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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950005-02-000484.txt : 20020430
<SEC-HEADER>0000950005-02-000484.hdr.sgml : 20020430
ACCESSION NUMBER: 0000950005-02-000484
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20020131
FILED AS OF DATE: 20020430
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SHARPER IMAGE CORP
CENTRAL INDEX KEY: 0000811696
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940]
IRS NUMBER: 942493558
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0131
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-15113
FILM NUMBER: 02628089
BUSINESS ADDRESS:
STREET 1: 650 DAVIS ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94111
BUSINESS PHONE: 4154456000
MAIL ADDRESS:
STREET 1: 650 DAVIS STREET
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94111
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>p15363_form10k405.txt
<DESCRIPTION>FORM 10-K
<TEXT>
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, 2002
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number 33-12755
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code:
(415) 445-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 15, 2002 was $152,085,694
The number of shares of Common Stock, with $.01 par value, outstanding on
April 15, 2002 was 12,145,553 shares.
Documents incorporated by reference:
Portions of Registrant's Annual Report to Stockholders for the fiscal year ended
January 31, 2002 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 3, 2002 are incorporated by reference into Part III
of this report.
<PAGE>
PART 1
This Annual Report on Form 10-K and the documents incorporated herein by
reference of Sharper Image Corporation (referred to as the "Company," "The
Sharper Image," "it," "we," "our," "ours," and "us") contain forward-looking
statements within the meaning of federal securities laws that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by the Company's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions, are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors Affecting Future
Operating Results" on pages 17 through 26 as well as those noted in the
documents incorporated herein by reference. Unless required by law, the Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. However,
readers should carefully review the statements set forth in other reports or
documents the Company files from time to time with the Securities and Exchange
Commission, particularly the Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
Item 1. Business
Overview
The Sharper Image is a leading specialty retailer of innovative, high
quality products that are useful and entertaining and are designed to make life
easier and more enjoyable. The Company offers a unique assortment of products in
the electronics, recreation and fitness, personal care, house ware, travel, toy,
gift and other categories. The Company's merchandising philosophy focuses on the
introduction of new and creative Sharper Image Design proprietary products and
Sharper Image private label products. In addition, the Company is a leading
source of branded products, a portion of which the Company offers on an
exclusive basis. The Company's products are marketed and sold through three
primary sales channels: The Sharper Image stores, The Sharper Image catalog, and
the Internet, primarily through its sharperimage.com Web site. The Company also
has business-to-business operations consisting of Sharper Image Corporate
Rewards & Incentives and wholesale operations. The Company believes that its
unique merchandising and creative marketing strategies have made The Sharper
Image one of the most widely recognized retail brand names in the United States.
The Company's merchandising strategy emphasizes products that are
innovative and new-to-market. In recent years, the Company has focused
significant resources on the development and marketing of its Sharper Image
Design proprietary products and its Sharper Image private label products, which
are exclusive to The Sharper Image. Sharper Image Design and private label
products typically generate higher gross margins than other products, lessen
direct price comparisons and, the Company believes, strengthens The Sharper
Image brand, as well as broadens its customer reach. The Company has increased
the percentage of its sales attributable
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<PAGE>
to Sharper Image Design proprietary and private label products to 70% for the
year ended January 31, 2002 (fiscal 2001) from 64% for the year ended January
31, 2001 (fiscal 2000).
The Company was founded in 1977 by Richard Thalheimer, who continues as
Chairman and Chief Executive Officer. The Sharper Image mailed its first catalog
in 1981, began the expansion into store operations in 1984, and commenced
Internet online retail operations in 1994. The Company markets and sells its
merchandise through the following three primary sales channels: The Sharper
Image stores, Catalog, which includes revenue from all direct marketing
activities and television infomercials, and the Internet, primarily through its
sharperimage.com Web site. The Company believes that this multi-channel approach
provides it with significant marketing, sales and operational synergies, and
provides its customers with enhanced shopping flexibility and superior customer
service.
The Company's store operations generated the highest proportion of its
sales, representing approximately 59% of total revenues in fiscal 2001 and
fiscal 2000. At the end of fiscal 2001, the Company operated 109 The Sharper
Image stores in 31 states and the District of Columbia and licensees operated
three stores internationally and two airport stores in the United States. The
Sharper Image stores present an interactive and entertaining selling environment
that emphasizes the features and functionality of its innovative, fun and useful
products and allows the customer to interact and experience the product while
shopping. The Company's average store sales per square foot are consistently
above industry averages, and during fiscal 2001 the Company generated average
sales of $578 per square foot, a decrease of 24% as compared with $763 per
square foot for fiscal 2000 (fiscal 2000 sales per square foot were
exceptionally high due to the razor scooter sales phenomenon experienced that
same year.) Sales per square foot for fiscal 1999 were $546. During fiscal 2001,
the Company opened 12 new The Sharper Image format stores, and two new The
Sharper Image Design format stores, and closed two The Sharper Image stores. The
Company plans to continue its real estate strategy of annual store unit growth
of 10-15%. Lease terms for several of the existing The Sharper Image store
locations will be maturing during fiscal 2002 and these leases may be
re-negotiated or terminated.
The Company also offers its products through direct marketing activities. The
Sharper Image catalog, an award winning, full-color monthly catalog uses
dramatic visuals and creative product descriptions designed and produced by its
in-house staff of writers and production artists. The Sharper Image catalog,
generally features between 180 and 250 products in each monthly catalog,
increasing to over 340 products during the Holiday shopping season and also
currently serves as the primary advertising vehicle for its stores and its
Internet retail operations at sharperimage.com. During fiscal 2001, the Company
mailed approximately 70 million The Sharper Image catalogs to over 10 million
individuals. The Company also has a television advertising program through
infomercials on a number of its most popular products. Approximately 23% of the
Company's total revenues were generated by direct marketing operations,
including revenue generated directly from the catalog, print advertising,
single-product mailers and television infomercials in fiscal 2001 and 21% in
fiscal 2000.
The Sharper Image products are also marketed through the Company's
Internet retail operations, primarily through its own Web site, which the
Company has maintained at sharperimage.com since 1995. The Sharper Image was one
of the early entrants into Internet retailing, and has participated in online
shopping since 1994. The Company's Internet operations generated approximately
13% of total revenues in fiscal 2001 and 14% in fiscal 2000. In addition to its
Web site, the Company has offered its products through Internet marketing
partnerships with
2
<PAGE>
America Online, Catalog City, Linkshare, Yahoo! Shopping, and others. The
Company believes that online retailing over the Internet presents The Sharper
Image with a significant opportunity for the marketing and sale of its products
and will enable it to expand and diversify its existing customer base. The
Company believes that its Sharper Image Design proprietary products are
particularly well positioned to be marketed and sold over the Internet. The
Company plans to continue to allocate the resources to its Internet operations
by establishing appropriate additional strategic relationships with other online
retail partners and continuing to enhance the technical capabilities and
presentation of products on its Web site. The Company also operates an auction
site where consumers can bid to win products at less than retail prices. This
allows the Company the ability to broaden its customer base and manage its
closeout, repackaged and refurbished inventory. The Company currently offers
international Web sites where online shoppers are able to get convenient,
efficient local delivery of Sharper Image Design products, which have been
specifically adapted for use throughout Europe.
The Company is known for its varied product mix and a merchandising
philosophy focusing on innovative, well-designed, high-quality products that are
developed by The Sharper Image, exclusive to The Sharper Image, or in limited
distribution. In product lines where the Company competes directly with other
retailers, it generally chooses to sell the best version of the product with the
most advanced features. The Company is frequently sought after by manufacturers
and inventors, to launch technologically advanced products with features that
are unique and innovative.
During fiscal 2001, the Company continued the expansion of its in-house
Sharper Image Design product development function. As a result of the increased
resources devoted to Sharper Image Design proprietary and private label products
during fiscal 2001, the creation and introduction of a number of new Sharper
Image Design products, as well as the continuing cumulative sales from
proprietary and private label products introduced in prior years, the percentage
of sales attributable to Sharper Image Design proprietary and private label
products was 70% in fiscal 2001 and 64% in fiscal 2000. The growth in gross
margin percentage rate by 2.9 percentage points in fiscal 2001 from fiscal 2000
was primarily due to the fact that The Sharper Image Design proprietary and
private label products generally carry higher margins than branded products. The
Company plans to continue to devote resources to its proprietary product
development efforts and its private label merchandising philosophy.
The Company's business is highly seasonal, with sales peaks in June for
Father's Day and graduation gift giving, and the Holiday shopping season. See
"Seasonality".
In addition to its primary businesses, The Sharper Image leverages its
name and reputation through its Corporate Incentives and Rewards program,
wholesale sales of Sharper Image brand products, which include Sharper Image
Design proprietary and private-label products, and a product licensing program
with select businesses. Wholesale sales are made primarily to fine department
stores and to select international retailers.
Store Operations
The Sharper Image stores are located nationwide in densely populated
downtown financial districts and business centers, upscale shopping malls and
drive-up suburban locations. The Company's store operations generate the highest
proportion of its sales, representing approximately 59% of total revenues for
fiscal 2001 and fiscal 2000. The Sharper Image stores
3
<PAGE>
present an interactive and entertaining selling environment that emphasizes the
features and functionality of its products and allows the customer to experience
the product while shopping. The Company has four retail formats, The Sharper
Image stores; The Sharper Image Design stores; Outlet stores and airport shops.
These formats are discussed below and in "Licensed Operations."
Each store is generally staffed with approximately six to eight
associates, including a manager, an assistant manager, a senior sales associate,
sales associates, and other support staff. A number of the Company's high volume
stores are staffed with 11 to 15 associates. The Company's store managers have
an average tenure of over seven years. The Company's store personnel are
compensated primarily through commissions. In order to maintain a high customer
service level, the Company's sales associates undergo considerable training on
its many new and often technically oriented products.
The Sharper Image stores are designed by the Company's visual design staff
at the Company's headquarters in San Francisco, California to standardize, where
possible, layout so as to simplify their operations. The stores are operated
according to standardized procedures for high level of customer service,
merchandise display and pricing, product demonstration, inventory maintenance,
personnel training, administration and security. The Company's original The
Sharper Image stores typically have 2,200 to 3,000 square feet of selling space
and approximately 1,300 to 2,200 square feet of storage and administrative
space. The typical cost of leasehold improvements, before landlord
contributions, but including fixtures, equipment and pre-opening expenses,
averages $450,000 to $550,000 per store. Initial inventory for a new The Sharper
Image store has generally cost approximately $200,000. Outlet stores are
approximately half the cost of the original The Sharper Image stores. The
Company also operates a second retail format of The Sharper Image Design stores,
which are approximately half the size of the original stores. The Sharper Image
Design store typically consist of between 1,200 to 2,000 of selling square feet
and feature higher margin proprietary products, in addition to other top selling
merchandise. At the end of fiscal 2001, the Company had 96 The Sharper Image
stores, 11 Sharper Image Design stores, and two outlet locations.
In 1997 the Company decided to update the look and appeal of its new
retail stores and select existing stores. The new format presents an open, fresh
and inviting environment that the Company believes appeals to both men and women
and highlights the Company's proprietary products and attractive product
packaging. The average cost of converting an existing store to the new format is
similar to that of building a new store, which ranges from $450,000 to $550,000,
subject to leasehold allowances. Utilizing the new format, the Company opened 14
new stores and remodeled, expanded or relocated 10 stores during fiscal 2001.
The Company opened nine new stores, including two flagship stores and remodeled
six stores in fiscal 2000. The Company intends to continue to selectively
remodel stores utilizing the new store format typically at the time of the
store's lease renewal.
The Sharper Image Catalog
The Sharper Image catalog is a full-color catalog that is mailed to an
average of approximately 4.9 million individuals each month. The Sharper Image
direct marketing operations, including revenues generated directly from the
catalog, single-product mailers, print ads and television infomercial, generated
approximately 23% of its total revenues in fiscal 2001 and 21% in fiscal 2000.
The Company's catalog has been recognized for creative excellence by
4
<PAGE>
leading catalog industry trade groups. The catalog is currently the primary
advertising vehicle for its retail stores and its Internet retailing business.
During fiscal 2001, the Company mailed approximately 70 million of The Sharper
Image catalogs to over 10 million individuals. Circulation and number of pages
of The Sharper Image catalog is under continual review to balance the costs of
mailing the catalogs with the revenues generated. The mailings increase
significantly for Father's Day and the Holiday shopping season to reflect the
seasonal nature of the business.
The Sharper Image catalog design uses dramatic visuals and problem-solving
and benefit-oriented product descriptions. The catalog design features the most
important products prominently. The number of items featured each month ranges
between 180 and 250 products during the first three quarters of the year,
increasing to more than 340 products during the Holiday shopping season in the
fourth quarter. The Sharper Image catalog is designed and produced by the
Company's in-house staff of writers and production artists. This enables the
Company to maintain quality control and shorten the lead-time needed to produce
the catalog. The monthly production and distribution schedule permits frequent
changes in the product selection. During fiscal 2001, The Sharper Image catalog
contained between 52 and 84 pages for non-peak months and between 52 and 124
pages for the peak seasons of Father's Day and the Holiday shopping season.
The Company has developed a proprietary customer database of over 12
million names, which the Company uses regularly and rents periodically to a
highly select group of companies. The Company collects customer names through
its catalog and online Web site order processing as well as electronic
point-of-sale registers in its retail stores. The names and associated sales
information are merged daily into its customer master file. This daily merge
process provides a constant source of current information to help assess the
effectiveness of the catalog as a form of retail advertising, identify new
customers that can be added to its in-house mailing list without using customer
lists obtained from other catalogers, and identify its top purchasers. To
further enhance the effectiveness of its catalog mailings to individuals in the
customer database, the in-house staff utilizes the Company's statistical
evaluation and selection techniques to determine which customer segments are
likely to contribute the greatest revenue per mailing. The Company has
established a data bank of top purchasers who receive preferred services,
including invitations for special sales events and enhanced customer service.
During fiscal 2001, the Company expanded its television infomercial
presence by highlighting several popular Sharper Image Design proprietary
products on cable and national broadcast stations. Approximately 28% of net
catalog sales were generated from television infomercial direct sales for fiscal
2001. The Company believes that this type of direct marketing will broaden the
existing customer base and will also increase customer traffic and sales in
retail store locations.
Internet Operations
The Sharper Image was an early entrant into Internet retailing. The
Company has participated in online shopping since 1994, and has maintained its
own Web site at sharperimage.com since 1995. Revenues from the Company's
Internet operations decreased to $49.8 million in fiscal 2001 from $60.2 million
in fiscal 2000 due primarily to the Company's planned decrease in its auction
sales. Revenues from the Company's Internet operations, excluding auction sales
decreased to $40.8 million in fiscal 2001 from $41.8 million in fiscal 2000. The
Company's online retail operations benefit from its brand name, customer base,
Sharper Image
5
<PAGE>
catalogs and unique product offerings, as well as its multimedia approach to
advertising. The Company believes that the Sharper Image catalog in particular
is a significant factor in generating online sales. In addition, the Company is
able to leverage its catalog operational infrastructure for fulfillment and
customer service experience, providing it with a significant advantage over
Internet retailers who have not developed such capabilities. Shoppers on the Web
site have the convenience of exchanging or returning products purchased through
the Internet at its retail locations. The Company sends out periodic email
campaigns to its list of online shoppers. These emails include sneak previews of
newly released products and special promotions that are intended to drive sales
in all selling channels.
The Company's goal is to make sharperimage.com a Web site that provides
its online customers with an interactive experience similar to its Sharper Image
stores. The Company continues to update its Web site by incorporating advanced
technologies to improve its product presentations and make its site increasingly
customer friendly, while retaining its entertainment value. During fiscal 2000,
the Company launched an enhanced and redesigned Web site that incorporated much
of the look and feel of the new store design. The redesigned Web site included
new features such as dynamic browsing, inventory status, order tracking
capabilities, easy registration and Flash technology. For fiscal 2001, the
Company focused on utilizing these improved features to enhance the ease and
speed of shopping and ordering. The Company's Web site now offers catalog quick
order and each product page lists related accessories with click-to-add check
boxes.
The Company also has an established online auction site which allows
customers to bid on and acquire a broad range of new, returned, repackaged and
refurbished Sharper Image products for less than regular retail price. Most
products purchased on the auction site have the same warranty and return
benefits that accompany full price products. The Company believes that bidders
have an enhanced level of confidence in its operations since, unlike many other
online auction sites, the Company is an established retailer with an inventory
of well-known products under warranty with established return policies. The
auction site not only offers consumers the enjoyment of bidding and winning
products at less than retail prices, it also allows the Company the opportunity
to effectively manage its closeout products, while maintaining gross margin
goals.
The Company is pursuing additional steps to achieve continued growth of
its Internet operations. These steps include technological improvements,
dramatic visual presentations, development of international Web sites in Europe,
including the United Kingdom and Germany, and seeking to establish strategic
Internet marketing partnerships. The Company has established relationships with
America Online, Catalog City, Linkshare, Yahoo! Shopping, and others. Although
the Company's international online revenues are not expected to be significant
during fiscal 2002, we believe there will be good growth opportunities in future
years.
Other Operations
In addition to its store, catalog and Internet operations, the Company
also has a business-to-business operation, which includes the corporate
incentive program, Sharper Image Rewards, wholesaling and licensing. The Company
also derives revenues from its customer list rental program.
Under the Sharper Image Rewards program, the Company sells to major
corporations and not-for-profit entities, product, rewards cards, incentive and
merchandise certificates to client
6
<PAGE>
companies who in turn distribute them under their programs to increase their
sales, or to motivate and reward their high achiever employees and best
customers. The Sharper Image stores, Internet site and catalog are the primary
means of offering and conveniently delivering the incentives and gifts. The
Company's certificates are redeemable for Sharper Image merchandise through its
retail stores, by mail, on the Internet or over the telephone through the
catalog telemarketing group. The Company offers a custom online points-based
incentive catalog called Sharper Image E-Awards, which highlights popular
Sharper Image products. Points are assigned to each product and will be offered
on a Web site developed specifically for the client company's incentive program.
It is intended that the client company will buy the points and distribute them
under their incentive program. The points are directly redeemable on the
E-Awards site. The editors and readers of Incentive magazine honored
sharperimage.com as one of the incentive industry's best Web sites. The Company
records revenues and expenses for its Sharper Image Rewards program through its
stores, catalog and Internet operations.
The Company's Business Development department is the primary group
responsible for wholesale marketing to other retailers, including fine
department stores in the United States as well as retailers in other countries.
This group's sales were $10.9 million in fiscal 2001 as compared to $9.4 million
in fiscal 2000. Plans for this group include selectively increasing its presence
in the international marketplace in 2002, and increase the number of Sharper
Image brand products offered to these customers.
The Company has an exclusive licensing agreement with a company located in
Switzerland. Under the international license agreement in Switzerland, the
licensee is granted the right to use the trademarked name, "The Sharper Image,"
in Switzerland in connection with The Sharper Image retail stores and catalog
operations. The Company has agreed to assist the licensee by producing a foreign
language edition of The Sharper Image catalog, with economies of scale but at
the expense of the licensee who then prints and distributes locally. There are
currently three Sharper Image retail stores operated by the foreign licensee in
Switzerland. The Company receives royalties on sales by the licensee. The
licensee will purchase products from the Company or directly from manufacturers,
maintain their own supply of inventory, and establish their own product prices.
The Company also has a licensing agreement with a domestic company, which allows
the licensee 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 receives royalties on sales by the
licensee. The licensee will purchase products from the Company or directly from
manufacturers, maintain their own supply of inventory, and establish their own
product prices.
In addition, the Company rents its customer list to a highly select group
of companies for a fee or in exchange for their customer lists. The value of
customer list exchanges is not included in the Company's revenues.
The Company continues to pursue opportunities in foreign countries,
primarily through wholesale and internet channels. For fiscal 2001,
international sales accounted for approximately 1.1% of total revenues.
Licensing arrangements are selectively revisited.
7
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Merchandising, Product Sourcing, Product Development
Merchandising
The Company's merchandise mix emphasizes innovative products that are new
to market, unique products which are proprietary, private label or available
exclusively through The Sharper Image, or branded products not available in
broad distribution. The Company chooses each product separately because its
sales are driven by individual products, and its marketing efforts focus on each
item's unique attributes, features and benefits. This approach distinguishes the
Company from other retailers who are more category or product classification
oriented. The Company adjusts its merchandise mix to reflect market trends and
customer buying habits. New products are selected or developed and brought into
the Company's merchandise mix based on criteria such as anticipated popularity,
gross margin, uniqueness, value, competitive alternatives, exclusivity, quality
and vendor performance. As a result of such shifting emphasis among individual
items and depending on the customers demand and the level of marketing and
advertising programs, the mix of sales by category changes from time to time and
the sales volume of individual or related products can be significant to any
particular reporting period's total sales.
The effect, from year to year, can be to increase or decrease the
merchandise gross margin rates since some categories of merchandise sustain
traditionally higher margins and some traditionally sustain lower margin rates.
The Company's goal is to increase sales of Sharper Image Design proprietary
products and exclusive private label products, as these products generally carry
higher margins than branded products. The popularity of these proprietary and
private label products contributed to the 2.9 percentage point increase in the
gross margin rate for fiscal 2001. The introduction of new proprietary and
private label products at gross margins that are anticipated to be in excess of
the average currently being realized should, we believe, have a positive impact
on the Company's gross margin rate for fiscal 2002, although we cannot assure
you of this result.
The Company's current merchandise strategy is to offer an assortment of
products with emphasis on Sharper Image Design proprietary and private label
products. The Company intends to continue to focus on offering products in the
$20 to $500 price range to appeal to a wide customer base. The Company also
intends to continue to increase its proprietary product offerings. While these
proprietary and private-labeled products offer important sales and gross margin
growth opportunities for all the revenue generating areas of the Company and
strengthen the Sharper Image brand, there are certain risks associated with
these internally developed products, such as possible manufacturing constraints,
delays in bringing these products to market and cost increases. Products may
also be subject to other regulation or limitations. See "Factors Affecting
Future Operating Results."
Sharper Image Design proprietary products are produced for the Company on
a contract basis, primarily by manufacturers in Asia. The Company provides all
product specifications to the contract manufacturers. Development lead-time is
generally in the range of 12 to 18 months, however certain product introductions
may require a shorter or longer lead-time.
The Company generates information frequently on merchandise orders and
inventory, which is reviewed by the Company's buyers, its senior merchandising
staff and top management. The Company averages new offerings of approximately 50
to 100 products during the two peak selling seasons. The Company carefully
considers which products will not be offered in future
8
<PAGE>
months based upon numerous factors, including revenues generated, gross margins,
the cost of catalog and store space devoted to each product, product
availability and quality.
Product Sourcing
The process of finding new products involves the Company's buyers
reviewing voluminous product literature, traveling extensively throughout the
United States and Asia to attend trade shows and exhibitions, and meeting with
manufacturers. The Company enjoys relationships with many major manufacturers
who use The Sharper Image regularly to introduce their newest products in the
United States. See "Factors Affecting Future Operating Results."
The Company purchases merchandise from numerous foreign and domestic
manufacturers and importers. The Company had a single supplier that provided
approximately 16% of the net merchandise purchases in fiscal 2001. Of the
products offered by the Company in recent catalogs, approximately 88% were
manufactured in Asia (primarily China), approximately 8% were manufactured
within the United States, approximately 2% were manufactured in Europe, and
approximately 2% were manufactured in other countries. The Company expects these
percentages to vary as new products are introduced. See "Factors Affecting
Future Operating Results."
Product Development
In addition to finding new product ideas from outside sources, the
Company's product development group conceives, designs and produces Sharper
Image Design proprietary products. The product development group meets regularly
with the merchandising and sales staff to review new proprietary product
opportunities, product quality, and customer feedback. From these creative
sessions product ideas are put into design, development and production.
Successful product introductions during the past three years include, among
others: the Ionic Breeze Quadra Silent Air Purifier; the Ionic Breeze Quadra
Silent Air Purifier with Germicidal Protection; Roboscout; Robocub; Now You Can
Find It; Two CD Shower Companion; Ionic Breeze Personal Air Purifier; Personal
Cooling System; Ionic Breeze Car Air Purifier; Turbo Groomer 2.0; Ionic Hair
Wand II; Ionic Bath Pet Brush; Shower Companion Plus; Ionic Conditioning Quiet
Hair Dryer; Talking Travel Companion; Sound Soother 20; CD Power Tower 200; Hot
and Cold Snack Box; and CD Soother Alarm Clock with 20 Soother Sounds. The
Company believes that the Sharper Image Design group will continue to design and
develop a variety of unique proprietary products that will enhance sales,
maintain or increase margins and continue to strengthen The Sharper Image brand.
In addition, the Company emphasizes and works with vendors to develop
private label products focusing on unique and innovative features that would
distinguish it from competitors. Successful private label introductions include,
among others, several uniquely styled stereo systems, as well as various
personal care and home-related products. The Company believes that the appeal of
these proprietary and private label products also serves as a key factor in
broadening its customer base and enhancing and strengthening its brand appeal.
The Company's goal is to continue to increase sales of these products through
the introduction of, and popularity of existing proprietary and private label
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."
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Customer Service
The Company is committed to providing its customers with courteous,
knowledgeable and prompt service. The Company's customer service and catalog
sales groups at the corporate headquarters and in Little Rock provide personal
attention to customers who call toll free or send emails to request a catalog
subscription, place an order, or inquire about a product. The Company's customer
service group is also responsible for resolving customer problems promptly and
to the customer's complete satisfaction. The Company also contracts with third
party call centers for additional sales and customer service representative
coverage. These third party call centers are subject to the same high-level
expectations of customer service as the Company's internal staff.
The Company seeks to hire and retain qualified sales and customer service
representatives in its mail-order (direct marketing), Internet and store
operations and to train them thoroughly. Each new store manager undergoes an
intense program during which the manager is trained in all aspects of the
Company's business. Sales personnel are trained during the first two weeks of
employment, or during the weeks before a new store opens, and updated
periodically with on-going sales training sessions. Training for sales personnel
focuses primarily on acquiring a working knowledge of the Company's products and
on developing selling skills and an understanding of the Company's high customer
service standards. Each sales associate is trained to adhere to the Company's
philosophy of "taking ownership" of every customer service issue that may arise.
The Company has also developed ongoing programs conducted at each store and by
district that are designed to keep each salesperson up to date on each new
product offered.
Order Fulfillment and Distribution
The Company owns a fulfillment and distribution facility in Arkansas of
approximately 110,000 square feet. The Company leases additional facility space
in Arkansas and California for overflow mail order and store fulfillment needs,
and storage. The Company's merchandise generally is delivered to the catalog and
Internet customers and to The Sharper Image stores directly from the Company's
distribution facilities. Specified 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 the majority of direct response and Internet orders
within 24 - 48 hours after the order is received. Store customers generally take
their purchases with them. The Company is currently evaluating the configuration
of its main distribution center in Arkansas to provide for more efficient
processing.
Sales and inventory information about store, direct response and Internet
operations is provided on an ongoing basis to the Company's merchandising staff
and to top management for review. The Company's stores are equipped with
electronic point-of-sale registers that communicate daily with the main computer
system at corporate headquarters, transmitting sales, inventory and customer
data as well as receiving data from the Company's headquarters. The sales,
inventory, and customer data enable sales and corporate personnel to monitor
sales by item on a daily basis, provide the information utilized by the
automatic replenishment system (ARS) and merchandising personnel for inventory
allocations, provide management with current inventory and merchandise
information, and enable the Company's in-house mailing list to be updated
regularly with customer names and activity.
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The Company has developed a proprietary ARS which is used to maximize
sales with minimal inventory investment. Under this ARS, information on
merchandise inventory and sales by each store location is generated and reviewed
daily. Sales information by product and location is systematically compared
daily to each product's "model stock" to determine store shipment quantities and
frequency. The ARS computes any adjustments to the model stock level based on
factors such as sales history by location in relation to total the Company's
sales of each product. Under this system, the model stock is continually revised
based on this analysis. Recommended adjustments to model stock levels and
recommended shipment amounts are reviewed daily by a group of Company store
distributors and merchandising managers who are responsible for allocating
inventory to stores.
Advertising
While the catalog remained the Company's primary advertising vehicle
during fiscal 2001, the Company also broadened its customer base through
increased multimedia advertising, including television infomercials,
single-product mailers, newspapers, magazines, radio, email marketing programs,
online advertising and marketing programs, and business-to-business trade
publications.
The Company increased its spending on television media infomercials, which
highlighted selected Sharper Image Design proprietary products. The Company
believes it will be able to achieve its goal of near breakeven results on this
type of advertising due to the broad appeal of the products in conjunction with
the higher gross margin that Sharper Image Design proprietary products generally
carry although there is no assurance that these goals will be met.
These increased advertising initiatives were utilized to realize the
Company's goal of acquiring new customers, which the Company believes will
produce additional sales in the stores, catalog, and Internet channels, and
business-to-business sales in the current and future periods. The Company
intends to continue the strategy of growing its customer base through aggressive
multimedia programs in fiscal 2002 with the objective of achieving a near
breakeven return on investment. The Company continually reevaluates its
advertising strategies to maximize the effectiveness of its advertising
programs.
Information Technology
The Company maintains an integrated management information system for
merchandising, point-of sale, order fulfillment, distribution and financial
reporting. The Company believes its system increases productivity by providing
extensive merchandise information and inventory control. The Company continually
evaluates and enhances its computer systems and information technology in
connection with providing additional and improved management and financial
information. In fiscal 2001, the Company added an additional AS400 mainframe at
its distribution center in Little Rock, Arkansas. The Company plans to have this
eventually act as a redundant system for the AS400 located in the corporate
headquarters. In fiscal 2002, technology development and enhancement initiatives
for the Company's Internet Web sites will continue to be part of the key
objectives of its Information Technology Team.
During fiscal 2000, the Company launched an enhanced and redesigned Web
site that incorporated much of the look and feel of the new store design. The
redesigned Web site included
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new features such as dynamic browsing, inventory status, order tracking
capabilities, easy registration and Flash technology. For fiscal 2001, the
Company focused on utilizing these improved features to enhance the ease and
speed of shopping and ordering. The Web site now offers catalog quick order and
each product page lists related accessories with click-to-add check boxes.
Competition
The Company operates in a highly competitive environment. The Company
principally competes with a diverse mix of department stores, sporting goods
stores, discount stores, specialty retailers and other catalog and Internet
retailers that offer products similar to or the same as some of those offered by
the Company. Many of the Company's competitors are larger companies with greater
financial resources, a wider selection of merchandise and greater inventory
availability. Although the Company attempts to market products not generally
available elsewhere and has emphasized exclusive products in its merchandising
strategy, some of the Company's products or similar products can also be found
in other retail stores or through other catalogs or through the Internet. The
Company offers competitive pricing where other retailers market certain products
identical to the Company's products at lower prices. In addition, a number of
other companies have attempted to imitate the presentation and method of
operation of the Company's catalog and stores, and the Company's proprietary
designed products. The Company competes principally on the basis of product
exclusivity, selection, brand recognition, quality and price of its products,
merchandise presentation in the catalog, stores, and on the Internet, its
customer list, and the quality of its customer service. The Company has
committed additional resources to its internal product development group to
create and produce proprietary products, and to its merchandising team to
support a program to increase private label products exclusively available from
the Company. The Company believes that these proprietary and private label
products provide a competitive advantage for it in its merchandising offering.
Trademark Licenses
The Company believes its registered service mark and trademark, "The
Sharper Image," and the brand name recognition that it has developed, are of
significant value. The Company actively protects its brand name and other
intellectual property rights to ensure that the quality of its brand and the
value of its proprietary rights are maintained. The Company currently licenses
the use of its trademarked name in connection with the production and
circulation of a foreign language edition of The Sharper Image catalog in
Switzerland and with The Sharper Image stores in Switzerland in consideration
for royalties and other fees. In addition to this international licensee, the
Company has also entered into a license for the right to operate Sharper Image
stores in domestic two non-duty-free airport locations as well as various
product license agreements, which grant the right to licensees to manufacture
and sell products bearing the Company's trademark.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Holiday shopping season. The secondary peak period for the Company is June,
reflecting gift buying for Father's Day and graduations. A substantial portion
of the Company's total revenues, and all or most of the Company's net earnings,
occur in its fourth fiscal quarter ending January 31. The Company generally
experiences
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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, similar to many retailers, the Company makes
merchandising and inventory decisions for the Holiday season well in advance of
the Holiday selling season. Accordingly, unfavorable economic conditions or
deviations from projected demand for products during the fourth quarter could
have a material adverse effect on the Company's financial position or results of
operations for the entire fiscal year. During fiscal years 2001 and 2000, the
Company's total revenues for the fourth quarter accounted for more than 40% of
total revenues.
Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Employees
As of January 31, 2002, the Company employed approximately 1,800
associates, of which approximately 56% 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, 54
Chairman of the Board, and
Chief Executive Officer
Tracy Wan President and Chief Operating 42
Officer
Greg Alexander Senior Vice President, Information
Technology 40
Anthony Farrell Senior Vice President, Creative Services 52
Jeffrey Forgan Senior Vice President, Chief Financial Officer 44
Joe Williams Senior Vice President, Loss Prevention 52
Richard Thalheimer is the founder of the Company and has served as the
Chief Executive Officer and as a Director of the Company since 1978 and as
Chairman of the Board of Directors since 1985. Mr. Thalheimer also served as the
Company's President from 1977 through July 1993.
Tracy Wan has been our President and Chief Operating Officer since April
1999. Ms. Wan served as Executive Vice President, Chief Financial Officer from
August 1998 through April 1999; Senior Vice President, Chief Financial Officer
from February 1995 through August 1998; as Vice President, Chief Financial
Officer from September 1994 through February 1995; as Vice President, Controller
from November 1991 through September 1994; and as Controller from July 1989
through November 1991.
Greg Alexander has been our Senior Vice President, Information Technology
since March 1999. Mr. Alexander served as Vice President, Information Technology
from February 1995 through March 1999 and as Director, Information Technology
from July 1991 through February 1995.
Anthony Farrell has been our Senior Vice President, Creative Services,
since July 1998. Mr. Farrell was a consultant to The Sharper Image from April
1998 through July 1998. Mr. Farrell was a senior vice president, merchandising
with SelfCare Catalog from March 1991 through December 1997.
Jeffrey Forgan has been our Senior Vice President and Chief Financial
Officer since April 1999. Prior to that, Mr. Forgan served as Vice President,
Corporate Finance with Foundation Health Systems from 1995 to 1998, and was with
Deloitte & Touche LLP from 1980 to 1995, serving as an audit partner during
1995. Mr. Forgan is a certified public accountant.
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Joe Williams has been our Senior Vice President, Loss Prevention, since
March 1999. Mr. Williams served as Vice President, Loss Prevention, from March
1993 through March 1999 and served as Director, Loss Prevention from April 1989
through March 1993.
Factors Affecting Future Operating Results
The following factors, in addition to the other information contained in this
report, should be considered carefully in evaluating the Company and our
prospects. This report (including without limitation the following Factors
Affecting Future Operating Results) contains forward-looking statements (within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) regarding the Company and our business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this report. Additionally, statements concerning
future matters such as the development of new products, store expansions,
possible changes in economic conditions and other statements regarding matters
that are not historical are forward-looking statements.
Although forward-looking statements in this report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors we currently know about. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, but are not limited to, those
discussed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of the
report.
If we fail to offer merchandise that our customers find attractive, our business
and operating results will be harmed
In order to meet our strategic goals, we must successfully offer to our
customers new, innovative and high quality products. Our product offerings must
be affordable, useful to the customer, well made, distinctive in design, and not
widely available from other retailers. We cannot predict with certainty that we
will successfully offer products that meet these requirements in the future.
If other retailers, especially department stores or discount retailers,
offer the same products or products similar to those we sell or if our products
become less popular with our customers, our sales may decline or we may decide
to offer our products at lower prices. If customers buy fewer of our products or
if we have to reduce our prices, our revenues and earnings will decline.
In addition, we must be able to deliver our merchandise in sufficient
quantities to meet the demands of our customers and deliver this merchandise to
customers in a timely manner. We must be able to maintain sufficient inventory
levels, particularly during peak selling seasons. Our future results would be
adversely affected if we are not successful in achieving these goals.
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Our success depends on our ability to anticipate and respond to changing
product trends and consumer demands in a timely manner. Our products must appeal
to a broad range of consumers whose preferences we cannot predict with certainty
and may change between sales seasons. If we misjudge either the market for our
products or our customers' purchasing habits, our sales may decline, our
inventories may increase or we may be required to sell our products at lower
prices. This would have a negative effect on our business.
If our sales decrease, our stock price maybe adversely affected
During fiscal 2000, we experienced a substantial increase in the level of
sales over fiscal 1999 due in large part to the popularity of the Razor
Rollerboard Scooter, which we introduced in 1999. The Razor Rollerboard Scooter
was one of the more popular products in the history of the Company, representing
approximately 17% of total revenues for fiscal 2000, the sales generated from
this product for fiscal 2001 and 1999 were not significant.
During fiscal 2001, we did not maintain the level of total sales
experienced in fiscal 2000, although we have been able to increase the gross
margin rate from the levels achieved during fiscal 2000, and we experienced a
substantial increase in sales of one of our Sharper Image Design proprietary
products, the Ionic Breeze Quadra Silent Air Purifier. Sales of this product
accounted for approximately 16% of our total revenues for fiscal 2001, compared
to approximately 7% and 4% for fiscal 2000 and 1999, respectively. We cannot
assure you that the sales from this product will continue at this level.
Our future growth will be substantially dependent on the continued
increase in growth of existing core and new products, while at the same time
maintaining or increasing our current gross margin rates. We cannot predict
whether we will be able to increase the growth of existing core and new products
or successfully introduce new products, increase our revenue level, or maintain
or increase our gross margin rate in future periods. Failure to do so may
continue to adversely affect our stock price.
Poor economic conditions may hurt our business
Certain economic conditions that affect the level of consumer spending on our
products include the following:
o general business conditions;
o stock market volatility;
o consumer confidence in future economic conditions;
o natural catastrophes;
o acts of terrorism;
o threats of war
o interest rates; and
o taxation.
Our business has been and could continue to be negatively affected by the
current recession and poor economic conditions and any related decline in
consumer demand for discretionary items such as our products. We face
uncertainty in the degree to which the continuing poor performance in the retail
industry and the current economic slowdown will negatively affect demand for our
products from our
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existing and potential customers. If the economic conditions in the United
States and globally do not improve, or if we experience a worsening in the
global economic slowdown, we may continue to experience material adverse impacts
on our business, operating results and financial condition. We may not be able
to accurately anticipate the magnitude of these effects on future quarterly
results.
Our success depends in part on our ability to design, develop, obtain and timely
deliver our proprietary products
We are increasingly dependent on the success of the proprietary products
that we design and develop for our customers. Some of these or related products,
which are affected by customers' demands and the level of marketing and
advertising efforts, can produce sales volume that is significant to a
particular reporting period's total sales volume. We must design and develop
products that meet the demands of our customers and manufacture these products
cost-effectively. We rely solely on a select group of contract manufacturers,
most of who are located in Asia (primarily China), to produce these products in
sufficient quantities to meet customer demand and to obtain and deliver these
products to our customers in a timely manner. These arrangements are subject to
the risks of relying on products manufactured outside the United States,
including political unrest and trade restrictions, currency fluctuations, work
stoppages, economic uncertainties including inflation and government
regulations, and other uncertainties. If we are unable to successfully design
and develop or to obtain and timely deliver sufficient quantities of these
products, our operating results may be adversely affected.
The Company had a single supplier located in Asia that provided
approximately 16% of the net merchandise purchases in fiscal 2001 and is likely
to provide a higher percentage in fiscal 2002. If we were unable to obtain
products from this supplier on a timely basis or on commercially reasonable
terms, our operating results may be adversely affected. Also, the arrangement
with this supplier is subject to the risks of products manufactured outside the
United States, including political unrest and trade restrictions, currency
fluctuations, work stoppages, economic uncertainties including inflation
government regulations, and other uncertainties.
We depend on our vendors' ability to timely deliver sufficient quantities of
products
Our performance depends on our ability to purchase our products in
sufficient quantities at competitive prices and on our vendors' ability to make
and deliver high quality products in a cost-effective, timely manner. Some of
our smaller vendors have limited resources, limited production capacities and
limited operating histories. We have no long-term purchase contracts or other
contracts that provide continued supply, pricing or access to new products and
any vendor or distributor could discontinue selling to us at any time. We cannot
assure you that we will be able to acquire the products we desire in sufficient
quantities or on terms that are acceptable to us in the future. In addition, we
cannot assure you that our vendors will make and deliver high quality products
in a cost-effective, timely manner. We may also be unable to develop
relationships with new vendors. All products we purchase from vendors in Asia
must be shipped to our distribution centers by freight carriers and we cannot
assure you that we will be able to obtain sufficient freight capacity at
favorable rates. Our inability to acquire suitable products in a cost-effective,
timely manner or the loss of one or more key vendors or freight carriers could
have a negative effect on our business.
Because we purchase merchandise from foreign entities and use foreign
manufacturers on a contract basis for Sharper Image Design products and other
private label products, we are subject to
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risks resulting from fluctuations in the economic conditions in foreign
countries. The majority of our vendors and manufacturers are located in various
countries in Asia, and as a result, our business may be particularly impacted by
changes in the political, social, legal, and economic conditions in these
countries. Additionally, weather and product transportation problems could
affect our ability to maintain adequate inventory levels and adversely affect
our future results.
Our quarterly operating results are subject to significant fluctuations and
seasonality
Our business is seasonal, reflecting the general pattern of peak sales and
earnings for the retail industry during the Holiday shopping season. Typically,
a substantial portion of our total revenues and all, or most of our net earnings
occur during our fourth quarter ending on January 31. During our 2001 and 2000
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
cannot predict with certainty whether the fourth quarter of 2002 will account
for such a large percentage of our total revenues. In anticipation of increased
sales activity during the fourth quarter, we incur significant additional
expenses, including significantly higher inventory costs and the costs of hiring
a substantial number of temporary employees to supplement our regular store
staff. If for any reason our sales were to be substantially below those normally
expected during the fourth quarter, our annual operating results would be
adversely affected. Due to this seasonality, our operating results for any one
period may not be indicative of our operating results for the full fiscal year.
Typically our operating results during the other quarters of the year are
generally lower and we have historically experienced losses in these periods.
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, similar to other retailers, we typically make merchandising
and purchasing decisions well in advance of the Holiday shopping season. As a
result, poor economic conditions or differences from projected customer demand
for our products during the fourth quarter could result in lower revenues and
earnings.
Our vital computer and communications hardware and software systems are
vulnerable to damage and interruption which could harm our business
Our success, in particular our ability to successfully receive and fulfill
Internet orders and provide high-quality customer service, largely depends upon
the efficient and uninterrupted operation of our computer and communications
hardware and software systems. We use internally managed systems for our Web
site and some aspects of transaction processing, including customer information
and order verifications. Our systems and operations are vulnerable to damage or
interruption from earthquake, fire, flood and other natural disasters, terrorist
attacks, power loss, computer systems failures, Internet and telecommunications
or data network failure, operator negligence, improper operation by or
supervision of employees, physical and electronic loss of data or security
breaches, misappropriation and similar events, fluctuations and failures in the
business of Internet service providers on which we rely, and computer viruses.
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In addition, we maintain our servers at the site of a third party located
in Santa Clara, California. We cannot control the maintenance and operation of
this site, which is also susceptible to similar disasters and problems. We also
cannot control the business or operations of Internet service providers, which
are susceptible to failure as a result of industry-wide business fluctuations.
During fiscal 2001 our Internet hosting provider petitioned for voluntary
reorganization under Chapter 11 of the United States bankruptcy laws. At this
time, we have not experienced any change in service due to the bankruptcy filing
and although have constructed a contingency plan, we cannot assure you our
servers will continue to perform without interruption. Because our strategies
depend in part on maintaining our reputation for superior levels of customer
service, any system failure that causes an interruption in our service or a
decrease in responsiveness could harm our relationships with our customers and
result in reduced revenues.
We are dependent on the success of our advertising and marketing efforts
Our revenues depend in part on our ability to effectively market and
advertise our products through The Sharper Image catalog and other advertising
vehicles. Increases in advertising, paper or postage costs may limit our ability
to advertise without reducing our profitability. If we decrease our advertising
efforts due to increased advertising costs, restrictions placed by regulatory
agencies, or for any other reason, our future operating results may be
materially adversely affected. We are also utilizing and constantly testing
other advertising media, such as television infomercials, radio, and single
product mailings, and significantly increased our advertising expenditures in
fiscal 2001. While we believe that increased expenditures on these and other
media have resulted in increasing revenues during fiscal 2001, we cannot assure
you that this trend will continue in the future. We expect to continue to spend
on advertising and marketing at increased levels in the future, but may not
continue to produce a sufficient level of sales to cover such expenditures,
which would reduce our profitability.
We face risks associated with expansion of our store operations
We plan to continue to increase the number of The Sharper Image stores in
the future in order to grow our revenues. Our ability to expand will depend in
part on the following factors:
o the availability of attractive store locations;
o our ability to negotiate favorable lease terms;
o our ability to identify customer demand in different geographic areas;
o general economic conditions; and
o the availability of sufficient funds for expansion.
As we continue to expand, 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, Internet sales, or existing store sales
in a specific region may decrease as a result of new store openings.
In order to continue our expansion, we will need to hire additional
management and staff for our corporate offices and employees for each new store.
We must also expand our management information systems and distribution systems
to serve these new stores. If we are unable to hire necessary personnel or grow
our existing systems, our expansion efforts may not succeed and our operations
may suffer.
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Some of our expenses will increase with the opening of new stores. If
store sales are inadequate to support these new costs, our profitability will
decrease. For example, inventory costs will increase as we increase inventory
levels to supply additional stores. We may not be able to manage this increased
inventory without decreasing our profitability. We may need additional financing
in excess of our current credit facility, or an amendment to such facility.
Furthermore, our current credit facility has various loan covenants we must
comply with in order to maintain the credit facility. We cannot predict whether
we will be successful in obtaining additional funds or new credit facilities on
favorable terms or at all.
We rely on our catalog operations
Our success depends in part on the success of our catalog operations. We
believe that the success of our catalog operations depends on the following
factors:
o our ability to achieve adequate response rates to our mailings;
o our ability to continue to offer a merchandise mix that is attractive to
our mail order customers;
o our ability to cost-effectively add new customers;
o our ability to cost-effectively design and produce appealing catalogs; and
o timely delivery of catalog mailings to our customers.
Catalog production and mailings entail substantial paper, postage,
merchandise acquisition and human resource costs, including costs associated
with catalog development and increased inventories. We incur nearly all of these
costs prior to the mailing of each catalog. As a result, we are not able to
adjust the costs being incurred in connection with a particular mailing to
reflect the actual performance of the catalog. If we were to experience a
significant shortfall in anticipated revenue from a particular mailing, and
thereby not recover the costs associated with that mailing, our future results
would be adversely affected. In addition, response rates to our mailings and, as
a result, revenues generated by each mailing are affected by factors such as
consumer preferences, economic conditions, the timing and mix of catalog
mailings, the timely delivery by the postal system of our catalog mailings and
changes in our merchandise mix, several or all 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. During the third quarter of fiscal 2001, we experienced delays
and non-delivery of several catalog mailings due to the post office closures and
mail interruptions that occurred after the September 11, 2001 terrorist attacks.
Our catalog costs are unpredictable
Historically, a significant portion of our revenues has been generated
from purchases made by customers driven by The Sharper Image catalog. Increases
in the costs of producing and distributing the catalog may reduce the
profitability of our catalog, store and Internet sales. Specifically, we may
experience increases in postage, paper or shipping costs due to factors beyond
our control. As a result, our future results may be adversely affected. We are
anticipating an increase in postal rates for fiscal 2002.
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The terrorist attacks that took place in the United States on September 11,
2001, and the mail service interruption and post office closures that commenced
in September 2001 are unprecedented events that have created many economic and
political uncertainties, some of which may harm our business and prospects
The terrorist attacks that took place in the United States on September
11, 2001 have adversely impacted many businesses, including ours, in multiple
ways. The national and global responses to these terrorist attacks and the mail
service interruption and post office closures, many of which are still being
formulated, may materially adversely affect us in ways we cannot predict at
present. Some of the possible material adverse impacts to our business from
these events include, but are not limited to:
o reduced activity in the retail industry;
o fears of or the occurrence of future terrorist attacks;
o possible delays in delivery of and failures to deliver our catalogs;
o increased postage expense for delivery of our catalogs; and
o increased insurance expenses.
We face certain risks relating to customer service
Our ability to provide customer service depends, to a large degree, on the
efficient and uninterrupted operation of our call centers, our contracting
services with third party call centers and our sharperimage.com Web site. Any
material disruption or slowdown in our order processing systems resulting from
labor disputes, telephone or Internet down times, electrical and service
outages, mechanical problems, human error or accidents, fire, earthquakes,
natural disasters, or other events could cause delays in our ability to receive
orders by telephone or over the Internet and distribute orders, and may cause
orders to be lost or to be shipped or delivered late. As a result, customers may
be unable to place orders, cancel orders or refuse to receive goods on account
of late shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs. We cannot assure you that telephone
call volumes will not exceed our present telephone system capacity. If this
occurs, we could experience telephone answer delays and delays in placing
orders. Because our strategies depend in part on maintaining our reputation for
superior levels of customer service, any impairment of our customer service
reputation could have an adverse effect on our business.
We face risks associated with our distribution and fulfillment operations
We conduct the majority of our distribution operations and all of our
catalog and Internet order processing fulfillment functions from our owned
facility in Little Rock, Arkansas, a leased facility in Little Rock, Arkansas
and a leased facility in Ontario, California. We also use contract fulfillment
and warehouse facilities for additional seasonal requirements. Any disruption in
the operations at any distribution center, particularly during the Holiday
shopping season, could have a negative effect on our business.
In addition, we rely upon third party carriers for our product shipments,
including shipments to and from all of our stores. As a result, we are subject
to certain risks, including employee strikes and inclement weather, associated
with such carriers' ability to provide delivery services to meet our shipping
needs. We are also dependent on temporary employees to adequately
21
<PAGE>
staff our distribution facility, particularly during busy periods such as the
Holiday shopping season. We cannot assure you that we will continue to receive
adequate assistance from our temporary employees, or that we will continue to
have access to sufficient sources of temporary employees.
Results for our comparable store sales may fluctuate
Our comparable store sales are affected by a variety of factors,
including, among others:
o customer demand in different geographic regions;
o our ability to efficiently source and distribute products;
o changes in our product mix;
o effects of competition; and
o general economic conditions.
Our comparable store sales have fluctuated significantly in the past and
we believe that such fluctuations may continue. Our historic comparable store
net sales changes were as follows:
Percentage
Fiscal Year Increase (Decrease)
----------- -------------------
1998 5.3
1999 12.3
2000 29.0
2001 (16.0)
These historic results are not necessarily indicative of future results,
and we cannot assure you that our comparable store sales results will not
continue to decrease in the future. Any reduction in or failure to increase our
comparable store sales results could impact our future operating performance and
cause the price of the common stock to fluctuate.
We experience intense competition in the rapidly changing retail markets
We operate in a highly competitive environment. We principally compete
with a variety of department stores, sporting goods stores, discount stores,
specialty retailers and other catalogs that offer products similar to or the
same as our products. We may increasingly compete with major Internet retailers.
Many of our competitors are larger companies with greater financial resources, a
wider selection of merchandise and greater inventory availability. If we
experience increased competition, our business and operating results could be
adversely affected.
The United States retail industry (the specialty retail industry in
particular) and e-commerce sector are dynamic in nature and have undergone
significant changes over the past several years. Our ability to anticipate and
successfully respond to continuing challenges is critical to our long-term
growth and we cannot assure you we will anticipate and successfully respond to
changes in the retail industry.
22
<PAGE>
We may be subject to regulations regarding state sales and use tax on catalog
and Internet sales and other Internet regulation
Our business may be affected by the adoption of regulations or rules
governing the sale of our products, with regard to state sales and use taxes and
the regulation of the Internet. Because we have broad store presence, we are
currently required to collect taxes for the majority of our catalog and Internet
transactions. However, any unfavorable change in the state sales and use tax,
which affects our catalog and Internet sales, could adversely affect our
business and results of operations. In addition, the Internet at present is
largely unregulated and we are unable to predict whether significant regulations
or taxes will be imposed on Internet commerce in the near future. We are unable
to predict how such regulations could affect the further development of our
Internet business.
Excessive merchandise returns could harm our business
As part of our customer service commitment, we maintain a liberal
merchandise return policy, which allows customers to return most merchandise. We
make allowances for returns of store, catalog and Internet sales in our
financial statements based on historical return rates. We cannot assure you that
actual merchandise returns will not exceed our allowances. In addition, because
our allowances are based on historical return rates, we cannot assure you that
the introduction of new merchandise in our stores or catalogs, the opening of
new stores, the introduction of new catalogs, increased sales over the Internet,
changes in the merchandise mix or other factors will not cause actual returns to
exceed return allowances. Any significant increase in merchandise returns that
exceed our allowances could adversely affect our future results.
We may be subject to risks associated with our products, including product
liability or patent and trademark infringement claims
Our current and future products may contain defects, which could subject
us to product liability claims and product recalls. Although we maintain limited
product liability insurance, if any successful product liability claim or
product recall is not covered by or exceeds our insurance coverage, our
business, results of operation and financial condition would be harmed.
Additionally, third parties may assert claims against us alleging infringement,
misappropriation or other violations of patent, trademark or other proprietary
rights, whether or not such claims have merit. Such claims can be time consuming
and expensive to defend and could require us to cease using and selling the
allegedly infringing products, which may have a significant impact on total
company sales volume, and to incur significant litigation costs and expenses.
We depend on our key personnel
Our success depends to a significant extent upon the abilities of our
senior management, particularly Richard Thalheimer, our founder, Chairman and
Chief Executive Officer. The loss of the services of any of the members of our
senior management or of certain other key employees could have a significant
adverse effect on our business. We maintain key man life insurance on Mr.
Thalheimer in the amount of $15 million. In addition, our performance will
depend upon our ability to attract and retain qualified management,
merchandising and sales personnel. There can be no assurance that Mr. Thalheimer
and the other members of our existing management team will be able to manage our
company or our growth or that we will be able to attract and hire additional
qualified personnel as needed in the future.
23
<PAGE>
We are controlled by a single shareholder
As of April 30, 2002, Richard Thalheimer beneficially owned approximately
39% of all of the outstanding shares of the common stock of the Company. As a
result, Mr. Thalheimer will continue to exert substantial influence over the
election of directors and over our corporate actions.
Our common stock price is volatile
Our common stock is quoted on the NASDAQ National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations, which could reduce the market price of our common stock
without regard to our operating performance. Additionally, as our Internet
business grows, we may become increasingly subject to stock price fluctuations
associated with companies operating in the Internet sector. We believe that
among other factors, any of the following factors could cause the price of the
common stock to fluctuate substantially:
o quarterly fluctuations in our comparable store sales;
o announcements by other accessory and gift item retailers;
o the trading volume of our common stock in the public market;
o general economic conditions;
o financial market conditions;
o acts of terrorism; and
o threats of war.
Our charter documents, our stockholders rights agreement and Delaware law may
make a takeover more difficult
We are a Delaware corporation. The Delaware General Corporation Law
contains certain provisions that may make a change in control of our company
more difficult or prevent the removal of incumbent directors. In addition, our
Certificate of Incorporation and Bylaws and our stockholders rights agreement
contain provisions that have the same effect. These provisions may have a
negative impact on the price of our common stock, may discourage third-party
bidders from making a bid for our company or may reduce any premiums paid to
stockholders for their common stock.
24
<PAGE>
Item 2. Properties
The Company occupies approximately 58,000 square feet of office space for
its corporate headquarters in San Francisco, CA. The Company signed a lease
extension in February 2000, extending the expiration date to January 2006. The
Company also leases approximately 5,600 square feet for its product development
offices in Northern California.
As of January 31, 2002 the Company operated 109 The Sharper Image stores
under leases covering a total of approximately 269,000 square feet of net
selling space.
The Company owns and operates a 110,000 square foot distribution facility
located in Little Rock, Arkansas. Distribution and warehouse functions are
conducted through this facility, a 60,000 square foot leased facility in
Ontario, California, a 104,000 square foot leased facility in Little Rock,
Arkansas, and other seasonally occupied space rented by the Company in close
proximity thereto.
Item 3. Legal Proceedings
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under "Note D -- Revolving Loan and Notes
Payable" in the Notes to Financial Statements on page 27 and the information set
forth under the caption "Common Stock Market Prices and Dividend Policy" on the
inside back cover of the Sharper Image Corporation 2001 Annual Report to
Stockholders is incorporated herein by reference. As of April 15, 2002 there
were 404 holders of record and the closing price of the Company's Common Stock
was $19.70 per share as reported by the NASDAQ Stock Market.
No cash dividends were declared or paid in fiscal 2000 or fiscal 2001.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on the inside
front cover of the Sharper Image Corporation 2001 Annual Report to Stockholders
is incorporated herein by reference.
25
<PAGE>
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 12 to 20 of
the Sharper Image Corporation 2001 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 19 to 20 of the Sharper Image Corporation
2001 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 21 through the inside back cover of the Sharper Image Corporation 2001
Annual Report to Stockholders are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is incorporated
herein by reference to the Company's 2002 Proxy Statement to Stockholders.
Information with respect to the executive officers of the Registrant is
contained in Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein
by reference to the Company's 2002 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of beneficial owners and
management is incorporated herein by reference to the Company's 2002 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
None.
26
<PAGE>
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
1. List of Financial Statements.
The following Financial Statements and Notes thereto set forth on pages 21
through the inside back cover of the Sharper Image Corporation 2001 Annual
Report to Stockholders are incorporated by reference as Exhibit 13.1 to this
Report on Form 10-K:
Independent Auditors' Report
Statements of Operations for the years ended January 31, 2002, 2001, and
2000
Balance sheets at January 31, 2002 and 2001,
Statements of Stockholders' Equity for the years ended January 31, 2002,
2001, and 2000
Statements of Cash Flows for the years ended January 31, 2002, 2001, and
2000
Notes to Financial Statements.
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
3. List of Exhibits.
Incorporated herein by reference is a list of the Exhibits contained in
the Exhibit Index, which begins on page 34 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the last quarter of the period covered by this Report.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHARPER IMAGE CORPORATION SHARPER IMAGE CORPORATION
By:/s/ Richard J. Thalheimer By: /s/ Jeffrey P. Forgan
--------------------------------- --------------------------------
Richard J. Thalheimer Jeffrey P. Forgan
Chief Executive Senior Vice President, Chief Financial
Officer, Chairman Officer, Corporate Secretary
(Principal Executive Officer) (Principal Financial &
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard Thalheimer and Jeffrey P. Forgan, and
each of them, as such person's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for such person and in such
person's name, place, and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard J. Thalheimer Chief Executive April 30, 2002
- ---------------------------- Officer, Chairman
Richard J. Thalheimer (Principal Executive Officer)
/s/ Jeffrey P. Forgan Senior Vice President, April 30, 2002
- ---------------------------- Chief Financial Officer,
Jeffrey P. Forgan Corporate Secretary
(Principal Financial and
Accounting Officer)
/s/ Alan Thalheimer Director April 30, 2002
- ----------------------------
Alan Thalheimer
/s/ Gerald Napier Director April 30, 2002
- ----------------------------
Gerald Napier
/s/ Morton David Director April 30, 2002
- ----------------------------
Morton David
/s/ George James Director April 30, 2002
- ----------------------------
George James
28
<PAGE>
SHARPER IMAGE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------
($000)
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVENTORY
YEAR ENDED JANUARY 31, 2002:
Inventory Obsolescence $2,594 $3,882 $1,484 $4,992
YEAR ENDED JANUARY 31, 2001:
Inventory Obsolescence $3,154 $1,573 $2,133 $2,594
YEAR ENDED JANUARY 31, 2000:
Inventory Obsolescence $1,938 $2,079 $ 863 $3,154
OTHER
YEAR ENDED JANUARY 31, 2002:
Other $ 730 $ 682 $ 330 $1,082
YEAR ENDED JANUARY 31, 2001:
Other $ 834 $ 449 $ 553 $ 730
YEAR ENDED JANUARY 31, 2000:
Other $ 804 $ 265 $ 235 $ 834
</TABLE>
29
<PAGE>
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, 2002 and 2001 and for each of the three years in the period ended
January 31, 2002, and have issued our report thereon dated March 25, 2002; such
financial statements and report are included in your 2001 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of Sharper Image Corporation, listed in Item
14. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California
March 25, 2002
30
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-1 (Registration No.
33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
3.3 Form of Certificate of Designation of Series A Junior participating
Preferred Stock. (Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
4.1 Form of Rights Certificate. (Incorporated by reference to Exhibit
4.01 to Amendment No. 2 to the Registration Statement on Form S-2.)
4.2 Form of Rights Agreement dated June 7, 1999. (Incorporated by
reference to Exhibit 4.02 to Amendment No. 2 to the Registration
Statement on Form S-2.)
10.1 Amended and Restated Stock Option Plan (as amended through September
25, 1998). (Incorporated by reference to Registration Statement on
Form S-8 filed on January 19, 1996 (Registration No. 33-3327) and
Exhibit to Definitive Proxy Statement on Schedule 14A filed April
29, 1999.)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994
(as amended through September 25, 1998). (Incorporated by reference
to Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327) and Exhibit to Definitive Proxy Statement
on Schedule 14A filed April 29, 1999.)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated
by reference to Exhibit 10.15 to Form 10-K for fiscal year ended
January 31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated
by reference to Exhibit 10.16 to Form 10-K for fiscal year ended
January 31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to
shares of Common Stock purchased pursuant to exercise of employee
stock options. (Incorporated by reference to Exhibit 10.3 to
Registration Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee
stock options. (Incorporated by reference to Exhibit 10.4 to
Registration Statement on Form S-1 (Registration No. 33-12755).)
31
<PAGE>
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee
stock options. (Incorporated by reference to Exhibit 10.5 to
Registration Statement on Form S-1 (Registration No. 33-12755).)
10.9 Form of Director Indemnification Agreement. (Incorporated by
reference to Exhibit 10.42 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.10 Financing Agreement dated September 21, 1994 between the Company and
CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit
10.12 to Form 10-Q for the quarter ended October 31, 1994.)
10.11 The Sharper Image 401(K) Savings Plan. (Incorporated by reference to
Exhibit 10.21 to Registration Statement of Form S-8 (Registration
No. 33-80504) dated June 21, 1994.)
10.12 Chief Executive Officer Compensation Plan dated February 3, 1995.
(Incorporated by reference to Exhibit 10.24 to the Form 10-K for the
fiscal year ended January 31, 1995.)
10.13 Split-Dollar Agreement between the Company and Mr. R. Thalheimer,
its Chief Executive Officer dated October 13, 1995, effective as of
May 17, 1995. (Incorporated by reference to Exhibit 10.17 to Form
10-K for the fiscal year ended January 31, 1996.)
10.14 Assignments of Life Insurance Policy as Collateral, both dated
October 13, 1995, effective May 17, 1995. (Incorporated by reference
to Exhibit 10.18 to Form 10-K for the fiscal year ended January 31,
1996.)
10.15 Amendment to the Financing Agreement dated May 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.19 to the Form 10-Q for the quarter ended
April 30, 1996.)
10.16 CAPEX Term Loan Promissory note dated October 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10-Q for the quarter ended
October 31, 1996.)
10.17 Amendment to the Financing Agreement dated February 13, 1997 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to Form 10-K for the fiscal year ended
January 31, 1997.)
10.18 Amendment to the Financing Agreement dated March 24, 1997 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.23 to Form 10-K for the fiscal year ended
January 31, 1997.)
10.19 Amendment to the Financing Agreement dated April 6, 1998 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.25 to Form 10-K for the fiscal year ended
January 31, 1998.)
32
<PAGE>
10.20 Amendment to the Financing Agreement dated March 23, 2000 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.22 to Form 10-K for the fiscal year ended
January 31, 2000.)
10.21 Amendment to the Corporate Headquarters Office Lease Agreement dated
February 9, 2000 between the Company and its landlord, CarrAmerica
Realty Corporation. (Incorporated by reference to Exhibit 10.23 to
Form 10-K for the fiscal year ended January 31, 2000.)
10.22 Amendment to the Financing Agreement dated July 18, 2000 between the
Company and The CIT Group/Business Credit, Inc. (Incorporated by
reference to Exhibit 10.23 to Form 10-Q for the quarter ended
October 31, 2000.)
10.23 Amendment to the Financing Agreement dated September 29, 2000
between the Company and The CIT Group/Business Credit, Inc.
(Incorporated by reference to Exhibit 10.24 to Form 10-Q for the
quarter ended October 31, 2000.)
10.24 Executive Bonus Plan. (Incorporated by reference to the Definitive
Proxy Statement on Schedule 14A filed May 4, 2001.)
10.25 Amendment to the Split-Dollar Agreement between the Company and
Richard Thalheimer, its Chief Executive Officer dated July 12, 2001,
effective as of March 28, 2001. (Incorporated by reference to
Exhibit 10.24 to Form 10-Q for the quarter ended October 31, 2001.)
13.1 2001 Annual Report to Stockholders.
23.1 Independent Auditor's Consent.
33
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>3
<FILENAME>p15335n30d.txt
<DESCRIPTION>2001 ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
THE
SHARPER
IMAGE(R)
Annual Report 2001
[PHOTO]
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars are in thousands except net earnings per share and statistics
Fiscal Year Ended January 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
Operating Results (Fiscal 2001) (Fiscal 2000) (Fiscal 1999) (Fiscal 1998) (Fiscal 1997)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 396,199 $ 421,136 $ 304,097 $ 251,369 $ 222,648
Earnings before income taxes 2,160 29,082 15,541 7,670 988
Net earnings $ 1,296 $ 17,449 $ 9,325 $ 4,602 593
Net earnings per share
Basic $ .11(1) $ 1.45(1) $ 0.89(1) $ 0.54 $ 0.07
Diluted $ .10(1) $ 1.33(1) $ 0.82(1) $ 0.51 $ 0.07
Balance Sheet Data
- -----------------------------------------------------------------------------------------------------------------------------------
Working capital $ 53,422 $ 59,309 $ 54,644 $ 16,003 $ 11,633
Total assets 162,338 178,836 142,119 82,045 78,662
Long-term notes payable 2,033 2,206 2,366 2,513 3,299
Stockholders equity $ 94,743 $ 93,562 $ 77,123 $ 36,649 $ 29,156
Current ratio 1.89 1.76 1.93 1.40 1.27
Statistics
- -----------------------------------------------------------------------------------------------------------------------------------
Number of stores at year end 109 97 89 87 85
Comparable store sales increase (decrease) (16.0%) 29.0% 12.3% 5.3% 1.1%
Annualized net sales per square foot $ 578 $ 763 $ 546 $ 484 $ 465
Number of catalogs mailed(2) 70,135,000 62,252,000 47,581,000 41,338,000 38,261,000
Average revenue per transaction:
Stores $ 118 $ 117 $ 106 $ 102 $ 104
Catalog $ 174 $ 164 $ 145 $ 141 $ 160
Internet $ 127(3) $ 108(3) $ 97(3) $ 140 $ 111
Return on average equity
stockholders 1.4% 20.4% 16.4% 14.0% 2.1%
Book value per share $ 7.96 $ 7.77 $ 7.33 $ 4.30 $ 3.51
Weighted average number of shares outstanding
Basic 11,904,562 12,036,569 10,516,358 8,532,588 8,303,425
Diluted 12,568,380 13,074,395 11,358,004 9,072,832 8,537,032
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The earnings per share reflect the effect of the additional 3.0 million
shares issued from the July 1999 secondary offering.
2 Based upon Sharper Image catalog - excludes other specialty and test
mailing catalogs.
3 Includes results from auction site opened in the quarter ended April 30,
1999.
- --------------------------------------------------------------------------------
CORPORATE PROFILE
- --------------------------------------------------------------------------------
[PHOTO]
Sharper Image Corporation is a multi-channel specialty retailer that is
renowned as a leading source of innovative new products. The Sharper Image is
one of the industry's strongest brands -- a name that conveys fun and
entertainment, design and creativity, uniqueness and technological innovation.
Sharper Image Design proprietary products -- created by the Company's
development group -- and private-label merchandise account for a significant
proportion of sales. The Company operates 113 Sharper Image stores and generates
direct sales through The Sharper Image catalog, mailers, print advertising,
television infomercials, and online at www.sharperimage.com, its e-commerce Web
site. Business-to-business wholesale operations and corporate incentive and
rewards programs contribute additional revenues.
The Sharper Image was founded in 1977 and celebrates its 25th anniversary
in 2002.
TIME LINE
- --------------------------------------------------------------------------------
1977 1978
- --------------------------------------------------------------------------------
The Sharper Image is founded The Sharper Image
by Richard Thalheimer with a merchandising strategy is in
magazine ad for the first place -- to seek out new,
waterproof, shock-resistant [PHOTO] interesting, technologically [PHOTO]
chronograph designed for advanced and novel products,
runners. Its success generated and to be the first to offer
the working capital to launch them. Richard Thalheimer, a
a thriving mail-order 30-year-old professional,
business. represents the profile of his
target customer.
<PAGE>
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
The year 2001 marked The Sharper Image's 25th year in business. It was one
of our most difficult years and yet one of the most gratifying and successful.
We faced three great challenges in 2001:
Razor Scooters. Comparisons to last year's sales were extremely difficult
because of the phenomenal success of Razor Scooters in 2000. The strength of our
core business was hidden by the prior year's extraordinary sales gains.
Recession. Consumer spending was slow throughout the year and it was
difficult to increase sales.
September 11. Those terrible events affected all of us and tested our
resolve to stay focused and move forward.
RESULTS
- --------------------------------------------------------------------------------
The year 2001 was acknowledged to be among the most difficult ever for
retailers, with one of the sharpest economic downturns in recent memory. I
believe our solid results -- highlighted by our fourth-quarter's excellent
merchandising, operational and financial performance -- reflect the enduring
strength of The Sharper Image and affirms the soundness of our strategy.
In 2001, revenues were $396.2 million -- just six percent less than last
year's record $421.1 million, which was 38 percent greater than the prior year.
Net earnings of $1.3 million, or $0.10 per diluted share, reflected strong
fourth-quarter earnings of $11.6 million, or $0.92 per diluted share; in 2000,
our net annual earnings were $17.4 million, or $1.33 per diluted share.
Store total sales of $232.1 million were down seven percent from last year;
comparable sales declined 16 percent -- a good result against the prior year's
29 percent gain.
Direct sales from catalogs and TV infomercials grew to $90.4 million, four
percent greater than last year's $86.8 million.
Internet sales of $49.8 million were 17 percent lower than last year's
$60.2 million, which had increased 111 percent over the prior year. With our
auction site's sales excluded, our Web site's sales declined just three percent.
Our gross margin rate climbed to a record 52.1 percent, up 2.9 percentage
points over last year. This great result -- in a highly promotional retail
environment -- is mainly due to the success of our high-margin proprietary and
private-label products.
STRATEGY
- --------------------------------------------------------------------------------
I founded The Sharper Image 25 years ago on three principles: offer
innovative products that can be found nowhere else; market those products with
exciting, imaginative presentations; and deliver great service that is better
than what customers expect.
Our long-term strategy builds on those principles and is equally simple and
straightforward:
Multiple Channels-- Make it easy and convenient for customers to buy. Sell
by Web, phone, fax, mail and in stores in diverse locations -- city or suburb;
street or mall. Support multiple selling channels with multimedia direct
advertising -- catalogs, mailers, print, radio, emails and TV infomercials.
Proprietary Products -- Sell a diverse selection of high-quality,
innovative products that are unavailable elsewhere. Create distinctive items
with broad appeal. Enjoy control over product packaging, pricing and marketing.
Achieve higher gross margins. Reinforce the brand's strength with exclusive
products.
Brand Name -- Build on The Sharper Image name, one of the most widely
recognized and positively perceived brands in retailing. Exploit the brand's
highly valued attributes of good design, fun, innovation, excitement and
imaginative use of new technologies.
Our goal is to grow the value of our Company to match the stature of our
brand name. I believe we are well on our way to achieving that as The Sharper
Image begins its second 25 years of business. Thank you for your confidence and
support.
Respectfully,
[PHOTO] /s/ Richard Thalheimer
Richard Thalheimer
Founder, Chairman and
Chief Executive Officer
- --------------------------------------------------------------------------------
1979 1980
- --------------------------------------------------------------------------------
The first Sharper Image The 1980 catalog showcases a
catalog is a slim 24 pages of large and eclectic product
30 items representing "the selection with an innovative
exceptional and innovative in [PHOTO] graphic style - bold, exciting [PHOTO]
elec- tronics," including the and enduring. Honored by
first cordless phone. We offer Catalog Age magazine as one of
toll-free 24-hour ordering and "The 10 BEST Catalog Concepts
generous return privileges. Ever."
<PAGE>
- --------------------------------------------------------------------------------
CATALOG AND DIRECT MARKETING
- --------------------------------------------------------------------------------
[PHOTO]
Millions of single-
product mailers were
circulated in 2001.
We began as direct marketers in 1977, with a single magazine ad for a
runner's watch. Two years later, we mailed our first catalog. Today, direct
marketing remains a vital part of our multichannel business. In 2001, we mailed
more than 70 million catalogs -- eight million more than last year; 22 million
more than two years ago. Honored by Catalog Age magazine as one of "The 10 BEST
Catalog Concepts Ever," our monthly catalog is also our primary advertising
medium for our Web site and stores. Additionally, we mailed millions of
solo-product brochures, and our direct-response television ad for the Ionic
Breeze(R) Silent Air Purifier was America's number one most frequently shown TV
infomercial in 2001. Magazine and newspaper advertising rounds out our
multimedia direct marketing efforts.
We believe direct marketing is retailing at its most persuasive and it
answers modern retailing's key question -- How to sell something that cannot be
touched to a person you cannot see? Direct marketing demands a distinctive brand
identity. The Sharper Image's direct marketing strategy has an "item" focus that
makes each single product important and relevant to the consumer's needs. Our
direct marketing materials feature outstanding graphics, bold photography,
exciting presentations, compelling copy and clear communication of benefits and
value -- all of it created by our in-house team of graphic designers, production
artists, photographers and writers.
Direct marketing demands superior customer service in all its aspects --
accurate information, fast delivery, rapid response to inquiries, no-hassle
exchanges, prompt refunds, in-stock merchandise, quick checkout, risk-free
trial, and reassuring warranties. In sum, successful direct marketing requires a
great shopping experience with an eye on building long-term customer
relationships. We have a large and growing database of loyal Sharper Image
customers and we are strongly focused on building sales from this vital
strategic asset.
Our mailed-catalog economics are improving, and with higher margins and
savings in printing and paper costs, we expect to help offset potentially higher
postage costs. Our plans are to continue our growth in all direct marketing
media.
(2)
- --------------------------------------------------------------------------------
1981 1982
- --------------------------------------------------------------------------------
The first Sharper Image store We are the first catalog to
opens in San Francisco. offer club-quality Nautilus
Catalog advertising created an [PHOTO] fitness equipment for the home [PHOTO]
enthusiastic base of customers - again leading a major
who also liked to shop in product trend.
stores.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[PHOTO]
The Sharper Image catalog's
sensational photography and
bold graphics distinguishes us
from all our competitors.
- --------------------------------------------------------------------------------
1983 1984
- --------------------------------------------------------------------------------
Sensational 64-page catalog We are widely recognized as
highlights hundreds of the first specialty catalog to
fantastic products and an [PHOTO] make it "cool" for tech-savvy [PHOTO]
exceptional toll-free customer young professionals to buy by
service phone line. mail.
<PAGE>
- --------------------------------------------------------------------------------
STORES
- --------------------------------------------------------------------------------
We opened our first store in 1981, when we were a four-year-old company.
Six years later - in 1987, when we went public - The Sharper Image had become a
multichannel retailer with 45 stores accounting for more than two-thirds of our
sales. In 2001, 109 stores accounted for 61 percent of sales.
Last year, we opened 14 stores; in 2000, we opened nine -- a two-year total
of 23. This accelerated pace takes strategic advantage of the increased
popularity of our proprietary and private-label products, the broadening of our
customer base, the increased number of highly desirable locations, and our
improved store economics.
In evaluating new-store investments, we are prudent in our selection
criteria but aggressive in our desire for rapid payback. Currently, these new
stores, together, are on track to reap a 100 percent return on investment within
their first 24 months.
We have often been told by landlords that in surveys of shoppers asking
which new stores they want to see in their mall, The Sharper Image is the
shoppers' top choice. Our stores are fun and exciting places to discover
innovative products that often can be found nowhere else. Our merchandise is
more broadly appealing than ever, with a wide selection of unique and popularly
priced items for men, women and children of all ages.
We have a variety of store locations in both new and established markets --
big and small; urban and suburban; downtown and tourist; major mall, shopping
center and street-front. We believe we have an excellent opportunity to meet or
exceed our goal of 10 to 15 percent new store unit growth in the next year.
The Sharper Image store in
[PHOTO] Bellevue Square, outside
Seattle, Washington, opened in
November 2001.
(4)
- --------------------------------------------------------------------------------
1985 1986
- --------------------------------------------------------------------------------
We change from a quarterly to Our product assortment
a monthly catalog, which gives broadens its appeal and
us flexibility to do [PHOTO] includes new ergonomic toys to [PHOTO]
innovative marketing such as improve the health and fitness
our first movie tie-in. of young children.
<PAGE>
- --------------------------------------------------------------------------------
1987 1988
- --------------------------------------------------------------------------------
The Sharper Image makes its A full page in our catalog
initial public offering as a introduces a pocket PC with
multichannel retailer with 45 [PHOTO] "32K memory (more than the [PHOTO]
stores contributing two-thirds original IBM PC!)" Another
of sales. page launches our fog-free
mirror.
<PAGE>
- --------------------------------------------------------------------------------
INTERNET
- --------------------------------------------------------------------------------
In Internet years, 1995 was long time ago, but it was the year we launched
our e-commerce Web site, sharperimage.com. In our 1995 annual report, we wrote,
"The Internet holds great promise and (in) the next three years, this medium
will emerge as a widespread communications channel.
The Sharper Image is pioneering (and that) will allow us to emerge as a
leader when the market begins to reach full acceptance." Yes, this was
visionary. We recognized, long before our competitors, the Web's extraordinary
potential. Our strengths matched the opportunity, powerful brand, exclusive
products, excellent customer service and superior direct-marketing know-how.
In 2001, we focused on improving the ease and speed of shopping and
ordering by streamlining checkout so registered customers are just three clicks
from completing an order. Catalog Quick Order is now a homepage fixture. Product
pages list related accessories with click-to-add check boxes. We are still
pioneers in the imaginative use of Web technology. Our growing list of more than
one million online shoppers receives monthly email product sneak previews and
special offers that have driven sales in all channels. Our online Auction helps
to manage close-out and reconditioned inventory. We launched Galleria, a portal
to other online stores where our customers earn Sharper Image Dollars.
Web-linked Affiliates add new-to-file online buyers with little advertising risk
to us. Finally, our pioneering European Web sites have modest sales today but --
like 1995's U.S. Web site -- we believe they are important first steps toward
realizing the international opportunity for Sharper Image products.
[PHOTO]
Emails go out to our online
customers every month to
introduce our newest products.
[PHOTO]
Internet sales have quickly
grown from just $50,000 in
1995 to more than $49 million
in 2001, more than 12 percent
of total revenues.
(6)
- --------------------------------------------------------------------------------
1989 1990
- --------------------------------------------------------------------------------
We introduce an electronic We open a 50,000 square foot
word processor for the home. distri-bution center in Little
"Everyone will have [PHOTO] Rock to support a growing base [PHOTO]
sophisticated office of 66 stores and an expanding
electronics by 2000. Panasonic mail-order business.
offers them today."
<PAGE>
- --------------------------------------------------------------------------------
1991 1992
- --------------------------------------------------------------------------------
Exclusive products with broad "The Sharper Image Store"
appeal are best exemplified by catalog has fewer pages and is
our popular Gel Insoles. This [PHOTO] less expensive to mail. It is [PHOTO]
"hard-to-resist $20 purchase the primary advertising medium
helps turn browsers into to attract shoppers to our
buyers." retail stores.
<PAGE>
[PHOTO]
(8)
- --------------------------------------------------------------------------------
1993 1994
- --------------------------------------------------------------------------------
Sharper Image Design group is The Sharper Image's position
established and its first as the premier store for
product is the Auto Drive Tie [PHOTO] Father's Day gifts is [PHOTO]
Rack, an upgrade of a proven practically unchallenged by
bestseller. any competitor.
<PAGE>
- --------------------------------------------------------------------------------
SHARPER IMAGE PRIVATE LABEL
- --------------------------------------------------------------------------------
[PHOTO]
Today, most of our major product programs from third-party vendors are
private-labeled "Sharper Image," packaged in colorful boxes with our distinctive
photography, and showcased with exciting store displays. Working directly with
the manufacturers, we often enhance private-label products with exclusive new
features and design elements. Private-label products have much higher margins
than the national brands in our assortment. Private-label products deflect
direct price competition. We believe our name and product know-how add value to
a wide range of merchandise. Private-label items continually reinforce our
status as a leading retailer for innovative products among shoppers as well as
gift recipients.
In 2001, private-label merchandise and Sharper Image Design proprietary
products accounted for 70 percent of sales. The largest, fastest growing
private-label program was consumer electronics, including great-looking and
affordable stereo systems. Our product-sourcing capabilities permit us to
significantly increase the number of categories and diversity of products that
can be labeled "Sharper Image."
Taking advantage of our vertical integration and exclusive products, our
business-to-business sales increased to more than $39 million, a 20% increase
over last year. Our national and international wholesale operations, and our
corporate incentive and rewards programs, have enhanced our market presence and
further established The Sharper Image as a premier source of innovative
merchandise to a larger universe of consumers.
- --------------------------------------------------------------------------------
1995 1996
- --------------------------------------------------------------------------------
We begin selling on AOL in After 15 years, and dozens of
spring; then, in June, we imitators, the November
launch our sharperimage.com [PHOTO] catalog unveils a new, [PHOTO]
e-commerce site on the World original graphic design and
Wide Web. our new logo.
<PAGE>
- --------------------------------------------------------------------------------
SHARPER IMAGE DESIGN
- --------------------------------------------------------------------------------
[PHOTO]
Our inaugural annual report for 1987 stated, "our goal is to create an
in-house product design department." It was a sound strategy but proved
challenging to implement. In 1993, we established Sharper Image Design, our
product development group, and by 1995 a range of items -- from a Sound
Soother(R) to a Memo Manager(R) to a Turbo-Groomer(R)-- began to have a positive
impact on sales and margin. In 1997, the Ionic Hair Wand(TM) was Sharper Image
Design's first proprietary product bestseller; and in 1998, with the launch of
the Personal Cooling System(TM) and the Ionic Breeze(R) Silent Air Purifier --
two number-one sellers -- proprietary products began to fuel large increases in
sales, margin and earnings.
For softgoods specialty retailers, proprietary merchandise is a proven
success formula because margins are higher, brand is reinforced and competition
is deflected. Among competing hardgoods retailers, The Sharper Image stands
apart with its superior competence in developing and marketing a diverse range
of best-selling products. This is a very important strategic asset.
The Sharper Image Design team of engineers is growing and our base of
contract manufacturers and technical resources is expanding. We see
opportunities for product development in electronics, toys, personal care, air
purification, robotics and more. Products that prove popular -- and we believe
our new Ionic Breeze(R) GP with UV Germicidal Protection will be a top-seller --
can have their sales maximized in all channels with aggressive multimedia
marketing.
[PHOTO]
Founder and CEO Richard Thalheimer with
the Sharper Image Design product
development team.
- --------------------------------------------------------------------------------
1997 1998 1999
- -------------------------------------------------------------------------------
The Ionic Hair Ionic Breeze(R) The year of the Web.
Wand(TM) -- a Silent Air Purifier We do more Internet
women's personal is launched and sales in two
care product -- is [PHOTO] becomes the [PHOTO] December weeks than
the first number-one company's in all the prior
seller ever created top-selling item. It year. And we launch
by Sharper Image incorporates an Auction site.
Design. exclusive, patented
technology.
<PAGE>
[PHOTO]
Sharper Image Design's new
Ionic Breeze GP Silent Air
Purifier with untraviolet
germicidal protection debuted
in March 2002.
- --------------------------------------------------------------------------------
2000 2001
- ------------------------------------------------------------------------------
Razor Scooter, which Founder Richard
we private-labeled Thalheimer
[PHOTO] and introduced to [PHOTO] celebrates the [PHOTO]
America, ignites one opening of The
of retailing's most Sharper Image's
extraordinary fads. 100th store in his
hometown of Little
Rock, Arkansas.
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
- --------------------------------------------------------------------------------
Sharper Image Corporation
Results of Operations
Percentage of Total Revenues
- --------------------------------------------------------------------------------
Fiscal Year Ended Jan. 31,
-------------------------------------------
2002 2001 2000
(Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
-------------------------------------------
Revenues:
Net store sales 58.6% 59.2% 61.9%
Net catalog sales 22.8 20.6 21.6
Net Internet sales 12.6 14.3 9.4
Net wholesale sales 2.8 2.2 3.4
List rental and licensing 0.2 0.5 0.5
Delivery 3.0 3.2 3.2
------- ------- ------
Total Revenues 100.0 100.0 100.0
Costs and Expenses:
Cost of products 47.8 50.6 50.6
Buying and occupancy 9.7 7.4 9.1
Advertising 17.3 13.0 12.5
General, selling,
and administrative 24.7 22.6 22.9
------- ------- ------
Operating Income 0.5 6.4 4.9
Other Income 0.0 0.5 0.2
------- ------- ------
Earnings Before
Income Tax 0.5 6.9 5.1
Income Tax 0.2 2.8 2.0
------- ------- ------
Net Earnings 0.3% 4.1% 3.1%
======= ======= ======
Revenues
Fiscal Year Ended Jan. 31,
---------------------------------------------
2002 2001 2000
Dollars in thousands (Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
---------------------------------------------
Net store sales $232,146 $249,449 $188,416
Net catalog sales 90,363 86,823 65,617
Net Internet sales 49,820 60,213 28,495
Net wholesale sales 10,893 9,426 10,483
-------- -------- --------
Total Net Sales 383,222 405,911 293,011
List rental and licensing 985 1,704 1,354
Delivery 11,992 13,521 9,732
-------- -------- --------
Total Revenues $396,199 $421,136 $304,097
======== ======== ========
Revenues
Fiscal 2001
Total Company net sales for fiscal 2001 decreased $22,689,000, or 5.6%,
from the prior fiscal year. Returns and allowances were 11.9% of sales for
fiscal 2001, as compared with 9.9% for fiscal 2000. The increase in the returns
rate is primarily due to the increased volume of Razor Rollerboard Scooters sold
in fiscal 2000, which had a lower returns rate. The decrease in net sales was
primarily attributable to decreases in net sales from stores of $17,303,000 and
Internet operations of $10,393,000 partially offset by an increase in catalog of
$3,540,000.
The decrease in net sales was due primarily to weak consumer spending
during most of fiscal 2001, the general economic slowdown, the events of
September 11, and the exceptional sales volume increase we experienced in fiscal
2000 related to the Razor Rollerboard Scooters. The decrease was minimized by
the strong sales volume experienced during the holiday season and the 14 new and
four temporary stores opened during fiscal 2001.Another factor that minimized
the overall decrease in net sales was the continued popularity of Sharper Image
Design proprietary and private label products, which increased from 64% of net
sales in fiscal 2000 to 70% in fiscal 2001. On a forward-looking basis, there
can be no assurance the sales growth from these types of products will continue.
Popular strong proprietary product include the various ionic technology-related
products such as the Ionic Breeze(R) QuadraSilent(TM) Air Purifier that has been
in our product line for several years, the Ionic Breeze Car Plug-In Ionizer, the
Ionic Hair Wand and the Ionic Conditioning(TM) QuietHair Dryer. The private
label products that were strong sellers during fiscal 2001 include several
uniquely styled stereo systems as well as various personal care and home-related
products. Management believes that the continued development and introduction of
new and popular Sharper Image Design proprietary and private label products is a
key strategic objective and important to the Companys future success.
Management believes that the increased investment in its advertising
initiatives during fiscal 2001 was another contributing factor to minimizing the
decrease in net sales in an extremely difficult retail environment and that net
sales in all selling channels benefited from the significant increase in
television infomercial advertising that highlighted select Sharper Image Design
proprietary products. Management also believes that these initiatives
12
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
are broadening the Company's customer base, which is an important factor in our
current and future revenue growth, although we cannot assure you of the
continued success of these and future advertising initiatives.
For fiscal 2001, net store sales decreased $17,303,000, or 6.9%, and
comparable store sales decreased 16.0% from the prior fiscal year. The decrease
in net store sales was primarily due to the exceptional sales volume experienced
in fiscal 2000 relating to the Razor Rollerboard Scooters and the closure of two
stores at lease maturity. Also contributing to the decrease in net store sales
for fiscal 2001 was a 4.2% decrease in total store transactions and a 1.2%
decrease in average revenue per transaction as compared with the same prior year
period. The decrease was partially offset by sales from the 14 new and four
temporary stores opened during fiscal 2001 and the annualized sales of nine new
stores opened in fiscal 2000. Management believes that the decrease was
minimized as a result of the increased television infomercial advertising during
fiscal 2001, which management believes increased customer traffic and sales in
retail store locations. Average net sales per square foot was $578 for fiscal
2001, compared to $763 in fiscal 2000 and $546 in fiscal 1999. Net store sales
and comparable store sales for fiscal 2001, excluding sales of scooters,
increased 14 percent and two percent, respect
Net catalog sales, which includes sales generated from catalog mailings,
solo mailers, print advertising and television infomercials, for fiscal 2001
increased $3,540,000 or 4.1% from fiscal 2000. The net sales increase from these
direct marketing activities was primarily due to an increase of 13% in Sharper
Image catalogs circulated, an increase of 8% in pages circulated, and an
increase in television infomercial advertising highlighting selected Sharper
Image Design products. Management believes the productivity of several catalogs
was negatively affected by the interruption in mail service and the closure of
several post office operations following September 11, which resulted in the
catalogs being delayed or not reaching their original destination. The increase
in net catalog sales for fiscal 2001 represents an increase of 18.3% in average
revenue per transaction offset by a 13.5% decrease in transactions, compared to
the prior year. Net catalog sales excluding Razor Scooter sales for fiscal 2001
increased by 23% over the same period in the prior year.
For fiscal 2001 and 2000, 27.9% and 15.4% of the net catalog sales were
generated from television infomercial direct sales. The Company intends to
continue its aggressive multimedia advertising programs during fiscal 2002 to
attract new customers, while achieving an appropriate return on advertising
investment, although there can be no assurance of the continued success of these
advertising initiatives. The Company's goal is to achieve direct response sales
resulting in near break even results on all direct marketing advertising
initiatives. Management continually reviews its advertising initiatives,
including the pages and the number of catalogs circulated, in its efforts to
optimize the revenues from catalog advertising.
The Company's fiscal 2001 Internet sales, which includes its auction sales,
decreased $10,393,000, or 17.3%, from fiscal 2000. The fiscal 2001 decrease in
Internet net sales was due primarily to the targeted decrease in auction sales
and the significant Razor scooter sales experienced in fiscal 2000. The decrease
in sales reflected a decrease of 30.1% in transactions partially offset by an
18.2% increase in revenue per transaction. We believe these changes were
primarily attributable to management's decision to raise bid prices and to
reduce the number of products offered during fiscal 2001 on its auction site,
which resulted in achieving the goal of improving the gross margin rate and
gross margin dollars from auctions. Excluding auction sales, Internet sales
decreased 2.6% for fiscal 2001, transactions decreased 8.8%, and average revenue
per transaction increased 6.8% for fiscal 2001. Excluding auction and Razor
Scooter sales, Internet sales for fiscal 2001 increased 16.0% over the same
prior year period.
The Company plans to continue using the auction sites to manage
inventories, including closeouts, repackaged and refurbished items.
During fiscal 2001, the Company updated its Web site with a new home page
that includes enhanced graphics, bolder presentation of more products and
catalog quick order. The Company also has streamlined its checkout process to
allow the customers to complete their on-line orders more quickly.
Net wholesale sales for fiscal year 2001 increased $1,467,000, or 15.6%,
compared to fiscal 2000, primarily due to testing of new programs during fiscal
2001.
Fiscal 2000
Total Company net sales for fiscal 2000 increased $112,900,000, or 38.5%,
from the prior fiscal year. Returns and allowances were
13
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Revenues (continued)
9.9% of sales for fiscal 2000, as compared with 11.0% for fiscal 1999. The
increase in net sales was primarily attributable to increases in net sales from
stores of $61,033,000, from catalog of $21,206,000 and from Internet operations
of $31,718,000.
For fiscal 2000, net store sales increased $61,033,000, or 32.4%, and
comparable store sales increased by 29.0% from the prior fiscal year. The
increase in net store sales for fiscal 2000 reflects a 19.2% increase in total
store transactions, with an 11.2% increase in average revenue per transaction.
The increase in net store sales and comparable stores sales reflects the
popularity of Sharper Image Design products and private label products,
including the significant sales of Razor Rollerboard Scooters. The increase in
net store sales in fiscal 2000 is also attributable to the opening of nine new
stores during fiscal 2000 and annualized sales of five new stores opened during
fiscal 1999. This was partially offset by one store that was closed in fiscal
2000 and the three stores that closed in 1999.
Net catalog sales for fiscal year 2000 increased $21,206,000, or 32.3%,
from fiscal 1999. The fiscal 2000 net sales increase reflects an increase of
16.6% in transactions, and a 13.5% increase in average revenue per transaction,
compared to the prior year. Management believes that the increase in Sharper
Image catalog sales is partially attributable to a 31% increase in Sharper Image
Catalog pages circulated in fiscal 2000 as compared to fiscal 1999, as well as
the continued popularity of Sharper Image Design proprietary and private label
products, including the Razor Rollerboard Scooter. Management also believes that
the increased catalog and page circulation has positively impacted the revenue
growth in store and Internet sales. Other contributing factors to the increase
in net catalog sales in fiscal 2000 from the same period last year, are the
increased single-product solo-mailer campaigns conducted in fiscal 2000, and
increased revenue generated from infomercials and print advertising in 2000.
The Company's fiscal 2000 Internet sales from sharperimage.com, which
includes the Sharper Image auction site, increased $31,718,000, or 111.3%, from
fiscal 1999. The fiscal 2000 increase in Internet net sales reflects an increase
of 88.5% in transactions and a 12.1% increase in revenue per transaction.
Net wholesale sales for fiscal year 2000 decreased $1,057,000, or 10.1%,
compared to fiscal 1999, primarily due to the testing of programs with new
customers that the Company did not repeat in 2000.
For the purpose of determining comparable store sales, comparable stores
are defined as those which were open during the entire comparable period of the
previous year and are compared monthly for purposes of this analysis.
Inflationary effects are not considered significant to the growth of sales.
Cost of Products
Fiscal 2001
Cost of products for fiscal 2001 decreased $23,489,000, or 11.0%, from
fiscal 2000. The decrease in cost of products is due to the lower sales volume
for the total Company, and to the increased percentage of sales of Sharper Image
Design proprietary products and private label products, which generally carry
higher margins. The gross margin rate for fiscal 2001 was 52.1%, which was 2.9
percentage points better than the prior year rate of 49.2%. The Sharper Image
Design proprietary and private label products as a percentage of net sales,
exclusive of wholesale, increased to 70% in fiscal 2001 as compared to 64% in
fiscal 2000.
Fiscal 2000
Cost of products for fiscal 2000 increased $59,201,000, or 38.5%, from
fiscal 1999. The increase in cost of products is due to the higher sales volume
compared to the prior year. The gross margin rate for fiscal 2000 was 49.2%,
which was consistent with the comparable prior-year period. The Sharper Image
Design proprietary and private label products as a percentage of net sales,
exclusive of wholesale, increased to 64% in fiscal 2000 as compared to 50% in
fiscal 1999.
The Company's gross margin rate fluctuates with the changes in its
merchandise mix, primarily Sharper Image Design proprietary and private label
products, which is affected by new items available in various categories or
introduced by the Company. The variation in merchandise mix from category to
category from year to year reflects the characteristic that the Company is
driven by individual products as opposed to general lines of merchandise.
Additionally, the auction sites and other selected promotional activities, such
as free shipping offers, will, in part, tend to offset the rate of increase in
our gross margin rate.
It is impossible to predict future gross margin rates accurately, although
the Company's goal is to continue to increase sales of Sharper Image Design
proprietary products and other exclusive private label products, as these
products generally carry higher
14
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Cost of Products (continued)
margins than branded products and may be less susceptible to price comparisons
by customers. The popularity of these proprietary products and private label
products contributed to the 2.9 percentage point increase in the gross margin
rate for fiscal 2001. Management believes that the introduction of new
proprietary and private label products at gross margins that are anticipated to
be in excess of the average of those currently being realized should have a
positive impact on the Company's gross margin rate for 2002, but management
cannot assure you that proprietary and private label products will continue to
have gross margins in excess of the average gross margin. Also, to the extent
that the introduction of popular proprietary products becomes a higher
proportion of sales, this could have a positive impact on the gross margin rate
for fiscal 2002 and in the future, although we cannot assure you such increase
in gross margin will occur.
Buying and Occupancy
Fiscal 2001
Buying and occupancy costs for fiscal 2001 increased $7,098,000, or 22.7%,
from fiscal 2000. The increase primarily reflects a full year of occupancy costs
for nine new stores opened in fiscal 2000, the occupancy costs associated with
the 14 new stores and four temporary stores opened in fiscal year 2001, and
occupancy cost increases associated with routine lease renewals, partially
offset by the two stores that closed during fiscal 2001. The increase also
reflects higher rent expense related to our corporate headquarters office space
beginning in fiscal 2001. Buying and occupancy costs as a percentage of total
revenues increased from 7.4% in fiscal 2000 to 9.7% in fiscal 2001. The
Company's goal is to continue to grow the number of new stores by 10-15 percent.
The Company met this goal in fiscal 2001 with 14 new stores and is on track to
achieve the store unit growth goal for fiscal 2002.
Fiscal 2000
Buying and occupancy costs for fiscal 2000 increased $3,384,000, or 12.2%,
from fiscal 1999. The increase primarily reflects a full year of occupancy costs
for five new stores opened in fiscal 1999, the occupancy costs associated with
the nine new stores opened in fiscal year 2000, and occupany cost increases
associated with certain existing locations, partially offset by the one store
that closed during fiscal 2000. The increase is partially attributable to
percentage rent increases due to higher sales volume in many of our stores.
Buying and occupancy costs as a percentage of total revenues decreased from 9.1%
in fiscal 1999 to 7.4% in fiscal 2000.
Advertising
Fiscal 2001
Advertising expenses for fiscal 2001 increased $13,845,000, or 25.3%, from
fiscal 2000. The increase in advertising expenses was attributable to a 13%
increase in the number of Sharper Image catalogs mailed, an 8% increase in
catalog pages circulated and a 108% increase in television infomercial
advertising. The increase also included higher postage costs for catalogs mailed
during fiscal 2001. Additionally, the Company continued its other multimedia
advertising initiatives, which included radio advertising and single product
mailers, among others. Although, management believes they contributed to sales
in the stores, catalog and Internet channels, there can be no assurance of the
continued success of these advertising initiatives. Advertising expenses as a
percentage of total revenues increased from 13.0% in fiscal 2000 to 17.3% in
fiscal 2001.
The Company increased its television media spending on infomercials
highlighting selected Sharper Image Design products. The broad appeal of our
Sharper Image Design products, in conjunction with the higher gross margin
rates, allow the Company to achieve its goal of near break-even results on this
type of advertising expenditure. The majority of the spending on television
infomercials was for one of our more popular Sharper Image Design proprietary
products, the Ionic Breeze(R) Quadra(TM) Silent Air Purifier. Advertising
expense, excluding television infomercial expenses, was 10.7% and 12.4% of total
net sales for fiscal 2000 and 2001, respectively.
Management believes that the expansion of its multimedia advertising
initiatives of direct marketing and radio helped contribute to the sales results
for fiscal 2001 and will continue to be an important factor in future revenue
growth. As a result, advertising costs, which include television infomercial,
catalog circulation, catalog pages, and other marketing initiatives are
anticipated to be higher in fiscal 2002. Additionally, the higher cost of
postage on various direct marketing mailers, including the catalog and single
product mailers, is expected to contribute to advertising cost increases
partially offset by the anticipated savings from lower paper costs in 2002.
15
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Advertising (continued)
Fiscal 2000
Advertising expenses for fiscal 2000 increased $16,642,000, or 43.8%, from
fiscal 1999. The increase in advertising expenses was partially attributable to
a 31% increase in the number of Sharper Image catalogs mailed, a 34% increase in
catalog pages circulated in fiscal 2000 and to the increases in television
infomercial spending. Advertising expenses as a percentage of total revenues
increased from 12.5% in fiscal 1999 to 13.0% in fiscal 2000.
General, Selling and Administrative
Fiscal 2001
General, selling and administrative expenses (GS&A) for fiscal 2001
increased $2,570,000, or 2.7%, from fiscal 2000. The increase in GS&A expenses
for fiscal 2001 was attributable to increases in overall selling expenses
related to the opening of 14 new stores and four temporary stores during fiscal
2001, and the annualized selling expenses related to the nine stores opened in
fiscal 2000, partially offset by the reduced selling expenses of two stores
closed at lease maturity during fiscal 2001. The increase was also due to the
Company's continued development of its proprietary products, the technological
system enhancements made in operational areas of the Company, the expansion and
improvement in operational infrastructure, and compensation and benefit expenses
associated with attracting and retaining key employees. Partially offsetting the
increase in GS&A expenses were cost savings achieved during fiscal 2001. These
cost savings benefits were achieved as a result of management's continual review
of the Company's GS&A expenses and infrastructure.
GS&A expenses for fiscal 2001 increased as a percentage of total revenues
to 24.7% from 22.6% in fiscal 2000. The increase is reflective of the lower
sales volume experienced in fiscal 2001 due to weak consumer spending, the
events of September 11 and the general economic slowdown. Management believed
that these events were temporary and retained the necessary operational
infrastructure, which resulted in the higher percentage to net sales for fiscal
2001.
During fiscal 2001, the Company took over the distribution center
operations of the 60,000 square foot leased facility located in Ontario,
California, which was previously utilized by the Company under a third party
service agreement, and consolidated two smaller sites into a 104,000 square foot
leased facility located adjacent to our owned facility in Little Rock, Arkansas.
These changes resulted in GS&A savings due to the termination of the higher
costs related to the third party service agreements for fulfillment and storage
services.
Fiscal 2000
General, selling and administrative expenses for fiscal 2000 increased
$25,740,000, or 37.0%, from fiscal 1999. The increase was primarily due to
increases in variable expenses from increased net sales and overall selling
expenses related to the opening of nine new stores. Also, the Company's
continued development of proprietary products and increasing Internet operations
have increased GS&A expenses in expanding and improving the operational
infrastructure, as well as attracting and retaining key employees. General,
selling and administrative expenses as a percentage of total revenues decreased
from 22.9% in fiscal 1999 to 22.6% in fiscal 2000 due to better leverage from
substantially increased sales volume.
Other Income
Other income, net, for fiscal 2001 decreased $1,961,000 from fiscal 2000,
primarily due to the decrease in interest income earned on lower investment
balances, the reduction in interest rates on invested balances and the interest
expense incurred on seasonal borrowings.
Other income, net, for fiscal 2000 increased $1,469,000 from fiscal 1999,
primarily due to the interest income earned during fiscal 2000 from higher
investment balances generated from improved operating results.
Income Taxes
The effective tax rate for fiscal 2001, 2000, and 1999 was 40.0%. Income
taxes are accounted for using an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our consolidated financial
statements or tax returns. In estimating future tax consequences, all expected
future events then known to management are considered, other than changes in the
tax law or rates.
16
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements
during fiscal 2001, with cash generated from operations, trade credit, its
revolving credit facility and existing cash balances. The Company believes that
the combination of its cash and cash equivalents, internally generated funds,
trade credits and available borrowings under its revolving credit facility will
be sufficient to finance its working capital and capital expenditure requirement
for at least the next twelve months.
Net cash provided by operating activities totaled $9,443,000 for fiscal
2001, a decrease of $8,606,000 million from fiscal 2000. The decrease in net
cash provided by operating activities is primarily due to the decrease in net
earnings, accounts payable, accrued expenses and deferred revenues. This is
partially offset by a 19% decrease in the Company's merchandise inventory
balance. The decrease in inventory reflected the Company's planned management to
lower inventory during fiscal 2001, and an increase in Sharper Image Design
proprietary and private label products, which generally have lower cost of
products.
Net cash used in investing activities, primarily capital expenditures for
new stores, design and tooling costs for proprietary products and technological
upgrades to our operational infrastructure, totaled $20,563,000 in fiscal 2001
compared to $19,747,000 in fiscal 2000. During fiscal 2001, the Company opened
14 new stores and four temporary stores. There were also two stores closed at
their lease maturity. The Company also remodeled nine stores during fiscal 2001.
Net cash used in financing activities totaled $482,000 in fiscal 2001,
which was the result of $988,000 used to repurchase the Company's stock and
$15,784,000 related to payments on the Company's mortgage loan and revolving
credit facility, offset by $15,625,000 of borrowings under the revolving credit
facility and $665,000 in proceeds from the issuance of common stock in
connection with the Company's stock option plan. On December 6, 2000, the
Company's board of directors authorized a common stock repurchase program. Under
the program, which expires on January 31, 2002, management has the authority to
purchase up to 800,000 shares of Sharper Image common stock in public market
transactions. Through January 31, 2002, the Company repurchased 206,000 shares
of common stock under this program for a total cost of approximately $2,365,000.
The table below presents significant commercial credit facilities available
to the Company and their associated expiration dates.
($ in millions)
- -------------------------------------------------------------------
Maximum Amount of Commitment Expiration Per Period
- -------------------------------------------------------------------
Total
Maximum Commercial Less than 1-3 Amount
Commitments 1 Year Years Committed
----------------------------------------
Revolving Credit Facility
--Oct. 1 - Dec. 31* $ 0.0 $ 33.0 $33.0
Term Loans for Capital
Expenditures 0.0 2.0 2.0
----- ------ ------
Total Commercial
Commitment $ 0.0 $ 35.0 $ 35.0
===== ====== ======
* This represents the maximum commitment under the revolving credit facility. It
includes limits of $15.0 million for documentary letters of credit and $5.0
million for standby letters of credit.
The Company has a revolving secured credit facility with The CIT
Group/Business Credit, Inc. (CIT) (formerly Tyco Capital) with an expiration
date of September 2004. The credit facility allows the Company borrowings and
letters of credit up to a maximum of $33 million for the period October 1
through December 31 and up to $20 million for other times of the year based on
inventory levels. The credit facility is secured by the Company's inventory,
accounts receivable, general intangibles and certain other assets. Borrowings
under this facility bear interest at either the prime rate plus a margin or at
LIBOR plus a margin based on the Company's financial performance. The credit
facility contains certain financial covenants pertaining to interest coverage
ratio and net worth and contains limitations on operating leases, other
borrowings, dividend payments and stock repurchases. The Company was in
compliance with all covenants as of January 31, 2002.
The highest amount of direct borrowing under the revolving loan credit
facility during fiscal 2001 was $15,625,000, which was repaid by December 10,
2001. During fiscal 2000, the Company did not borrow under the revolving loan
credit facility. Letter of credit commitments outstanding under the credit
facility at January 31, 2002, and 2001 were $4,494,000 and $1,134,000,
respectively.
In addition, the credit facility provides for term loans for capital
expenditures ("Term Loans") up to $2.0 million. Amounts borrowed under the Term
Loans bear interest at a variable rate of
17
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Liquidity and Capital Resources (continued)
either prime rate plus a margin or at LIBOR plus a margin based on the Company's
financial performance. Each Term Loan is to be repaid in 36 equal monthly
principal installments. As of January 31, 2002, there were no borrowings on this
facility.
The table below presents significant contractual obligations of the Company
at fiscal year end.
($ in millions)
- ----------------------------------------------------------------------------
Contractual Less than 1-3 4-5 After 5
Obligations 1 Year Years Years Years Total
--------------------------------------------
Revolving Credit Facilty $ 4.5 -- -- -- $ 4.5
Letters of Credit
Notes Payable .1 $ 0.4 $ 0.5 $ 1.2 2.2
Operating Leases 24.1 43.8 32.9 51.7 152.5
Other Long--Term
Obligations -- -- -- -- --
----- ------ ------ ------ -----
Total Contractual
Cash Obligations 28.7 $ 44.2 $ 33.4 $ 52.9 $159.2
===== ====== ====== ====== =====
At January 31, 2002, notes payable included a mortgage loan collateralized
by the Company's Little Rock distribution center. This note bears interest at a
fixed rate of 8.40%, provides for monthly payments of principal and interest in
the amount of $29,367, and matures in January 2011. At January 31, 2002, the
balance of this note was $2.2 million.
In fiscal 2002, the Company plans to continue its real estate strategy of
annual new store unit growth of 10-15%, to remodel approximately five to 10
stores at lease renewal, and continue its capital investment in design and
tooling costs for proprietary products. The Company also plans to update and
refine its Web site, sharperimage.com, and to further develop its Web site
presence internationally. The Company is planning to reconfigure its existing
distribution centers to accommodate future growth. Total capital expenditures
for fiscal 2002 are estimated at approximately $18 to $22 million. We cannot
assure that any of these expenditures will lead to an increase in sales.
New Accounting Pronouncements
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," as amended, requires the Company to record all derivatives as
either assets or liabilities on the balance sheet and to measure those
instruments at fair value, and is effective for all fiscal years beginning after
June 15, 2000. The Company implemented SFAS 133, as amended, on February 1,
2001. Adoption of this statement did not have a material impact on the Company's
financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and
Other Intangible Assets" (effective for the Company on February 1, 2002). SFAS
No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142
specifies that goodwill and certain intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. The
adoption of the new standards is not expected to have a material impact on the
Company's financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. SFAS No. 144 became effective for the
Company on February 1, 2002. Adoption of this standard is not expected to have a
material effect on the Company's financial position or results of operations.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosures.
Estimates and assumptions include,
18
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Critical Accounting Policies and Estimates (continued)
but are not limited to the carrying value of inventory, fixed asset lives,
deferred cost recovery period, income taxes and contingencies and litigation.
The Company bases its estimates on analyses, of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following represent our more critical estimates and
assumptions used in the preparation of our financial statements, although not
inclusive.
Accounts Receivable -- The Company records an allowance for credit losses
based on estimates of customers' ability to pay. If the financial condition of
our customers were to deteriorate, additional allowances may be required.
Revenue Recognition -- The Company recognizes revenue at the point of sale
at its retail stores and at the commencement of delivery to a customer for its
mail order sales, including Internet. The Company records estimated reductions
to revenue for customer returns. These estimates are based on the Company's
historical trends adjusted for current market conditions. If actual return rates
differ from those estimated by the Company, additional reductions may be
required. The Company also records estimated reductions to revenue for customer
programs and incentive offerings including special pricing agreements, price
protection, promotions and other volume-based incentives. If market conditions
were to decline, the Company may take actions to increase customer incentive
offerings, possibly resulting in an incremental reduction of revenue at the time
the incentive is offered.
Store Closure Reserves -- The Company records reserves for closed stores
based on future lease commitments, anticipated future subleases of properties
and current risk-free interest rates. If interest rates or the real estate
leasing markets change, additional reserves may be required.
Merchandise Inventories -- The Company will write down inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Other accounting estimates inherent in the preparation of the Company's
financial statements include estimates associated with its evaluation of the
recoverability of deferred tax assets as well as those used in the determination
of liabilities related to litigation, product liability, taxation and inventory
valuations. Various assumptions and other factors underlie the determination of
these significant estimates. The process of determining significant estimates is
fact specific and takes into account factors such as historical experience,
current and expected economic conditions, and product mix. The Company
constantly re-evaluates these significant factors and makes adjustments where
facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimate described above.
As discussed in Note I to the consolidated financial statements, the
Company is involved in litigation incidental to its business, the disposition of
which is expected to have no material effect on the Company's financial position
or results of operations. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in the Company's assumptions related to these proceedings.
The Company accrues its best estimates of the probable cost for the resolution
of legal claims. Such estimates are developed in consultation with outside
counsel handling these matters and are based upon a combination of litigation
and settlement strategies. To the extent additional information arises or the
Company's strategies change, it is possible that the Company's best estimates of
its probable liability in these matters may change.
Quantitative and Qualitative
Disclosure About Market Risk
The Company is exposed to market risks, which include changes in interest
rates and, to a lesser extent, foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
The interest payable on the Company's credit facility is based on variable
interest rates and therefore affected by changes in market interest rates. If
interest rates on existing variable rate debt rose 0.48% (10% from the bank's
reference rate) as of January 31, 2002, the Company's results from operations
and cash flows would not be materially affected. In addition, the
19
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Quantitative and Qualitative Disclosure About Market Risk (continued)
Company has fixed and variable income investments consisting of cash equivalents
and short-term investments, which are also affected by changes in market
interest rates. The Company does not use derivative financial instruments in its
investment portfolio. The Company enters into a significant amount of purchase
obligations outside of the U.S. which are settled in U.S. dollars and,
therefore, have only minimal exposure to foreign currency exchange risks. The
Company does not hedge against foreign currency risks and believes that foreign
currency exchange risk is immaterial.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Holiday shopping season. In past years, a substantial portion of the Company's
total revenues, and all or most of the Company's net earnings, have occurred in
the fourth quarter ending January 31. The Company, as is typical in the retail
industry, generally experiences lower revenues and earnings during the other
quarters and has incurred and may continue to incur losses in these quarters.
Uncertainties and Risk
The foregoing discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included with this report.
Certain statements contained herein, including, without limitation, statements
containing the words "plans," "believes," "anticipates," "estimates," "expects,"
"projections," and words of similar import, constitute "forward-looking
statements." These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth in such forward-looking statements. Such risks and uncertainties
include, without limitation, risks of changing market conditions in the overall
economy and the retail industry, consumer demand, the opening of new stores,
actual advertising expenditures by the Company, the success of the Company's
advertising and merchandising strategy, availability of products, and other
factors detailed from time to time in the Company's annual and other reports
filed with the Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking statements. The Company undertakes
no obligations to revise these forward-looking statements to reflect events or
circumstances after the date hereof.
20
<PAGE>
Statements of Operations
- --------------------------------------------------------------------------------
Sharper Image Corporation
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-------------------------------------
2002 2001 2000
Dollars in thousands except per share amounts (Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sales $ 435,131 $ 450,298 $ 329,384
Less: returns and allowances 51,909 44,387 36,373
---------- ---------- ----------
Net Sales 383,222 405,911 293,011
List rental 935 1,454 1,129
Licensing 50 250 225
Delivery 11,992 13,521 9,732
---------- ---------- ----------
396,199 421,136 304,097
---------- ---------- ----------
Costs and Expenses:
Cost of products 189,454 212,943 153,742
Buying and occupancy 38,324 31,226 27,842
Advertising 68,479 54,634 37,992
General, selling, and administrative 97,835 95,265 69,525
---------- ---------- ----------
394,092 394,068 289,101
---------- ---------- ----------
Other Income:
Interest income 702 2,613 983
Interest expense (355) (330) (380)
Other income (expense)--net (294) (269) (58)
---------- ---------- ----------
53 2,014 545
---------- ---------- ----------
Earnings Before Income Taxes 2,160 29,082 15,541
Income Taxes 864 11,633 6,216
---------- ---------- ----------
Net Earnings $ 1,296 $ 17,449 $ 9,325
========== ========== ==========
Net Earnings Per Share - Basic $ 0.11 $ 1.45 $ 0.89
========== ========== ==========
Net Earnings Per Share - Diluted $ 0.10 $ 1.33 $ 0.82
========== ========== ==========
Weighted Average Number of Shares - Basic 11,904,562 12,036,569 10,516,358
========== ========== ==========
Weighted Average Number of Shares - Diluted 12,568,380 13,074,395 11,358,004
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
Balance Sheets
- --------------------------------------------------------------------------------
Sharper Image Corporation
<TABLE>
<CAPTION>
January 31,
--------------------------------------
2002 2001
Dollars in thousands except per share amounts (Fiscal 2001) (Fiscal 2000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and equivalents $ 40,417 $ 52,019
Accounts receivable, net of allowance for doubtful accounts of $1,082 and $730 8,098 9,722
Merchandise inventories 50,151 61,959
Deferred catalog costs 3,844 3,943
Prepaid expenses and other 10,648 9,992
----------- -----------
Total Current Assets 113,158 137,635
Property and Equipment, Net 44,862 36,474
Deferred Taxes and Other Assets 4,318 4,727
----------- -----------
Total Assets $ 162,338 $ 178,836
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 16,511 $ 25,177
Accrued expenses 25,262 29,838
Deferred revenue 16,982 12,440
Income taxes payable 807 10,711
Current portion of notes payable 174 160
----------- -----------
Total Current Liabilities 59,736 78,326
Notes Payable 2,033 2,206
Other Liabilities 5,826 4,742
Commitments and Contingencies -- --
----------- -----------
Total Liabilities 67,595 85,274
----------- -----------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized, 3,000,000 shares: Issued and outstanding, none -- --
Common stock, $0.01 par value:
Authorized, 25,000,000 shares: Issued and outstanding,
11,970,684and 11,961,911 shares 120 120
Additional paid-in capital 42,582 42,697
Retained earnings 52,041 50,745
----------- -----------
Total Stockholders' Equity 94,743 93,562
----------- -----------
Total Liabilities and Stockholders' Equity $ 162,338 $ 178,836
=========== ===========
See Notes to Financial Statements.
</TABLE>
22
<PAGE>
Statements of Cash Flows
- --------------------------------------------------------------------------------
Sharper Image Corporation
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
Dollars in thousands Shares Amount Capital Earnings Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1999 8,916,995 $ 89 $ 12,589 $23,971 $36,649
Issuance of common stock
from secondary offering and
for stock options exercised
(including income tax benefit) 3,099,832 31 31,118 31,149
Net earnings 9,325 9,325
---------- ---- ------- ------- -------
Balance at January 31, 2000 12,016,827 120 43,707 33,296 77,123
Issuance of common stock
for stock options exercised
(including income tax benefit) 71,084 1 659 660
Repurchase of common stock (126,000) (1) (1,669) (1,670)
Net earnings 17,449 17,449
---------- ---- ------- ------- -------
Balance at January 31, 2001 11,961,911 120 42,697 50,745 93,562
Issuance of common stock for stock
options exercised
(including income tax benefit) 108,773 1 872 873
Repurchase of common stock (100,000) (1) (987) (988)
Net earnings 1,296 1,296
---------- ---- ------- ------- -------
Balance at January 31, 2002 11,970,684 $120 $42,582 $52,041 $94,743
========== ==== ======= ======= =======
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
Statements of Cash Flows
- --------------------------------------------------------------------------------
Sharper Image Corporation
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
- -----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Dollars in thousands (Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash was Provided by (Used for) Operating Activities:
Net earnings $ 1,296 $ 17,449 $ 9,325
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 11,644 7,922 6,480
Deferred rent expenses and landlord allowances 332 (185) (187)
Deferred income taxes (124) 1,191 (1,349)
Loss on sale of equipment 395 299 --
Change in operating assets and liabilities:
Accounts receivable 1,624 (1,840) (1,095)
Merchandise inventories 11,808 (22,307) (7,054)
Deferred catalog costs, prepaid expenses and other (24) (4,686) (2,061)
Accounts payable and accrued expenses (13,034) 12,041 14,361
Deferred revenue and other liabilities (4,474) 7,957 6,062
---------- ---------- ----------
Cash Provided by Operating Activities 9,443 17,841 24,482
---------- ---------- ----------
Cash was Provided by (Used for) Investing Activities:
Property and equipment expenditures (20,574) (19,747) (8,039)
Proceeds from sale of equipment 11 -- 111
---------- ---------- ----------
Cash Used for Investing Activities (20,563) (19,747) (7,928)
---------- ---------- ----------
Cash was Provided by (Used for) Financing Activities:
Proceeds from issuance of common stock, including warrants
and stock options exercised 665 285 31,149
Repurchase of common stock (988) (1,670) --
Proceeds from notes payable and revolving credit facility 15,625 -- 11,955
Principal payments on notes payable and revolving credit facility (15,784) (147) (12,590)
---------- ---------- ----------
Cash Provided by (Used for) Financing Activities (482) (1,532) 30,514
---------- ---------- ----------
Net Increase (Decrease) in Cash and Equivalents (11,602) (3,438) 47,068
Cash and Equivalents at Beginning of Period 52,019 55,457 8,389
---------- ---------- ----------
Cash and Equivalents at End of Period $ 40,417 $ 52,019 $ 55,457
========== ========== ==========
Supplemental Disclosure of Cash Paid for:
Interest $ 349 $ 362 $ 403
Income Taxes $ 8,991 $ 10,536 $ 3,839
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note A -- Summary of
Significant Accounting Policies
The Company is a leading specialty retailer that introduces and sells
quality, innovative and entertaining products. These products are sold through
its retail stores, catalogs (which includes other sources of direct marketing
such as single product mailers, television infomercials, radio and newspapers),
Internet and other marketing channels throughout the United States. The Company
also has stores and catalog operations internationally through licensees.
Accounting Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition: The Company recognizes revenue at the point of sale at
its retail stores and at the commencement of delivery to customers for its mail
order sales, including Internet. The Company records estimated reductions to
revenue for customer returns based upon historical returns rate. Deferred
revenue represents merchandise certificates outstanding and unfilled cash orders
at the end of the fiscal period. Mailing list rental revenue is recognized when
the list is fulfilled. Delivery revenue is recognized at the commencement of
delivery to customers.
Fair Value of Financial Instruments: The carrying value of cash, accounts
receivable, accounts payable and notes payable approximates their estimated fair
value.
Effects of Inflation: The effects of inflation are not material to the
Company's financial position and results of operations.
Merchandise Inventories: Merchandise inventories are stated at lower of
cost (first-in, first-out method) or market. The Company provides a reserve for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions.
Cash and Equivalents: Cash and equivalents represent cash and short-term,
highly liquid investments with original maturities of three months or less.
Deferred Catalog and Advertising Costs: Direct costs incurred for the
production and distribution of catalogs are capitalized and amortized, once the
catalog is mailed, over the expected sales period which does not exceed three
months. Other advertising costs are expensed as incurred and amounted to
$35,297,000, $25,374,000, and $15,455,000, for the fiscal years ended January
31, 2002, 2001, and 2000, respectively.
Start-Up Activities: All start-up and preopening costs are expensed as
incurred.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the various assets which range from three to 10 years for office
furniture and equipment and transportation equipment, and 40 years for the
building. Leasehold improvements are amortized using the straight-line method
over the lesser of their estimated useful lives or the term of the applicable
leases, which range from seven to 18 years.
The Company designs and produces its own proprietary products for sale.
Costs incurred for tooling, dies and package design are capitalized and
amortized over the estimated life of these products, which is generally two
years. At January 31, 2002, and 2001, capitalized costs included in property and
equipment, net of related amortization, were $2,967,000 and $3,499,000,
respectively.
The Company reviews its long-lived assets, including identifiable
intangible assets, whenever events or changes indicate the carrying amount of
such assets may not be recoverable. The Company's policy is to review the
recoverability of all assets, at a minimum, on an annual basis. Based on the
Company's review at January 31, 2002, no material adjustments were made to
long-lived assets.
Income Taxes: Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events then known to management that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, all expected future events then known to
management are considered other than changes in the tax law or rates.
Store Closures: The Company continually reviews the operating performance
of individual stores and records a provision for closing costs at the date
management commits to closing a store. Operating costs, including depreciation,
of stores to be closed are expensed during the period they remain in use.
25
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note A--Summary of Significant Accounting Policies (continued)
Accounts Payable: Accounts payable represents amounts owed to third parties
at the end of the period.
Stock-Based Compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, Accounting for Stock Issued to Employees.
Earnings Per Share: Basic earnings per share is computed as net earnings
divided by the weighted average number of common shares outstanding during each
year of 11,904,562 and 12,036,569 and 10,516,358, for the fiscal years ended
January 31, 2002, 2001 and 2000, respectively. Diluted earnings per share
reflect the potential dilution that could occur from common shares issuable
through stock options. Weighted average number of common shares outstanding was
adjusted for 663,818 and 1,037,826 and 841,646 incremental shares assumed issued
under the treasury stock method during the fiscal years ended January 31, 2002,
2001 and 2000, respectively.
Options for which the exercise price was greater than the average market
price of common stock for the period were not included in the computation of
diluted earnings per share. The number of such options for which the exercise
price was greater than the average market price of $9.94, $14.37 and $11.92 for
the fiscal years ended January 31, 2002, 2001 and 2000, was 303,500 and 54,600
and 9,000 , respectively.
Comprehensive Income: Comprehensive income consists of net earnings or loss
for the current period and other comprehensive income (income, expenses, gains
and losses that currently bypass the income statement and are reported directly
as a separate component of equity). Comprehensive income does not differ from
net earnings for the Company for the years ended January 31, 2002, 2001 and
2000.
New Accounting Pronouncements: SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended, requires the Company to record
all derivatives as either assets or liabilities on the balance sheet and to
measure those instruments at fair value, and is effective for all fiscal years
beginning after June 15, 2000. The Company implemented SFAS 133, as amended on
February 1, 2001. Adoption of this statement did not have a material impact on
the Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and
Other Intangible Assets" (effective for the Company on February 1, 2002). SFAS
No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142
specifies that goodwill and certain intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. The
adoption of the new standards is not expected to have a material impact on the
Company's financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. SFAS No. 144 became effective for the
Company on February 1, 2002. Adoption of this standard is not expected to have a
material effect on the Company's financial position or results of operations.
Reclassification: Certain reclassifications have been made to prior years'
financial statements in order to conform with the classifications of the January
31, 2002, financial statements.
26
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note B -- Property and Equipment
Property and equipment is summarized as follows:
January 31,
------------------------------
2002 2001
Dollars in thousands (Fiscal 2001) (Fiscal 2000)
- --------------------------------------------------------------------------------
Leasehold improvements $ 28,645 $ 26,937
Furniture, fixtures and equipment 72,155 57,538
Land 53 53
Building 2,874 2,874
---------- ----------
103,727 87,402
Less accumulated depreciation
and amortization 58,865 50,928
---------- ----------
$ 44,862 $ 36,474
========== ==========
Note C -- Other Assets
The Company has an agreement under which it will advance the premiums on a
split-dollar life insurance policy for its Founder, Chairman and Chief Executive
Officer. The Company has an interest in the insurance benefits equal to the
amount of the premiums advanced. The amount receivable for premiums advanced as
of January 31, 2002, and 2001 was $1,882,000 and $1,520,000, respectively.
Note D -- Revolving Loan and Notes Payable
The Company has a revolving secured credit facility with The CIT
Group/Business Credit Inc. (CIT) (formerly Tyco Capital) with an expiration date
of September 2004. The credit facility allows the Company borrowings and letters
of credit to a maximum of $33 million for the period October 1 through December
31 and up to $20 million for other times of the year based on inventory levels.
The credit facility is secured by the Company's inventory, accounts receivable,
general intangibles and certain other assets. Borrowings under this facility
bear interest at either the prime rate plus a margin or at LIBOR plus a margin
based on the Company's financial performance. The credit facility contains
certain financial covenants pertaining to interest coverage ratio and net worth
and contains limitations on operating leases, other borrowings, dividend
payments and stock repurchases.
The highest amount of direct borrowing under the revolving loan credit
facility during fiscal 2001 was $15,625,000. During fiscal 2000, the Company did
not borrow under the revolving loan credit facility. At January 31, 2002, and
2001, the Company had no amounts outstanding on its revolving credit facility.
Letter of credit commitments outstanding under the credit facility at January
31, 2002, and 2001 were $4,494,000 and $1,134,000, respectively.
At January 31, 2002, notes payable included a mortgage loan collateralized
by the Company's distribution center. This note bears interest at a fixed rate
of 8.40%, provides for monthly payments of principal and interest in the amount
of $29,367, and matures in January 2011. At January 31, 2002, and 2001, the
balance of this note was $2,207,000 and $2,366,000, respectively.
Future minimum principal payments on notes payable at January 31, 2002, are
as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
Fiscal Year Ending January 31,
2003 $ 174
2004 189
2005 205
2006 223
2007 243
Later years 1,173
--------
Total notes payable $ 2,207
========
27
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note E -- Income Taxes
Fiscal Year Ended January 31,
-----------------------------------------
2002 2001 2000
Dollars in thousands (Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
- --------------------------------------------------------------------------------
Current:
Federal $ 843 $ 8,914 $ 6,430
State 144 1,528 1,135
------- -------- --------
987 10,442 7,565
Deferred:
Federal (105) 1,017 (1,147)
State (18) 174 (202)
------- -------- --------
(123) 1,191 (1,349)
------- -------- --------
$ 864 $ 11,633 $ 6,216
======= ======== ========
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
Fiscal Year Ended January 31,
------------------------------------------
2002 2001 2000
(Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
- --------------------------------------------------------------------------------
Federal tax rate 35.0% 35.0% 34.0%
State income tax,
less federal benefit 6.0 6.0 6.0
Other (1.0) (1.0) --
---- ---- ----
Effective tax rate 40.0% 40.0% 40.0%
==== ==== ====
Deferred taxes result from differences in the recognition of expense for
income tax and financial reporting purposes. The principal components of
deferred tax assets (liabilities) are as follows:
January 31,
-------------------------------
2002 2001
Dollars in thousands (Fiscal 2001) (Fiscal 2000)
- -------------------------------------------------------------------
Current:
Nondeductible reserves $ 7,027 $ 5,245
Deferred catalog costs (1,465) (1,617)
State taxes (1,612) (1,188)
--------- --------
Current-- net 3,950 2,440
--------- --------
Noncurrent:
Deferred rent 1,245 1,042
Depreciation 3,173 3,470
Deductible software costs (2,671) (1,377)
Other-- net (165) (166)
--------- --------
Noncurrent-- net 1,582 2,969
--------- --------
Total $ 5,532 $ 5,409
========= ========
Note F -- Leases
The Company leases retail facilities, offices, and equipment under
operating leases for terms expiring at various dates through 2016. Under the
terms of certain of the leases, rents are adjusted annually for changes in the
consumer price index and increases in property taxes. The aggregate minimum
annual lease payments under leases in effect at January 31, 2002, are as
follows:
Dollars in thousands
- --------------------------------------------------------------
Fiscal Year Ending January 31,
2003 $ 24,107
2004 22,803
2005 20,955
2006 18,869
2007 14,096
Later years 51,711
----------
Total minimum lease commitments $ 152,541
==========
Many of the Company's leases contain predetermined fixed escalations of the
minimum rentals during the initial term. For these leases, the Company has
recognized the related rental expense on a straight-line basis and has recorded
the difference between the expense charged to income and amounts payable under
the leases as deferred rent which is included in Other Liabilities. Total
minimum rent from noncancelable sublease agreements through 2005 is
approximately $548,960 as of February 1, 2002, which has not been netted against
the above amounts.
Some store leases contain renewal options for periods ranging up to five
years. Most leases also provide for payment of operating expenses, real estate
taxes and for additional rent based on a percentage of sales.
Rental expense for all operating leases was as follows:
Fiscal Year Ended January 31,
-------------------------------------------------------
2002 2001 2000
Dollars in thousands (Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
- --------------------------------------------------------------------------------
Minimum rentals $22,941 $ 18,124 $ 16,146
Percentage rentals
and other charges 8,436 7,300 6,367
------- ---------- ---------
$31,377 $ 25,424 $ 22,513
======= ========== =========
28
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note G -- Stockholders' Equity
On July 22, 1999, the Company completed an offering of 3.0 million shares of
its common stock. The proceeds from the offering, net of underwriters discount
and offering expenses, totaled $30.2 million. The Company has used the proceeds
from this offering for general corporate purposes, including investments in the
Company's Internet business, expansion of its distribution and fulfillment
capacity, and working capital.
In December 2000, the Board of Directors approved a stock repurchase program,
which authorizes the Company to repurchase up to 800,000 shares at a per share
price of $20.00 or below. The program expired January 31, 2002. Through January
31, 2002, a total of 206,000 shares were repurchased under this stock repurchase
program at an average price of $11.48.
During fiscal 2000, the Company adopted the 2000 Stock Incentive Plan. The
Stock Incentive Plan combines the 1985 Stock Option Plan, as amended, and the
1994 Non-Employee Director Stock Option Plan, as amended, into a single
comprehensive equity incentive plan. The 2000 Stock Incentive Plan is divided
into four separate equity incentive programs and will allow the issuance of
non-qualified options to key employees, non-employee Board members and
consultants up to an initial aggregate of 3,147,107 shares. An automatic
increase of shares available for issuance will occur on the first trading day of
each fiscal year, beginning with fiscal 2001, by an amount equal to 3% of the
total number of shares of common stock outstanding on the last trading day of
the immediately preceding fiscal year. In no event will the annual increase
exceed 500,000 shares.
Options issued to key employees and consultants will generally vest over a
four- to six-year period from the date of the grant and are priced at 100% of
the fair market value at the date of the grant. Options issued to non-employee
Board members will be immediately exercisable, vest over one year of board
service from the date of the grant and are priced at 100% of the fair market
value at the date of the grant. Any shares purchased under the option plan will
be subject to repurchase by the Company at the exercise price paid per share,
upon the optionee's cessation of Board service prior to vesting.
Additional Stock Plan Information
As discussed in Note A, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net earnings (loss) and earnings (loss) per share had
the Company adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards.
These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life from date of grant, five years in fiscal 2001, five years in fiscal 2000
and four years in fiscal 1999; stock volatility, 37% in fiscal 2001, 66% in
fiscal 2000 and 57% in fiscal 1999; risk-free interest rates, 4.09% in fiscal
2001, 6.24% in fiscal 2000 and 5.70% in fiscal 1999; and no dividends during the
expected term.
The Company's calculations are based on a single option valuation approach,
and forfeitures are recognized as they occur. If the computed fair values of the
fiscal years 1996 through 2001 awards had been amortized to expense over the
vesting period of the awards, pro forma net earnings would have been $97,306
($0.01 earnings per share -- basic and $0.01 earnings per share -- diluted) in
fiscal 2001, $16,261,190 ($1.35 earnings per share -- basic and $1.24 earnings
per share -- diluted) in fiscal 2000 and $8,324,490 ($0.79 earnings per share --
basic and $0.73 earnings per share -- diluted) in fiscal 1999.
29
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note G -- Stockholders' Equity (continued)
The following table reflects the activity under these plans:
Weighted
Number of Average
Options Exercise Price
----------------------------
Balance at January 31, 1999 1,145,105 $ 3.76
Granted (weighted average fair value of $5.41) 1,228,100 9.28
Exercised (99,832) 4.11
Cancelled (167,385) 3.78
---------
Balance at January 31, 2000 2,105,988 $ 6.96
Granted (weighted average fair value of $8.63) 128,600 13.82
Exercised (71,084) 4.36
Cancelled (20,617) 6.77
---------
Balance at January 31, 2001 2,142,887 $ 7.46
Granted (weighted average fair value of $3.13) 800,350 7.96
Exercised (86,655) 5.00
Cancelled (82,619) 8.36
=========
Balance at January 31, 2002 2,773,963 $ 7.65
=========
Exercisable at January 31, 2000 531,391 $ 4.39
=========
Exercisable at January 31, 2001 982,430 $ 6.07
=========
Exercisable at January 31, 2002 1,397,869 $ 6.79
=========
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- --------------------------------------
Number Weighted Average Weighted Number Weighted
Range of of Options Remaining Contractual Average of Options Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$1.16-$1.99 4,835 3.0 $ 1.88 4,835 $ 1.88
2.00- 3.99 678,574 5.9 3.74 664,084 3.75
4.00- 7.99 398,664 9.5 6.65 55,764 5.47
8.00- 11.99 1,599,890 8.6 9.11 610,966 9.28
11.99- 21.00 92,000 9.0 15.81 62,220 16.35
--------- ---------
$1.16-$21.00 2,773,963 8.0 $ 7.65 1,397,869 $ 6.79
========= =========
</TABLE>
Note H -- 401(k) Savings Plan
The Company maintains a defined contribution, 401(k) Savings Plan, covering
all employees who have completed one year of service with at least 1,000 hours
and who are at least 21 years of age. The Company makes employer matching
contributions at its discretion. Company contributions amounted to $172,000,
$196,000 and $152,000 for the fiscal years ended January 31, 2002, 2001 and
2000, respectively.
Note I -- Commitments and Contingencies
The Company is party to various legal proceedings arising from normal
business activities. Management believes that the resolution of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
30
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note J -- Segment Information
The Company classifies its business interests into three reportable
segments: retail stores, catalog and Internet. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note A). The Company evaluates performance and allocates
resources based on operating contribution, which excludes unallocated corporate
general and administrative costs and income tax expense or benefit. The
Company's reportable segments are strategic business units that offer the same
products and utilize common merchandising, distribution, and marketing
functions, as well as common information systems and corporate administration.
The Company does not have intersegment sales, but the segments are managed
separately because each segment has different channels for selling the products.
Financial information for the Company's business segments is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-------------------------------------------------
2002 2001 2000
Dollars in thousands (Fiscal 2001) (Fiscal 2000) (Fiscal 1999)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Stores $ 232,146 $ 249,449 $ 188,416
Catalog 90,363 86,823 65,617
Internet 49,820 60,213 28,495
Other 23,870 24,651 21,569
---------- ---------- ----------
Total Revenues $ 396,199 $ 421,136 $ 304,097
========== ========== ==========
Operating Contributions
Stores $ 24,056 $ 39,998 $ 27,947
Catalog 7,661 14,865 9,134
Internet 8,858 7,543 3,193
Unallocated (38,415) (33,324) (24,733)
---------- ---------- ----------
Earnings Before Income Tax $ 2,160 $ 29,082 $ 15,541
========== ========== ==========
Depreciation and Amortization
Stores $ 4,782 $ 3,717 $ 3,534
Catalog -- -- --
Internet 1,845 449 14
Unallocated 5,017 3,756 2,932
---------- ---------- ----------
Total Depreciation and Amortization $ 11,644 $ 7,922 $ 6,480
========== ========== ==========
Capital Asset Expenditures
Stores $ 12,296 $ 6,333 $ 3,561
Catalog -- -- --
Internet 2,134 3,550 425
Unallocated 6,144 9,864 4,053
---------- ---------- ----------
Total Capital Asset Expenditures $ 20,574 $ 19,747 $ 8,039
========== ========== ==========
Assets
Stores $ 27,613 $ 20,745 $ 13,590
Catalog -- -- --
Internet 4,825 4,418 448
Unallocated 129,900 153,673 128,081
---------- ---------- ----------
Total Assets $ 162,338 $ 178,836 $ 142,119
========== ========== ==========
</TABLE>
31
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Sharper Image Corporation
Fiscal Years Ended January 31, 2002, 2001 and 2000
Note K -- Quarterly Financial Information (Unaudited) Dollars in thousands
except per share amounts
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal Year Ended January 31, 2002 2001 2001 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 69,759 $ 82,797 $ 77,004 $ 166,639
Expenses
Cost of products 33,231 39,634 38,084 78,505
Buying and occupancy 8,572 9,089 9,922 10,741
Advertising 12,867 17,580 12,667 25,365
General, selling and administrative 20,089 22,705 22,338 32,703
Other income (expense) 406 54 (351) (56)
Earnings (loss) before income tax expense (benefit) (4,594) (6,157) (6,358) 19,269
Income tax expense (benefit) (1,838) (2,463) (2,543) 7,708
Net earnings (loss) $ (2,756) $ (3,694) $ (3,815) $ 11,561
Net earnings (loss) per share - Basic(1) $ (0.23) $ (0.31) $ (0.32) $ 0.97
Diluted(2) $ (0.23) $ (0.31) $ (0.32) $ 0.92
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------
April 30, July 31, October 31, January 31,
Fiscal Year Ended January 31, 2001 2000 2000 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 60,862 $ 82,463 $ 101,084 $ 176,727
Expenses
Cost of products 31,207 41,457 52,117 88,162
Buying and occupancy 6,920 7,249 7,778 9,279
Advertising 7,342 12,556 12,600 22,136
General, selling and administrative 15,881 19,617 23,764 36,003
Other income 663 389 350 612
Earnings before income tax expense 175 1,973 5,175 21,759
Income tax expense 70 789 2,070 8,704
Net earnings $ 105 $ 1,184 $ 3,105 $ 13,055
Net earnings per share - Basic(1) $ 0.01 $ 0.10 $ 0.26 $ 1.09
Diluted(2) $ 0.01 $ 0.09 $ 0.23 $ 1.00
</TABLE>
1 Basic earnings per share is calculated for interim periods including the
effect of stock options exercised in prior interim periods. Basic earnings
per share for the fiscal year is calculated using weighted shares outstanding
based on the date stock options were exercised. Therefore, basic earnings per
share for the cumulative four quarters may not equal fiscal year basic
earnings per share.
2 Diluted net earnings per share for the fiscal year and for quarters with net
earnings are computed based on weighted average common shares outstanding
which include common stock equivalents (stock options). Net loss per share
for quarters with net losses is computed based solely on weighted average
common shares outstanding. Therefore, the net earnings (loss) per share for
each quarter do not sum up to the earnings per share for the full fiscal
year.
32
<PAGE>
Corporate Data
- --------------------------------------------------------------------------------
Sharper Image Corporation
Board of Directors
- --------------------------------------------------------------------------------
Richard Thalheimer Morton David
Founder Retired Chairman, President, and
Chairman of the Board Chief Executive Officer,
Chief Executive Officer Franklin Electronic Publishers, Inc.
Alan Thalheimer George James
Retired Business Executive Retired Senior Vice President
and Chief Financial Officer,
Gerald Napier Levi Strauss & Co.
Retired President of
I. Magnin and Company
Officers
- --------------------------------------------------------------------------------
Richard Thalheimer Aimee Cooper
Founder Vice President
Chairman of the Board Human Resources
Chief Executive Officer
William Feroe
Tracy Wan Vice President
President Merchandise Planning
Chief Operating Officer and Allocation
Greg Alexander Susan Fischer
Senior Vice President Vice President
Management Information Systems Internet Division
Roger Bensinger Harvey Johnson
Senior Vice President Vice President
Business Development Customer Service
Tony Farrell Tom Krysiak
Senior Vice President Vice President
Creative Services Sharper Image Design
Jeff Forgan Karen Luey
Senior Vice President Vice President
Chief Financial Officer Controller
Corporate Secretary
Andrew Parker
Barry Jacobsen Vice President
Senior Vice President Sharper Image Design
Distribution
Robert Pintane
Charles Taylor Vice President
Senior Vice President Merchandising
Sharper Image Design
Lynda Rose
Craig Trabeaux Vice President
Senior Vice President Product Development
Retail Operations
Joseph Tsang
Joe Williams Vice President
Senior Vice President Creative Services
Loss Prevention
Corporate Information
- ------------------------------------------------------------------------------
Corporate Headquarters SEC Form 10-K
650 Davis Street A copy of the Companys annual
San Francisco, CA 94111 report to the Securities and
Telephone (415) 445-6000 Exchange Commission of Form
FAX: (415) 445-1574 10-K (exclusive of exhibits) is available
without charge upon written
Transfer Agent and Registrar request to:
Mellon Investor Investor Relations
Services LLC The Sharper Image
85 Challenger Road 650 Davis Street
Ridgefield Park, NJ 07660 San Francisco, CA 94111
or online at
Corporate Counsel www.sharperimage.com
Brobeck, Phleger & Harrison LLP
One Market Annual Meeting
Spear Street Tower The Annual Meeting of
San Francisco, CA 94105 Stockholders of Sharper Image
Corporation will be held on
Independent Auditors Monday, June 3, 2002, at 10 a.m.
Deloitte & Touche LLP at World Trade Club
50 Fremont Street One Ferry Plaza
San Francisco, CA 94105 San Francisco, California.
Common Stock Market
Prices and Dividend Policy
- --------------------------------------------------------------------------------
The common stock of Sharper Image Corporation is traded in the Nasdaq National
Market under the symbol SHRP. The following table sets forth, for the periods
indicated, the range of high and low prices reported for the common stock.
The Company has not paid cash dividends to holders of its common stock.
Fiscal Year 2001 Fiscal Year 2000
High Low High Low
First Quarter 16.88 8.00 14.37 8.69
Second Quarter 12.95 8.90 18.25 10.005
Third Quarter 10.15 6.76 21.62 14.62
Fourth Quarter 12.01 6.57 20.50 10.75
Independent Auditors' Report
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Sharper Image Corporation
San Francisco, California
We have audited the accompanying balance sheets of Sharper Image Corporation as
of January 31, 2002 and 2001, and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 2002. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sharper Image Corporation as of January 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP [LOGO]DELOITTE & TOUCHE
San Francisco, California
March 25, 2002
<PAGE>
[PHOTO]
Sharper Image Design created the Ionic
Breeze(R) Quadra(TM) Silent Air
Purifier. It was the top-selling product
in 2001.
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
www.sharperimage.com
[PHOTO] -------------------------------------------------------------------
(R)The Sharper Image is a registered trademark of Sharper Image
Corporation.(TM) Sharper Image Design is a trademark of Sharper
Image Corporation.
Copyright(C)2002 by Sharper Image Corporation. All rights reserved.
Traded on NASDAQ under the symbol SHRP.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>4
<FILENAME>p15363_ex23-1.txt
<DESCRIPTION>INDEPENDENT AUDITOR'S CONSENT
<TEXT>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-16059, No. 33-12755, No. 33-55614, No. 33-80504, No. 333-327 and No.
333-44180 of Sharper Image Corporation on Form S-8 of our reports dated March
25, 2002, appearing in and incorporated by reference in this Annual Report on
Form 10-K of Sharper Image Corporation for the year ended January 31, 2002.
/s/ Deloitte & Touche LLP
San Francisco, California
April 30, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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