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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, 2001
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number 33-12755
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code:
(415) 445-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 16, 2001 was $104,367,958
The number of shares of Common Stock, with $.01 par value, outstanding on April
16, 2001 was 11,982,544 shares.
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Documents incorporated by reference: Portions of Registrant's Annual Report to
Stockholders for the fiscal year ended January 31, 2001 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 4, 2001 are
incorporated by reference into Part III of this report.
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PART 1
This Annual Report on Form 10-K and the documents incorporated herein by
reference of Sharper Image Corporation (referred to as the "Company," "The
Sharper Image," "it," "we," "ours," and "us") contain forward-looking statements
within the meaning of federal securities laws 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 16 through 25, as well as those noted in the
documents incorporated herein by reference. Unless required by law, the Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. However,
readers should carefully review the statements set forth in other reports or
documents the Company files from time to time with the Securities and Exchange
Commission, particularly the Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
Item 1. Business
Overview
The Sharper Image is a leading specialty retailer of innovative, high
quality products that are useful and entertaining and are designed to make life
easier and more enjoyable. The Company offers a unique assortment of products in
the electronics, recreation and fitness, personal care, houseware, travel, toy,
gift and other categories. The Company's merchandising philosophy focuses on new
and creative proprietary Sharper Image Design products and Sharper Image private
label products. In addition, the Company is a leading source of branded
products, a portion of which the Company offers on an exclusive basis. The
Company's products are marketed and sold through three primary sales channels:
The Sharper Image stores, The Sharper Image catalog, and the Internet, primarily
through its sharperimage.com Web site. The Company also has business-to-business
operations consisting of Sharper Image Corporate Rewards & Incentives and
wholesale operations. The Company believes that its unique merchandising and
creative marketing strategies have made The Sharper Image one of the most widely
recognized retail brand names in the United States.
The Company's merchandising strategy emphasizes products that are
innovative and new-to-market. In recent years, the Company has focused
significant resources on the development and marketing of its Sharper Image
Design proprietary products and its Sharper Image private label products, which
are exclusive to The Sharper Image. Sharper Image Design products typically
generate higher gross margins than other products, lessen direct price
comparisons and, the Company believes, strengthens The Sharper Image brand, as
well as broadens its customer reach. The Company has increased the percentage of
its sales attributable to Sharper Image Design
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proprietary and private label products, including the Razor Rollerboard
scooters, to 64% for the year ended January 31, 2001 (fiscal 2000) from 50% for
the year ended January 31, 2000 (fiscal 1999).
The Company markets and sells its merchandise through three primary sales
channels, including The Sharper Image stores, The Sharper Image catalog, and the
Internet, primarily through its sharperimage.com Web site. The Company believes
that this multi-channel approach provides it with significant marketing, sales
and operational synergies, and provides its customers with enhanced shopping
flexibility and superior customer service. The Company's store operations
generate the highest proportion of its sales, representing approximately 59% of
total revenues in fiscal 2000 and 62% in fiscal 1999. As of January 31, 2001,
the Company operated 97 The Sharper Image stores in 28 states and the District
of Columbia. The Sharper Image stores present an interactive and entertaining
selling environment that emphasizes the features and functionality of its fun
and relevant products and allows the customer to interact and truly experience
the product while shopping. The Company's average store sales per square foot
are consistently above industry averages, and during 2000 the Company generated
average sales of $763 per square foot, an increase of 40% as compared with $546
per square foot for fiscal 1999.
The Company also offers its products through its award-winning The Sharper
Image catalog, a full-color monthly catalog that uses dramatic visuals and
creative product descriptions designed and produced by its in-house staff of
writers and production artists. The Sharper Image catalog, which generally
features between 180 and 250 products in each monthly catalog, increasing to
over 340 products during the Holiday shopping season, also currently serves as
the primary advertising vehicle for its stores and its Internet retail operation
at, sharperimage.com. During fiscal 2000, the Company mailed approximately 62.3
million The Sharper Image catalogs to over 10 million individuals. Approximately
21% of the Company's total revenues were generated by direct marketing
operations, including revenue generated directly from the catalog, print ads,
solo mailers and television in fiscal 2000 and 22% in fiscal 1999.
Sharper Image products are also marketed through the Company's Internet
retail operations, including its own Web site, which the Company has maintained
at sharperimage.com since 1995. The Sharper Image was one of the early entrants
into Internet retailing, and has participated in online shopping since 1994. The
Company's Internet operations grew significantly in fiscal 2000 by 111%, to
$60.2 million, or approximately 14% of its total revenues, from $28.5 million or
9% of total revenues for fiscal 1999. In addition to its Web site, the Company
has offered its products through Internet marketing partnerships with America
Online, Catalog City, Linkshare, Yahoo! Shopping, and others. The Company
believes that online retailing over the Internet presents The Sharper Image with
a significant opportunity for the marketing and sale of its products and will
enable it to expand and diversify its existing customer base. The Company
believes that its Sharper Image Design products are particularly well positioned
to be marketed and sold over the Internet. The Company plans to continue to
expand the resources dedicated to its Internet operations by establishing
additional strategic relationships with other online retail partners and
continue to enhance the technical capabilities and presentation of products on
its Web site. The Company also operates an auction site where consumers can bid
to win products at less than retail prices, while allowing the Company the
opportunity to effectively manage its closeout products. During fiscal 2000, the
Company launched its e-commerce Web sites in Europe, with international online
stores that accept Euros for the European Union, British pounds for the United
Kingdom and Deutsche marks for Germany. International online shoppers will be
able to get
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convenient, efficient local delivery of Sharper Image Design products that have
been specifically adapted for use throughout Europe.
The Company was founded in 1977 by Richard Thalheimer, who continues as
Chairman and Chief Executive Officer. The Sharper Image mailed its first catalog
in 1981, began the expansion into store operations in 1984, and commenced
Internet online retail operations in 1994. The Company's store operations
generate the highest proportion of its sales, representing approximately 59% of
total revenues for fiscal 2000 and 62% for fiscal 1999. As of January 31, 2001,
the Company operated 97 The Sharper Image stores in the United States and
licensees operated three stores internationally and two airport stores in the
United States. The typical Sharper Image store ranges from approximately 2,200
to 2,500 selling square feet in size, with several larger size stores having
3,000 to 5,000 selling square feet. The Sharper Image stores present an
interactive and entertaining selling environment that emphasizes the features
and functionality of its products and allows the customer to truly experience
the product while shopping. The Company also has three additional retail
formats, Sharper Image Design stores, Outlet stores and airport shops. These
formats are discussed under "Store Operations" and "Licensed Operations."
During fiscal 2000, the Company opened eight new Sharper Image format
stores, one new Sharper Image Design format store and closed one Sharper Image
store. The Company plans to open approximately 12 new stores during the fiscal
year ending January 31, 2002 (fiscal 2001). Lease terms for several of the
existing The Sharper Image store locations will be maturing during fiscal 2001
and these leases may be re-negotiated or terminated.
The Company is known for its varied product mix and a merchandising
philosophy focusing on innovative, well-designed, high-quality products that are
developed by The Sharper Image, exclusive to The Sharper Image, or in limited
distribution. In product lines where the Company competes directly with other
retailers, it chooses to sell the best version of the product with the most
advanced features. The Company is frequently sought after by manufacturers and
inventors to launch technologically advanced products, with features that are
unique and innovative.
During fiscal 2000, the Company continued the expansion of its in-house
Sharper Image Design product development function. As a result of the increased
resources devoted to Sharper Image Design proprietary and private label products
during fiscal 2000, creating and introducing a number of new Sharper Image
Design products, as well as, the continuing cumulative sales from proprietary
and private label products introduced in prior years, the percentage of sales
attributable to Sharper Image Design proprietary and private label products was
64 percent in fiscal 2000 and 50 percent in fiscal 1999. Since Sharper Image
Design proprietary products generally carry higher margins than branded
products, this increase was the primary reason that the retail gross margin
percentage rate improved by 80 basis points in fiscal 2000 over 1999. The
Company plans to continue to devote resources to its proprietary product
development efforts and its private label merchandising philosophy.
The Company's business is highly seasonal, with sales peaks in June for
Father's Day and graduation gift giving, and the Holiday shopping season. See
"Seasonality".
In addition to its primary businesses, The Sharper Image leverages its name
and reputation through its Corporate Incentives and Rewards program, wholesale
sales of Sharper Image brand products, which include Sharper Image Design
proprietary products and private-
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label products, and a product licensing program with selected businesses.
Wholesale sales are made primarily to fine department stores and to select
international retailers.
Store Operations
The Sharper Image stores are located nationwide in densely populated
downtown financial districts and business centers, upscale shopping malls and
drive-up suburban locations.
Each store is generally staffed with approximately six to eight associates,
including a manager, an assistant manager, a senior sales associate, sales
associates, and other support staff. A number of the Company's high volume
stores are staffed with 11 to 15 associates. The Company's store managers have
an average tenure of over seven years. The Company's store personnel are
compensated primarily through commissions. In order to maintain a high customer
service level, the Company's sales associates undergo considerable training on
its many new and often technically oriented products.
The Sharper Image stores are designed by the Company's visual design staff
at the Company's headquarters in San Francisco to standardize, where possible,
layout so as to simplify their operations. The stores are operated according to
standardized procedures for customer service, merchandise display and pricing,
product demonstration, inventory maintenance, personnel training, administration
and security. The Company's original Sharper Image stores typically have 2,200
to 2,500 square feet of selling space and approximately 1,300 to 2,200 square
feet of storage and administrative space. The typical cost of leasehold
improvements, before landlord contributions, but including fixtures, equipment
and pre-opening expenses, averages $400,000 to $500,000 per store. Initial
inventory for a new Sharper Image store has generally cost approximately
$100,000 to $200,000. Outlet stores are approximately half the cost of the
original Sharper Image stores. The Company also operates a second retail format
of Sharper Image Design stores which are approximately half the size of the
original store with between 1,000 to 1,200 of selling square feet, and feature
higher margin proprietary products in addition to other top selling merchandise.
At the end of fiscal 2000, the Company had 86 The Sharper Image stores, 9
Sharper Image Design stores, and 2 outlet locations.
In 1997 the Company decided to update the look and appeal of its new retail
stores and select existing stores. The new format presents an open, fresh and
inviting environment that appeals to both men and women and highlights the
Company's proprietary products and attractive product packaging. The average
cost of converting an existing store to the new format is similar to that of
building a new store, which ranges from $400,000 to $500,000, subject to
leasehold allowances. During fiscal 2000 the Company opened two flagship
locations, with an average cost of leasehold improvements of $1.1 million. The
Company selectively chooses premier locations in upscale areas for its flagship
stores. Utilizing the new format, the Company opened five new stores and
converted two stores during fiscal 1999, and opened nine new stores, including
two flagship stores and converted six stores in fiscal 2000. The Company intends
to continue to selectively remodel stores utilizing the new store format mainly
at the time of lease renewal.
The Sharper Image Catalog
The Sharper Image catalog is a full-color catalog that is mailed to an
average of approximately 4.2 million individuals each month. The Sharper Image
direct marketing operations, including revenues generated directly from the
catalog, solo mailers, print ads and
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television generated approximately 21% of its total revenues in fiscal 2000 and
22% in fiscal 1999. The Company's catalog has been recognized for creative
excellence by the Direct Marketing Association, a leading catalog industry trade
group. The catalog is currently the primary advertising vehicle for its retail
stores and its Internet retailing business. During fiscal 2000, the Company
mailed approximately 62.2 million of The Sharper Image catalogs to over 10
million individuals. Circulation and number of pages of The Sharper Image
catalog is under continual review to balance the costs of mailing the catalogs
with the revenues generated. The mailings increase significantly for Father's
Day and the Holiday shopping season reflecting the seasonal nature of the
business.
The Sharper Image catalog design uses dramatic visuals and problem-solving
and benefit-oriented product descriptions. The catalog design features the most
important products prominently. The number of items featured each month ranges
between 180 and 250 products during the first three quarters of the year,
increasing to more than 340 products during the Holiday shopping season in the
fourth quarter. The Sharper Image catalog is designed and produced by the
Company's in-house staff of writers and production artists. This enables the
Company to maintain quality control and shorten the lead-time needed to produce
the catalog. The monthly production and distribution schedule permits frequent
changes in the product selection. During fiscal 2000, The Sharper Image catalog
contained from 52 to 84 pages for non-peak months and between 52 and 124 pages
for the peak seasons of Father's Day and the Holiday shopping season.
The Company has developed a proprietary customer database of over 12
million names, which the Company uses regularly and rents periodically to a
highly select group of companies. The Company collects customer names through
its catalog and online Web site order processing as well as electronic
point-of-sale registers in its retail stores. The names and associated sales
information are merged daily into its customer master file. This daily merge
process provides a constant source of current information to help assess the
effectiveness of the catalog as a form of retail advertising, identify new
customers that can be added to its in-house mailing list without using customer
lists obtained from other catalogers, and identify its top purchasers. To
further enhance the effectiveness of its catalog mailings to individuals in the
customer database, the in-house staff utilizes the Company's statistical
evaluation and selection techniques to determine which customer segments are
likely to contribute the greatest revenue per mailing. The Company has
established a data bank of top purchasers who receive preferred services,
including invitations for special sales events and enhanced customer service.
Internet Operations
The Sharper Image was an early entrant into Internet retailing. The Company
has participated in online shopping since 1994, and has maintained its own Web
site at sharperimage.com since 1995. Revenues from the Company's Internet
operations have increased to $60.2 million in fiscal 2000 from $28.5 million in
fiscal 1999. The Company achieved these results without significant incremental
investment in online advertising. The Company's online retail operations benefit
from its brand name, customer base, Sharper Image catalogs and unique product
offerings, as well as its multimedia approach to advertising. The Company
believes that the Sharper Image catalog in particular is a significant factor in
generating online sales. In addition, the Company is able to leverage its
catalog operational infrastructure for fulfillment and customer service
experience, providing it with a significant advantage over Internet retailers
who
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have not developed such capabilities. Shoppers on the Web site have the
convenience of exchanging or returning products purchased through the Internet
at its retail locations.
The Company's goal is to make sharperimage.com a Web site that provides its
online customers with an interactive experience similar to its Sharper Image
stores. The Company is aggressively updating its site by incorporating advanced
technologies to improve its product presentations and making its site
increasingly customer friendly, while retaining its entertainment value. In
fiscal 1999, the Company implemented technology which allows for: the display of
its products using interactive 3D enriched presentations and sound, one-time
registration in a secure environment, express shopping enhancements to free
customers of redundant keying of information, multiple ship-to addresses, and
virtual electronic gift certificates. During fiscal 2000, the Company launched
an enhanced and redesigned Web site that incorporated much of the look and feel
of the new store design. The redesigned Web site includes new features including
dynamic browsing, inventory status, order tracking capabilities, easy
registration and Flash technology. The Company believes that these features are
valuable tools for further increasing its brand recognition and advertising its
products, and will prove particularly useful in reaching its goal of attracting
a broader consumer base to its Web site.
The Company also has an established online auction site. The Company's
auction site allows customers to bid on and acquire a broad range of new,
returned, repackaged and refurbished Sharper Image products for less than
regular retail price. Most products purchased on the auction site have the same
warranty and return benefits that accompany full price products. The Company
believes that bidders have an enhanced level of confidence in its operations
since, unlike many other online auction sites, the Company is an established
retailer with an inventory of well-known products under warranty with
established return policies. The auction site not only offers consumers the fun
of bidding and winning products at less than retail prices, it also allows the
Company the opportunity to effectively manage its closeout products.
The Company is pursuing additional steps to achieve continued growth of its
Internet operations. These steps include technological improvements, dramatic
visual presentations, development of international Web sites in Europe, the
United Kingdom and Germany, and seeking to establish strategic Internet
marketing partnerships. The Company has established relationships with America
Online, Catalog City, Linkshare, Yahoo! Shopping, and others. Periodically, the
Company will engage in email marketing campaigns, which includes special
offerings to Internet customers to receive advance notice of promotions and new
product offerings. Although the Company's international online revenues and
profitability are not planned to be significant during fiscal 2001, we believe
there are good growth opportunities in future years.
Other Operations
In addition to its store, catalog and Internet operations, the Company also
has a business-to-business operation, which includes the Corporate Incentives
and Rewards program, wholesale, and licensing. The Company also derives revenues
from its customer list rental program.
In the Corporate Incentives and Rewards programs, the Company sells
product, incentive and merchandise certificates to client companies who in turn
distribute them under their programs to increase their sales, or to motivate and
reward their high achiever employees and best customers. The Sharper Image
stores, Internet site and catalog are the primary means of offering and
conveniently delivering the incentives and gifts. The Company's certificates are
redeemable for
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Sharper Image merchandise through its retail stores, by mail, on the Internet or
over the telephone through the catalog telemarketing group. The Company is also
developing an additional Internet channel for this area of its business. The
editors and readers of Incentive magazine honored sharperimage.com as one of the
incentive industry's best Web sites. The Company records revenues and expenses
for its Corporate Incentives and Rewards program through its stores, catalog and
Internet operations.
The Company's Business Development department is the primary group
responsible for wholesale marketing to other retailers, including fine
department stores in the U.S. as well as retailers in other countries. This
group's sales were $9.4 million in fiscal 2000 as compared to $10.5 million in
fiscal 1999. Certain customers in fiscal 1999 were part of a concept test
program and did not repeat in fiscal 2000. Plans for this group are to
selectively increase its presence in the international marketplace in 2001, and
increase the number of Sharper Image brand products offered to these customers.
The Company has an exclusive licensing agreement in Switzerland, as well as
airport locations in the United States. Under the international license
agreement, the licensee is granted the right to use the trademarked name, "The
Sharper Image," in Switzerland in connection with The Sharper Image retail
stores and catalog operations. The Company will assist the licensee by producing
a foreign language edition of The Sharper Image catalog, with economies of scale
but at the expense of the licensee who then prints and distributes locally.
There are currently three Sharper Image retail stores operated by the foreign
licensee in Switzerland. The Company receives royalties on sales by the
licensee. Licensees purchase products from the Company or directly from
manufacturers, maintain their own supply of inventory, and establish their own
product prices. The airport licensee is entitled to utilize The Sharper Image
trademark and trade dress in designated airport locations, the design of which
is subject to the approval of the Company. There are two locations -- one at
Dallas-Fort Worth and a second location at Detroit Metropolitan.
In addition, the Company rents its customer list to a highly select group
of companies for a fee or in exchange for their customer lists. The value of
customer list exchanges are not included in the Company's revenues.
The Company continues to pursue additional wholesale opportunities in
foreign countries. Licensing arrangements are selectively revisited.
Merchandising, Product Sourcing, Product Development
Merchandising
The Company's merchandise mix emphasizes innovative products that are new
to market, unique products which are proprietary, private label or available
exclusively through The Sharper Image, or branded products not available in
broad distribution. The Company chooses each product separately because its
sales are driven by individual products, and its marketing efforts focus on each
item's unique attributes, features and benefits. This approach distinguishes the
Company from other retailers who are more category or product classification
oriented. The Company adjusts its merchandise mix to reflect market trends and
customer buying habits. New products are selected or developed and brought into
the Company's merchandise mix based on criteria such as anticipated popularity,
gross margin, uniqueness, value, competitive alternatives, exclusivity, quality
and vendor performance. As a result of such shifting emphasis among
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individual items and depending on the customers demand and the level of
marketing and advertising programs, the mix of sales by category changes from
time to time and the sales volume of individual or related products can be
significant to any particular reporting period's total sales. The effect, from
year to year, can be to increase or decrease the merchandise gross margin rates
since some categories of merchandise sustain traditionally higher margins and
some traditionally sustain lower margin rates. The Company's goal is to increase
sales of Sharper Image Design proprietary products and exclusive private label
products, as these products generally carry higher margins than branded
products. The popularity of these proprietary and private label products
contributed to the 80 basis point increase in the retail gross margin rate for
fiscal 2000, and should continue to have a positive impact on the Company's
retail gross margin rate.
The Company's current merchandise strategy is to offer an assortment of
products with emphasis on Sharper Image Design proprietary and private label
products. The Company intends to focus on offering products in the $40 to $350
price range to appeal to a wide customer base. The Company also intends to
increase its proprietary product offerings. While these proprietary and
private-labeled products offer important sales and gross margin growth
opportunities for all the revenue generating areas of the Company, there are
certain risks associated with these internally developed products, such as
possible manufacturing constraints, delays in bringing these products to market
and cost increases. Products may also be subject to other regulation or
limitations. See "Factors Affecting Future Operating Results."
Sharper Image Design proprietary products are produced for the Company on a
contract basis primarily by manufacturers in Asia. The Company provides all
product specifications to the contract manufacturers. Development lead-time is
generally in the range of 12 to 18 months. However, certain product
introductions may require a longer lead-time.
The Company generates information frequently on merchandise orders and
inventory, which is reviewed by the Company's buyers, its senior merchandising
staff and top management. The Company averages new offerings of approximately 50
to 100 products during the two peak selling seasons. The Company carefully
considers which products will not be offered in future months based upon
numerous factors, including revenues generated, gross margins, the cost of
catalog and store space devoted to each product, product availability and
quality.
Product Sourcing
The process of finding new products involves the Company's buyers reviewing
voluminous product literature, traveling extensively throughout North America
and Asia to attend trade shows and exhibitions, and meeting with manufacturers.
The Company enjoys relationships with many major manufacturers who use The
Sharper Image regularly to introduce their newest products in the United States.
See "Factors Affecting Future Operating Results".
The Company purchases merchandise from numerous foreign and domestic
manufacturers and importers. The Company had a single supplier that provided 8%
of the net merchandise purchases in fiscal 2000. Of the products offered by the
Company in recent catalogs, approximately 89% were manufactured in Asia
(primarily China), approximately 6% were manufactured within the United States,
approximately 3% were manufactured in Europe, and approximately 2% were
manufactured in other countries. The Company expects these percentages to vary
as new products are introduced. See "Factors Affecting Future Operating
Results."
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Product Development
In addition to finding new product ideas from outside sources, the
Company's product development group conceives, designs and produces Sharper
Image Design products. The product development group meets regularly with the
merchandising and sales staff to review new product opportunities, product
quality, and customer feedback. From these creative sessions product ideas are
put into design, development and production. Successful product introductions
during the past three years include, among others: the Ionic Breeze Quadra
Silent Air Purifier; Power Tower 100 Motorized CD Rack; Ionic Breeze Personal
Air Purifier; Personal Cooling System; Ionic Breeze Car Air Purifier; Turbo
Groomer 2.0; Ionic Hair Wand II; Q Ball; Personal Warm-Cool System; Ionic Bath
Pet Brush; Shower Companion Plus; Quick Draw Zappin' Weebots; Ionic Conditioning
Quiet Hair Dryer; Insector; Talking Travel Companion; Executive Q-Ball; Sound
Soother 20; CD Power Tower 200; CD Soother Alarm Clock with 20 Soother Sounds;
and the Ionic Foot Care Station. The Company believes that the Sharper Image
Design group will continue to design and develop a variety of unique products
that enhance sales and maintain or increase margins. In addition, the Company
places emphasis and works with vendors to develop private label products
focusing on unique and innovative features that would distinguish it from
competitors. The Company believes that the appeal of these proprietary and
private label products also serves as a key driver in broadening its customer
base and enhancing its brand appeal. The Company's goal is to increase sales of
these proprietary products. However, there is no assurance that the Company will
be able to continue the growth of gross margin and sales related to these
proprietary products. See "Factors Affecting Future Operating Results".
Customer Service
The Company is committed to providing its customers with courteous,
knowledgeable and prompt service. The Company's customer service and catalog
sales groups at the corporate headquarters and in Little Rock provide personal
attention to customers who call toll free or send emails to request a catalog
subscription, place an order, or inquire about a product. The Company's customer
service group is also responsible for resolving customer problems promptly and
to the customer's complete satisfaction. The Company also contracts with third
party call centers for additional sales and customer service representative
coverage. These third party call centers are subject to the same high- level
expectations of customer service.
The Company seeks to hire and retain qualified sales and customer service
representatives in both its mail-order (including Internet) and store operations
and to train them thoroughly. Each new store manager undergoes an intensive
program during which the manager is trained in all aspects of the Company's
business. Sales personnel are trained during the first two weeks of employment,
or during the weeks before a new store opens, and updated periodically with
on-going sales training sessions. Training focuses primarily on acquiring a
working knowledge of the Company's products and on developing selling skills and
an understanding of the Company's high customer service standards. Each sales
associate is trained to adhere to the Company's philosophy of "taking ownership"
of every customer service issue that may arise. The Company has also developed
ongoing programs conducted at each store and by district that are designed to
keep each salesperson up to date on each new product offered.
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Order Fulfillment and Distribution
The Company owns a single fulfillment and distribution facility in Arkansas
of approximately 110,000 square feet. The Company leases additional facility
space in Arkansas and California for overflow mail order and store fulfillment
needs, and storage. The Company's merchandise generally is delivered to the
catalog and Internet customers and to The Sharper Image stores directly from the
Company's distribution facilities. Certain products are shipped directly from
the vendor to the customer or to the stores. The shipment of products directly
from vendors to the stores and customers reduces the level of inventory required
to be carried at the distribution center, freight costs, and the lead-time
required to receive the products. Each catalog order is received via remote
terminal at the distribution facility after the order has been approved for
shipment. The Company's goal is to ship catalog and Internet orders within 24 -
48 hours after the order is received. Store customers generally take their
purchases with them. The Company is currently evaluating various alternatives to
expand the capacity of its distribution facilities to provide for planned
business growth.
Sales and inventory information about store, catalog and Internet
operations is provided on an ongoing basis to the Company's merchandising staff
and to top management for review. The Company's stores are equipped with
electronic point-of-sale registers that communicate daily with the main computer
system at corporate headquarters, transmitting sales, inventory and customer
data as well as receiving data from the Company's headquarters. The sales,
inventory, and customer data enable sales and corporate personnel to monitor
sales by item on a daily basis, provide the information utilized by the
automatic replenishment system (ARS) and merchandising personnel for inventory
allocations, provide management with current inventory and merchandise
information, and enable the Company's in-house mailing list to be updated
regularly with customer names and activity.
The Company has developed a proprietary ARS which is used to maximize sales
with minimal inventory investment. Under this ARS, information on merchandise
inventory and sales by each store location is generated and reviewed daily.
Sales information by product and location is systematically compared daily to
each product's "model stock" to determine store shipment quantities and
frequency. The ARS computes any adjustments to the model stock level based on
factors such as sales history by location in relation to total the Company's
sales of each product. Under this system, the model stock is continually revised
based on this analysis. Recommended adjustments to model stock levels and
recommended shipment amounts are reviewed daily by a group of Company store
distributors and merchandising managers who are responsible for allocating
inventory to stores.
Advertising
While the catalog remained the Company's primary advertising vehicle during
fiscal 2000, the Company also broadened its customer base through increased
multimedia advertising, including: single product mailers, newspapers,
magazines, radio, television infomercials, email marketing programs, online
advertising and marketing programs, and business-to-business trade publications.
These increased advertising initiatives were utilized to realize the Company's
goal of acquiring new customers, which the Company believes will produce
additional sales in the stores, catalog, and Internet channels, and
business-to-business sales in the current and future periods. The Company
intends to continue the strategy of growing its customer base through aggressive
multimedia programs in fiscal 2001 with the objective of achieving an
appropriate return on investment. The Company continually reevaluates its
advertising strategies to maximize the effectiveness of its advertising
programs.
12
Information Technology
The Company maintains an integrated management information system for
merchandising, point-of sale, order fulfillment, distribution and financial
reporting. The Company believes its system increases productivity by providing
extensive merchandise information and inventory control. The Company continually
evaluates and enhances its computer systems and information technology in
connection with providing additional and improved management and financial
information. In fiscal 2000 and 2001, technology development and enhancement
initiatives for the Company's Internet Web sites was and will be part of the key
objectives of its Information Technology Team.
The Company continually evaluates its computer systems and information
technology in connection with providing additional and improved management and
financial information. During fiscal 2000, the Company launched its enhanced and
redesigned Web site that incorporates much of the look and feel of the new
Sharper Image store design. The redesigned Web site includes new features,
including dynamic browsing, inventory status, order tracking capabilities, easy
registration, Flash technology and 3-D technology. The Company has developed and
implemented international Web sites targeting Europe, the United Kingdom, and
Germany. The Company is currently developing an international web site that will
target the Pacific Rim.
Competition
The Company operates in a highly competitive environment. The Company
principally competes with a diverse mix of department stores, sporting goods
stores, discount stores, specialty retailers and other catalog and Internet
retailers that offer products similar to or the same as some of those offered by
the Company. Many of the Company's competitors are larger companies with greater
financial resources, a wider selection of merchandise and a greater inventory
availability. Although the Company attempts to market products not generally
available elsewhere and has emphasized exclusive products in its merchandising
strategy, many of the Company's products or similar products can also be found
in other retail stores or through other catalogs or on-line. The Company offers
competitive pricing where other retailers market certain products identical to
the Company's at lower prices. In addition, a number of other companies have
attempted to imitate the presentation and method of operation of the Company's
catalog and stores, and the Company's proprietary designed products. The Company
competes principally on the basis of product exclusivity, selection, brand
recognition, quality and price of its products, merchandise presentation in the
catalog, stores, and on the Internet, its customer list, and the quality of its
customer service. The Company has committed additional resources to its internal
product development group to create and produce proprietary products, and to its
merchandising team to support a program to increase private label products
exclusively available from the Company. The Company believes that these
proprietary and private label products provide a competitive advantage for it in
its merchandising offering.
Trademark Licenses
The Company believes its registered service mark and trademark, "The
Sharper Image," and the brand name recognition that it has developed, are of
significant value. The Company actively protects its brand name and other
intellectual property rights to ensure that the quality of its brand and the
value of its proprietary rights are maintained. The Company currently licenses
13
the use of its trademarked name in connection with the production and
circulation of a foreign language edition of The Sharper Image catalog in
Switzerland and with The Sharper Image stores in Switzerland in consideration
for royalties and other fees. In addition to this international licensee, 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
Holiday shopping season. The secondary peak period for the Company is June,
reflecting gift buying for Father's Day and graduations. A substantial portion
of the Company's total revenues and all or most of the Company's net earnings
occur in its fourth fiscal quarter ending January 31. The Company generally
experiences lower revenues during the other quarters and, as is typical in the
retail industry, has incurred and may continue to incur losses in these
quarters. The results of these interim quarters may not be representative of the
results for the full fiscal year. In addition, like many retailers, the Company
makes merchandising and inventory decisions for the Holiday season well in
advance of the Holiday selling season. Accordingly, unfavorable economic
conditions or deviations from projected demand for products during the fourth
quarter could have a material adverse effect on the Company's results of
operations for the entire fiscal year. During fiscal years 2000 and 1999, the
Company's total revenues for the fourth quarter accounted for more than 40% of
total revenues.
Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Employees
As of January 31, 2001, the Company employed approximately 1800 associates,
approximately 55% of whom were full-time. The Company considers its employee
relations to be good.
14
Executive Officers of the Registrant
Set forth below is a list of the executive officers of the Company,
together with brief biographical descriptions.
Name Position Age
- ---- -------- ---
Richard Thalheimer Founder, 53
Chairman of the Board, and
Chief Executive Officer
Tracy Wan President and Chief Operating 41
Officer
Greg Alexander Senior Vice President, Information
Technology 39
Anthony Farrell Senior Vice President, Creative Services 51
Jeffrey Forgan Senior Vice President, Chief 43
Financial Officer, and Corporate Secretary
Robert Thompson Senior Vice President, Merchandising 56
Joe Williams Senior Vice President, Loss Prevention 51
Richard Thalheimer is the founder of the Company and has served as the
Chief Executive Officer and as a Director of the Company since 1978 and as
Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the
Company's President from 1977 through July 1993.
Tracy Wan has been the Company's President and Chief Operating Officer
since April 1999. Ms. Wan served as Executive Vice President, Chief Financial
Officer from August 1998 through April 1999; Senior Vice President, Chief
Financial Officer from February 1995 through August 1998; as Vice President,
Chief Financial Officer from September 1994 through February 1995; as Vice
President, Controller from November 1991 through September 1994; and as
Controller from July 1989 through November 1991. Ms. Wan is a certified public
accountant.
Greg Alexander has been our Senior Vice President, Information Technology
since March 1999. Mr. Alexander served as Vice President, Information Technology
from February 1995 through March 1999 and as Director, Information Technology
from July 1991 through February 1995.
Anthony Farrell has been our Senior Vice President, Creative Services,
since July 1998. Mr. Farrell was a consultant to The Sharper Image from April
1998 through July 1998. Mr. Farrell was a senior vice president, merchandising
with SelfCare Catalog from March 1991 through December 1997.
15
Jeffrey Forgan has been our Senior Vice President and Chief Financial
Officer since April 1999. Prior to that, Mr. Forgan served as Vice President,
Corporate Finance with Foundation Health Systems from 1995 to 1998, and was with
Deloitte & Touche LLP from 1980 to 1995, serving as an audit partner during
1995. Mr. Forgan is a certified public accountant.
Robert Thompson has been our Senior Vice President of Merchandising since
August 1999. Mr. Thompson served as Vice President of Merchandising from January
1998 through August 1999. Prior to that. Mr. Thompson served as Director of
Planning and Allocation for Natural Wonders from April 1991 to January 1998.
Joe Williams has been our Senior Vice President, Loss Prevention, since
March 1999. Mr. Williams served as Vice President, Loss Prevention, from March
1993 through March 1999 and served as Director, Loss Prevention from April 1989
through March 1993.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act"), which became law in late December 1995, provide companies with a "safe
harbor" when making forward-looking statements. This "safe harbor" encourages
companies to provide prospective information about their companies without fear
of litigation. The Company wishes to take advantage of the "safe harbor"
provisions of the Act and is including this section in its Annual Report on Form
10-K in order to do so. Statements that are not historical facts, including
statements about management's expectations for fiscal year 2001 and beyond, are
forward-looking statements and involve various risks and uncertainties. Factors
that could cause the Company's actual results to differ materially from
management's projections, forecasts, estimates and expectations include, but are
not limited to, the following:
If we fail to offer merchandise that our customers find attractive, our business
and operating results will be harmed
In order to meet our strategic goals, we must successfully offer to our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other retailers. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
If other retailers, especially department stores or discount retailers,
offer the same products or products similar to those we sell or if our products
become less popular with our customers, our sales may decline or we may decide
to offer our products at lower prices. If customers buy fewer of our products or
if we have to reduce our prices, our revenues and earnings will decline.
In addition, we must be able to deliver our merchandise in sufficient
quantities to meet the demands of our customers and deliver this merchandise to
customers in a timely manner. We must be able to maintain sufficient inventory
levels, particularly during peak selling seasons. Our future results would be
adversely affected if we are not successful in achieving these goals.
Our success depends on our ability to anticipate and respond to changing
product trends and consumer demands in a timely manner. Our products must appeal
to a broad range of consumers whose preferences we cannot predict with certainty
and may change between sales
16
seasons. If we misjudge either the market for our products or our customers'
purchasing habits, our sales may decline, our inventories may increase or we may
be required to sell our products at lower prices. This would result in a
negative effect on our business.
If we fail to grow our sales profitably in fiscal 2001 comparable to our growth
rate in fiscal 2000, our stock price may be adversely affected
In 1999, we introduced the Razor Rollerboard scooter at a time when similar
scooters were not widely available from other retailers. This product has since
become one of the most popular in the history of our Company. Sales of Razor
Rollerboard scooters contributed substantially to the net sales increases during
fiscal 2000.
Other retailers are currently offering versions of the Razor Rollerboard
scooter and other scooters. We cannot predict with certainty as to the level of
future sales of the Razor Rollerboard scooter. We also cannot predict whether we
will introduce another product that will be as successful as the Razor
Rollerboard scooter or our other top selling products.
Although we experienced significant overall growth in our store, Internet
and catalog sales channels in fiscal 2000, our future growth will be
substantially dependent on continued increases in sales of popular existing and
new core products. We cannot be assured that we will be able to maintain our
current levels of sales or continue in future periods the rate of growth we
experienced in the fiscal 2000. Our stock price may be adversely affected if we
do not maintain current levels of sales or profitability or achieve sales or
profit growth in line with recent performance or with that expected by analysts
or other stock market professionals.
Our quarterly operating results are subject to significant fluctuations and
seasonality
Our business is highly seasonal, reflecting the general pattern of peak
sales and earnings for the retail industry during the Holiday shopping season.
Typically, a substantial portion of our total revenues and all, or most of our
net earnings occur during our fourth quarter ending January 31. During our 2000
and 1999 fiscal years, our total revenues for the fourth quarter ending January
31 accounted for more than 40% of total revenues for the full fiscal year. In
anticipation of increased sales activity during the fourth quarter, we incur
significant additional expenses, including significantly higher inventory costs
and the costs of hiring a substantial number of temporary employees to
supplement our regular store staff. If for any reason our sales were to be
substantially below those normally expected during the fourth quarter, our
annual results would be adversely affected. Due to this seasonality, our
operating results for any one period may not be indicative of our operating
results for the full fiscal year.
Typically our operating results during the other quarters of the year are
generally lower and we have historically experienced losses in these periods.
While in fiscal 2000, for the first time in our operating history, we were
profitable in all four quarters, in the future it is possible that we will
experience losses similar to those of fiscal 1999 and 1998 in the first three
quarters of the fiscal year. Our quarterly results of operations may fluctuate
significantly as a result of a variety of factors, including, among other
things, the timing of new store openings, net sales contributed by new stores,
increases or decreases in comparable store sales, changes in our merchandise mix
and net catalog sales.
17
In addition, like other retailers we typically make merchandising and
purchasing decisions well in advance of the Holiday shopping season. As a
result, poor economic conditions or differences from projected customer demand
for our products during the fourth quarter could result in lower revenues and
earnings.
Our success depends in part on our ability to design, develop, obtain and timely
deliver our proprietary products
We are increasingly dependent on the success of the proprietary products
that we design and develop for our customers. Affected by customers' demands and
the level of marketing and advertising efforts, certain of these or related
products can produce sales volume that is significant to a particular reporting
period's total sales volume. We must design and develop products that meet the
demands of our customers and manufacture these products cost-effectively. We
rely solely on a select group of contract manufacturers, most of whom are
located in Asia (primarily China), to produce these products in sufficient
quantities to meet customer demand and to obtain and deliver these products to
our customers in a timely manner. These arrangements are subject to the risks of
relying on products manufactured outside the United States, including political
unrest and trade restrictions, currency fluctuations, work stoppages, economic
uncertainties including inflation and government regulations, and other
uncertainties. If we are unable to successfully design and develop or to obtain
and timely deliver sufficient quantities of these products, our operating
results may be adversely affected. The Company had a single supplier that
provided 8% of the net merchandise purchases in fiscal 2000 and is likely to be
a higher percentage in fiscal 2001.
Our vital computer and communications hardware and software systems are
vulnerable to damage and interruption which could harm our Internet business
Our success, in particular our ability to successfully receive and fulfill
Internet orders and provide high-quality customer service, largely depends upon
the efficient and uninterrupted operation of our computer and communications
hardware and software systems. We use internally managed systems for our Web
site and some aspects of transaction processing, including customer information
and order verifications. Our systems and operations are vulnerable to damage or
interruption from: earthquake, fire, flood and other natural disasters, power
loss, computer systems failures, Internet and telecommunications or data network
failure, operator negligence, improper operation by or supervision of employees,
physical and electronic loss of data or security breaches, misappropriation and
similar events, and computer viruses.
In addition, we maintain our servers at the site of a third party located
in Santa Clara, California. We cannot control the maintenance and operation of
this site, which is also susceptible to similar disasters and problems. Because
our strategies depend in part on maintaining our reputation for superior levels
of customer service, any system failure that causes an interruption in our
service or a decrease in responsiveness could harm our relationships with our
customers and result in reduced revenues.
We are subject to increased energy and power costs associated with our
headquarters and retail store locations based in California
We maintain corporate headquarters and retail store locations in
California, which have been subject to rolling-blackouts due to the decreased
availability of natural gas and energy. This
18
will have an adverse effect on utility costs for the corporate offices and the
retail store locations operated out of California.
We face risks associated with expansion of our store operations
We plan to continue to increase the number of The Sharper Image stores in
the future in order to grow our revenues. Our ability to expand will depend in
part on the following factors:
o the availability of attractive store locations;
o our ability to negotiate favorable lease terms;
o our ability to identify customer demand in different geographic areas;
o general economic conditions; and
o the availability of sufficient funds for expansion.
As we continue to expand, we have started to and may continue to become
concentrated in limited geographic areas. This could increase our exposure to
customer demand, weather, competition, distribution problems, and poor economic
conditions in these regions. In addition, our catalog sales, including Internet
sales, or existing store sales in a specific region may decrease as a result of
new store openings.
In order to continue our expansion, we will need to hire additional
management and staff for our corporate offices and employees for each new store.
We must also expand our management information systems and distribution systems
to serve these new stores. If we are unable to hire necessary personnel or grow
our existing systems, our expansion efforts may not succeed and our operations
may suffer.
Some of our expenses will increase with the opening of new stores. If store
sales are inadequate to support these new costs, our profitability will
decrease. For example, inventory costs will increase as we increase inventory
levels to supply additional stores. We may not be able to manage this increased
inventory without decreasing our profitability. We may need additional financing
in excess of our current credit facility, or an amendment to such facility, to
be used for new store openings. Furthermore, our current credit facility has
various loan covenants we must comply with in order to maintain the credit
facility. We cannot predict with certainty that we will be successful in
obtaining additional funds or new credit facilities on favorable terms or at
all.
We are dependent on the success of our advertising and marketing efforts
Our revenues depend in part on our ability to effectively market and
advertise our products through The Sharper Image catalog and other advertising
vehicles. Increases in advertising, paper costs or postage may limit our ability
to advertise without reducing our profitability. If we decrease our advertising
efforts due to increased advertising costs, restrictions placed by regulatory
agencies, or for any other reason, our future operating results may be
materially adversely affected. We are also testing other advertising media, such
as television infomercials, radio, and single product mailings, and
significantly increased our advertising expenditures in fiscal 2000. While we
believe that increased expenditures on these and other media have resulted in
increasing revenues in fiscal 2000, we cannot assure you that this trend will
continue in the future. We expect to continue to spend at increased levels in
the future, but may not continue to produce a sufficient level of sales to cover
such expenditures, which would reduce our profitability.
19
We rely on our catalog operations
Our success depends in part on the success of our catalog operations. We
believe that the success of our catalog operations depends on the following
factors:
o our ability to achieve adequate response rates to our mailings;
o our ability to continue to offer a merchandise mix that is attractive
to our mail order customers;
o our ability to cost-effectively add new customers; and
o our ability to cost-effectively design and produce appealing catalogs.
Catalog production and mailings entail substantial paper, postage,
merchandise acquisition and human resource costs, including costs associated
with catalog development and increased inventories. We incur nearly all of these
costs prior to the mailing of each catalog. As a result, we are not able to
adjust the costs being incurred in connection with a particular mailing to
reflect the actual performance of the catalog. If we were to experience a
significant shortfall in anticipated revenue from a particular mailing, and
thereby not recover the costs associated with that mailing, our future results
would be adversely affected. In addition, response rates to our mailings and, as
a result, revenues generated by each mailing are affected by factors such as
consumer preferences, economic conditions, the timing and mix of catalog
mailings and changes in our merchandise mix, several of which may be outside our
control. Further, we have historically experienced fluctuations in the response
rates to our catalog mailings. If we are unable to accurately target the
appropriate segment of the consumer catalog market or to achieve adequate
response rates, we could experience lower sales, significant markdowns or
write-offs of inventory and lower margins, which would adversely affect our
future results.
Our catalog costs are unpredictable
Historically, a significant portion of our revenues has been from purchases
made by customers driven by The Sharper Image catalog. Increases in the costs of
producing and distributing the catalog may reduce the profitability of our
catalog, store and Internet sales. Specifically, we may experience increases in
postage, paper or shipping costs due to factors beyond our control. As a result,
our future results may be adversely affected.
We depend on our vendors' ability to timely deliver sufficient quantities of
products
Our performance depends on our ability to purchase our products in
sufficient quantities at competitive prices and on our vendors' ability to make
and deliver high quality products in a cost- effective, timely manner. Some of
our smaller vendors have limited resources, limited production capacities and
limited operating histories. We have no long-term purchase contracts or other
contracts that provide continued supply, pricing or access to new products and
any vendor or distributor could discontinue selling to us at any time. We cannot
assure you that we will be able to acquire the products we desire in sufficient
quantities or on terms that are acceptable to us in the future. In addition, we
cannot assure you that our vendors will make and deliver high quality products
in a cost-effective, timely manner. We may also be unable to develop
relationships with new vendors. All products we purchase from vendors in Asia,
must be shipped to our distribution centers by freight carriers. We cannot
assure you that we will be able to obtain sufficient freight capacity at
favorable rates. Our inability to acquire suitable products in a cost-effective,
timely
20
manner or the loss of one or more key vendors or freight carriers could have a
negative effect on our business.
Additionally, our relationships with our vendors are also subject to the
risks of relying on products manufactured outside the United States, including
political unrest and trade restrictions, work stoppages, economic uncertainties
including inflation, foreign government regulation and currency fluctuations.
Because the majority of our products were manufactured in various countries in
Asia, primarily China, during fiscal 2000 and fiscal 1999, any significant
disruption in any of these countries could impair our ability to obtain
sufficient quantities of products in a timely manner.
We face certain risks relating to customer service
Our ability to provide customer service depends, to a large degree, on the
efficient and uninterrupted operation of our call centers, our contracting
services with third party call centers and our sharperimage.com Web site. Any
material disruption or slowdown in our order processing systems resulting from
labor disputes, telephone or Internet down times, electrical outages, mechanical
problems, human error or accidents, fire, earthquakes, natural disasters, or
comparable events could cause delays in our ability to receive orders by
telephone or over the Internet and distribute orders, and may cause orders to be
lost or to be shipped or delivered late. As a result, customers may be unable to
place orders, cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs. We cannot assure you that telephone
call volumes will not exceed our present telephone system capacity. If this
occurs, we could experience telephone answer delays and delays in placing
orders. Because our strategies depend in part on maintaining our reputation for
superior levels of customer service, any impairment of our customer service
reputation could have an adverse effect on our business.
We face risks associated with our distribution and fulfillment operations
We conduct the majority of our distribution operations and all of our
catalog and Internet order processing fulfillment functions from our owned
facility in Little Rock, Arkansas. We added a third party operated distribution
center in California during the second quarter of 2000 to handle increased
processing fulfillment needs. We also use contract fulfillment and warehouse
facilities for additional seasonal requirements. Any failure to integrate our
new distribution center into our operations or any disruption in the operations
at any distribution center, particularly during the Holiday shopping season,
could have a negative effect on our business.
In addition, we rely upon third party carriers for our product shipments,
including shipments to and from all of our stores. As a result, we are subject
to certain risks, including employee strikes and inclement weather, associated
with such carriers' ability to provide delivery services to meet our shipping
needs. We are also dependent on temporary employees to adequately staff our
distribution facility, particularly during busy periods such as the Holiday
shopping season. We cannot assure you that we will continue to receive adequate
assistance from our temporary employees, or that we will continue to have access
to sufficient sources of temporary employees.
21
Results for our comparable store sales may fluctuate
Our comparable store sales are affected by a variety of factors, including,
among others:
o customer demand in different geographic regions;
o our ability to efficiently source and distribute products;
o changes in our product mix;
o effects of competition; and
o general economic conditions.
Our comparable store sales have fluctuated significantly in the past and we
believe that such fluctuations may continue. Our historic comparable store net
sales changes were as follows:
Percentage
Fiscal Year Increase
----------- --------
1997 1.1
1998 5.3
1999 12.3
2000 29.0
These historic results are not necessarily indicative of future results,
and we cannot assure you that our comparable store sales results will not
decrease in the future. Any changes in our comparable store sales results could
impact our future operating performance and cause the price of the common stock
to fluctuate.
We experience intense competition in the rapidly changing retail markets
We operate in a highly competitive environment. We principally compete with
a variety of department stores, sporting goods stores, discount stores,
specialty retailers and other catalogs that offer products similar to or the
same as our products. We may increasingly compete with major Internet retailers.
Many of our competitors are larger companies with greater financial resources, a
wider selection of merchandise and a greater inventory availability. If we
experience increased competition, our business and operating results could be
adversely affected.
The United States retail industry (the specialty retail industry in
particular) and e-commerce sector are dynamic in nature and have undergone
significant changes over the past several years. Our ability to anticipate and
successfully respond to continuing challenges is critical to our long-term
growth.
We may be subject to regulations regarding state sales and use tax on catalog
and Internet sales and other Internet regulation
Our business may be affected by the adoption of regulations or rules
governing the sale of our products, with regard to state sales and use taxes and
the regulation of the Internet. Because we have broad store presence, we are
currently required to collect taxes for the majority of our catalog and Internet
transactions. However, any unfavorable change in the state sales and use taxes
which affects our catalog and Internet sales could adversely affect our business
and results of operations. In addition, the Internet at present is largely
unregulated and we are unable to predict whether significant regulations or
taxes will be imposed on Internet commerce in the near
22
future. We are unable to predict how such regulations could affect the further
development of our Internet business.
We may have greater exposure internationally due to the expansion of our Web
site
We have expanded our Web site presence to include Europe, the United
Kingdom and the Pacific Rim. We must conform to all international rules and
regulations for sales generated from each country. We may be subject to changes
in local regulations and liability issues on product sales that occur in those
countries. As this business expands, our exposure to product liability issues
grows. We are also dependent on our relationship with various international
third parties that handle product fulfillment, credit card processing and
customer service for our international orders.
Poor economic conditions may hurt our business
Certain economic conditions that affect the level of consumer spending on
our products include the following:
o general business conditions;
o interest rates;
o taxation;
o stock market volatility; and
o consumer confidence in future economic conditions.
Our business could be negatively affected by a recession or poor economic
conditions and any related decline in consumer demand for discretionary items
such as our products. Because we purchase merchandise from foreign entities and
use foreign manufacturers on a contract basis for Sharper Image Design products
and other private label products, we are subject to risks resulting from
fluctuations in the economic conditions in foreign countries. The majority of
our vendors and manufacturers are located in various countries in Asia, and as a
result, our business may be particularly impacted by changes in the political,
social, legal, and economic conditions in these countries. Additionally, weather
and product transportation problems could affect our ability to maintain
adequate inventory levels and adversely affect our future results.
Excessive merchandise returns could harm our business
As part of our customer service commitment, we maintain a liberal
merchandise return policy, which allows customers to return most merchandise. We
make allowances for returns of store, catalog and Internet sales in our
financial statements based on historical return rates. We cannot assure you that
actual merchandise returns will not exceed our allowances. In addition, because
our allowances are based on historical return rates, we cannot assure you that
the introduction of new merchandise in our stores or catalogs, the opening of
new stores, the introduction of new catalogs, increased sales over the Internet,
changes in the merchandise mix or other factors will not cause actual returns to
exceed return allowances. Any significant increase in merchandise returns that
exceed our allowances could adversely affect our future results.
We may be subject to risks associated with our products, including product
liability or patent and trademark infringement claims
23
Our current and future products may contain defects, which could subject us
to product liability claims. Although we maintain limited product liability
insurance, if any successful product liability claim is not covered by or
exceeds our insurance, our business, results of operation and financial
condition would be harmed. Additionally, third parties may assert claims against
us alleging infringement, misappropriation or other violations of patent,
trademark or other proprietary rights, whether or not such claims have merit.
Such claims can be time consuming and expensive to defend and could require us
to cease using and selling the allegedly infringing products, which may have a
significant impact on total company sales volume, and to incur significant
litigation costs and expenses.
We depend on our key personnel
Our success depends to a significant extent upon the abilities of our
senior management, particularly Richard Thalheimer, our founder, Chairman and
Chief Executive Officer. The loss of the services of any of the members of our
senior management or of certain other key employees could have a significant
adverse effect on our business. We maintain key man life insurance on Mr.
Thalheimer in the amount of $15 million. In addition, our performance will
depend upon our ability to attract and retain qualified management,
merchandising and sales personnel. There can be no assurance that Mr. Thalheimer
and the other members of our existing management team will be able to manage our
company or our growth or that we will be able to attract and hire additional
qualified personnel as needed in the future.
We are controlled by a single shareholder
As of January 31, 2001, Richard Thalheimer beneficially owned approximately
40% of all of the outstanding shares of the common stock of our company. As a
result, Mr. Thalheimer will continue to exert substantial influence over the
election of directors and over our corporate actions.
Our common stock price is volatile
Our common stock is quoted on the Nasdaq National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations, which could reduce the market price of our common stock
without regard to our operating performance. Additionally, as our Internet
business grows, we may become increasingly subject to stock price fluctuations
associated with companies operating in the Internet sector. We believe that
among other factors, any of the following factors could cause the price of the
common stock to fluctuate substantially:
o quarterly fluctuations in our comparable store sales;
o announcements by other accessory and gift item retailers;
o the trading volume of our common stock in the public market;
o general economic conditions; and
o financial market conditions.
Our charter documents, our stockholders rights agreement and Delaware law may
make a takeover more difficult
We are a Delaware corporation. The Delaware General Corporation Law
contains certain provisions that may make a change in control of our company
more difficult or prevent the removal of incumbent directors. In addition, our
Certificate of Incorporation and Bylaws and our recently
24
adopted stockholders rights agreement contain provisions that have the same
effect. These provisions may have a negative impact on the price of our common
stock, may discourage third-party bidders from making a bid for our company or
may reduce any premiums paid to stockholders for their common stock.
Item 2. Properties
The Company occupies approximately 58,000 square feet of office space for
its corporate headquarters in San Francisco, CA. The Company signed a lease
extension in February 2000, extending the expiration date to January 2006. The
Company also leases approximately 5,600 square feet for its product development
offices.
As of January 31, 2001 the Company operated 97 The Sharper Image stores
under leases covering a total of approximately 232,000 square feet of net
selling space.
The Company owns and operates a 110,000 square foot distribution facility
located in Little Rock, Arkansas. Distribution functions are conducted through
this facility, a 60,000 square foot leased facility in Ontario, California and
other seasonally occupied space rented by the Company in close proximity
thereto. Additional mail order fulfillment is conducted by a third party.
Item 3. Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under "Note D -- Revolving Loan and Notes
Payable" in the Notes to Financial Statements on page 25 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
31 of the Sharper Image Corporation 2000 Annual Report to Stockholders is
incorporated herein by reference. As of April 16, 2001 there were 391 holders of
record and the closing price of the Company's Common Stock was $8.71 per share
as reported by the Nasdaq Stock Market.
No cash dividends were declared or paid in fiscal 1999 or fiscal 2000.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on page
3 of the Sharper Image Corporation 2000 Annual Report to Stockholders is
incorporated herein by reference.
25
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 14 to 19 of
the Sharper Image Corporation 2000 Annual Report to Stockholders is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information set forth under the caption "Quantitative and Qualitative
Disclosure About Market Risk" on page 19 of the Sharper Image Corporation 2000
Annual Report to Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and independent auditors' report set forth on
pages 20 through 31 of the Sharper Image Corporation 2000 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 Company is incorporated
herein by reference to the Company's 2001 Proxy Statement to Stockholders.
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 Company's 2001 Proxy Statement.
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 Company's 2001 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
26
(a)1. List of Financial Statements.
The following Financial Statements and Notes thereto set forth on pages 20
through 30 of the Sharper Image Corporation 2000 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:
Independent Auditors' Report
Statements of Operations for the years ended January 31, 2001, 2000, and 1999,
Balance sheets at January 31, 2001 and 2000,
Statements of Stockholders' Equity for the years ended January 31, 2001, 2000,
and 1999
Statements of Cash Flows for the years ended January 31, 2001, 2000, and 1999.
Notes to Financial Statements.
(a)2. List of Financial Statement Schedule.
The following are filed as part of this Report:
Independent Auditors' Report on Schedule.
Schedule II - Valuation and Qualifying Accounts
(a)3. List of Exhibits.
Incorporated herein by reference is a list of the Exhibits contained in the
Exhibit Index which begins on page 32 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.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHARPER IMAGE CORPORATION SHARPER IMAGE CORPORATION
By:/s/ Richard J. Thalheimer By:/s/ Jeffrey P. Forgan
-------------------------- ----------------------
Richard J. Thalheimer Jeffrey P. Forgan
Chief Executive Senior Vice President, Chief Financial
Officer, Chairman Officer, Corporate Secretary
(Principal Executive Officer) (Principal Financial & Accounting Officer)
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Thalheimer and Jeffrey P. Forgan, and
each of them, as such person's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for such person and in such
person's name, place, and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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 May 1, 2001
- --------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Jeffrey P. Forgan Senior Vice President, May 1, 2001
- --------------------------- Chief Financial Officer,
Jeffrey P. Forgan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Alan Thalheimer Director May 1, 2001
- ---------------------------
Alan Thalheimer
28
/s/ Gerald Napier Director May 1, 2001
- ---------------------------
Gerald Napier
/s/ Morton David Director May 1, 2001
- ---------------------------
Morton David
/s/ George James Director May 1, 2001
- ---------------------------
George James
29
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, 2001:
Inventory Obsolescence $ 3,154 $1,573 $2,133 $2,594
YEAR ENDED JANUARY 31, 2000:
Inventory Obsolescence $1,938 $2,079 $ 863 $3,154
YEAR ENDED JANUARY 31, 1999:
Inventory Obsolescence $1,486 $1,298 $ 846 $1,938
OTHER
YEAR ENDED JANUARY 31, 2001:
Other $834 $ 449 $ 553 $ 730
YEAR ENDED JANUARY 31, 2000:
Other $804 $ 265 $ 235 $ 834
YEAR ENDED JANUARY 31, 1999:
Other $508 $ 830 $ 534 $ 804
30
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, 2001 and 2000 and for each of the three years in the period ended
January 31, 2001, and have issued our report thereon dated March 30, 2001; such
financial statements and report are included in your 2000 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of Sharper Image Corporation, listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California
March 30, 2001
31
EXHIBIT INDEX
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
to Registration Statement on Form S-1 (Registration No. 33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
3.3 Form of Certificate of Designation of Series A Junior participating
Preferred Stock. (Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
4.1 Form of Rights Certificate. (Incorporated by reference to Exhibit 4.01
to Amendment No. 2 to the Registration Statement on Form S-2.)
4.2 Form of Rights Agreement dated June 7, 1999. (Incorporated by reference
to Exhibit 4.02 to Amendment No. 2 to the Registration Statement on
Form S-2.)
10.1 Amended and Restated Stock Option Plan (as amended through September
25, 1998). (Incorporated by reference to Registration Statement on Form
S-8 filed on January 19, 1996 (Registration No. 33-3327) and Exhibit to
Definitive Proxy Statement on Schedule 14A filed April 29, 1999.)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994 (as
amended through September 25, 1998). (Incorporated by reference to
Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327) and Exhibit to Definitive Proxy Statement on
Schedule 14A filed April 29, 1999.)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by
reference to Exhibit 10.15 to Form 10-K for fiscal year ended January
31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended January
31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
32
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.9 Form of Director Indemnification Agreement. (Incorporated by reference
to Exhibit 10.42 to Registration Statement on Form S-1 (Registration
No. 33-12755).)
10.10 Financing Agreement dated September 21, 1994 between the Company and
CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit
10.12 to Form 10-Q for the quarter ended October 31, 1994)
10.11 The Sharper Image 401(K) Savings Plan (Incorporated by reference to
Exhibit 10.21 to Registration Statement of Form S-8 (Registration No.
33-80504) dated June 21, 1994))
10.12 Chief Executive Officer Compensation Plan dated February 3, 1995.
(Incorporated by reference to Exhibit 10.24 to the Form 10-K for the
fiscal year ended January 31, 1995.)
10.13 Split-Dollar Agreement between the Company and Mr. R. Thalheimer, its
Chief Executive Officer dated October 13, 1995, effective as of May 17,
1995 (Incorporated by reference to Exhibit 10.17 to Form 10-K for the
fiscal year ended January 31, 1996).
10.14 Assignments of Life Insurance Policy as Collateral, both dated October
13, 1995, effective May 17, 1995 (Incorporated by reference to Exhibit
10.18 to Form 10-K for the fiscal year ended January 31, 1996).
10.15 Amendment to the Financing Agreement dated May 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.19 to the Form 10-Q for the quarter ended April
30, 1996).
10.16 CAPEX Term Loan Promissory note dated October 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10-Q for the quarter ended
October 31, 1996).
10.17 Amendment to the Financing Agreement dated February 13, 1997 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to Form 10-K for the fiscal year ended
January 31, 1997).
10.18 Amendment to the Financing Agreement dated March 24, 1997 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.23 to Form 10-K for the fiscal year ended
January 31, 1997).
10.19 Amendment to the Financing Agreement dated April 6, 1998 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.25 to Form 10-K for the fiscal year ended
January 31, 1998).
33
10.20 Amendment to the Financing Agreement dated March 23, 2000 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.22 to Form 10-K for the fiscal year ended
January 31, 2000).
10.21 Amendment to the Corporate Headquarters Office Lease Agreement dated
February 9, 2000 between the Company and its landlord, CarrAmerica
Realty Corporation. (Incorporated by reference to Exhibit 10.23 to Form
10-K for the fiscal year ended January 31, 2000).
10.22 Amendment to the Financing Agreement dated July 18, 2000 between the
Company and The CIT Group/Business Credit, Inc. (Incorporated by
reference to Exhibit 10.23 to Form 10-Q for the quarter ended October
31, 2000).
10.23 Amendment to the Financing Agreement dated September 29, 2000 between
the Company and The CIT Group/Business Credit, Inc. (Incorporated by
reference to Exhibit 10.24 to Form 10-Q for the quarter ended October
31, 2000).
99.1 2000 Stock Incentive Plan. (Incorporated by reference to Exhibit to
Definitive Proxy Statement on Schedule 14A filed May 9, 2000.)
99.2 Form of Notice of Grant of Stock Option. (Attached herewith).
99.3 Form of Stock Option Agreement. (Attached herewith).
99.4 Form of Addendum to Stock Option Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control). (Attached
herewith).
99.5 Form of Addendum to Stock Option Agreement (Limited Stock Appreciation
Right). (Attached herewith).
99.6 Form of Stock Issuance Agreement. (Attached herewith).
99.7 Form of Addendum to Stock Issuance Agreement (Involuntary Termination
Following Corporate Transaction/Change in Control). (Attached
herewith).
99.8 Form of Automatic Stock Option Agreement. (Attached herewith).
99.9 Form of Notice of Grant of Non-Employee Director-Automatic Stock
Option. (Attached herewith).
11.1 Statement Re: Computation of Earnings per Share.
13.1 2000 Annual Report to Stockholders.
23.1 Independent Auditor's Consent.
34