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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, 1999
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. ____
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 15, 1999 was $42,462,174.
The number of shares of Common Stock, with $.01 par value, outstanding on
April 15, 1999 was 8,959,648 shares.
Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January 31, 1999 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 7, 1999 are incorporated by reference into Part III
of this report.
1
PART 1
This Annual Report on Form 10-K and the documents incorporated herein
by reference of Sharper Image Corporation (referred to as the "Company" or "The
Sharper Image") contain forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates, and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," or variations
of such words and similar expressions, are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors Affecting Future
Operating Results" on pages 10 through 16, 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 Corporation is a specialty retailer which introduces
and sells quality, innovative, useful and entertaining products through The
Sharper Image stores, monthly mail-order catalog, Internet, and other marketing
channels.
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,
1999, the Company operated 87 The Sharper Image stores in the United States and
licensees operated six stores internationally and two airport stores in the
United States. 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.
During the fiscal year ended January 31, 1999 (fiscal 1998), the
Company opened four new stores of The Sharper Image concept and format. Two
Sharper Image stores were closed at the maturity of their leases. The Company
plans to open three to five new stores during the fiscal year ending January 31,
2000 (fiscal 1999). Lease terms for certain of the existing The Sharper Image
store locations will be maturing during fiscal 1999 and these locations may be
relocated or closed. The Company employs approximately 1,300 employees in
twenty-eight states and the District of Columbia.
In addition to serving as the primary advertising vehicle for the
Company's stores, The Sharper Image Catalog generated approximately 29% of total
revenues in fiscal 1998. The monthly catalog, which ranged from 52 to 124 pages
in fiscal 1998, is recognized for creative excellence within the catalog
industry. Worldwide, the Company mailed approximately 41 million of The Sharper
Image Catalogs in fiscal 1998.
The Company's Internet sales in fiscal 1998 increased over 200 percent
to $4.9 million from $1.6 million in the fiscal year ended January 31, 1998
(fiscal 1997). The Company believes the Internet is a significant marketing and
sales opportunity. The Sharper Image Catalog is on the World Wide Web at
http://www.sharperimage.com. While this sales channel is still emerging, the
Company is encouraged with the sales growth in the Internet marketplace and
expects to continue be a leader as this market continues its dynamic growth.
Other Internet sales channels currently used by the Company include America
Online's Shopping Channel, Microsoft Plaza, Yahoo Stores, @ Home Network,
Catalog City and PC World Shopping.
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
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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 innovative products with features that are
unique and surprising.
During fiscal 1998, the Company continued the development of its
in-house Sharper Image Design product development function. The percentage of
sales attributable to Sharper Image Design proprietary products increased from
eight percent in fiscal 1997 to 18 percent in fiscal 1998. This increase was the
primary reason that the gross margin percentage rate improved by 2.7 percentage
points in fiscal 1998. The Company's goal is to continue to increase the
proportion of sales from Sharper Image Design proprietary 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.
In addition to its primary businesses, The Sharper Image leverages its
brand name and reputation through a corporate marketing program, wholesale sales
of Sharper Image brand products, which include Sharper Image Design proprietary
products and private-labeled products, and a product licensing program with
selected businesses. Wholesale sales are made primarily to fine department
stores and to international retailers.
Store Operations
The Sharper Image stores are located throughout the United
States-typically in densely populated downtown financial districts and business
centers, upscale shopping malls and drive-up suburban locations.
Each store is generally staffed with approximately six to eight
employees, including a manager, an assistant manager, a senior sales associate,
sales associates, and other support staff. A few of the Company's high volume
stores are staffed with 11 to 15 associates. Current 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 often technically oriented products, 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 to standardize layout, where possible, 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 $350,000 to $450,000. Initial inventory for a
new Sharper Image store has generally cost approximately $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 stores 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 1998, the
Company had 77 The Sharper Image stores, eight Sharper Image Design stores, and
two outlet locations.
In fiscal 1997 the Company retained a leading design firm to update the
look and appeal of its retail stores. During fiscal 1998 the Company opened four
new stores and remodeled four stores utilizing the new look. The Company is
currently evaluating the financial results of the new prototype in the new
stores and remodeled stores.
The Sharper Image Catalog
The Sharper Image Catalog is a full-color catalog that is mailed to an
average of approximately 3 million individuals each month. The catalog is also
the primary source of advertising for the Company's retail stores. During fiscal
1998, the Company mailed approximately 41 million of The Sharper Image Catalogs
to over 6 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.
The Sharper Image Catalog is designed 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
3
lead-time needed to produce the catalog. The monthly production and distribution
schedule permits frequent changes in the product selection. During fiscal 1998,
The Sharper Image Catalog typically contained from 52 to 84 pages for non-peak
months and between 76 and 124 pages for the peak seasons of Father's Day and
Christmas. The Sharper Image catalog design uses dramatic visuals and
benefit-oriented clever 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 300 products during the fourth quarter.
During fiscal 1998, the Company discontinued its test mailing of
catalogs for The Sharper Image Home Collection concept. The Company mailed over
3 million Sharper Image Home Collection catalogs during fiscal 1998.
The Company collects customer names through mail and Internet order
processing and the electronic point-of-sale registers in its retail stores. The
names and associated sales information are merged daily into the Company's
customer master file. This daily merge process provides a constant source of
current information to help assess the effectiveness of the catalog as a form of
retail advertising, identify new customers that can be added to the in-house
mailing list without using customer lists obtained from other catalogers, 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.
Internet Operations
The Sharper Image was one of the first specialty retailers to enter the
world of electronic commerce. The Company's revenue from its Internet operations
increased over 200 percent in fiscal 1998 to $4.9 million from $1.6 million in
fiscal 1997. The Company has participated in online shopping since 1994 and has
maintained its own site on the World Wide Web at http://www.sharperimage.com
since 1995. In addition other Internet sales channels used by the Company
include America Online's Shopping Channel, Microsoft Plaza, Yahoo Stores,
Catalog City and PC World Shopping. The Company believes that one of the
advantages of the Internet is the ability to introduce and/or market merchandise
at a relatively low cost. The Company can present a full spectrum of styles or
models and in-depth promotions at reasonable cost, especially compared to the
higher cost of a comparable presentation in The Sharper Image Catalog. The
Company recently introduced an auction site at its sharperimage.com web site.
Unlike most other auction sites on the Internet, the Company's auction site is a
transaction between an established retailer and the consumer and the auctions
feature both new and refurbished products with return privileges. The Company
has been able to develop and expand its Internet business without incurring high
start-up costs because of its market leadership position, its brand name and its
strategic alliances. In addition, the Company leverages its experience in order
processing, fulfillment and customer service gained in over 20 years of mail
order catalog operations.
Other Operations
Corporate Marketing
During fiscal 1998, the Company's corporate marketing sales 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 best customers. The Sharper Image
stores and catalog are the primary means of offering and conveniently delivering
the incentives and gifts. The Company sells 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 is also developing the Internet channel for
this area of the business. The Company intends to 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
in the U.S. as well as retailers in other countries. Wholesale sales increased
from $3.2 million in fiscal 1997 to $3.5 million in fiscal 1998. Wholesale sales
increased during fiscal 1998 primarily as result of increased sales of Sharper
Image Design proprietary products.
4
Licensed Operations
The Company has exclusive licensing agreements in Japan, Switzerland
and Saudi Arabia, as well as for non-duty free airport locations in the United
States. Under the international license agreements, the licensee is granted the
right to use the trademarked name, "The Sharper Image," in their country in
connection with The Sharper Image retail store and catalog operations. The
Company will assist the licensee by producing a foreign language edition of The
Sharper Image catalog, with economies of scale but at the expense of the
licensees who then print and distribute locally. There are currently six Sharper
Image retail stores operated by the foreign licensees, two in Switzerland, three
in Saudi Arabia and one in Dubai. The Company receives royalties on sales by the
licensees. Licensees purchase products from the Company or directly from
manufacturers, maintain their own supply of inventory, and establish their own
product prices. The airport licensee is entitled to utilize The Sharper Image
trademark and trade dress in designated airport locations, the design of which
is subject to the approval of the Company. There are two locations -- one at
Dallas-Fort Worth and a second location at Detroit Metropolitan. The Company
continues to pursue additional licensing and wholesale opportunities in foreign
countries.
Merchandising, Product Selection and Development
Merchandising
The Company's merchandise mix emphasizes innovative products that are
new to market, and unique products, which are proprietary, 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 items
that are innovative and high quality, as distinguished from a broad assortment
of categories of merchandise. As individual items come to market or are
developed internally by the Company that 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.
The Company's current merchandise strategy is to offer an assortment
with emphasis on Sharper Image Design proprietary and private label products.
The Company intends to focus on offering products in the $50 to $300 price range
to appeal to a wide customer base. 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. See "Factors
Affecting Future Operating Results."
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. 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.
The Company has developed a proprietary automatic replenishment system
(ARS) which is used to maximize sales with minimal inventory investment. Under
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 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 distributors and merchandising managers who are
responsible for allocating inventory to stores.
Product Selection
The process of finding new products involves the Company's buyers
reviewing voluminous product literature, traveling extensively throughout the
United States 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."
5
The Company purchases merchandise from numerous foreign and domestic
manufacturers and importers. None of the Company's suppliers accounted for more
than 10% of the dollar amount of the Company's purchases during fiscal 1998. Of
the products offered by the Company in the past fiscal year, approximately 75%
were manufactured in the Far East, approximately 20% were manufactured within
the United States, approximately 3% were manufactured in Europe, and
approximately 2% were manufactured in Mexico and Canada. The Company expects
these percentages to vary as new products are introduced. See "Factors Affecting
Future Operating Results."
Product Development
In addition to finding new products from outside sources, the Company's
product development group conceives, designs 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 production. Successful product introductions during the
past two years include the Ionic Breeze silent air purifier, CD Radio/Alarm
Clock with Sound Soother, Weebot, the Electronic Pet, Personal Cooling System,
Turbo Groomer, Truth Quest, Ionic Hair Wand, Stereo Sound Soother, Shower
Companion Plus, and the portable Sound Soother.
The Company believes that this proprietary product development
function, in addition to increasing its sales and gross margins and adding
incremental wholesale sales, will favorably impact the Company's increasing flow
of unique and exclusive products in The Sharper Image stores, catalog and our
Internet site sharperimage.com. The Company believes that the appeal of these
proprietary products is also serves as a key driver in broadening its customer
base and enhancing its brand appeal. The Company's goal is to significantly
increase the proportion of sales and margin contributions from 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."
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. Development lead-time is
generally in the range of 12 to 18 months. However, certain product
introductions may require longer lead time.
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 and catalog sales group at the corporate
headquarters and at the Little Rock distribution center provides personal
attention to customers who call toll free to request a catalog subscription,
place an order, or inquire about a product. The Company also contracts with
third party contract call centers to provide twenty-four hour coverage for
customer services and catalog sales. 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 providing its customers with
courteous, knowledgeable, and prompt service.
Advertising
While the catalog remained the Company's primary advertising vehicle
during fiscal 1998, the Company also utilized newspaper, leading consumer
magazine and airline magazine inserts to advertise specific products. The
Company plans to continue these efforts in fiscal 1999. The Company also tested
televised "infomercials" in fiscal 1998 and plans to increase the number of
infomercials in fiscal 1999. The Company believes these advertisements generate
store sales as well as mail-order sales.
6
Catalog Order Fulfillment and Distribution
The Company has a single distribution facility in Little Rock, Arkansas
of approximately 110,000 square feet. 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 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. Store customers generally take their
purchase with them. The Company is evaluating the need to increase the capacity
of the distribution facility in Little Rock to provide for projected business
growth.
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.
Information Systems
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 1998 and 1999, technology
development and enhancement initiatives for the Company's web site are also part
of the key objectives of its information systems team.
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000. The Company has reviewed its computer
and business processes, and is reprogramming its computer applications to
provide for their continued functionality. An assessment of the readiness of the
external entities with which the Company interfaces is ongoing.
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 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 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, quality and price of its products, merchandise
presentation in the catalog, stores, and on the Internet, 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 believes that these proprietary products provide a competitive
advantage for the Company in its merchandising offering.
Trademark Licenses
In the opinion of management, the Company's registered service mark and
trademark, "The Sharper Image," and the brand name recognition that it has
developed, are 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 Switzerland, Saudi Arabia and
Dubai 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.
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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's results of
operations for the entire fiscal year. During fiscal years 1998 and 1997, the
Company's total revenues for the fourth quarter ended January 31 accounted for
more than 40% of total revenues for the fiscal year.
Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have an adverse material effect on the Company's financial position and
results of operations.
Employees
As of January 31, 1999, the Company employed approximately 1,300
associates, approximately 60% of whom were full-time. The Company considers its
employee relations to be good.
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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, Chairman of the Board, 51
and Chief Executive Officer
Barry Gilbert Vice Chairman, 48
Chief Operating Officer
Tracy Wan Executive Vice President, 39
Chief Financial Officer,
and Corporate Secretary
Davia Kimmey Senior Vice President, 45
Marketing
Shannon King Senior Vice President, 43
Merchandising
Anthony Farrell Senior Vice President, 49
Creative
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.
Tracy Wan has been the Company's Executive Vice President, Chief
Financial Officer since August 1998. Ms. Wan served as Senior Vice President
from February 1995 through August 1998, 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.
Davia Kimmey has been the Company's Senior Vice President, Marketing
since June 1997. Prior to joining the Company, Ms. Kimmey was with Spiegel Inc.
where she served as Corporate Vice President, Advertising from 1995 to 1997 and
as Vice President, Advertising from 1992 to 1995.
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.
Anthony Farrell has been the Company's Senior Vice President, Creative
Services, since July, 1998. Mr. Farrell was a consultant to the Company from
April 1998 through July 1998. Prior to joining the Company, Mr. Farrell was with
SelfCare Catalog, where he served as Senior Vice President, Merchandising from
March 1991 through December 1997.
9
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 1999 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:
We May Not Successfully Offer Attractive Merchandise to Our Customers
In order to meet our strategic goals, we must successfully locate and
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 can not 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 or similar products 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 less of our products or if we
have to reduce our prices, our revenues and profits will decline.
In addition, we must offer 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 may be affected if
we are not successful in achieving these goals.
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 Christmas season. A
substantial portion of our total revenues and all or most of our net earnings
occur during our fourth quarter ending January 31. In anticipation of increased
sales activity during the fourth quarter, we incur significant additional
expenses, including significantly higher inventory costs and the cost of hiring
a substantial number of temporary employees to supplement our permanent store
staff. If for any reason our sales were to be substantially below those normally
expected during the winter quarter of our fiscal year, our annual results would
be adversely affected. Due to this seasonality, our operating results for any
one period may not be indicative of our operating results for the full fiscal
year.
Our operating results during the other quarters of the year are
generally lower and we have experienced losses in such periods. It is possible
that we may experience similar losses in the future in such periods. Our
quarterly results of operations may fluctuate significantly as a result of a
variety of factors, including among other things, the timing of new store
openings, net sales contributed by new stores, increases or decreases in
comparable store sales, changes in our merchandise mix and net catalog sales.
In addition, like other retailers we typically make merchandising and
purchasing decisions for the Christmas season well in advance of the holiday
selling season. As a result, poor economic conditions and/or differences from
projected customer demand for our products during the fourth quarter could
result in lower revenues. During our 1998 and 1997 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.
We May Not Successfully Design and Develop Proprietary Products
We are increasingly dependent on the success of the proprietary
products that we have designed and developed for our customers. We must design
products that meet the demands of our customers and manufacture these products
cost-effectively. In addition, we must rely on contracted manufacture resources
to produce these products in sufficient quantities to meet customer demand and
deliver these products in a timely manner to our customers. We rely solely on
our contracted manufacturers to produce and timely deliver these proprietary
products. If we are unable to successfully design, develop, and timely deliver
our proprietary products, our operating results may be materially adversely
affected.
10
We Face Certain Risks Associated with Expansion
We plan to continue to increase the number of 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 geographies;
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 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 fulfill additional stores. We may not be able to manage this increased
inventory without decreasing our profitability. We may need additional financing
in excess of our current credit facility to be used for new store openings.
Furthermore, our current credit facility has various loan covenants we must
comply with in order to maintain the credit facility. We cannot predict with
certainty that we will be successful in obtaining additional funds or new credit
facilities on favorable terms or at all.
We Are Dependent on the Success of our Advertising 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 or for any other reason, our future
operating results may be materially adversely affected. We are also testing
other advertising media such as television (infomericals) and the Internet.
Expenditures on these and other media may not produce a sufficient level of
sales to cover such expenditures, which would reduce our profitability.
We Rely on Our Catalog Operations
Our success depends in part on the success of our catalog operations. We
believe that successful catalog operations will depend in part on the following
factors:
o the efficient targeting of our mailings;
o productive prospect mailing;
o appropriate shifts in our merchandise mix; and
o our ability to achieve adequate response rates to our mailings.
Catalog 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 the
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.
11
Our Catalog Operating Costs are Unpredictable
Historically, significant portions of our revenues have been from
purchases made by customers from The Sharper Image catalog. Increases in the
costs of producing and distributing the catalog may reduce the profitability of
our catalog sales. Specifically, we may experience increases in postage, paper
or shipping costs due to factors beyond our control. As a result, our future
results may be adversely affected.
We maintain a contract with a major package carrier for the delivery of
our merchandise. There can be no assurance that, once this contract expires or
is terminated, we will be able to negotiate similar or better terms with this
major carrier or another shipping company or that the resulting contract(s)will
be on terms favorable to us. Our inability to secure suitable or commercially
favorable contracts for the delivery of our merchandise could have an adverse
effect on our future results.
Our New Business Lines and Internet Strategy May Not Succeed
In the past we have tested new lines of business that have not always
proven profitable. We continually examine and evaluate all revenue channels for
profitability. We may decide to develop new business lines or to acquire
additional businesses in the future, and we cannot predict whether such efforts
will be successful. The failure of new business lines or acquisitions could hurt
future results.
We believe that we need to reach our current customers and generate new
customers through methods other than regular catalog mailings. We are pursuing
opportunities to sell our products over the Internet through our own web site
http://www.sharperimage.com and other interactive shopping media including
on-line computer networks such as America Online's Shopping Channel, Microsoft
Plaza, Yahoo Stores, Catalog City and PC World Shopping. This is a new business
and marketing strategy for us and involves certain risks and uncertainties. We
may not succeed in achieving profitable operations in marketing our products
over the Internet.
We Depend on Our Vendors
Our performance depends on our ability to purchase our products in
sufficient quantities at competitive prices and on our vendors' ability to make
and deliver high quality products in a cost effective, timely manner. Some of
our smaller vendors have limited resources, production capacities and limited
operating histories. We have no long-term purchase contracts or other contracts
that provide continued supply, pricing or access to new products and any vendor
or distributor could discontinue selling to us at any time. We cannot assure you
that we will be able to acquire the products we desire in sufficient quantities
or on terms that are acceptable to us in the future. In addition, we cannot
assure you that our vendors will make and deliver high quality products in a
cost effective, timely manner. We may also be unable to develop relationships
with new vendors. Also all products we purchase from vendors in the Far East
must be shipped to our distribution centers by freight carriers and we cannot
assure you that we will be able to obtain sufficient capacity at favorable
rates. Our inability to acquire suitable products in a cost effective, timely
manner or the loss of one or more key vendors or freight carriers could have a
negative impact on our business.
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 two call centers and
contracting services with the third party call centers. Any material disruption
or slowdown in our order processing systems resulting from labor disputes,
telephone down times, electrical outages, mechanical problems, human error or
accidents, fire, natural disasters, or comparable events could cause delays in
our ability to receive and distribute orders and may cause orders to be lost or
to be shipped or delivered late. As a result, customers may 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 delay 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.
12
We Face Risks Associated with Distribution
We conduct all of our distribution operations and all of our catalog
and Internet order processing fulfillment functions from a single facility in
Little Rock, Arkansas. We also use contract warehouse facilities for additional
seasonal requirements. Any disruption in the operations at the distribution
center, particularly during the Christmas season, could have a negative impact
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
Christmas season and while new stores are opening. We cannot assure you that we
will continue to receive adequate assistance from our temporary employees, or
that we will continue to have access to sufficient sources of temporary
employees.
Results for Our Comparable Store Sales May Fluctuate
Our comparable store sales are affected by a variety of factors,
including, among others:
o customer demand in different geographies;
o our ability to efficiently source and distribute products;
o changes in our product mix;
o impact of competition; and
o general economic conditions.
Our comparable store sales have fluctuated significantly in the past
and we believe that such fluctuations may continue. Our historic comparable
store net sales changes were as follows:
Percentage
Fiscal Year Increase (Decrease)
----------- -------------------
1995 3.3
1996 (2.1)
1997 1.1
1998 5.3
These historic results are not necessarily indicative of future results, and we
cannot assure you that our comparable store sales results will not decrease in
the future. Any changes in our comparable store sales results could impact our
future operating performance and cause the price of the common stock to
fluctuate.
We Experience Intense Competition in Our 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.
We May Fail to Anticipate and Adapt to Changing Consumer Trends
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 cannot always be
predicted with certainty and may change between sales seasons. If we misjudge
either the market for our products or our customers' purchasing habits, our
sales may decline or we may be required to sell our products at lower prices.
This would result in a negative impact on our business.
13
We May be Subject to State Sales and Use Tax or Internet Regulation
Our business may be affected by the adoption of new regulations or
rules governing the sale of our products, particularly with regard to state
sales and use taxes. Any unfavorable change in the state sales and use taxes,
which affect our catalog and retail store sales could adversely affect our
business and results of operations. In addition, the Internet at present is
largely unregulated and we are unable to predict whether significant regulations
or taxes will be imposed on Internet commerce in the near future. Because our
Internet business is still in its initial stages, we are unable to predict how
such regulations could affect the further development of our Internet business.
Poor Economic Conditions May Hurt Our Business
Certain economic conditions affect the level of consumer spending on
our products, including, among others, the following:
o general business conditions;
o interest rates;
o taxation; and
o consumer confidence in future economic conditions.
Our business could be negatively impacted 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
proprietary 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 foreign vendors and manufacturers are located in the Far East,
and as a result, our business may be particularly impacted by changes in the
political, social, legal, and economic conditions in the Far East. Additionally,
foreign weather and product transportation problems could affect our ability to
maintain adequate inventory levels and adversely affect our future results.
We are Dependent on Certain Key Personnel
Our success depends to a significant extent upon the abilities of our
senior management, particularly Richard Thalheimer, our founder, President 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 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 ability to attract and hire additional qualified personnel as
needed in the future.
We are Controlled by a Single Stockholder
As of April 15, 1999, Richard Thalheimer will beneficially own
approximately 55.1% of all of the outstanding shares of the common stock of our
company. As a result, Mr. Thalheimer will continue to be able to elect the
entire Board of Directors and control the corporate actions of our company.
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 the common stock
without regard to our operating performance. In addition, 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.
14
Failure of Our Computer Systems to Recognize Year 2000 Could Negatively Affect
Our Business
We recognize that the arrival of the year 2000 poses a unique worldwide
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. We have assessed our computer and business
processes and we are reprogramming our computer applications to provide for
their continued functionality. We are currently assessing the readiness of our
vendors and other third parties with which we interface.
We are presently unable to assess the likelihood that we will
experience operational problems due to unresolved year 2000 problems of third
parties that we do business with. We cannot assure you that other entities will
achieve timely year 2000 compliance; and if they do not, year 2000 problems
could have an adverse impact on our operations. Where commercially reasonable to
do so, we intend to assess our risks with respect to failure by third parties to
be year 2000 compliant and to seek to mitigate those risks. If we cannot achieve
such mitigation, year 2000 problems could have an adverse impact on our
operations.
The estimated cost for this project is between $400,000 and $600,000,
and is being funded through operating cash flows. We will incur operating costs
related to year 2000 compliance projects over several quarters and we will
expense such costs as incurred. Through January,31, 1999, we have incurred
approximately $300,000 on work related to year 2000 compliance.
Our estimates of the costs of achieving year 2000 compliance and the date
by which year 2000 compliance will be achieved are based on management's best
estimates, which were derived using numerous assumptions about future events
including the continued availability of certain resources, third party
modification plans and other factors. However, we cannot assure you that these
estimates will be achieved, and actual results could differ materially from
these estimates. Specific factors that might cause such material differences
include, but are not limited to the following:
o the availability and cost of personnel trained in year 2000 remediation
work;
o the ability to locate and correct all computer codes;
o our vendors and suppliers success in reaching year 2000 readiness; and
o the timely availability of necessary replacement items.
We presently believe that the most reasonably likely worst-case scenarios that
we might confront with respect to year 2000 issues have to do with third parties
not being year 2000 compliant. We are presently evaluating vendor and customer
compliance and will develop contingency plans, such as alternate vendor
opportunities, after obtaining compliance evaluations. We intend to develop
contingency plans by September 1999.
Merchandise Returns
As part of our customer service commitment, we maintain a liberal
merchandise return policy, which allows customers to return most merchandise. As
with industry practice, we make allowances for catalog sales in our financial
statements for anticipated merchandise returns 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,
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.
Our Charter Documents and Delaware Law May Prohibit a Takeover
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 contain certain 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 shareholders for their common stock.
15
We must Successfully Respond to Changes in the Retail Industry
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.
16
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.
As of January 31, 1999, the Company operated 87 The Sharper Image
stores under leases covering a total of approximately 202,000 square feet of net
selling space.
The Company's operates a 110,000 square foot distribution facility
located in Little Rock, Arkansas. All of the Company's distribution functions
are conducted through this facility and other seasonally occupied space rented
by the Company in close proximity thereto.
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 position and
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 21 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on page
27 of the Sharper Image Corporation 1998 Annual Report to Stockholders is
incorporated herein by reference. As of April 15, 1999 there were 490 holders of
record of the Registrant's Common Stock.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
page 3 of the Sharper Image Corporation 1998 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 10 to 15
of the Sharper Image Corporation 1998 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 pages 13 and 14 of the Sharper
Image Corporation 1998 Annual Report to Stockholders is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and independent auditors' report set forth on
pages 16 through 27 of the Sharper Image Corporation 1998 Annual Report to
Stockholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
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 1998 Proxy Statement to
Stockholders, pages 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 1999 Proxy Statement, pages 18 to 19.
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 1998 Proxy
Statement, pages 16 to 17.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a)1. List of Financial Statements.
The following Financial Statements and Notes thereto set forth on pages 16
through 27 of the Sharper Image Corporation 1998 Annual Report to Stockholders
are incorporated by reference as Exhibit 13.1 to this Report on Form 10-K:
Independent Auditor's Report
Statements of Operations for the years ended January 31, 1999, 1998 and 1997.
Balance sheets at January 31, 1999 and 1998
Statements of Stockholders' Equity for the years ended January 31, 1999, 1998
and 1997
Statements of Cash Flows for the years ended January 31, 1999, 1998 and 1997
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
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.
18
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the last quarter of the period covered by this Report.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of the
expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered on the Form S-8
identified below, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
The preceding undertaking shall be incorporated by reference into registrant's
Registration Statement on Form S-8 (Registration No. 33-12755).
(c) List of Exhibits.
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index which begins on page 27 of this report.
19
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 Executive 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 28, 1999
- ---------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Tracy Y. Wan Executive Vice President, April 28, 1999
- ---------------------------- Chief Financial Officer
Tracy Y. Wan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Alan Thalheimer Director April 28, 1999
- ----------------------------
Alan Thalheimer
/s/ Maurice Gregg Director April 28, 1999
- ----------------------------
Maurice Gregg
/s/ Gerald Napier Director April 28, 1999
- ----------------------------
Gerald Napier
/s/ Morton David Director April 28, 1999
- ----------------------------
Morton David
20
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, 1999:
- ----------------------------
Inventory Obsolescence $1,486 $1,298 $ 846 $1,938
YEAR ENDED JANUARY 31, 1998:
- ----------------------------
Inventory Obsolescence $1,509 $ 678 $ 701 $1,486
YEAR ENDED JANUARY 31, 1997:
- ----------------------------
Inventory Obsolescence $1,449 $1,681 $1,621 $1,509
OTHER
YEAR ENDED JANUARY 31, 1999:
- ----------------------------
Other $ 508 $ 830 $ 534 $ 804
YEAR ENDED JANUARY 31, 1998:
- ----------------------------
Other $ 505 $ 321 $ 318 $ 508
YEAR ENDED JANUARY 31, 1997:
- ----------------------------
Other $ 461 $ 351 $ 307 $ 505
21
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, 1999 and 1998 and for each of the three years in the period ended
January 31, 1999, and have issued our report thereon dated March 26, 1999; such
financial statements and report are included in your 1998 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, whom 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 26, 1999
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
appendix to Proxy Statement for annual meeting to be held June 7, 1999)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994, as
amended. (Incorporated by reference to appendix to Proxy Statement for
annual meeting to be held June 7, 1999)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by
reference to Exhibit 10.15 to Form 10-K for fiscal year ended January
31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended January
31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
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.)
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).
22
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. (Incorporated by reference to Exhibit 10.20 to the Form 10-K
for the year ended January 31, 1997).
10.21 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 the Form 10-K for the year ended January
31, 1997).
10.22 Warrant to Purchase Common Stock Agreement dated February 13, 1997
between the Company and The CIT Group/Business Credit Inc.
(Incorporated by reference to Exhibit 10.22 to the Form 10-K for the
year ended January 31, 1997).
10.23 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 the Form 10-K for the year ended January
31, 1997).
10.24 Warrant to Purchase Common Stock Agreement dated April 6, 1998 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.24 to the Form 10-K for the year ended January
31, 1998).
10.25 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 the Form 10-K for the year ended January
31, 1998).
10.26 Amendment to Employment Agreement between the Company and Mr. Barry
Gilbert, its Vice Chairman and Chief Operating Officer dated and
effective November 30, 1998.
11.1 Statement Re: Computation of Earnings per Share.
13.1 1998 Annual Report to Stockholders.
23.1 Independent Auditors' Consent.
27.0 Financial Data Schedule.