, however, that this Warrant shall expire and be null and void if not exercised in the manner herein provided by 5:00 p.m., Pacific Standard Time, on the Expiration Date. (b) Manner of Exercise. This Warrant is exercisable at the Purchase Price, payable in cash or by certified check, payable to the order of the Company, subject to adjustment as provided in Section 3 hereof. Upon surrender of this Warrant with the annexed Subscription Form duly executed, together with payment of the Purchase Price for the Shares purchased (and any applicable transfer taxes) at the Company's principal executive offices, the Holder shall be entitled to receive a certificate or certificates for the Shares so purchased. (c) Delivery of Stock Certificates. As soon as practicable, but not exceeding 30 days, after exercise of this Warrant, the Company, at its expense, shall cause to be issued in the name of the Holder (or upon payment by the Holder of any applicable transfer taxes, the Holder's assigns) a certificate or certificates for the number of fully paid and non-assessable Shares to which the Holder shall be entitled upon such exercise, together with such other stock or securities or property or combination thereof to which the Holder shall be entitled upon such exercise, determined in accordance with Section 3 hereof. (d) Record Date of Transfer of Shares. Irrespective of the date of issuance and delivery of certificates for any stock or securities issuable upon the exercise of this Warrant, each person (including a corporation or partnership) in whose name any such certificate is to be issued shall for all purposes be deemed to have become the holder of record of the stock or other securities represented thereby immediately prior to the close of business on the date on which (i) a duly executed Subscription Form containing notice of exercise of this Warrant, (ii) payment of the Purchase Price, and (iii) the opinion or certificate required by Section 4(a)(ii) of this Warrant is received by the Company. 2. 3. Adjustments. Except as otherwise provided in this Section 3, after each adjustment of the Purchase Price pursuant to this Section 3, the number of shares of Common Stock purchasable upon exercise of this Warrant shall be the number derived by dividing such adjusted Purchase Price into the Purchase Price in effect immediately prior to such adjustment. The Purchase Price shall be subject to adjustment as follows: (a) In the event, prior to the expiration of this Warrant by exercise or by its terms, the Company shall issue any shares of its Common Stock as a share dividend on its outstanding shares of Common Stock or shall subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either of such events, the Purchase Price per share of Common Stock purchasable pursuant to this Warrant in effect at the time of such action shall be decreased proportionately and the number of shares purchasable pursuant to this Warrant shall be increased proportionately. Conversely, in the event the Company shall reduce the number of shares of its outstanding Common Stock by combining such shares into a smaller number of shares, then, in such event, the Purchase Price per share purchasable pursuant to this Warrant in effect at the time of such action shall be increased proportionately and the number of shares of Common Stock at that time purchasable pursuant to this Warrant shall be decreased proportionately. Any dividend paid or distributed on the Common Stock in shares of any other class of capital stock of the Company or securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable on the conversion thereof. (b) In the event, prior to the expiration of this Warrant by exercise or by its terms, the Company merges or consolidates with or into another person or entity in which the Company is not the surviving corporation or entity or sells all or substantially all of its property, or dissolves, liquidates or winds up its affairs, prompt, proportionate, equitable, lawful and adequate provision shall be made as part of the terms of any such merger, consolidation, sale, dissolution, liquidation or winding up such that the Holder of this Warrant may thereafter receive, on exercise thereof, in lieu of each share of Common Stock of the Company which the Holder would have been entitled to receive, the same kind and amount of any shares, securities, or assets as may be issuable, distributable or payable on any such merger, consolidation, sale, dissolution, liquidation or winding up with respect to each share of Common Stock of the Company; provided, however, that, in the event of any such merger, consolidation, sale, dissolution, liquidation or winding up, the right to exercise this Warrant shall terminate on a date fixed by the Company, such date to be not earlier than 5:00 p.m., Pacific Standard Time, on the 30th day next succeeding the date on which notice of such termination of the right to exercise this Warrant has been given by mail to the Holder thereof at such address as may appear on the books of the Company. (c) Notwithstanding the provisions of this Section 3, no adjustment of the Purchase Price shall be made whereby such Purchase Price is adjusted in an amount less than $.001 or until the aggregate of such adjustments shall equal or exceed $.001. (d) In the event, prior to the expiration of this Warrant by exercise or by its terms, the Company shall determine to take a record of the Holders of its Common 3. Stock for the purpose of determining the shareholders entitled to receive any share dividend or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other securities or assets deliverable on exercise of this Warrant pursuant to the foregoing provisions, the Company shall give to the registered Holder of this Warrant at the address as may appear on the books of the Company at least 15 days' prior written notice to the effect that the Company intends to take such a record. Such notice shall specify (i) the date as of which such record is to be taken, (ii) the purpose for which such record is to be taken, (iii) and the number, amount, price and nature of the Shares or other shares, securities or assets which will be deliverable on exercise of this Warrant after the action for which such record will be taken has been completed. Without limiting the obligation of the Company to provide notice to the registered Holder of this Warrant of any corporate action hereunder, the failure of the Company to give notice shall not invalidate such corporate action of the Company. (e) Before taking any action which would cause an adjustment reducing the Purchase Price below the then par value of the shares of Common Stock issuable upon exercise of this Warrant, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Purchase Price. (f) Upon any adjustment of the Purchase Price required to be made pursuant to this Section 3, the Company, within 30 days thereafter, shall cause to be mailed to the registered Holder of this Warrant written notice of such adjustment setting forth the Purchase Price in effect after such adjustment and the number of Shares or other shares, securities or property issuable upon exercise of this Warrant, and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 4. Restriction on Transfer. (a) The Holder, by its acceptance hereof, represents, warrants, covenants and agrees that: (i) the Holder has knowledge of the business and affairs of the Company; (ii) this Warrant and the Shares issuable upon the exercise of this Warrant are being acquired for investment and not with a view to the distribution thereof and that, absent an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the disposition of the Shares issued or issuable upon exercise of this Warrant, such Shares will not be sold, transferred, assigned, hypothecated or otherwise disposed of without first providing the Company with an opinion of counsel (which may be counsel for the Company) or other evidence, reasonably acceptable to the Company, to the effect that such sale, transfer, assignment, hypothecation or other disposal will be exempt from the registration and prospectus delivery requirements 4. of the Securities Act and the registration or qualification requirements of any applicable state or foreign securities laws; and (iii) the Holder consents to the making of a notation in the Company's books or giving to any transfer agent of this Warrant or the Shares an order to implement such restrictions on transferability described in subparagraph (ii) above. (b) This Warrant (and any successor or replacement warrant) shall bear the certificate shown on the front page hereof and the Shares issuable upon the exercise of this Warrant shall bear the following legend or a legend of similar import; provided, however, that such legend shall be removed or not placed upon this Warrant or the certificate or other instrument representing the Shares, as the case may be, if such legend is no longer necessary to ensure compliance with the Securities Act: "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE UPON THE EXEMPTION UNDER THE SECURITIES ACT AND EXEMPTIONS FROM REGISTRATION AVAILABLE UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE. ACCORDINGLY, SUCH SHARES MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE." (c) This Warrant (and any successor or replacement Warrant) may not be sold, transferred, assigned or hypothecated except to a wholly owned subsidiary of the Holder or to a parent corporation owning a majority of the outstanding securities of the Holder or to any successor of the Holder in connection with a merger, sale or consolidation of the Holder in which the Holder is not the surviving entity. 5. Payment of Taxes. All Shares issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable and the Company shall pay all taxes and other governmental charges (other than income tax) that may be imposed in respect of the issue or delivery thereof. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Shares in any name other than that of the Holder surrendered in connection with the purchase of such Shares, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's satisfaction that no tax or other charge is due. 6. Repurchase Right. (a) Notwithstanding anything herein to the contrary, in the event the Holder of this Warrant provides notice of the exercise of this Warrant to the Company with respect to any of the Shares, then, in such event, the Company shall have the right (the 5. "Repurchase Right"), at its election, by delivery to the Holder of this Warrant of written notice of the exercise of the Repurchase Right within thirty (30) days following the receipt by the Company of the Repurchase Notice (the "Repurchase Notice"), to repurchase all (but not less than all) of the Shares issued or to be issued in connection with the exercise of this Warrant from the Holder or Holders thereof at a purchase price per share of Shares equal to the Current Market Price (as defined below) per share of Common Stock (the "Repurchase Price") determined as of the close of business on the date on which such Shares are to be repurchased as specified by the Company in the Repurchase Notice (which date shall be not less than five (5) nor more than ten (10) days from the date of the Repurchase Notice (the "Repurchase Date"). The Repurchase Price of the Shares to be repurchased by the Company hereunder shall be payable by the Company to the holder or holders of such Shares in immediately available funds on the Repurchase Date specified in the Repurchase Notice. (b) The "Current Market Price" per share of Common Stock shall be determined as follows: (i) if there then exists an active public trading market for the Company's Common Stock, the Current Market Price shall be the average of the daily market prices of the Common Stock over a period of 20 consecutive trading days prior to the day on which Current Market Price is being determined. The market price for each such trading day shall be the average of the closing prices on such day of the Common Stock on all domestic exchanges on which the Common Stock is then listed, or, if there shall have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of the such day, or, if the Common Stock shall not be so listed, the average of the representative bid and asked prices at the end of such trading day as reported by NASDAQ. (ii) if there then does not exist an active public trading market or the Common Stock shall not be listed on any domestic exchange or quoted on NASDAQ, the Current Market Price shall be the Fair Market Value (as defined below) of the Common Stock based upon the Fair Market Value of 100% of the Company if the Company were sold as a going concern and without regard to any discount for lack of liquidity or as to whether the Company is then a public or a private company, or on the basis that the relevant shares of Common Stock do not constitute a majority or controlling interest in the Company and assuming the exercise or conversion of all or warrants, options, convertible securities or other rights to subscribe for or purchase any shares of Common Stock or convertible securities, all as determined by an independent financial expert (the "Expert"), which such Expert shall be mutually agreed upon by the parties. If the parties are unable to agree on an Expert, then each party shall nominate a nationally recognized independent investment firm, which such nominees shall mutually appoint an Expert in their sole discretion. "Fair Market Value" shall mean the value obtainable upon a sale in an arm's length transaction to an unaffiliated third party under usual and normal circumstances, with neither the buyer nor the seller under any compulsion to 6. act, with equity to both. The determination of the Fair Market Value by the Expert shall be final, binding, and conclusive on the Company and the Holder of this Warrant. All costs and expenses of the Expert shall be borne by the Company. 7. Registration Rights. (a) Right to Join in Registration. If, at any time prior to two years after the Expiration Date, the Company proposes to file a Registration Statement under the Securities Act (other than on Form S-4 or Form S-8, or similar or replacement forms) seeking registration of any securities of the Company for sale for cash to the public either for its own account or for the account of any holder of securities of the Company, the Company shall promptly notify, in writing, the Holder of its intention to file such Registration Statement and in addition to, and independent of, the rights afforded by subsection (b), will afford the Holder the opportunity to request inclusion in such Registration Statement of all of the Shares issuable upon exercise of this Warrant. If the Holder desires to join in such Registration Statement, it shall, within twenty (20) days after the receipt of such notice by the Company, notify the Company, in writing, of the number of Shares it desires to include in any such Registration Statement. The Company shall cause to be registered under the Securities Act all of the Shares that the Holder has requested to be registered except as provided below. If the Holder requests inclusion of any Shares in such Registration Statement and if such public offering is to be underwritten, the Company will request the underwriters of the offering to purchase and sell such Shares. The right of the Holder to registration pursuant to this subsection shall be conditioned upon the Holder's participation in such underwriting and the inclusion of Shares in the underwriting unless otherwise agreed to by the Company. If the managing underwriter determines that marketing factors require a limitation or complete exclusion of the number of shares to be underwritten, the Company shall so advise the Holder and the other persons distributing their securities through such underwriting, and (i) Common Stock held (or issuable upon conversion or exercise of securities held) by any person who does not have contractual rights of registration shall first be excluded; and (ii) if such exclusion is not sufficient, Common Stock held (or issuable upon exercise of securities held) by any person other than the Holder and Shares held by the Holder shall be excluded to the extent required to permit the number of Shares held by the Holder and shares of Common Stock held by such other persons that may be included in the registration and underwriting to be allocated among the Holder and such other persons in proportion, as nearly as practicable, to the number of Shares held by the Holder and shares of Common Stock held (or issuable upon conversion or exercise of securities held) by such other persons at the time of filing the Registration Statement. (b) Form S-3 Registration. In case the Company shall receive, at any time prior to two years after the Expiration Date, from the Holder a written request that the Company effect a registration of Shares on a Form S-3 Registration Statement and any related qualification or compliance with respect to all or a part of the Shares, the Company will: 7. (i) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all of such Holder's Shares as are specified in such request; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section: (i) if Form S-3 is not available for such offering by the Holder; (ii) if the Company shall furnish to the Holder a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its shareholders for such Form S-3 registration to be effective at such time, in which event the Company shall have the right to defer the filing of the Form S-3 Registration Statement for a period of not more than 120 days after receipt of the request of the Holder under this Section; provided, however, that the Company shall not utilize this right more than once in any twelve month period; or (iii) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on a Form S-3 Registration Statement for the Holder pursuant to this Section. (ii) Subject to the foregoing, the Company shall file a Form S-3 Registration Statement covering the Shares and other securities so requested to be registered as soon as practicable after receipt of the request of the Holder. (iii) If the Company is unable to effect a registration pursuant to subsection (i) of this Section 7(b), the Company shall be obligated, upon 120 days' prior written notice to the Company by the Holder of this Warrant, to repurchase this Warrant (the "Put Option") at a purchase price per share of Common Stock issuable upon exercise of the Warrant equal to the then existing Current Market Price, as determined in accordance with Section 6(b)(i) and (ii) hereof. Notwithstanding the foregoing, the Holder of this Warrant shall be entitled to a determination of the then existing Current Market Price (the "Put Option Price") prior to an election to exercise its Put Option; provided, however, that the Holder shall only be entitled to a determination of the Put Option Price under this Section 7 once during the Term of this Warrant. Nothing herein shall obligate the Holder of this Warrant to exercise its Put Option. (c) Indemnification. In the event any Shares are included in a registration statement under this Section: (i) To the extent permitted by law, the Company will indemnify and hold harmless the Holder, any underwriter (as defined in the Securities Act) for the Holder and each person, if any, who controls the Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act or the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission 8. or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act or the Exchange Act or any state securities law; and the Company will pay to the Holder, underwriter or controlling person any legal or other expenses reasonably incurred by one law firm retained by them (or such additional law firms retained by the Holder if such Holder reasonably believes there exists a conflict of interest among them) in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (ii) To the extent permitted by law, the Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other investor selling securities in such registration statement and any controlling person of any such underwriter or other investor, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject under the Securities Act or the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by the Holder expressly for use in connection with such registration; and the Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection, in connection with investigating or defending any such loss, claims, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, further, however, that in no event shall any indemnity under this subsection exceed the net proceeds from the offering received by the Holder. (iii) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, provide a written notice of the commencement thereof to the indemnifying party and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that any indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to 9. retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section. (iv) The obligations of the Company and the Holder under this Section shall survive the completion of any offering of Shares in a registration statement under this Section, and otherwise. (d) Expenses. The Company shall bear all expenses incurred in connection with all registrations of the Shares effected pursuant to Section 7(a) hereof and in connection with one registration effected pursuant to Section 7(b) hereof, in each case excluding any underwriting discounts or commissions. 8. Reservation of Common Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the exercise of this Warrant, such number of shares of Common Stock as shall be issuable up on the exercise hereof. The Company covenants and agrees that, upon exercise of this Warrant and payment of the Purchase Price thereof pursuant to Section 2(b) hereof, all Shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable. 9. Rights; Notices. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter or as having any right whatsoever as a shareholder of the Company. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered or mailed by registered or certified mail, postage prepaid, return receipt requested: (a) if to the Holder, to the address of such Holder as shown on the books of the Company; or (b) if to the Company, to its principal executive office. 10. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the ownership of and the loss, theft, destruction or mutilation of this Warrant and (in case of loss, theft or destruction) upon delivery of an indemnity agreement in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of the mutilated Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. 11. Successors. All the covenants, agreements, representations and warranties contained in this Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, distributees, successors and assigns. 12. Change; Waiver. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 13. Headings. The section headings in this Warrant are inserted for purposes of convenience only and shall have no substantive effect. 11. 14. Law Governing. This Warrant shall for all purposes be construed and enforced in accordance with, and governed by, the internal laws of the State of California, without giving effect to principles of conflict of laws. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated as of the date first above written. SHARPER IMAGE CORPORATION By: /s/ Craig P. Womack ---------------------------------------------- Name: Craig P. Womack Title: President, Chief Administrative Officer By: /s/ Tracy Y. Wan ---------------------------------------------- Name: Tracy Y. Wan Title: Sr. V.P., Chief Financial Officer ACCEPTED AND AGREED: CIT GROUP/BUSINESS CREDIT, INC. /s/ Bonnie Schain - -------------------------------- Name: Bonnie Schain Title: Assistant Vice President 12. EXHIBIT A SUBSCRIPTION FORM (To be Executed by the Registered Holder if it Desires to Exercise this Warrant) To Sharper Image Corporation: The undersigned hereby irrevocably elects to exercise the right to purchase ____________ of the Shares covered by this Warrant according to the conditions hereof and herewith makes payment of the Purchase Price in full in accordance with Section 2(b) of the Warrant. The undersigned requests that certificates for such Shares be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: Signature: ---------------- --------------------------------------- NOTICE: The above signature must correspond with the name as written within the Warrant in every particular, without alteration or enlargement or any change whatsoever, and if the certificate representing the Shares is to be registered in a name other than that in which the Warrant is registered, the signature of the Holder hereof must be guaranteed. Signature Guaranteed: ---------------------------------------------------------- SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE. EX-10.23 5 EXHIBIT 10.23 Exhibit 10.23 The CIT Group/ Business Credit, Inc. 3rd Floor 300 South Grand Avenue Los Angeles, CA 90071 Tel: 213-613-2575 Fax: 213-613-2588 [LOGO] March 24, 1997 Sharper Image Corporation 650 Davis Street San Francisco, CA 94111 Gentlemen: Reference is made to the Financing Agreement between us dated September 21, 1994, as amended (the "Financing Agreement"). Capitalized terms used herein shall have the same meanings as specified in the Financing Agreement unless otherwise specifically defined herein. You have advised us that for the period ended January 31, 1997, you were not in compliance with the Working Capital Covenant as set forth in paragraph 10 of Section 6 of the Financing Agreement and the Fixed Charge Coverage Ratio as set forth in paragraph 11 of Section 6 of the Financing Agreement. We hereby confirm that solely for the period ended January 31, 1997, we shall not deem the foregoing to be a breach of, or violation under the Agreement, provided, however, henceforth you must be in strict compliance with such covenants. In addition, pursuant to mutual understanding and effective immediately, the Financing Agreement shall be, and hereby is, amended as follows. (1) Section 1 of the Financing Agreement shall be, and hereby is, amended by amending the definitions of EBITDA, Working Capital, Net Worth, and Leverage Ratio in their entirety to read as follows: A company of Dai-Ichi Kangyo Bank and Chase Manhattan Corporation "EBITDA shall mean, in any period, the net income (or net loss) of the Company and its Subsidiaries, on a consolidated basis plus all amounts deducted in determining net income in respect of Interest Expense, income tax obligations (paid or accrued), depreciation expense and amortization expense plus, without duplication, the Spa Writeoff before the related income tax benefit, each determined in accordance with GAAP consistently applied." "Working Capital shall mean (a) the sum of (i) Current Assets plus (ii) the amount paid to Internationale Nederlanden with respect to the repurchase of their warrant not to exceed an amount satisfactory to CITBC in the aggregate minus (b) the difference of (i) Current Liabilities minus (ii) the Spa Reserve less amounts written-off against the Spa Reserve for long term assets relating to the Spa Division." "Net Worth shall mean (a) the sum of (i) Total Assets plus (ii) the amount paid to Internationale Nederlanden with respect to the repurchase of their warrant not to exceed an amount satisfactory to CITBC in the aggregate plus (iii) the Spa Writeoff minus (b) Total Liabilities, and shall be determined in accordance with GAAP, on a consistent basis with the latest audited statements of the Company." "Leverage Ratio shall mean the ratio determined by dividing (i) Total Liabilities minus the amount of the Spa Reserve, by (ii) Net Worth." (2) Section I of the Financing Agreement shall be further amended by the addition thereto of the following definitions of "Spa Reserve" and "Spa Writeoff": "Spa Reserve shall mean the amount of Current Liabilities recorded at January 31, 1997, by the Company pursuant to GAAP with respect to the discontinuance of its Spa Division, provided such amount shall not exceed $8,000,000 in the aggregate." "Spa Writeoff shall mean all amounts deducted in determining net income with respect to charges taken during the Fiscal Quarter ended January 31, 1997 related to the Company's discontinuance of its Spa Division, provided such net amount shall not exceed $5,000,000 in the aggregate." Except as specifically set forth above, no other amendment, modification, waiver, or change in any of the terms or provisions of the Financing Agreement is hereby intended or implied. This letter shall also not constitute a waiver by us of any other existing defaults under the Financing Agreement, whether or not we have knowledge of same, and shall not constitute a waiver of any other default whatsoever. If the foregoing is in accordance with your understanding, please sign and return to us the enclosed copy of this letter to so indicate. Very truly yours, THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ Bonnie Schain ----------------------------------------- Title: Assistant Vice President Read and Agreed to: SHARPER IMAGE CORPORATION By: /s/ Tracy Y. Wan ------------------------------------- Title: Sr. V.P., C.F.O. By: /s/ Vince Barriero ------------------------------------- Title: Sr. V.P. CIO EX-11.1 6 COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 SHARPER IMAGE CORPORATION STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended January 31, 1997 January 31, 1996 January 31, 1995 ---------------- ---------------- ---------------- Net Earnings (Loss) ($000) $ (4,345) $ 444 $ 3,683 =========== =========== =========== Average Shares of Common Stock Outstanding During the Period 8,260,208 8,249,259 8,294,378 Add: Incremental Shares from Assumed Exercise of Stock Options (primary) -- 432,819 604,911 ----------- ----------- ----------- 8,260,208 8,682,078 8,899,289 =========== =========== =========== Primary Earnings (Loss) $ (0.53) $ 0.05 $ 0.41 per share =========== =========== =========== Average Shares of Common Stock Outstanding During the Period 8,260,208 8,249,259 8,294,378 Add: Incremental Shares from Assumed Exercise of Stock Options (fully-diluted) -- 432,819 622,236 ----------- ----------- ----------- 8,260,208 8,682,078 8,916,614 =========== =========== =========== Fully-Diluted Earnings (Loss) Per Share $ (0.53) $ 0.05 $ 0.41 =========== =========== ===========
EX-13.1 7 1996 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13.1
Financial Highlights - ------------------------------------------------------------------------------------------------------------------------------------ Fiscal Year Ended January 31, ----------------------------------------------------------------------------------- Operating Results 1997 1996 1995 1994 1993 Revenues $ 210,245 $ 204,184 $ 188,535 $ 147,441 $ 149,995 Provision for loss on the closure of the SPA Collection division (8,000) -- -- -- -- Earnings (loss) before income taxes (7,241) 739 6,139 2,939 598 Net earnings (loss) (4,345) 444 3,683 1,763 359 Net earnings (loss) per share $ (0.53) $ 0.05 $ 0.41 $ 0.20 $ 0.04 Balance Sheet Data Working capital $ 9,429(1) $ 17,233 $ 23,011 $ 19,488 $ 15,426 Total assets 78,804 70,456 64,036 55,095 53,739 Notes payable 4,245 3,355 838 987 648 Stockholders' equity $ 28,449 $ 32,758 $ 32,792 $ 29,868 $ 28,025 Current ratio 1.22 1.56 1.85 1.94 1.75 Statistics Number of stores at year end 88(2) 82(2) 74 73 74 Comparable store sales (2.1%) 3.3% 17.8% (4.1%) 4.8% Annualized net sales per selling square foot $ 817 $ 850 $ 832 $ 726 $ 796 Number of catalogs mailed 37,695,000(3) 32,780,000(3) 31,522,000 25,879,000 23,413,000 Number of catalog orders 470,000 536,000 426,000 252,000 248,000 Average revenue per order: Stores $ 97 $ 106 $ 102 $ 95 $ 89 Catalog $ 138 $ 122 $ 116 $ 120 $ 112 Returns on average stockholder's equity N/A 1.4% 11.8% 6.1% 1.3% Book value per share $ 3.44 $ 3.97 $ 3.96 $ 3.61 $ 3.40 Weighted average number of shares outstanding 8,260,208 8,682,078 8,899,289 8,683,929 8,652,178 Dollars are in thousands except Net earnings (loss) per share and Statistics. (1)Includes $8,000 of accrued liabilities related to the closure of the SPA Collection division. (2)Includes six and four SPA Collection stores at January 31, 1997 and 1996, respectively. (3)Includes 2,900,000 of The Sharper Image HOME Collection(a) catalogs mailed for January 31, 1997. Excludes SPA Collection catalogs mailed for January 31, 1997 and 1996.
GRAPH GOES HERE Management's Discussion and Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- Sharper Image Corporation Results Of Operations Fiscal Year Ended January 31, 1997 1996 1995 Percentage of Total Revenues (Fiscal 1996) (Fiscal 1995) (Fiscal 1994) - -------------------------------------------------------------------------------- Revenues: Net store sales 71.0% 71.1% 71.7% Net catalog sales 25.9 26.6 26.2 Net wholesale sales 1.9 1.5 1.0 List rental 0.6 0.5 0.8 Licensing 0.6 0.3 0.3 ----- ----- ----- Total Revenues 100.0 100.0 100.0 Costs and Expenses: Cost of products 51.8 50.3 51.1 Buying and occupancy 11.4 10.5 10.4 Advertising and promotion 12.2 15.5 11.3 General, selling, and administrative 24.1 23.5 23.8 Provision for loss due to closure of SPA Collection division 3.8 -- -- ----- ----- ----- Operating Income (Loss) (3.3) 0.2 3.4 Other Income (Expense) (0.2) 0.2 (0.1) ----- ----- ----- Earnings (Loss) Before Income Tax (Benefit) (3.5) 0.4 3.3 Income Tax (Benefit) (1.4) 0.2 1.3 ----- ----- ----- Net Earnings (Loss) (2.1%) 0.2% 2.0% ----- ----- ----- Supplemental Pro Forma Data The following supplemental pro forma data is presented to assist the reader in understanding the impact of the closure of the SPA Collection division.
January 31, 1997 January 31, 1996 --------------------------------------- --------------------------------------- Results excluding SPA Total Results excluding SPA Total Dollars in thousands SPA Division Division Company SPA Division Division Company - --------------------- --------------------------------------- --------------------------------------- Fiscal year Revenues $ 199,120 $ 11,125 $ 210,245 $ 195,838 $ 8,346 $ 204,184 Provision for loss due to closure of SPA Collection division -- (8,000) (8,000) -- -- -- Earnings (loss) from operations 4,618 (11,546) (6,928) 4,110 (3,750) 360 Net earnings (loss) $ 2,664 $ (7,009) $ (4,345) $ 2,771 $ (2,327) $ 444 Per share data: Provision for loss due to closure of SPA Collection division, net of tax benefit $ -- $ (0.56) $ (0.56) $ -- $ -- $ -- Net earnings (loss) per share $ 0.32 $ (0.85) $ (0.53) $ 0.32 $ (0.27) $ 0.05 Fourth quarter Revenues $ 85,045 $ 5,145 $ 90,190 $ 75,908 $ 3,481 $ 79,389 Provision for loss due to closure of SPA Collection division -- (8,000) (8,000) -- -- -- Earnings (loss) from operations 9,579 (8,528) 1,051 6,905 (1,309) 5,596 Net earnings (loss) $ 5,732 $ (5,127) $ 605 $ 4,166 $ (795) $ 3,371 Per share data: Provision for loss due to closure of SPA Collection division, net of tax benefit $ -- $ (0.56) $ (0.56) $ -- $ -- $ -- Net earnings (loss) per share $ 0.67 $ (0.60) $ 0.07 $ 0.48 $ (0.09) $ 0.39
11 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Revenues Fiscal Year Ended ---------------------------------------------------- Jan. 31, Jan. 31, Jan. 31, 1997 1996 1995 Dollars in thousands (Fiscal 1996) (Fiscal 1995) (Fiscal 1994) - -------------------------------------------------------------------------------- Net store sales $149,321 $ 145,095 $ 135,203 Net catalog sales 54,420 54,160 49,462 Net wholesale sales 4,029 3,145 1,912 ------- ------- ------- Total Net Sales 207,770 202,400 186,577 List rental 1,177 1,102 1,442 Licensing 1,298 682 516 ------- ------- ------- Total Revenues $210,245 $204,184 $188,535 ------- ------- ------- Net sales of $207,770,000 for fiscal 1996 increased $5,370,000, or 2.7%, from the prior fiscal year. Returns and allowances as a percentage of sales were 12.3% for fiscal 1996, compared to 12.2% for fiscal 1995. Net store sales increased $4,226,000, or 2.9%, comparable store sales decreased 2.1%, net catalog sales increased $260,000, or 0.5%, and net wholesale sales increased $884,000, or 28.1%. During the first nine months of fiscal 1996, the Company's sales and operating results were negatively impacted by key factors ranging from key vendors missing delivery dates, to out-of-stock situations with key items, to higher catalog paper prices. These factors turned positive during the fourth quarter with key new products arriving as planned, increased inventory levels and savings on catalog paper prices. The increase in net stores sales for fiscal 1996 was primarily attributable to the addition of eight new stores opened during the year, two of which were Sharper Image SPA stores. The increase in net store sales also reflected a 9.8% increase in total store transactions, partially offset by a decrease in average revenue per order from $106 to $97. Net sales per average selling square foot were $817 for fiscal 1996, compared to $850 in fiscal 1995, and $832 in fiscal 1994. Sharper Image stores' sales productivity compares favorably with the retail industry's specialty store (hard goods) average of $327 for fiscal 1995, $295 for fiscal 1994, and $253 for fiscal 1993 (statistical information for 1996 is not yet available). Although comparable store sales decreased by 11.5% for the first nine months of fiscal 1996, the excellent fourth quarter sales offset almost all of the decrease. Comparable store sales increased 5.9% for the fourth quarter, during which the Company generated approximately 43% of its revenues. Management believes the successful quarter was primarily fueled by the introduction of several key new products as well as better inventory in-stock position. Net catalog sales were positively impacted by the test mailings of the Sharper Image HOME Collection catalog, an increase in average revenue per order from $122 to $138, and by the changes that were made during the fourth quarter, which included the new redesigned Sharper Image catalog and the advertising campaign in major consumer magazines and newspapers. This was partially offset by the decrease in net catalog sales related to the Sharper Image catalog, due primarily to the decrease in the number of pages circulated for the Sharper Image catalog. Wholesale sales increased primarily due to the increase in the number of wholesale customers both in the U.S. and internationally. 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 fiscal 1995, compared to 12.3% for fiscal 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. The increase in net store sales was partially attributable to the addition of ten new stores opened during the year, four of which were Sharper Image SPA test stores. The Sharper Image SPA store and catalog concept was 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 fiscal 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 catalogs, partially offset by a slight decrease in net catalog sales related to The Sharper Image Catalog. The Company believes that the increase in the number of catalogs and catalog pages circulated for the Sharper Image 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. Wholesale sales increased primarily due 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. 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 $6,071,000, or 5.9% in fiscal 1996 from fiscal 1995. The increase was primarily related to increases in net sales and the higher cost of products related to the merchandise mix. The gross margin rate for fiscal 1996 was 47.6%, compared to 49.1% for fiscal 1995. The lower gross margin rate for fiscal 1996 as compared to fiscal 1995 is partially attributable to the changes in the Company's merchandise mix, which reflected an increase in sales of lower margin products, such as certain state-of-the-art electronic items and games and a decrease in sales of certain higher margin products, such as the Company's Sharper Image Design propriety products and fitness equipment. Cost of products increased $6,415,000, or 6.7%, in fiscal 1995 from fiscal 1994. This increase primarily reflected the increase in cost of products related to increases in net sales. The gross margin rate for fiscal 1995 was 49.1%, compared to 48.2 % for fiscal 1994. The higher gross margin rate for fiscal 1995 as compared to fiscal 1994 primarily reflected the positive impact of the Company's merchandise mix during fiscal 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. The Company's gross margin rate fluctuates with the changes in its merchandise mix, which is affected by new items available in various categories. The variation in merchandise mix from category to category from year to year reflects the characteristic that the Company is individual product driven, as opposed to general lines of merchandise. It is impossible to predict future gross margin rates. Buying and Occupancy Buying and occupancy expenses increased $2,653,000, or 12.4%, in fiscal 1996 from fiscal 1995. The increase primarily reflected the occupancy costs associated with the eight new stores opened during fiscal 1996 and the annualized occupancy cost of the ten new stores opened in fiscal 1995, which was partially offset by the elimination of the occupancy costs of the two stores closed during fiscal 1996. Buying and occupancy expenses increased $1,763,000, or 9.0%, in fiscal 1995 from fiscal 1994. The increase primarily reflected the occupancy costs associated with the ten new stores opened during fiscal 1995, and partially to the increase in store rents due to the expiration of certain negotiated rent concessions. Advertising and Promotion Advertising and promotion expenses for fiscal 1996 decreased $5,974,000, or 18.8%, from fiscal 1995. The decrease in advertising and promotion expense was primarily due to a 25% decrease in the number of catalog pages circulated for the Sharper Image catalog, the decrease in the number of pages and the number of catalogs mailed for the SPA Collection catalog, and lower paper prices since July 1996. The decrease in advertising and promotion expense was partially offset by a 3% increase in the number of Sharper Image catalogs circulated, the costs incurred for the redesign of The Sharper Image catalog which was launched in October 1996, the advertising campaign initiated during the fourth quarter in major consumer magazines and newspapers designed to attract new customers, and the test mailings of The Sharper Image Home Collection. The Company began to receive rate decreases in paper costs during the second quarter of fiscal 1996, which has had a favorable impact on costs for fiscal 1996 as compared to fiscal 1995. Advertising and promotion expenses for fiscal 1995 increased $10,317,000, or 48.2%, from fiscal 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 had a significant effect on the Company. The Company 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 catalogs. 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. 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. 13 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation General, Selling, and Administrative General, selling, and administrative (GS&A) expenses for fiscal 1996 increased $2,599,000, or 5.4%, from fiscal 1995, primarily due to increases in overall selling expenses related to the increase in net sales, the increase in store expenses associated with the eight new stores opened during fiscal 1996, an increase in corporate personnel expenses to support the additional stores, and the development of new retail concepts. Also contributing to the increase in GS&A expenses was an increase in net delivery expense related to mail-order shipments. GS&A expenses for fiscal 1995 increased $3,284,000, or 7.3% from fiscal 1994, primarily due to increases in overall selling expenses related to the increase in net sales. The increase in GS&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 fiscal 1995, and an increase in net delivery expense related to the increase in mail-order sales. Provision for Loss Due to Closure of SPA Collection Division The Company critically evaluates the results and long-term potential of its current and test business concepts in order to determine which will generate the greatest return on its investments. As part of this process, the Company decided to close the unprofitable SPA Collection division. As a result of the closure of the SPA Collection division during the fourth quarter of fiscal 1996, the Company incurred a one-time charge of $8,000,000 ($4,800,000 net of the tax benefit, or 56 cents loss per share), which contributed to the Company's net loss of 53 cents per share for the fiscal year ended January 31, 1997. The Company estimates that the phase-out period will take six to twelve months. Other Income (Expense) Other income (expense) for fiscal 1996 decreased $692,000 from fiscal 1995. The decrease in other income (expense) is primarily due to an increase in interest expense related to borrowings on the Company's credit facility, and a decrease in interest income from available cash. Other income (expense) for fiscal 1995 increased $730,000 from fiscal 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. Income Taxes The effective tax rate for fiscal 1996 and fiscal 1995 was 40.0%. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events then known to management are considered, other than changes in the tax law or rates. Liquidity and Capital Resources At January 31, 1997, the Company had cash and equivalents of $10,873,000, a decrease of $1,603,000, as compared to $12,476,000 at January 31, 1996. During fiscal 1996, the Company met its short-term liquidity needs and its capital requirements with available cash, cash flow provided by operations, trade credit, and the revolving and term loans. The decrease in cash was primarily due to the property and equipment expenditures related to new and remodeled stores. At January 31, 1997, the Company had no amounts outstanding on its revolving loan credit facility. There was $1,833,000 of CAPEX Term Loans outstanding which was included in notes payable. The highest amount of direct borrowings under the revolving loan credit facility during fiscal 1996 was $11,711,000, compared with $11,000,000 in fiscal 1995. Letters of credit commitments outstanding at January 31, 1997 were $1,285,000. In September 1994, the Company entered into a five-year revolving secured credit facility with The CIT Group/Business Credit, Inc. 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 May 1996, an amendment to the credit facility was completed with CIT to provide for term loans for capital expenditures ("CAPEX Term Loans") up to an aggregate amount of $4.5 million. As a result of the amendment, the total credit facility was increased from $20.0 million to $24.5 million and the expiration has been extended for an additional two years to September 2001. The CAPEX Term Loans allow the Company to borrow amounts for capital improvements. Amounts borrowed under the CAPEX Term Loans bear interest at either prime plus 1% per annum, or at LIBOR plus 3% per annum. Each CAPEX Term Loan is to be repaid in 36 equal monthly principal installments. Certain financial covenants of the credit facility were revised in the amendment. 14 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Liquidity and Capital Resources (continued) Subsequent to January 31, 1997, two amendments to the credit facility were completed with CIT to amend certain financial covenants and to provide additional seasonal borrowings during 1997. The credit facility has been increased to $29.5 million for the period from October 1, 1997 through December 31, 1997. CIT also provided the Company a waiver for non-compliance of the working capital and the fixed charge ratio covenants for the period ended January 31, 1997. The non-compliance occurred as a result of the closure of the SPA Collection division. 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. 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. Notes payable also included a CIT funded CAPEX Term Loan which bears interest at a variable rate equal to the prime rate plus 1%, provides for monthly principal payment of $55,555 plus the related interest payment, and matures in October 1999. The Company's merchandise inventory at January 31, 1997 was approximately 12.6% higher than the prior fiscal year. The increase in inventory reflected the incremental amounts for the support of eight new stores opened during 1996. The Company leases all of its offices, stores, and seasonal warehouse space. The Company opened six Sharper Image stores located in Chestnut Hill, Massachusetts; Edina, Minnesota; Raleigh, North Carolina; Garden City, New York; Paramus, New Jersey; and Naples, Florida. Two Sharper Image SPA Collection stores were also opened. The Company remodeled five Sharper Image stores located in Redondo Beach and San Diego, California; Chicago, Illinois; Boca Raton, Florida; and San Antonio, Texas, and closed two stores located in Minneapolis, Minnesota, and Lahaina, Maui, Hawaii. The Company is currently evaluating its plan to open one to three new Sharper Image stores and convert certain of the SPA Collection stores to Sharper Image stores during fiscal 1997. Total capital expenditures estimated for new and existing stores, corporate headquarters and the distribution center for fiscal 1997 are between $4.0 million and $6.0 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. Uncertainties and Risk The foregoing discussion and analysis should be read in conjunction with the Company's financial statements and notes thereto included with this report. The foregoing discussion contains certain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, risks of changing market condition in the overall economy and the retail industry, consumer demand, the opening of new stores, actual advertising expenditures by the Company, the success of the Company's advertising and merchandising strategy, availability of products , and other factors detailed from time to time in the Company's annual and other reports filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligations to publicly release any revisions to these forward-looking statement or reflect events or circumstances after the date hereof. 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, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Sharper Image Corporation as of January 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Francisco, California March 28, 1997 16 Statements of Operations - ------------------------------------------------------------------------------------------------------ Sharper Image Corporation
Fiscal Year Ended January 31, --------------------------------------- Dollars in thousands except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Revenues: Sales $ 236,844 $ 230,410 $ 212,785 Less: returns and allowances 29,074 28,010 26,208 ----------- ----------- ----------- Net Sales 207,770 202,400 186,577 List rental 1,177 1,102 1,442 Licensing 1,298 682 516 ----------- ----------- ----------- 210,245 204,184 188,535 ----------- ----------- ----------- Costs and Expenses: Costs of products 108,799 102,728 96,313 Buying and occupancy 23,967 21,314 19,551 Advertising and promotion 25,736 31,710 21,393 General, selling, and administrative 50,671 48,072 44,788 Provision for loss due to closure of SPA Collection division 8,000 -- -- ----------- ----------- ----------- 217,173 203,824 182,045 ----------- ----------- ----------- Other Income (Expense): Interest income (expense)--net (391) 220 (164) Other--net 78 159 (187) ----------- ----------- ----------- (313) 379 (351) ----------- ----------- ----------- Earnings (Loss) before Income Tax (Benefit) (7,241) 739 6,139 Income Tax (Benefit) (2,896) 295 2,456 ----------- ----------- ----------- Net Earnings (Loss) $ (4,345) $ 444 $ 3,683 ----------- ----------- ----------- Net Earnings (Loss) Per Share $ (0.53) $ 0.05 $ 0.41 ----------- ----------- ----------- Weighted Average Number of Shares 8,260,208 8,682,078 8,899,289 ----------- ----------- ----------- See Notes to Financial Statements
17 Balance Sheets - -------------------------------------------------------------------------------- Sharper Image Corporation January 31, ---------------- Dollars in thousands except per share amounts 1997 1996 - -------------------------------------------------------------------------------- Assets Current Assets: Cash and equivalents $ 10,873 $ 12,476 Accounts receivable, net of allowance for doubtful accounts of $505 and $461 5,915 4,436 Merchandise inventories 27,365 24,313 Deferred catalog costs 3,713 4,135 Prepaid expenses and other 4,495 2,576 -------- --------- Total Current Assets 52,361 47,936 Property and Equipment, Net 23,012 20,726 Deferred Taxes and Other Assets 3,431 1,794 -------- --------- Total Assets $ 78,804 $ 70,456 -------- --------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 17,025 $ 13,994 Accrued expenses 19,628 11,230 Deferred revenue 5,045 4,893 Income taxes payable 307 363 Current portion of notes payable 927 223 -------- --------- Total Current Liabilities 42,932 30,703 Notes Payable 4,245 3,355 Other Liabilities 3,178 3,640 -------- --------- Total Liabilities 50,355 37,698 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, 8,266,940 and 8,250,980 shares 83 82 Additional paid-in capital 9,590 9,555 Retained earnings 18,776 23,121 -------- --------- Total Stockholders' Equity 28,449 32,758 -------- --------- Total Liabilities and Stockholders' Equity $ 78,804 $ 70,456 -------- --------- 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, 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 earnings 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 earnings 444 444 ---------- ---------- ---------- ---------- ---------- Balance at January 31, 1996 8,250,980 82 9,555 23,121 32,758 Issuance of common stock for stock options 15,960 1 35 36 Net loss (4,345) (4,345) ---------- ---------- ---------- ---------- ---------- Balance at January 31, 1997 8,266,940 $ 83 $ 9,590 $ 18,776 $ 28,449 ---------- ---------- ---------- ---------- ---------- See Notes to Financial Statements.
19 Statements of Cash Flows - ------------------------------------------------------------------------------------------------------------------------------------ Sharper Image Corporation
Fiscal Year Ended January 31, -------------------------------------------------- Dollars in thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Cash was Provided by (Used for) Operating Activities: Net earnings (loss) $ (4,345) $ 444 $ 3,683 Adjustments to reconcile net earnings (loss) to net cash provided by operations: Depreciation and amortization 4,195 3,461 3,269 Deferred rent expense 142 69 (3) Deferred income taxes (3,188) (127) (63) Change in operating assets and liabilities: Accounts receivable (1,479) (1,202) 581 Merchandise inventories (3,052) (758) 1,806 Deferred catalog costs, prepaid expenses and other 54 (2,018) (743) Accounts payable and accrued expenses 11,429(1) 4,141 4,953 Deferred revenue and other liabilities (508) (347) 1,235 -------- -------- -------- Cash Provided by Operating Activities 3,248 3,663 14,718 -------- -------- -------- Cash was Provided by (Used for) Investing Activities: Property and equipment expenditures (6,579) (11,507) (2,655) Disposals of equipment 98 14 191 -------- -------- -------- Cash Used for Investing Activities (6,481) (11,493) (2,464) -------- -------- -------- Cash was Provided by (Used for) Financing Activities: Issuance of common stock for stock options and warrant 36 128 1,778 Repurchase of common stock -- (606) (2,537) Proceeds from notes payable and revolving loan 25,665 14,000 2,000 Principal payments on notes payable and revolving loan (24,071) (11,409) (2,168) -------- -------- -------- Cash Provided by (Used for) Financing Activities 1,630 2,113 (927) -------- -------- -------- Net Increase (Decrease) in Cash and Equivalents (1,603) (5,717) 11,327 Cash and Equivalents at Beginning of Period 12,476 18,193 6,866 -------- -------- -------- Cash and Equivalents at End of Period $ 10,873 $ 12,476 $ 18,193 -------- -------- -------- Supplemental Disclosure of Cash Paid for: Interest $ 700 $ 312 $ 288 Income Taxes $ 459 $ 1,971 $ 1,008 (1)Includes $8,000 of accrued liabilities related to the closure of the SPA Collection division. See Notes to Financial Statements.
20 Notes to Financial Statements - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1997, 1996, and 1995 Note A--Summary of Significant Accounting Policies The Company is a leading specialty retailer which introduces and sells quality, innovative, and entertaining products. These products are sold through its retail stores, catalogs, and other marketing channels throughout the United States. The Company also has stores and catalog operations internationally through licensees. Additional revenue is derived from rental of the Company's mailing list and from licensing activities relating to the Company's trade name. Revenue Recognition: Catalog sales are recorded when merchandise is shipped. Deferred revenue represents merchandise certificates outstanding and unfilled cash orders at the end of the fiscal period. Mailing list rental revenue is recognized when the list is fulfilled. Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments: The carrying value of cash, accounts receivable, and accounts payable approximates the estimated fair value. Merchandise Inventories: Merchandise inventories are stated at lower of cost (first-in, first-out method) or market. Cash and Equivalents: Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less. Deferred Catalog and Advertising Costs: Direct costs incurred for the production and distribution of catalogs are capitalized. Capitalized catalog costs are amortized, once the catalog is mailed, over the expected sales period which is generally three months. Other advertising costs are expensed as incurred and amounted to $5,306,000, $3,807,000, and $3,019,000, for the fiscal years ended January 31, 1997, 1996, and 1995. 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 then known to management that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events then known to managment are considered other than changes in the tax law or rates. Stock-Based Compensation: The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees. Earnings Per Share: 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, 1997 financial statements. New Accounting Standards: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The pro forma effect assuming adoption of SFAS No. 128 at the beginning of each period is presented below: Fiscal Year Ended January 31, ----------------------------- 1997 1996 1995 ---- ---- ---- Pro forma Earnings (Loss) Per Share: Basic $(0.53) $0.05 $0.44 Diluted $(0.51) $0.05 $0.41 21 Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1997, 1996, and 1995 Note B--Property and Equipment Property and equipment is summarized as follows: January 31, ----------------------- Dollars in thousands 1997 1996 - -------------------------------------------------------------------------------- Leasehold improvements $24,341 $22,542 Office furniture and equipment 26,839 23,264 Transportation 2,422 2,266 Land 53 53 Building 2,874 2,873 ------- ------- 56,529 50,998 Less accumulated depreciation and amortization 33,517 30,272 ------- ------- $23,012 $20,726 ------- ------- 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, 1997 and 1996 was $392,000 and $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. 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. In May 1996, an amendment to the credit facility was completed with CIT to provide for term loans for capital expenditures ("CAPEX Term Loans") up to an aggregate amount of $4.5 million. As a result of the amendment, the total credit facility was increased from $20.0 million to $24.5 million and the expiration has been extended for an additional two years to September 2001. The CAPEX Term Loans allow the Company to borrow amounts for capital improvements. Amounts borrowed under the CAPEX Term Loans bear interest at either prime plus 1% per annum, or at LIBOR plus 3% per annum. Each CAPEX Term Loan is to be repaid in 36 equal monthly principal installments. Certain financial covenants of the credit facility were revised in the amendment. Subsequent to January 31, 1997, two amendments to the credit facility were completed with CIT to amend certain financial covenants and to provide additional seasonal borrowings during 1997. The credit facility has been increased to $29.5 million for the period from October 1, 1997 through December 31, 1997. CIT also provided the Company a waiver for non-compliance of the working capital and the fixed charge ratio covenants for the period ended January 31, 1997. The non-compliance occurred as a result of the closure of the SPA collection division. At January 31, 1997 and 1996, the Company had no amounts outstanding on its revolving loan credit facility. Letters of credit commitments as of January 31, 1997 were $1,285,000. 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. Notes payable also included a CAPEX Term Loan which bears interest at a variable rate equal to the prime rate plus 1%, provides for monthly principal payments of $55,555 plus the related interest payment, and matures in October 1999. The respective balance of each note payable is $2,887,000, $452,000 and $1,833,000. Future minimum principal payments on notes payable are as follows: Dollars in thousands - ------------------------------------------------------------- Year ending January 31, 1998 $ 927 1999 946 2000 787 2001 147 2002 160 Later years 2,205 ------ Total notes payable $5,172 ------ 22 Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1997, 1996, and 1995 Note E--Income Taxes January 31, ---------------------------------------- Dollars in thousands 1997 1996 1995 - -------------------------------------------------------------------------------- Currently payable: Federal $ 248 $ 359 $ 2,144 State 44 63 375 ------- ------- ------- 292 422 2,519 Deferred: Federal (2,710) (107) (54) State (478) (20) (9) ------- ------- ------- (3,188) (127) (63) ------- ------- ------- $(2,896) $ 295 $ 2,456 ------- ------- ------- The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows: January 31, --------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Federal tax rate 34.0% 34.0% 34.0% State income tax, less federal benefit 6.0 6.0 6.0 ------- ------- ------- Effective tax rate 40.0% 40.0% 40.0% ------- ------- ------- Deferred taxes result from differences in the recognition of expense for income tax and financial reporting purposes. Temporary differences which give rise to deferred tax assets (liabilities) are as follows: January 31, --------------------------------------------- Dollars in thousands 1997 1996 - -------------------------------------------------------------------------------- Current: Nondeductible reserves $ 4,457 $ 2,844 Deferred catalog costs (1,485) (1,654) State taxes (551) (522) Valuation allowance -- -- -------- -------- Current--net 2,421 668 -------- -------- Noncurrent: Deferred rent 1,566 1,251 Depreciation 2,512 1,248 Deductible software costs (924) (800) Other--net (168) (148) Valuation allowance -- -- -------- -------- Noncurrent--net 2,986 1,551 -------- -------- Total $ 5,407 $ 2,219 -------- -------- Note F--Leases The Company leases its offices, retail facilities, and equipment under operating leases for terms expiring at various dates through 2008. Under the terms of certain of the leases, rents are adjusted annually for changes in the consumer price index and increases in property taxes. The aggregate minimum annual lease payments under leases in effect at January 31, 1997, are as follows: Dollars in thousands - -------------------------------------------------------------------------------- Year ending January 31, 1998 $ 14,002 1999 13,977 2000 13,659 2001 12,181 2002 8,120 Later years 28,276 -------- Total minimum lease commitments $ 90,215 -------- 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 1997 1996 1995 - -------------------------------------------------------------------------------- Minimum rentals $ 13,259 $ 11,917 $ 11,094 Percentage rentals and other charges 5,546 5,093 4,540 -------- -------- -------- $ 18,805 $ 17,010 $ 15,634 -------- -------- -------- 23 Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1997, 1996, and 1995 Note G--Related Party Transactions In October 1993, the Company refinanced one of its existing mortgage loans with a loan of $300,000 from a minority stockholder and director of the Company. This loan balance of $256,000 was paid in full in December 1995. In 1993, the Company acquired the rights to manufacture certain products along with related tooling and equipment from a former director of the Company. The agreement provided for ongoing manufacturing assistance with payments based on sales of certain products. Under the agreement, the Company paid $640,000 for the fiscal year ended January 31, 1995. 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. 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. The Company did not repurchase any shares during fiscal 1996. During fiscal 1995 and fiscal 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, 1997, 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 100% of the fair market value at the date of the grant. During 1995, with stockholders' approval, the Company amended the 1985 Stock Option Plan to increase the number of shares of its common stock reserved for the issuance of additional stock options by 750,000 shares, limit the maximum number of shares any one individual may be granted per fiscal year, expand the eligibility provisions to allow individuals owning more than 25% of the Company's common stock to receive stock options and render the non-employee members of the Board ineligible to receive stock option grants under this plan. In 1995, the Company also implemented the 1994 Non-Employee Directors Stock Option Plan, as approved by stockholders, to allow for stock option grants of common stock to the non-employee members of the Board of Directors. Options will be immediately exercisable, vest over one year of Board service from the date of the grant, and are priced at 100% of the fair market value at the date of the grant. Any shares purchased under the option will be subject to repurchase by the Company upon the optionee's cessation of Board service prior to vesting. At January 31, 1997, the Company had reserved 636,420 shares and 33,000 shares, under the 1985 Stock Option Plan and the 1994 Non-Employee Directors Stock Option Plan, respectively, for the granting of additional stock options. Additional Stock Plan Information As discussed in Note A, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", requires the disclosure of pro forma net earnings (loss) and earnings (loss) per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life five years from date of grant; stock volatility, 45% in fiscal 1996 and fiscal 1995; risk free interest rates, 6.21% in fiscal 1996 and 6.23% in fiscal 1995; and no dividends during the expected term. The Company's calculations are based on a single option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 1996 and fiscal 1995 awards had been amortized to expense over the vesting period of the awards, pro forma net earnings (loss) would have been $(4,576,000) ($0.55 loss per share) in fiscal 1996 and $317,000 ($0.04 earnings per share) in fiscal 1995. However, the impact of outstanding non-vested stock options granted prior to fiscal 1995 has been excluded from the pro forma calculation; accordingly, the fiscal 1996 and fiscal 1995 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all future applicable stock options. 24 Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1997, 1996, and 1995 Note H--Stockholders' Equity (continued) The following table reflects the activity under these plans: Weighted Number of Average Options Exercise Price --------------------------- Balance at January 31, 1994 756,590 $1.99 Granted 378,100 6.73 Exercised (57,070) 1.94 ----------- Cancelled (113,950) 1.98 Balance at January 31, 1995 963,670 3.88 Granted (weighted average fair value of $2.76) 630,100 5.65 Exercised (62,640) 2.06 Cancelled (352,860) 6.80 ----------- Balance at January 31, 1996 1,178,270 4.03 Granted (weighted average fair value of $1.70) 951,800 3.54 Exercised (15,960) 4.39 Cancelled (609,610) 5.58 ----------- Balance at January 31, 1997 1,504,500 $3.13 ----------- Exercisable at January 31, 1996 624,000 $1.70 ----------- Exercisable at January 31, 1997 650,000 $2.49 -----------
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------- ----------------------------------------------- Number Weighted Average Weighted Average Number Weighted Range of of Options Remaining Contractual Exercise of Options Average Exercise Prices Outstanding Life (years) Price Exercisable Exercise Price - ---------------------------------------------------------------------------------- ----------------------------------------------- $1.16-$1.99 333,690 4.8 $1.81 323,000 $1.81 2.00- 3.99 1,089,910 9.3 3.37 295,000 2.92 4.00- 7.00 80,900 8.0 5.27 32,000 5.51 --------- ------- $1.16-$7.00 1,504,500 8.2 $3.13 650,000 $2.49 --------- -------
Note I--Provision for Loss Due to Closure of SPA Collection Division The Company critically evaluates the results and long-term potential of its current and test business concepts in order to determine which will generate the greatest return on its investments. As part of this process, the Company decided to close the unprofitable SPA Collection division. Related to the closure of the SPA Collection division, for the fourth quarter of fiscal 1996, the Company incurred a one-time charge of $8,000,000 ($4,800,000 net of the tax benefit, or 56 cents loss per share). The Company estimates that the phase-out period will take six to twelve months. The one-time charge of $8,000,000 is primarily related to the lease commitments and the net book value of fixed assets related to the SPA Collection division. 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. 25 Notes to Financial Statements (continued) - -------------------------------------------------------------------------------- Sharper Image Corporation Fiscal Years Ended January 31, 1997, 1996, and 1995 Note K--Quarterly Financial Information (Unaudited)
Dollars in thousands except per share amounts Three Months Ended ------------------------------------------------------------ April 30, July 31, October 31, January 31, Fiscal year ended January 31,1997 1996 1996 1996 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 36,501 $ 44,186 $ 39,368 $ 90,190 Expenses Cost of products 19,245 22,872 20,282 46,400 Buying and occupancy 5,601 5,785 6,071 6,510 Advertising and promotion 4,726 5,806 4,562 10,642 General, selling and administrative 10,651 11,370 11,064 17,586 Provision for loss due to closure of SPA Collection division(1) -- -- -- 8,000 Other income (expense) 21 (106) (184) (44) Earnings (loss) before income tax (benefit) (3,701) (1,753) (2,795) 1,008 Income tax (benefit) (1,480) (701) (1,118) 403 Net earnings (loss) $ (2,221) $ (1,052) $ (1,677) $ 605 Net earnings (loss) per share $ (0.27) $ (0.13) $ (0.20) $ 0.07 Three Months Ended ------------------------------------------------------------ April 30, July 31, October 31, January 31, Fiscal year ended January 31,1996 1995 1995 1995 1996 - ------------------------------------------------------------------------------------------------------------------------------------ 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 administrative 9,791 11,338 10,847 16,096 Other income (expense) 213 213 (67) 20 Earnings (loss) before income tax (benefit) (1,555) (1,931) (1,391) 5,616 Income tax (benefit) (622) (772) (556) 2,245 Net earnings (loss) $ (933) $ (1,159) $ (835) $ 3,371 Net earnings (loss) per share(2) $ (0.11) $ (0.14) $ (0.10) $ 0.39 (1)See Note I for discussion on the closure of SPA Collection Division. (2)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 - -------------------------------------------------------------------------------- Richard Thalheimer Lawerence Feldman Founder Chairman Emeritus Chairman of the Board San Francisco Mart Chief Executive Officer J. Gary Shansby Elyse Eng Thalheimer Founder The Shansby Group Alan Thalheimer Retired Business Executive Gerald Napier* Retired President of Maurice Gregg I. Magnin and Company Retail Financial Consultant *Joined April 1997. Officers - -------------------------------------------------------------------------------- Richard Thalheimer Jennifer Grellman Founder Vice President Chairman of the Board Corporate Marketing Chief Executive Officer Greg Hickey Barry Gilbert Vice President Vice Chairman Management Information Systems Chief Operating Officer Barry Jacobsen Craig Womack Vice President President Distribution Chief Administrative Officer Mary MacKenzie Vincent Barriero Vice President Senior Vice President Human Resources Chief Information Officer Assistant Corporate Secretary Richard Mueller Vice President Shannon King Merchandising Senior Vice President Merchandising Woodrow Nelson Vice President Sydney Klevatt Creative Services Senior Vice President Marketing Judith Serlin Vice President Tracy Wan Merchandising Senior Vice President Chief Financial Officer Charles Taylor Corporate Secretary Vice President TSI Design Joe Williams Vice President Loss Prevention Corporate Information - -------------------------------------------------------------------------------- Corporate Headquarters 650 Davis Street San Francisco, CA 94111 Telephone (415) 445-6000 FAX: (415) 445-1574 Transfer Agent and Registrar Chase Mellon Shareholder Services 50 California Street San Francisco, California 94111 Corporate Counsel Brobeck, Phleger & Harrison LLP One Market Spear Street Tower San Francisco, California 94105 Certified Public Accountants Deloitte & Touche LLP 50 Fremont Street San Francisco, CA 94105 SEC Form 10-K A copy of the Company's annual report to the Securities and Exchange Commission of Form 10-K (exclusive of exhibits) is available without charge upon written request to: Investor Relations The Sharper Image 650 Davis Street San Francisco, CA 94111 Annual Meeting The Annual Meeting of Stockholders of Sharper Image Corporation will be held on Monday June 9, 1997, at 2 pm at the World Trade Club, Ferry Building, Coit Tower Room, San Francisco, California. - -------------------------------------------------------------------------------- Common Stock Market Prices and Dividend Policy The common stock of Sharper Image Corporation is traded in the Nasdaq National Market under the symbol SHRP. The following table sets forth, for the periods indicated, the range of high and low prices reported for the common stock. The Company has not paid cash dividends to holders of its common stock. Fiscal Year 1996 High Low First Quarter 6 1/4 3 5/8 Second Quarter 6 3/8 3 1/2 Third Quarter 4 1/2 3 1/4 Fourth Quarter 4 1/8 3 1/8 27 EX-23.1 8 INDEPENDENT AUDITORS' 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, 1997 and 1996 and for each of the three years in the period ended January 31, 1997, and have issued our report thereon dated March 28, 1997, such financial statements and reports are included in your 1996 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 28, 1997 - ----------------- Deloitte Touche Tohmatsu International - ----------------- EX-23.2 9 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. 33-12755 and No. 33-80504 of Sharper Image Corporation on Forms S-8 of our report dated March 28, 1997, appearing in this Annual Report on Form 10-K of Sharper Image Corporation for the year ended January 31, 1997. /s/ Deloitte & Touche LLP April 29, 1997 - ----------------- Deloitte Touche Tohmatsu International - ----------------- EX-27.0 10 FINANCIAL DATA SCHEDULE
5 0000811696 SHARPER IMAGE CORPORATION 1,000 U.S. DOLLARS 12-MOS JAN-31-1997 FEB-1-1996 JAN-31-1997 1 10873 0 6420 (505) 27365 52361 56529 (33517) 78804 42932 0 83 0 0 28366 78804 236844 210245 108799 209173 (78) 8000 391 (7241) (2896) (4345) 0 0 0 (4345) (0.53) (0.53)
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