Thursday, February 21, 2008

Board's Ignorance Plays a Role in Sharper Image Bankruptcy Filing

Since August 2007, Sharper Image (SHRP-$0.41) had summarily dismissed notions that it was headed for bankruptcy. Late Tuesday in U.S. bankruptcy court in Wilmington, Delaware, the ailing electronics and specialty gifts retailer buckled, filing for reorganization under Chapter 11 of the bankruptcy code.

In an affidavit, Chief Financial Officer Rebecca L. Roedell said the Company was in a "severe liquidity crisis," hurt by tougher competition, deteriorating gross margins, pending litigation and the volatile credit and financing markets, among other factors.

Sharper Image has seen its sales decline steadily since 2004, and has posted three straight years of net losses (in fiscal 2005 to 2007, with an accumulated deficit of $52.8 million, as of the nine-months ended October 31, 2007).

The multi-channel gadget retailer said it had $251.5 million in assets (with about 40 percent in merchandise inventories) and $199 million in debt as of January 31, but just $700,000 of cash on hand, according to court papers.

The Company deals with more than 650 suppliers and vendors on a credit basis, many of whom, however, have begun to request cash upon delivery. [Ed. note. More than one-third of debt is in current accounts payable.]

Sharper Image is seeking a $60 million loan arranged by Wells Fargo Retail Finance to keep operating.

Last week, Sharper Image named crisis-management expert, Ron Conway, as its new chief executive, replacing direct-marketing/ mail order business veteran, Stephen A. Lightman (appointed less than one-year ago to prop-up flagging sales).

Conway and his New York-based management consultancy, Conway, Del Genio, Gries & Co., LLC (CDG), stand to benefit financially, irrespective of their performance in turning the gadget retailer around.

According to a regulatory filing with the Securities and Exchange Commission on Tuesday, CDG will receive a $100,000 monthly fee plus a 1.0% fee from any restructured debt or assets sold.

There is nothing more frightful than active ignorance. ~ German writer Johan Wolfgang von Goethe (1749-1832)

In hindsight, the writing was in the proxy that Sharper Image would not survive its own ignorance.

The Board had a history of granting contracts of desperation. To wit: "We aim to reward performance, while recognizing that our business performance has been challenging in recent years and that we still need to retain talented executives during difficult times." Sharper Image Compensation Philosophy [2006 Filing]

The Board handed out lucrative compensation packages to Named Executive Officers through the revolving door of leadership at the Company, with no guarantee that a CEO could right the foundering ship.

Stephen Lightman received severance of $1.1 million in salary and a guaranteed bonus of $275,000, for ten-months work.

The separation agreement with founder Richard J. Thalheimer, ousted in September 2007, was even more one-sided. Terms of his Settlement Agreement included, but were not limited to the following amounts: (i) severance in the amount of $1.85 million (including interest payments on severance, too!); (ii) $182,769 for unused vacation time; (iii) continued health coverage for himself and his dependents until his death; (iv) payment of a nonqualified retirement benefit of $3.90 million; (v) an allowance of $300,000 to assist him in renting office space and in securing secretarial assistance for three years; (vi) purchase of 3CPO model and Superman sculpture for $10,000 (which reflects the customary directors’ discount of 50% from the retail price for these sculptures); and (vii) lifetime entitlement to retain his 50% director’s discount card on all goods sold by Sharper Image, up to $50,000 per year (based on the marked retail price of such goods).
In addition, as profiled in a 10Q Detective posting on August 8, 2007, the Company never had Thalheimer sign a non-compete agreement. Today, while Sharper Image struggles to survive, Thalheimer’s new venture, the e-commerce gadget site,, seems to be thriving.

Since hitting an intra-day high of $39.92 a share on February 6, 2004, Sharper Image's stock has plunged 98.9 percent.

If misery has company, misery has company enough. ~ American author Henry David Thoreau (1817-1862)

Directors and Named Executive Officers beneficially own 24.3% of the common stock of Sharper Image. Small comfort to other stakeholders, but some pleasure can be derived from the knowing that the Board’s stupidity will lead to their holdings ultimately being worth no more than pennies a share, too!

The tangible book value is approximately $4.21 a share. However, value investors should not be misled, for promotional discounts to move the approximately $101.4 million in merchandise inventories would probably yield the company no more than $50 –to- $60 million in cash, wiping out most of stockholder equity.

Aside from the net deferred tax assets (related primarily to net operating loss carry forwards) of approximately $90.1 million (as of As of October 31, 2007), there is little of value to any potential buyers. AVOID

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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