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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, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number 33-12755
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code:
(415) 445-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 14,1997 was $10,057,621
The number of shares of Common Stock, with $.01 par value, outstanding on
April 14, 1997 was 8,266,940 shares.
Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January 31, 1997 are incorporated by reference into Parts II and IV of this
Report. Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 9, 1997 are incorporated by reference into Part III
of this report.
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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" or "The
Sharper Image") contain forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors Affecting Future
Operating Results" on pages 12 through 14, as well as those noted in the
documents incorporated herein by reference. Unless required by law, the Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. However,
readers should carefully review the statements set forth in other reports or
documents the Company files from time to time with the Securities and Exchange
Commission, particularly the Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
Item 1. Business
Overview
Sharper Image Corporation is a specialty retailer which introduces and
sells quality, innovative and entertaining products through The Sharper Image
stores and monthly mail-order catalog, and other marketing channels. In the past
year, the Company also marketed through two new concepts. The Sharper Image Home
Collection had its initial mail-order test in January 1996, and the Sharper
Image SPA Collection concept was marketed through mail-order and stores. As
discussed below, after critical evaluation of the operating results and future
prospects of the SPA Collection division, management made the decision to close
the SPA Collection division.
The Company was founded in 1977 by Richard Thalheimer, who continues as
Chairman and Chief Executive Officer. First mailed in 1981, The Sharper Image
Catalog found success in the growing field of mail-order shopping. Expansion of
The Sharper Image concept to retail stores began in 1984, and as of January 31,
1997, the Company operated 82 The Sharper Image stores in the United States and
licensees operate 5 stores internationally and 2 airport stores in the United
States. The Company's aggregate sales from its stores have grown substantially
since the beginning of fiscal 1984 and have increased from 3% of total revenues
in fiscal 1983 to 71% of total revenues for the fiscal year ended January 31,
1997 (fiscal 1996). The typical Sharper Image stores range from approximately
2,200 to 2,500 selling square feet in size, with several larger size stores that
have 3,000 to 5,000 selling square feet. The Company also has two additional
retail formats, Sharper Image Design stores and airport shops. These formats are
discussed under "Store Operations" and "Licensed Operations".
During fiscal 1996, the Company opened 3 new stores of The Sharper
Image concept and format and 3 new Sharper Image Design stores. Two
under-performing Sharper Image stores were closed. The Company is planning to
open one to three new stores during the fiscal year ending January 31, 1998
(fiscal 1997). Management's goal is to grow the number of stores by 10% to 15%
during the next two fiscal years. However, there can be no assurances that the
Company will meet this goal. See "Factors Affecting Future Operating Results."
Lease terms for certain of the existing The Sharper Image store locations will
be maturing during
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fiscal 1997 and such locations may be relocated or closed. The Company employs
over 1,200 employees in twenty-eight states.
In addition to serving as the primary advertising vehicle for the
Company's stores, The Sharper Image Catalog generated about 80% of its total
mail-order sales (approximately 26% of total revenues) in fiscal 1996. The
monthly color catalog which ranged from 68 to 124 pages in fiscal 1996, is
recognized for creative excellence within the catalog industry. Worldwide, the
Company mailed approximately 35 million of The Sharper Image Catalogs in fiscal
1996. The Company launched the test mailing of the Sharper Image Home Collection
catalog in January 1996. Management plans to focus its efforts in growing this
concept in fiscal 1997 and will continue to evaluate the operating results and
potential of this concept.
The Company is known for its varied product mix and a merchandising
philosophy focusing on quality products which are unique, innovative,
entertaining, and useful that are developed by The Sharper Image, exclusive to
The Sharper Image, or in limited distribution. In product lines where the
Company competes directly with other retailers, it chooses to sell the best
version of the product--maximizing features, uniqueness, and value. The Company
is frequently sought after by manufacturers and inventors to launch
technologically-advanced and fun products.
The Company's business is highly seasonal, with sales peaks at the
holiday periods of Father's Day and Christmas. See "Seasonality". Historically,
the typical Sharper Image demographic mix has been upper income, approximately
65% male, 35% female.
In addition to its primary businesses, The Sharper Image leverages its
name and reputation through a corporate marketing program, wholesale sales of
Sharper Image brand products, which included Sharper Image Design proprietary
products and private-labeled products, and a product licensing program with
selected businesses. Wholesale sales are made primarily to fine department
stores and to international retailers. The most leading-edge marketing
opportunity for the Company is the Internet. The Company's The Sharper Image
Catalog is on the World Wide Web at http://www.sharperimage.com. Other
electronic medium include America Online's Marketplace and Time-Warner's
Dreamshop at http://www.dreamshop.com. Although it is too early to predict the
potential of this sales medium and there is no guarantee of the possibility of
success, the Company is at the forefront of this electronic marketplace and
hopes to be a leader when this market begins to reach full acceptance. See
"Factors Affecting Future Operating Results".
During fiscal 1996, the Company continued the development of an
in-house new product development function along with a wholesale sales group to
market its proprietary Sharper Image Design and other Sharper Image brand
products to fine department stores nationwide and internationally. While this
sales channel is still in its early stage and a small part of total revenues,
the wholesale sales group made sales gains in fiscal 1996. The development of
the proprietary and private-labeled products, and wholesales sales opportunities
will continue to be an integral part of the Company's growth.
The Company launched the test mailings of the Sharper Image SPA
Collection (SPA) catalog in February 1995. During the second half of fiscal
1995, the Company also opened four SPA stores to test this retail concept.
During fiscal 1996, in its second year of operations, the Company mailed more
than 7 million SPA catalogs and opened two additional SPA stores. In late fiscal
1996, management reviewed the operating results for the two-year period, and the
future potential of this concept, and determined that it would be prudent for
the Company to re-direct resources to the higher growth opportunities of the
core business of The Sharper Image. As a result, the decision was made to close
the operations of the SPA catalog and the six SPA stores. See "Factors Affecting
Future Operating Results".
3
The Sharper Image Catalog/Retail Advertising
The Sharper Image Catalog is a full-color catalog that is mailed to an
average of approximately 2.5 million individuals each month. The catalog is also
the primary source of advertising for the Company's retail stores. During fiscal
1996, the Company mailed approximately 35 million of The Sharper Image Catalogs
to over 5 million different individuals. Circulation and number of pages of The
Sharper Image Catalog is under continual review to balance the costs of mailing
the catalogs with the revenues generated. The mailings increase at Father's Day
and Christmas reflecting the seasonal nature of the Company's business.
In fiscal 1995, the Company experienced a significant increase in
advertising and promotion expenses due to the increased cost of paper and
postage resulting from the industry-wide rate increases in paper and a one-time
postal rate increase in January 1995. Although paper costs have started to level
off from the highest point experienced during fiscal 1995, the rate increases in
paper that took place in fiscal 1995 continued to have an upward impact on
advertising expense for the first half of fiscal 1996. The Company has
experienced lower paper prices since July 1996. The Company has implemented
certain actions designed to lower the costs of producing the catalog to lessen
the impact of the paper and postage increases, including reducing the number of
pages per catalog, trimming the dimensions of the catalogs and using a lighter
weight of paper. As a result of these changes, advertising and promotion
expenses for fiscal 1996 were substantially lower than for fiscal 1995. There
have been two moderate paper price increases since the beginning of fiscal 1997.
The Company continually reviews the cost and effectiveness of its advertising
efforts. See "Factors Affecting Future Operating Results".
The Sharper Image Catalog is created and produced by the Company's
in-house staff of writers and production artists. The Company utilizes
free-lance photographers on an as needed basis. The catalog is electronically
produced in-house on a network of computers using the latest desktop publishing
software. This enables the Company to maintain quality control and shorten the
lead time needed to produce the catalog. The monthly production and distribution
schedule permits frequent changes in the product selection. During fiscal 1996,
The Sharper Image Catalog typically contained from 68 to 76 pages for non-peak
months and between 84 and 124 pages for the peak seasons of Father's Day and
Christmas. The catalogs typically feature between 300 and 700 products, of which
approximately 10% to 25% are new each month. In October 1996, the Company
re-designed The Sharper Image catalog to update the look of the catalog to
distinguish the Company from other specialty retailers. The new catalog design
uses dramatic visuals and humorous and clever product descriptions. The new
catalog design features products more prominently, but includes a fewer number
of products, which ranged between 200 to 350 products in the fourth quarter of
fiscal 1996.
During fiscal 1996, the Company also utilized newspaper and airline
magazine inserts to advertise specific products. The Company believes these
advertisements generate store sales as well as mail-order sales. The Company
plans to continue them in fiscal 1997. In addition, from time to time, the
Company has also produced certain specialty catalogs to test new catalog
concepts. To enhance the effectiveness of the catalog, the Company's in-house
staff utilizes statistical evaluation and selection techniques to determine
which segments of the in-house mailing list are likely to contribute the
greatest revenue per mailing. This evaluation has provided the Company with the
ability to quickly increase circulation to responsive segments and to scale back
circulation to non-responsive segments thus reducing the effective cost of
advertising.
In January 1996, the Company mailed its initial test catalog for The
Sharper Image Home Collection concept. This catalog features high quality,
luxury home furnishings and accessories. The responses to this mailing during
its first year is encouraging and the Company plans to continue to invest in the
development of this concept.
The Company collects customer names through the electronic
point-of-sale registers in its retail stores. The names and associated sales
information are merged daily into the Company's customer master file. This
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daily merge process provides a constant source of current information useful to
assess the effectiveness of the catalog as a form of retail advertising,
identify what new customers can be added to the in-house mailing list without
the traditional list rental "prospecting" costs, and identify the "best
customers." The Company's addition of names to the in-house mailing list
enhances its value for list rental purposes. Periodically, the Company mails
promotional material to these best customers which is designed to produce
incremental sales.
Store Operations
The Sharper Image stores are located throughout the United States
generally in downtown financial districts and business centers, upscale shopping
malls or drive-up suburban locations, all of which are areas that typically have
a high population density.
Each store is generally staffed with approximately 6 to 8 employees,
including a manager, an assistant manager, a senior sales associate, sales
associates, and other support staff. A few of the Company's high volume stores
are staffed with 11 to 15 associates. The Company's President and Chief
Administrative Officer currently oversees store operations. Store personnel
compensation structure is based largely on commission and is closely monitored
in relation to sales. The Company expends considerable effort to train its sales
associates on the many new and frequently technically oriented items in order to
maintain a high customer service level.
The Sharper Image stores are designed by the Company's design staff at
the Company's headquarters in San Francisco to standardize, where possible,
layout so as to simplify their operations. The stores are operated according to
standardized procedures for customer relations, merchandise display and pricing,
product demonstration, inventory maintenance, personnel training, administration
and security. The Company's original Sharper Image stores typically have 2,200
to 2,500 square feet of selling space and approximately 1,300 to 2,200 square
feet of storage and administrative space. The cost of leasehold improvements,
fixtures and other equipment associated with the opening of a new Sharper Image
store has averaged approximately $300,000 to $500,000. Initial inventory for a
new Sharper Image store has generally cost approximately $250,000. Outlet stores
are approximately half the cost of the original Sharper Image stores. The
Company also operates a second retail format of Sharper Image Design stores
which are approximately half the size of the original store with between 1,000
to 1,200 of selling square feet, and features higher margin proprietary products
in addition to other top selling merchandise. At the end of fiscal 1996, the
Company had 70 The Sharper Image stores, 8 Sharper Image Design stores, and 4
outlet locations.
The Company's retail stores' product presentation includes bold
eye-catching displays designed to draw customers to new or top-selling products.
Product presentations are organized into distinct categories such as health and
massage, travel, home and safety, recreation and fitness, and the newest in
electronics.
Merchandising, Product Selection and Development
The Company's merchandise mix emphasizes innovative products that are
new to market, and unique products which are proprietary, available exclusively
through The Sharper Image, or are not available in broad distribution. The
Company's sales are driven by individual products, focusing on offering
pre-selected items which represent quality, innovation, and entertainment, as
distinguished from offering broad assortments of categories of merchandise. As
individual items come to market or are developed internally by the Company which
fit the criteria for new products, the Company's buying and merchandise mix will
change to emphasize those products. As a result of such shifting emphasis among
individual items, the mix of sales by category changes from time to time. The
effect, from year to year, can be to increase or decrease the merchandise gross
margin rates since some categories of merchandise sustain traditionally higher
margins and some traditionally sustain lower margin rates.
5
The Company's current merchandise strategy is to offer a narrower
assortment in its stores and catalogs. The Company offers products at price
levels ranging from $10 to over $5,000. The Company intends to keep expanding
the offering of products in the $50 to $500 price range to appeal to the
Company's customer base. The Company also intends to continue to develop Sharper
Image Design proprietary and private-labeled products to utilize its marketing
knowledge built from 20 years of retailing experience. While these proprietary
and private-labeled products offer important sales and gross margin growth
opportunities for all the revenue generating areas of the Company, there are
certain risks associated with these internally developed products, such as
possible manufacturing constraints, delays in bringing these products to market
and cost increases. Products may also be subject to other imitations. See
"Factors Affecting Future Operating Results".
The process of finding new products involves the Company's buyers
reviewing voluminous product literature, traveling extensively throughout the
United States, Europe and the Far East to attend trade shows and exhibitions,
and meeting with manufacturers. The Company enjoys relationships with many major
manufacturers who use The Sharper Image regularly to introduce their newest
products in the United States. See "Factors Affecting Future Operating Results".
In addition to finding new products from outside sources, the Company's
new product development group develops and produces Sharper Image Design
proprietary products. The new product development group meets regularly with the
merchandising staff to review new product opportunities, product quality , and
customer feedback. From these creative sessions product ideas are put into
development, design and productivity. Successful product introductions during
the past two years include the Memo Manager Executive, KeySeeker, Shower
Companion, Keycorder, and the Heart & Sound Soother.
The Company believes that this new product development function, in
addition to increasing its sales and gross margins and adding incremental
wholesale sales, will favorably impact the Company by increasing the flow of
unique and exclusive products in The Sharper Image stores and catalog and
enhancing its brand name extension. However, there is no assurance that the
Company will be able to continue the growth of gross margin and the
proportionate sales related to these proprietary products. See "Factors
Affecting Future Operating Results".
The Company purchases merchandise from numerous foreign and domestic
manufacturers and importers. None of the suppliers accounted for more than 10%
of the dollar amount of the Company's purchases during fiscal 1996. Of the
products offered by the Company in recent catalogs, approximately 69% were
manufactured in the Far East, approximately 18% were manufactured within the
United States, approximately 10% were manufactured in Europe, and approximately
3% were manufactured in Mexico and Canada. The Company expects these percentages
to vary as new products are introduced. See "Factors Affecting Future Operating
Results".
Sharper Image Design proprietary products are produced for the Company
on a contract basis by manufacturers in the Far East. The Company provides all
product specifications to the contract manufacturers. Delivery lead time is
generally in the range of 6 to 12 months. However, certain products
introductions may require longer lead time.
The Company generates information on merchandise orders and inventory,
which is reviewed daily by the Company's buyers, its senior merchandising staff
and top management. Each month, the Company generally replaces approximately 10%
to 25% of its product offerings each month. The Company carefully considers
which products will not be offered in future months based upon numerous factors,
including revenues generated, gross margins, the cost of catalog and store space
devoted to each product, product availability and quality.
6
The Company has developed a proprietary automatic replenishment system
(ARS) which is based on the "just-in-time" inventory management concept. Under
ARS, information on merchandise inventory and sales by each store location are
generated and reviewed daily. Sales information by product and location are
systematically compared daily to each product's "model stock" to determine store
shipment quantities and frequency. The ARS computes any adjustments to the model
stock level based on factors such as sales history by location in relation to
total Company sales of each product. Under this system, the model stock is
continually revised based on this analysis. Recommended adjustments to model
stock levels and recommended shipment amounts are reviewed daily by the
Company's group of store planners and merchandising managers who are responsible
for allocating inventory to stores.
Corporate Marketing
During fiscal 1996, the Company's Corporate Marketing continued to
grow. The incentive and gifting programs are designed by the Corporate Marketing
unit to be used by client companies to increase their sales, or to motivate and
reward their high achievers and customers utilizing The Sharper Image stores and
catalog as the primary means of offering and delivering the incentives and
gifts. The Company sells the incentive and gift merchandise certificates to the
client companies who in turn distribute them under their programs. The
certificates are redeemable for Sharper Image merchandise through its retail
stores, by mail, or over the telephone through the catalog telemarketing group.
The Company will continue to grow this area of its business.
Wholesale Operations
The Company's Business Development department is the primary group
responsible for marketing to other retailers, including fine department stores
domestically as well as retailers in other countries. This group's sales grew
from about $3.1 million in fiscal 1995 to about $4.0 million in fiscal 1996.
Plans for this group are to continue to increase the number of wholesale
customers in the U.S. and abroad, and the number of Sharper Image brand products
offered to these customers. Negotiations to add other major department stores
are on-going. By choosing to feature Sharper Image brand products, these fine
department stores can sell proven products with positive sales appeal.
Licensed Operations
The Company has exclusive licensing agreements in Japan, Switzerland,
South Korea, Australia and Saudi Arabia, as well as in the United States for
non-duty free airport locations. In fiscal 1996, the Company entered into a
licensing agreement with its Saudi Arabia licensee. The new Saudi Arabia
licensee opened its first The Sharper Image store in Riyadh in December 1996.
Under the international license agreements, the licensee is granted the right to
use the trademarked name, "The Sharper Image," in their country in connection
with The Sharper Image retail store and catalog operations. The Company will
assist the licensee by producing a foreign language edition of The Sharper Image
catalog, typically quarterly, with economies of scale but at the expense of the
licensees who then print and distribute locally. There are currently five
Sharper Image retail stores operated by the foreign licensees, one each in
Japan, Switzerland, Australia, Korea and Saudi Arabia. The Company receives
royalties on sales by the licensees. Licensees purchase products from the
Company or directly from manufacturers, maintain their own supply of inventory,
and establish their own product prices The airport licensee is entitled to
utilize The Sharper Image trademark and trade dress in designated airport
locations, the design of which is subject to the approval of the Company. There
are two locations -- one at Dallas-Fort Worth which opened in July 1994, and a
second location at Detroit Metropolitan which opened in May 1995. The Company
continues to pursue additional licensing and wholesale opportunities in foreign
countries.
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Product Licensing/The Sharper Image Trademark
The Company also has product license agreements with various
businesses. The Company controls the selection of the licensees and retail
distribution channels for the products in order to maintain the quality
associated with The Sharper Image name. Under each of these agreements, the
licensee is granted the right to use the trademarked name, "The Sharper Image,"
in connection with the manufacture and sale of certain products. In
consideration for the rights granted to the licensee, the Company receives
royalties on the licensees' net sales, subject, in certain cases, to a periodic
minimum royalty. The Company believes that product licensing presents
opportunities to further leverage the value of The Sharper Image as a brand
name.
Customer Service
The Company seeks to hire and retain qualified sales and customer
service representatives in both its mail-order catalog and store operations and
to train them thoroughly. Each new store manager undergoes an intensive program
during which the manager is trained in all aspects of the Company's business.
Sales personnel are trained during the first two weeks of employment, or during
the weeks before a new store opens. Training focuses primarily on acquiring a
working knowledge of the Company's products and on developing selling skills and
an understanding of the Company's high customer service standards. Each sales
associate is trained to adhere to the Company's philosophy of "taking ownership"
of every customer service issue that may arise. The Company has also developed
ongoing programs conducted at each store that are designed to keep each
salesperson up to date on each new product offered.
The Company's Customer Service group at the corporate headquarters
provides personal attention to customers who call toll free to request a catalog
subscription, place an order, or inquire about a product. The Company's Customer
Service group is also responsible for resolving customer problems promptly and
to the customer's complete satisfaction. The Company is committed to provide
courteous, knowledgeable, and prompt service to its customers.
Catalog Order Fulfillment and Distribution
The Company has a single distribution facility in Little Rock,
Arkansas. This facility was expanded during fiscal 1995, increasing the space
from approximately 50,000 square feet to about 110,000 square feet. The
Company's merchandise generally is delivered to the catalog customer and to The
Sharper Image stores directly from the Company's distribution facility. A number
of products are shipped directly from the vendor to the customer or to the
stores. The shipment of products directly from vendors to the stores and
customers reduces the level of inventory required to be carried at the
distribution center, freight costs, and the lead time required to receive the
products. Each catalog order is received via remote terminal at the distribution
facility after the order has been approved for shipment. The Company's goal is
to ship catalog orders within 48 hours after the order is received. The Company
generally delivers products by second day air service to its customers. Store
customers take their purchase with them. In fiscal 1996, the Company established
a telemarketing center located at the Littler Rock distribution facility to
augment the telemarketing team at the corporate offices.
Sales and inventory information about catalog and store operations is
provided on an ongoing basis to the Company's merchandising staff and to top
management for review. The Company's stores are equipped with electronic
point-of-sale registers that communicate daily with the main computer system at
corporate headquarters, transmitting sales, inventory and customer data as well
as receiving data from the Company's headquarters. The sales, inventory, and
customer data enables sales and corporate personnel to monitor sales by item on
a daily basis, provides the information utilized by the ARS for inventory
allocations, provides management with current inventory and merchandise
information, and enables our in-house mailing list to be updated regularly with
customer names and activity.
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The Company continually evaluates its computer systems and information
technology in connection with providing additional and improved management and
financial information.
Competition
The Company operates in a highly competitive environment. The Company
principally competes with a variety of department stores, sporting goods stores,
discount stores, specialty retailers and other catalogs that offer products
similar to or the same as some of those offered by the Company. Many of the
Company's competitors are larger companies with greater financial resources, a
wider selection of merchandise and a greater inventory availability. Although
the Company attempts to market products not generally available elsewhere and
has emphasized exclusive products in its merchandising strategy, many of its
products or similar products can also be found in other retail stores or through
other catalogs. The Company offers competitive pricing where other retailers
market certain products similar to the Company's at lower prices. In addition, a
number of other companies have attempted to imitate the presentation and method
of operation of the Company's catalog and stores, and the Company's proprietary
designed products. The Company competes principally on the basis of product
exclusivity, selection, quality and price of its products, merchandise
presentation in both the catalog and stores, its customer list, name
recognition, and the quality of its customer service. The Company is committing
additional resources to its internal product development group to create and
produce proprietary products exclusively available from the Company. The Company
is also testing additional retail concepts in it's efforts to grow revenues and
net earnings in the long-term.
Trademark Licenses
In the opinion of management, the Company's registered service mark
and trademark, "The Sharper Image," and the name recognition that it has
developed, is of significant value. The Company currently licenses the use of
its trademarked name in connection with the production and circulation of
foreign language editions of The Sharper Image catalog in Japan and Switzerland
and in connection with The Sharper Image stores in Japan, Switzerland,
Australia, Korea and Saudi Arabia in consideration for royalties and other fees.
In addition to these international licensees, the Company has also entered into
a license for the right to operate Sharper Image stores in domestic non-duty
free airport locations as well as various product license agreements which grant
the right to licensees to manufacture and sell products bearing the Company's
trademark.
Seasonality
The Company's business is highly seasonal, reflecting the general
pattern associated with the retail industry of peak sales and earnings during
the Christmas season. In addition, as the proportion of the Company's revenues
derived from store sales has grown, the impact of seasonal fluctuations on the
Company's sales and earnings has increased. As a result, a substantial
percentage of the Company's total revenues and all or most of the Company's net
earnings occur in its fourth fiscal quarter ending January 31. The Company
generally experiences lower revenues during the other quarters and, as is
typical in the retail industry, has incurred and may continue to incur losses in
these quarters. The results of these interim quarters may not be representative
of the results for the full fiscal year. In addition, like many retailers, the
Company makes merchandising and inventory decisions for the Christmas season
well in advance of the Holiday selling season. Accordingly, unfavorable economic
conditions and/or deviations from projected demand for products during the
fourth quarter could have a material adverse affect on the Company results of
operations for the entire fiscal year. During the fiscal years 1996 and 1995,
the Company's total revenues for the fourth quarter accounted for more than 40%
of total revenues.
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Employees
As of January 31, 1997, the Company employed more than 1,200
associates, approximately 62% of whom were full-time. The Company considers its
employee relations to be good.
Executive Officers
Set forth below is a list of the executive officers of the Company,
together with brief biographical descriptions.
Name Position Age
- ---- -------- ---
Richard Thalheimer Founder, 49
Chairman of the Board, and
Chief Executive Officer
Barry Gilbert Vice Chairman, 46
Chief Operating Officer
Craig Womack President, 46
Chief Administrative Officer
Vincent Barriero Senior Vice President, 48
Chief Information Officer, and
Assistant Corporate Secretary
Shannon King Senior Vice President, 41
Merchandising
Sydney Klevatt Senior Vice President, 61
Marketing
Tracy Wan Senior Vice President, 37
Chief Financial Officer,
and Corporate Secretary
Richard Thalheimer is the founder of the Company and has served as the
Chief Executive Officer and as a Director of the Company since 1978 and as
Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the
Company's President from 1977 through July 1993.
Barry Gilbert has been the Company's Vice Chairman and Chief Operating
Officer since December 1996. Prior to joining the Company, Mr. Gilbert was with
Warner Bros. Studio Stores, where he served as Senior Vice President of
International Franchise Operations from 1994 to 1996, and as Senior Vice
President of Stores from 1990 to 1994.
Craig Womack has been the Company's President and Chief Administrative
Officer since December 1996. Mr. Womack served as the Company's President and
Chief Operating Officer from July 1993 to December 1996, and as the Company's
Executive Vice President and Chief Operating Officer from December 1989 to July
1993.
10
Vincent Barriero has been the Company's Senior Vice President, Chief
Information Officer since February 1995. Mr. Barriero served as the Company's
Senior Vice President, Management Information Systems from August 1992 through
February 1995 and as Vice President, Management Information Systems from August
1989 through August 1992.
Shannon King has been the Company's Senior Vice President,
Merchandising, since February 1995. Ms. King served as the Company's Vice
President, Merchandising from March 1993 through February 1995, and as Director
of Merchandising from July 1988 through March 1993.
Sydney Klevatt has been the Company's Senior Vice President, Marketing
since January 1991. From April 1982 through September 1990, Mr. Klevatt was the
Executive Vice President of Hanover Direct, Inc., with responsibilities in the
general corporate management and direction of the company including catalog
merchandising, marketing, creative and public and legal relations.
Tracy Wan has been the Company's Senior Vice President, Chief Financial
Officer since February 1995. Ms. Wan served as Vice President, Chief Financial
Officer from September 1994 through February 1995, as Vice President, Controller
from November 1991 through September 1994, and as Controller from July 1989
through November 1991. Ms. Wan is a certified public accountant.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995
(the "Act"), which became law in late December 1995, provide companies with a
"safe harbor" when making forward-looking statements. This "safe harbor"
encourages companies to provide prospective information about their companies
without fear of litigation. The Company wishes to take advantage of the new
"safe harbor" provisions of the Act and is including this section in its Annual
Report on Form 10-K in order to do so. Statements that are not historical facts,
including statements about management's expectations for fiscal year 1997 and
beyond, are forward-looking statements and involve various risks and
uncertainties. Factors that could cause the Company's actual results to differ
materially from management's projections, forecasts, estimates and expectations
include, but are not limited to, the following:
(a) The ability to offer an attractive selection of merchandise, including
the ability to locate and offer new, innovative, and high quality
products that satisfy its customers' demands and to acquire merchandise
in sufficient quantities and on a timely basis.
(b) The ability to design and develop proprietary products that satisfy its
customers' demands and to have such products manufactured
cost-effectively and in sufficient quantities and delivered to the
Company on a timely basis.
(c) The ability to successfully open new stores, which depends on a variety
of factors, including, without limitation, the identification of new
markets with sufficient customer demand, the selection and availability
of suitable locations, the negotiation of acceptable store leases, the
ability to hire and train additional store management and sales
associates, and the availability of adequate capital resources on
acceptable terms.
(d) The ability to successfully and cost-effectively advertise and market
its products through The Sharper Image catalog and other advertising
vehicles, including new media such as television shopping services and
the Internet.
11
(e) Future increases in postage, paper or shipping costs that increase the
cost of producing and distributing the Company's catalogs or
merchandise.
(f) The success of new businesses that the Company may either develop or
acquire from time to time. In late fiscal 1996, the Company made the
decision to close its SPA Collection division as a result of its lack
of profitability and anticipated future performance.
(g) The highly seasonal nature of the Company's business - See
"Seasonality".
(h) Changes in merchandise mix.
(i) The ability to maintain sufficient inventory levels of its products,
particularly during peak selling seasons.
(j) The ability to compete effectively in the Company's highly competitive
industry with existing and potential competitors, many of which have
substantially greater financial and other resources than the Company.
(k) Changes in consumer preferences and customer demand for the Company's
products, which fluctuates based on a variety of factors, including,
without limitation, general or local economic conditions, buying
trends, and the retail sales environment.
(l) Changes in general or local economic conditions, including conditions
affecting the level of consumer spending on merchandise offered by the
Company and the general demand for products of stores located adjacent
to the Company's stores, particularly in malls.
(m) The political, social, legal and economic risks in foreign countries
where the Company purchases a significant amount of merchandise from
foreign vendors.
(n) Fluctuations in comparable store sales results, which have fluctuated
significantly and have decreased in the past from period to period.
(o) The ability to hire and retain the services of management and other key
employees, particularly its senior management, including, without
limitation, Richard Thalheimer, the Company's Founder, Chairman and
Chief Executive Officer.
(p) Any significant increase in merchandise returns.
(q) The quality of merchandise purchased by the Company.
(r) The ability of the Company's single distribution facility located in
Little Rock, Arkansas to distribute the Company's inventory merchandise
to its stores and customers on a cost-effective and timely basis, and
the ability to provide superior customer service and efficiently
fulfill customer orders. A disruption in operations of the distribution
facility may significantly increase the Company's distribution costs.
(s) The ability to have its merchandise manufactured and delivered by the
Company's vendors and manufacturers in sufficient quantities and on a
cost-effective and timely basis.
(t) Changes in the availability of capital expenditure and working capital
financing, including the availability of long-term financing to support
development of retail stores.
12
(u) The imposition of new restrictions or regulations regarding the sale of
the Company's products or changes in tax rules and regulations
applicable to the Company, particularly with regard to state sales and
use taxes.
(v) Adverse results in significant litigation matters.
The United States retail industry, and the specialty retail industry in
particular, are dynamic by nature and have undergone significant changes over
the past several years. The Company's ability to anticipate and successfully
respond to continuing challenges is critical to achieving its expectations.
Item 2. Properties
The Company occupies approximately 50,000 square feet of office space
for its corporate headquarters in San Francisco, CA, under a lease scheduled to
expire on January 31, 2001, with an option to extend for two additional
five-year periods.
The Company currently operates 82 The Sharper Image stores under leases
covering a total of approximately 185,000 square feet of net selling space.
The Company's distribution facility is located in Little Rock,
Arkansas. The Company completed the addition of the 60,000-square-foot phase one
expansion of the distribution center in October 1995. The expanded distribution
center now has about 110,000 square feet of space. The costs for phase one
expansion were approximately $3.2 million. During fiscal 1996, the Company
completed phase two of the expansion which involve the installation of pallet
racking and the mail-order conveying system. All of the Company's distribution
functions are through this facility and other seasonally occupied space rented
by the Company in close proximity thereto. With the expanded building, the
Company reduced its usage of seasonal overflow storage facility.
Item 3. Legal Proceedings
The Company is party to various legal proceeding arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under "Note D -- Revolving Loan and Notes
Payable" in the Notes to Financial Statements on page 22 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
27 of the Sharper Image Corporation 1996 Annual Report to Stockholders is
incorporated herein by reference. As of April 14, 1997 there were 530 holders of
record of the Registrant's Common Stock.
13
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
page 3 of the Sharper Image Corporation 1996 Annual Report to Stockholders is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information set forth under the caption "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 11 to 15
of the Sharper Image Corporation 1996 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 8. Financial Statements and Supplementary Data
The financial statements and independent auditors' report set forth on
pages 16 through 26 of the Sharper Image Corporation 1996 Annual Report to
Stockholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Registrant is
incorporated herein by reference to the Registrant's 1997 Proxy Statement to
Stockholders, pages 2 through 3. Information with respect to the executive
officers of the Registrant is contained in Part I of this Annual Report on Form
10-K.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated
herein by reference to the Registrant's 1997 Proxy Statement, pages 6 to 7.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of beneficial owners and
management is incorporated herein by reference to the Registrant's 1997 Proxy
Statement, pages 4 to 5.
Item 13. Certain Relationships and Related Transactions
None.
14
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)1. List of Financial Statements.
The following Financial Statements and Notes thereto set forth on pages 17
through 27 of the Sharper Image Corporation 1996 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:
Statements of Operations for the years ended January 31, 1997, 1996 and 1995.
Balance sheets at January 31, 1997 and 1996.
Statements of Stockholders' Equity for the years ended January 31, 1997, 1996
and 1995.
Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995.
Notes to Financial Statements.
(a)2. List of Financial Statement Schedule.
The following are filed as part of this Report:
Independent Auditors' Report on Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts
Financial Data Schedule
Schedules other than those listed are omitted for the reason that they
are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto, contained in, or
incorporated by reference into, this Report.
(a)3. List of Exhibits.
Incorporated herein by reference is a list of the Exhibits contained in the
Exhibit Index which begins on page 21 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the last quarter of the period covered by this Report.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other
15
than the payment by the registrant of the expenses incurred or paid by
a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered on the Form S-8 identified below, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
The preceding undertaking shall be incorporated by reference into registrant's
Registration Statement on Form S-8 (Registration No. 33-12755).
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHARPER IMAGE CORPORATION SHARPER IMAGE CORPORATION
By: /s/ Richard J. Thalheimer By: /s/ Tracy Y. Wan
--------------------------- ----------------------
Richard J. Thalheimer Tracy Y. Wan
Chief Executive Senior Vice President,
Officer, Chairman Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Thalheimer and Tracy Wan, and each of
them, as such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for such person and in such person's
name, place, and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard J. Thalheimer Chief Executive April 30, 1997
- --------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Tracy Y. Wan Senior Vice President, April 30, 1997
- --------------------------- Chief Financial Officer
Tracy Y. Wan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Elyse Eng Thalheimer Director April 30, 1997
- ---------------------------
Elyse Eng Thalheimer
17
/s/ Alan Thalheimer Director April 30, 1997
- ---------------------------
Alan Thalheimer
/s/ Lawrence Feldman Director April 30, 1997
- ---------------------------
Lawrence Feldman
/s/ Maurice Gregg Director April 30, 1997
- ---------------------------
Maurice Gregg
/s/ Gerald Napier Director April 30, 1997
- ---------------------------
Gerald Napier
/s/ J. Gary Shansby Director April 30, 1997
- ---------------------------
J. Gary Shansby
18
SHARPER IMAGE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------
($000)
COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E
- -------------------------------------------------------------------------------------------------------------------------
Balance at Additions Balance
Beginning Charged to at End of
DESCRIPTION of Period Costs & Exp. Deductions Period
- -------------------------------------------------------------------------------------------------------------------------
INVENTORY
YEAR ENDED JANUARY 31, 1997:
Inventory Obsolescence $1,449 $1,681 $1,621 $1,509
YEAR ENDED JANUARY 31, 1996:
Inventory Obsolescence $ 891 $2,109 $1,551 $1,449
YEAR ENDED JANUARY 31, 1995:
Inventory Obsolescence $1,140 $1,630 $1,879 $ 891
OTHER
YEAR ENDED JANUARY 31, 1997:
Other $ 461 $ 351 $ 307 $ 505
YEAR ENDED JANUARY 31, 1996:
Other $ 291 $ 462 $ 292 $ 461
YEAR ENDED JANUARY 31, 1995:
Other $ 196 $ 371 $ 276 $ 291
19
EXHIBIT INDEX
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
to Registration Statement on Form S-1 (Registration No. 33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.1 Amended and Restated Stock Option Plan. (Incorporated by reference to
Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327).)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994.
(Incorporated by reference to Registration Statement on Form S-8 filed
on January 19, 1996 (Registration No. 33-3327).)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by
reference to Exhibit 10.15 to Form 10-K for fiscal year ended January
31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended January
31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.9 Form of Director Indemnification Agreement. (Incorporated by reference
to Exhibit 10.42 to Registration Statement on Form S-1 (Registration
No. 33-12755).)
10.10 Real Estate Installment Note and Mortgage dated October 4, 1993 among
the Company and Lee Thalheimer, Trustee for the Alan Thalheimer Trust.
(Incorporated by reference to Exhibit 10.20 to Form 10-K for fiscal
year ended January 31, 1994)
10.11 Financing Agreement dated September 21, 1994 between the Company and
CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit
10.12 to Form 10-Q for the quarter ended October 31, 1994)
10.12 The Sharper Image 401(K)Savings Plan (Incorporated by reference to
Exhibit 10.21 to Registration Statement of Form S-8 (Registration No.
33-80504) dated June 21, 1994))
10.13 Chief Executive Officer Compensation Plan dated February 3, 1995.
(Incorporated by reference to Exhibit 10.24 to the Form 10-K for the
fiscal year ended January 31, 1995.)
20
10.14 Annual Report for the Sharper Image 401(K) Savings Plan (Incorporated
by reference to Form 11-K (Registration No. 33-80504) for the plan year
ended December 31, 1995.)
10.15 Split-Dollar Agreement between the Company and Mr. R. Thalheimer, its
Chief Executive Officer dated October 13, 1995, effective as of May 17,
1995 (Incorporated by reference to Exhibit 10.17 to Form 10-K for the
fiscal year ended January 31, 1996).
10.16 Assignments of Life Insurance Policy as Collateral, both dated October
13, 1995, effective May 17, 1995 (Incorporated by reference to Exhibit
10.18 to Form 10-K for the fiscal year ended January 31, 1996).
10.17 Amendment to the Financing Agreement dated May 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.19 to the Form 10-Q for the quarter ended April
30, 1996).
10.18 Warrant to Purchase Common Stock Agreement dated May 15, 1996 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.20 to the Form 10Q for the quarter ended April
30, 1996).
10.19 CAPEX Term Loan Promissory note dated October 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10-Q for the quarter ended
October 31, 1996).
10.20 Employment Agreement between the Company and Mr. Barry Gilbert, its
Vice Chairman and Chief Operating Officer dated and effective December
2, 1996.
10.21 Amendment to the Financing Agreement dated February 13, 1997 between
the Company and The CIT Group/Business Credit Inc.
10.22 Warrant to Purchase Common Stock Agreement dated February 13, 1997
between the Company and The CIT Group/Business Credit Inc.
10.23 Amendment to the Financing Agreement dated March 24, 1997 between the
Company and The CIT Group/Business Credit Inc.
11.1 Statement Re: Computation of Earnings per Share.
13.1 1996 Annual Report to Stockholders.
23.1 Independent Auditor's Report.
23.2 Independent Auditor's Consent.
27.0 Financial Data Schedule.
21