Class-action Suit Alleges Sharper Image Defrauded Investors

Stephen Barrett, M.D.


Sharper Image Corporation is being sued by shareholders who believe that its management withheld information in order to maintain the price of the company's stock. The complaint, which names chairman/CEO Richard Thalheimer and three other officers as defendants, alleges:

On August 5, when Sharper Image announced that its second quarter earnings would be only 5¢ per-share, the price of its shares plummeted 23%. Plaintiff seeks to recover damages on behalf of all who purchased Sharper Image common stock between February 5 and August 4, 2004.


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA

FEDERAL CLAIMS

ROSENBAUM CAPITAL, LLC, On Behalf of
Itself and All Others Similarly Situated,

Plaintiff,

vs.

SHARPER IMAGE CORPORATION,
RICHARD THALHEIMER, TRACY WAN,
ANTHONY FARRELL and JEFFREY FORGAN,

Defendants.


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No.

CLASS ACTION

COMPLAINT FOR VIOLATION OF THE
FEDERAL SECURITIES LAWS

 

 

 

DEMAND FOR JURY TRIAL

SUMMARY AND OVERVIEW

1. This is a securities class action on behalf of all purchasers of the common stock of Sharper Image Corporation ("Sharper Image" or the "Company") between February 5, 2004 and August 4, 2004 (the ''Class Period''), against Sharper Image and certain of its officers and directors for violations of the Securities Exchange Act of 1934 (the "1934 Act'').

2. Sharper Image is a specialty retailer of products in the electronics, recreation and fitness, personal care, houseware, travel, toy, gifts and other categories. The Sharper Image designs and develops its Sharper Image Design products, while Sharper Image branded products are generally designed by the Company with third parties. It markets and sells its merchandise primarily through three integrated sales channels: The Sharper Image stores; The Sharper Image catalog, which includes revenue from all direct marketing activities and television infomercials; and the Internet.

3. During the Class Period, defendants made false and misleading statements regarding the Company's business and prospects. The true facts, which were known by each of the defendants but concealed from the investing public during the Class Period, were as follows:

(a) The Company businesses, including wholesale, Internet and catalog, were cannibalizing the Company's retail and infomercial sales.

(b) The Company's profitability was being adversely affected by a drastic slow down in the Company's key product—the Ionic Breeze family of air purifiers (there are 9 separate such products). This was partially attributable to the questionable quality of Sharper Image's Ionic Breeze. In fact, independent third parties (including Consumer Reports) found the product unable to perform as defendants claimed, and contrary to defendants' claims (the key reasons for consumers purchasing the product), the product did not remove dust and smoke from the air and may, in fact, release high levels of ozone instead. All of which was eating into already slumping sales. Moreover, the Company's attempt to revitalize growth in this key product through the introduction of the "Professional" Ionic Breeze was a failure. Not only did the 'Professional" version not invigorate sales due to lack of demand, but defendants had failed to timely develop the necessary infomercials for this product sending internal growth projections into a free fall.

(c) When defendants attempted to acquire infomercial blocks of time in early 2004, they learned that these extra blocks of time had already been acquired as a result of the Olympics and the Presidential election. Moreover, the additional costs associated with infomercial time were seriously impacting the Company's margins associated with the Ionic Breeze family of products.

(d) As a result of (a)-(c) above, the Company's Q2 2004 projections of $0.09-$0.11 earnings per share ("EPS") were grossly overstated.

4. As a result of the defendants' false statements, Sharper Image stock traded at inflated levels during the Class Period, whereby the Company's top officers and directors sold more than $18 million worth of their own shares.

JURISDICTION AND VENUE

5. Jurisdiction is conferred by §27 of the 1934 Act. The claims asserted herein arise under §§10(b) and 20( a) of the 1934 Act and Rule 10b- 5.

6. (a) Venue is proper in this District pursuant to §27 of the 1934 Act. Many of the false and misleading statements were made in or issued from this District.

(b) Sharper Image's executive offices are located in San Francisco, California, where the day-to-day operations of the Company are directed and managed.

THE PARTIES

7. Plaintiff Rosenbaum Capital, LLC purchased Sharper Image common stock as described in the attached certification and was damaged thereby.

8. Defendant Sharper Image is a specialty retailer of products in the electronics, recreation and fitness, personal care, houseware, travel, toy, gifts and other categories. The Sharper Image designs and develops its Sharper Image Design products, while Sharper Image branded products are generally designed by the Company with third parties. It markets and sells its merchandise primarily through three integrated sales channels: The Sharper Image stores; The Sharper Image catalog, which includes revenue from all direct marketing activities and television infomercials; and the Internet.

9. Defendant Richard Thalheimer ("Thalheimer") is Chairman, Chief Executive Officer and founder of Sharper Image. During the Class Period, Thalheimer sold more than $15.5 million worth of his Sharper Image stock.

10. Defendant Tracy Wan ("Wan") is President and Chief Operating Officer of Sharper Image. During the Class Period, Wan sold $870,000 worth of her Sharper Image stock.

11. Defendant Anthony Farrell ("Farrell") is Senior Vice President of Creative Services of Sharper Image. During the Class Period, Farrell sold $854,000 worth of his Sharper Image stock.

12. Defendant Jeffrey Forgan ("Forgan") was Chief Financial Officer of Sharper Image. During the Class Period, Forgan sold $848,674 worth of his Sharper Image stock.

13. The individuals named as defendants in ¶¶9-12 are referred to herein as the "Individual Defendants." The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of Sharper Image's quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them but not to the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. The Individual Defendants are liable for the false statements pleaded herein at ¶¶21, 25-26 and 29, as those statements were each "group-published" information, the result of the collective actions of the Individual Defendants.

SCIENTER

14. In addition to the above-described involvement, each Individual Defendant had knowledge of Sharper Image's problems and was motivated to conceal such problems. Forgan, as CFO, was responsible for financial reporting and communications with the market. Many of the internal reports showing Sharper Image's forecasted and actual growth were prepared by the finance department under Forgan's direction. Defendants Thalheimer, as CEO and Chairman, and Wan, as President and COO, were responsible for the financial results and press releases issued by the Company. Each Individual Defendant sought to demonstrate that he or she could lead the Company successfully and generate the growth expected by the market.

15. Defendants were motivated to engage in the fraudulent practices alleged herein in order to obtain insider trading proceeds of more than $18 million.

FRAUDULENT SCHEME AND COURSE OF BUSINESS

16. Each defendant is liable for (i) making false statements, or (ii) failing to disclose adverse facts known to him or her about Sharper Image. Defendants' fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Sharper Image common stock was a success, as it (i) deceived the investing public regarding Sharper Image's prospects and business; (ii) artificially inflated the price of Sharper Image common stock; (iii) allowed defendants to obtain larger bonuses which were directly tied to the performance of Sharper Image shares; (iv) allowed defendants to arrange to sell and actually sell in excess of $18 million worth of Sharper Image stock at artificially inflated prices; and (v) caused plaintiff and other members of the Class to purchase Sharper Image common stock at inflated prices.

BACKGROUND

17. Sharper Image is a specialty retailer of products in the electronics, recreation and fitness, personal care, houseware, travel, toy, gifts and other categories. The Sharper Image designs and develops its Sharper Image Design products, while Sharper Image branded products are generally designed by the Company with third parties. It markets and sells its merchandise primarily through three integrated sales channels: The Sharper Image stores; The Sharper Image catalog, which includes revenue from all direct marketing activities and television infomercials; and the Internet.

18. The Company's business is highly seasonal, with sales peaks in the end-of-year holiday shopping season as well as for Mother's Day, Father's Day and graduation gift-giving. Thus, the Company's Q2 (ending July 31) was an important quarter for the Company. Revelations of poor Q2 2004 performance thus would translate into a dramatic drop in share price and erode the value of defendants' Sharper Image shareholdings. Defendants were thus intent on selling their own shares before Wall Street was aware of the fundamental problems plaguing the Company's profit centers. In fact, by Spring of 2004, defendants were aware of several fundamental issues which would cause sales of the Ionic Breeze to lag (and be less profitable).

19. The slowing growth in this key product family was exacerbated in 2004 by less productive advertising, as well as the greater volume of Ionic Breeze products being sold through the wholesale channel. These wholesale sales cannibalized sales through the normal outlets, and eroded the gross and operating margin contributions of this key product. Thus, the Company was experiencing reduced profitability on Sharper Image's key product. Couple that with the fact that the Company barely breaks even on EPS in its non-holiday quarters, and only a few basis points reduction in operating margin could have a severe negative impact on EPS in Q2.

20. During early 2004 there was a mix shift from retail sales to wholesale sales. The Company was experiencing operating margin erosion due to poor availability of TV advertising space, particularly during Q2. TV ad space (the residual type that Sharper Image typically buys for its infomercials and commercials) became a rare commodity during Q2 as aggressive early election ads soaked up excess airtime capacity. The lack of availability of inexpensive airtime meant that the

Company would advertise less on TV than it had hoped and as a result, the ads were generating lower sales of its key Ionic Breeze product than the Company had claimed.

DEFENDANTS' FALSE AND MISLEADING
STATEMENTS ISSUED DURING THE CLASS PERIOD

21. On February 5,2004, the Company issued a press release entitled "Sharper Image Reports January 21 Percent Increase in Comparable Store Sales, Total Company Sales Increase 40 Percent, Raises Earnings Guidance." The press release stated in part:

For the fiscal year ended January 31, 2004, total Company sales increased 26 percent to $630.1 million from last year's $498.7 million which was a 32 percent increase in [sic] over the prior year. Total store sales increased 29 percent to $379.3 million from $293.8 million in the prior year; comparable store sales increased 15 percent. Catalog sales increased 15 percent to $155.7 million from the last year's $135.7 million. Internet sales increased 37 percent to $95.1 million from last year's $69.2 million.

Related to the growth of our corporate incentive sales our January, fourth quarter and fiscal year's sales for current periods and comparable prior periods include reclassification between sales and related cost of good sold for certain corporate incentive program allowances. The reclassification does not affect net income for any period.

Operational discussion

"We are pleased with the high growth of January and fourth quarter sales," said Richard Thalheimer, founder, chairman and chief executive officer. "The outstanding increase in sales for the high- volume months of November and December continued through the end of January; particularly outstanding was January's comparable store sales increase of 21 percent on top of last January's 37 percent comparable store sales increase," Mr. Thalheimer continued.

"We had excellent sales momentum in all our sales channels -- stores, catalog, Internet, wholesale and corporate incentive business. Our Sharper Image proprietary and brand products proved appealing to a broad customer base across diverse product categories at popular price points. We built on our strong sales trend earlier in the fourth quarter with increased multimedia advertising and our inventory was well positioned to support the high growth," said Mr. Thalheimer.

* * *

"We are increasing our fourth quarter guidance to $1.38 to $1.40 earnings per diluted share; this is higher than our previous guidance of $1.34 to $1.38 earnings per diluted share. The improved guidance is a 10 percent mid-point increase over 2002's fourth quarter earnings of $1.26 per diluted share. Our guidance for the full year is increasing to $1.63 to $1.65 earnings per diluted share, a 36 percent mid-point increase over last year's $1.21 earnings per diluted share. Our net earnings (based on the mid-point of our guidance) are expected to increase 34 percent for the fourth quarter and 58 percent for tre year -- greater percentage increases than the earnings per share because of the increased number of shares outstanding resulting from our May 2003 follow-on offering.

22. This press release raising the Company's earnings guidance caused the Company's shares to trade above $39 per share.

23. With the Company's shares trading at new highs, the Company's Chairman and CEO, defendant Thalheimer, quickly extracted $7.5 million in insider trading profits, selling 222,200 Sharper Image shares at $32.82-$36.00 per share between February 11, 2004 and April 16, 2004.

24. In addition, on February 10 and 11, 2004, defendant Farrell sold 24,400 shares of Sharper Image stock at $35.00 per share for proceeds of $854,000, and on April 15, 2004, defendant Forgan sold 11,400 Sharper Image shares at $32.69 per share for proceeds of $372,674.

25. On April 15, 2004, the Company filed its annual report on Form 10-K with the SEC. The section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" stated in part:

Overview

The Sharper Image is a multi-channel specialty retailer of innovative, high quality products that are useful and entertaining and are designed to make life easier and more enjoyable. Our unique assortment of products offers design, creativity and technological innovation, in addition to fun and entertainment. We market and sell our merchandise primarily through three integrated sales channels: The Sharper Image stores, The Sharper Image catalog, which includes revenue from all direct marketing activities and television infomercials, and the Internet. We also market to other businesses through our corporate sales, where revenues are recorded in each of our three sales channels and wholesale operations.

Our total revenues increased 26.0% t> $647.5 million in the year ended January 31,2004 (fiscal 2003) from $513.8 million in the year ended January 31, 2003 (fiscal 2002). This increase was due primarily to the popularity of our Sharper Image Design and Sharper Image branded products, including our air purification line of products, the opening of 22 net new stores, a comparable store sales increase of 15.3%, and an increase in our multimedia advertising which we believe increased sales in all selling channels.

* * *

Revenue recognition. We recognize revenue at the point of sale at our retail stores and at the time of customer receipt for our catalog and direct marketing sales, including the Internet. We recognize revenue for sales to resellers of sales made on a wholesale basis when the products are shipped, which is the time title passes to the purchaser. We record estimated reductions to revenue for customer returns based on our historical return rates. Revenues are recorded net of sale discounts and other rebates and incentives offered to customers. Deferred revenue represents merchandise certificates, gift cards and rewards cards outstanding and unfilled cash orders at the end of the fiscal period. Delivery revenue is recognized at the time of customer receipt.

Merchandise inventories. We write down inventory for estimated obsolescence on 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 writedowns may be required.

Accounts receivable. Counterparties to our accounts receivable include credit card issuers, corporate marketing incentive customers, wholesale customers, installment plan customers for purchases of a limited number of products, merchandise vendors, and landlords from whom we expect to receive amounts due. We record 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.

Store closure reserves. We record 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.

Other accounting estimates inherent in the preparation of our financial statements include estimates associated with our evaluation of the recoverability of deferred tax assets as well as those used in the determination of liabilities related to litigation, product liability, and taxation. 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. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

As discussed in the Notes to the Financial Statements, we are involved in litigation incidental to our business, the disposition of which is expected to have no material effect on our 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 our assumptions related to these proceedings. We accrue our 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 our strategies change, it is possible that our best estimates of our probable liability in these matters may change.

26. On May 20, 2004, the Company issued a press release entitled "Sharper Image Reports First Quarter Record Revenues and Net Earnings, Earnings Per Share Increased 160 Percent, Revenues Increase 34 Percent." The press release stated in part:

Sharper Image Corporation today reported record revenues and earnings for the first quarter of its fiscal year ending January 31, 2005. The Company said first quarter total revenues increased 34 percent and first quarter net earnings per diluted share increased 160 percent to $0.13 from the prior's years [sic] $0.05 per diluted share.

First-quarter highlights

-- Record first-quarter earnings of $0.13 per diluted share, a 160 percent increase -- Total revenues increase 34 percent

-- Comparable store sales increase eight percent

-- Total store sales increase 26 percent

-- Catalog/direct marketing sales increase 40 percent

-- Internet sales increase 58 percent

For the fiscal first quarter ended April 30, 2004, net earnings of $0.13 per diluted share, or $2.1 million, is a 160 percent increase over last year's first quarter earnings of $0.05 per diluted share and a 211 percent increase in net earnings over last year's first quarter net earnings of $0.7 million. The total net earnings increase is greater than the per share increase because of the additional 2.1 million shares issued in the May 2003 follow-on offering. Company revenues increased 34 percent to $156.4 million from last year's $116.3 million. Total store sales increased 26 percent to $81.4 million from $64.8 million in the prior first quarter; comparable store sales increased eight percent. Catalog/direct marketing sales increased 40 percent to $45.1 million from last year's first quarter of $32.2 million. Internet sales increased 58 percent to $26.2 million from last year's first quarter of $16.6 million.

Operations discussion

"We are pleased with the performance that resulted in the first quarter record revenues and net earnings," said Richard Thalheimer, founder, chairman and chief executive officer. "The eight percent Comparable store sales increase is very impressive considering it is on top of last year's first quarter 18 percent comparable store sales gain. Our Internet sales and catalog/direct marketing sales (which include wholesale) each enjoyed stellar first-quarter performance, with Internet sales increasing 58 percent and catalog/direct marketing sales increasing 40 percent.

"Our business continues to be driven principally by Sharper Image Design proprietary products and Sharper Image brand merchandise. The Sharper Image brand has proved very popular among a growing consumer base, across a diverse range of categories and price points, supported by aggressive multichannel advertising," Mr. Thalheimer stated. "We opened five new stores in the first quarter and we are on track to achieve our goal of 15 to 20 percent new store unit growth, with a target of 26 stores opened during the fiscal year," Mr. Thalheimer further stated.

"Our record first quarter earnings per share of $0.13 per diluted share is a great start to our fiscal year. We finished the quarter with a strong balance sheet; we have no long term debt and our inventory levels are appropriate to support our increased sales and growing retail store base.

"Our earnings guidance for the second quarter is a range of$0.09 to $0.11 per diluted share, a significant increase over last year's second quarter earnings of $0.05 per diluted share. The earnings per share guidance is based upon an anticipated lowsingle digit comparable store sales increase, which is on top of last year's second quarter comparable store sales increase of 14 percent; a gross margin rate improvement of 30 to 50 basis points; improved operating expense leverage of 30 to 40 basis points; and continued strong multimedia advertising. Our earnings per share guidance for the full year is a record $2.00 to $2.04 per diluted share. The midpoint of our full year guidance is a 22 percent increase over last year's $1.65 per diluted share," Mr. Thalheimer concluded.

27. In response to defendants' earnings guidance, the Company's share price started to climb, from $26.60 on May 20,2004 to over $31 per share in late June and early July. Defendant Thalheimer seized this as an opportunity to raise an additional $7.5 million in insider trading proceeds, selling 272,942 Sharper Image shares at $26.39-$31.02 per share between May 24,2004 and July 1,2004.

28. In addition, on June 4, 2004, defendant Forgan sold 17,000 shares of Sharper Image stock at $28.00 per share for insider trading proceeds of $476,000, and on June 9, 2004, defendant Wan sold 30,000 Sharper Image shares at $29.00 per share for insider trading proceeds of $870,000.

29. On July 8,2004, Sharper Image reported its June total company sales in a release which stated in part:

"We're please with our record sales performance for the important Father's day and graduation gift-giving season," said Richard Thalheimer, founder, chairman and chief executive officer. "The June's sales [sic] increases come on top of excellent increases in the prior year. Total Company June sales were up 23 percent on top of the prior June's 28 percent gain; catalog/direct marketing sales (which includes TV infomercial and wholesale sales) were up 42 percent on top of last June's 19 percent; Internet sales were up a substantial 17 percent over a huge 54 percent increase last June," noted Mr. Thalheimer. "The wholesale component of catalog sales/direct marketing enjoyed another outstanding month. June's comparable store sales increase of two percent was on top of the prior year's excellent 14 percent comparable store increase."

* * *

"Sales volume and growth in new stores, as well as in our other sales channels, including our wholesale business, continues to be comprised mainly of Sharper Image Design proprietary and Sharper Image brand products; these exclusive products account for more than 70 percent of our sales," Mr. Thalheimer said.

"Sharper Image brand merchandise has proven to be widely appealing to an ever growing consumer base, across a diverse range of products for tre home, office, travel, play and personal care, and at prices that represent an excellent value to the customer," Mr. Thalheimer concluded.

30. Between July 13,2004 and July 20, 2004, defendant Thalheimer sold an additional 7,500 shares of Sharper Image stock at $29.05-$31.08 per share for insider trading proceeds of $228,025.

31. Then, On August 5, 2004, Sharper Image announced that Q2 2004 results would be much worse than previously represented, with EPS of only $0.03-$0.05 versus prior representations of $0.09-$0.11. The release stated in part:

"While our July's sales increases come on top of excellent increases in the prior year, they were below our expectations," said Richard Thalheimer, founder, chairman and chief executive officer. "Total Company July sales were up 18 percent on top of the prior July's 20 percent gain; catalog/direct marketing sales (which includes TV infomercial and wholesale sales) were up 27 percent over last year's flat sales increase; Internet sales were up 14 percent over a huge 57 percent increase last July," noted Mr. Thalheimer. "On a preliminary basis the Company believes that sales and gross margin were adversely impacted by less than anticipated television infomercial media availability in July, combined with generally lower sales returns on direct response media spending and lighter customer traffic at retail locations . We believe that increased travel, good summer weather and competition generally from election related media spending contributed to this lower return on our advertising expenditures ."

* * *

"We are updating our earnings guidance for the second quarter to a range of $0.03 to $0.05 per diluted share. This compares with last year's second quarter earnings of $0.05 per diluted share. The earnings per share guidance is based on our lower than expected sales for the second quarter in our retail channels resulting in less productive advertising and lower gross margin rate. Based on our preliminary second quarter results, we believe it is also prudent to lower our full year earnings per share guidance to $1.83 to $1.87 per diluted share, a decrease from our previous full year guidance of $2.00 to $2.04 per diluted share. The midpoint of our revised full year guidance would be record annual earnings and a 12 percent increase over last year's $1.65 per diluted share," Mr. Thalheimer concluded.

32. On this new, Sharper Image shares fell 23%. Analysts noted the adverse impact of too little commercial time:

Infomercials for the company's Ionic Breeze purifier are a major customer draw for Sharper Image, said Susquehanna Financial Group analyst Thomas Filandro, who rates the company's shares "buy" and doesn't own any. Sales of the item make up as much as 30 percent of Sharper Image's total revenue, Filandro said.

"Without question, the availability of infomercial time has been a challenge for them," Filandro said in an interview from New York. "Their Ionic Breeze is such a category driver that it's having an impact," on earnings, he said.

33. Subsequently, on November 4, 2004, Bloomberg reported:

Sharper Image Group, the seller of lonic Breeze air purifiers, robotic vacuum cleaners and wireless speakers, said its fiscal third-quarter net loss was wider than expected. The shares fell 10 percent.

Sharper Image said it had a loss of 19 cents to 23 cents a share in the period ended Oct. 31. The San Francisco-based company in August had forecast a loss of 8 cents to 11 cents a share. It had net income of 6 cents a share a year earlier.

The company said sales for the quarter were at the lower end of its expectations because it took longer to process merchandise through West Coast ports. Sharper Image also said it had to cut prices on more products.

The shares fell $2.20 to $19.48 . . . .

34. On November 18, 2004, the Company issued a press release announcing the resignation of its Chief Financial Officer, defendant Forgan. The press release stated in part:

Sharper Image Corporation today confirmed earnings guidance for the fourth quarter and fiscal year ending January 31, 2005, and announced the resignation of the chief financial officer.

The Company's guidance for the fourth quarter is $1.33 to $1.38 net earnings per diluted share, compared with last year's fourth quarter net earnings of $1.40 per diluted share. The guidance for fourth quarter's earnings per diluted share is based on the following assumptions: total Company revenues to increase 15 to 18 percent, comparable store sales to decrease in mid-single digit range with the November comparable store sales with the largest decrease; catalog circulation increasing low double-digits and catalog page circulation increasing approximately 15 percent; advertising expenses increasing slightly faster than sales increases; merchandise gross margin decreasing 200 basis points and overall operating expenses at approximately 43 percent of revenue.

The revised Company guidance for the fiscal year is $1.29 to $1.34 net earnings per diluted share, compared to last year's $1.65 per diluted share.

35. On April 8, 2005, the Company issued a press release entitled "Sharper Image Completes Accounting Review, Expects Non-Cash Adjustments, Updates Guidance for Fiscal Year 2004." The press release stated in part:

Management and the Audit Committee of the Board of Directors of the Company concluded on April 4, 2005 that the Company's financial statements in the first three interim quarters of the fiscal year ended January 31, 2005, and in each of the four quarters and fiscal year ended January 31, 2004, and the fiscal year ended January 31, 2003, should be restated to correct its accounting for the matters described above. The Company's previously filed financial statements and related independent audit reports should no longer be relied upon. The Company currently believes that these adjustments will reduce net income (on an after-tax basis) by approximately $500 thousand for the first nine months of the fiscal year ended January 31,2005; by approximately $2.0 million for fiscal year ended January 31, 2004; and by approximately $700 thousand for fiscal year ended January 31, 2003.

The Company's beginning retained earnings will be decreased by approximately $1.3 million for the cumulative adjustment of all periods prior to fiscal year ended January 31, 2003.

36. The true facts, which were known by each of the defendants but concealed from the investing public during the Class Period, were as follows:

(a) The Company businesses, including wholesale, Internet and catalog, were cannibalizing the Company's retail and infomercial sales.

(b) The Company's profitability was being adversely affected by a drastic slow down in the Company's key product—the Ionic Breeze family of air purifiers (there are 9 separate such products). This was partially attributable to the questionable quality of Sharper Image's Ionic Breeze. In fact, independent third parties (including Consumer Reports) found the product unable to perform as defendants claimed, and contrary to defendants' claims, the product did not remove dust and smoke from the air and may, in fact, release high levels of ozone instead. All of which was eating into already slumping sales. Moreover, the Company's attempt to revitalize growth in this key product through the introduction of the "Professional" Ionic Breeze was a failure. Not only did the "Professional" version not invigorate sales due to lack of demand, but defendants had failed to timely develop an infomercial for this product sending internal growth projections into a free fall.

(c) When defendants attempted to acquire infomercial blocks of time in early 2004, they learned that these extra blocks of time had already been acquired as a result of the Olympics and the Presidential election. Moreover, the additional costs associated with infomercial time were seriously impacting the Company's margins associated with the Ionic Breeze family of products.

(d) As a result of (a)-(c) above, the Company's Q2 2004 projections of $0.09-$0.11 EPS were grossly overstated.

COUNT I
For Violation of §10(b) of the 1934 Act and Rule 10b-5
Against All Defendants

37. Plaintiff incorporates ¶¶1-36 by reference.

38. During the Class Period, defendants disseminated or approved the false statements specified above, which they knew or deliberately disregarded were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

39. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(c) Engaged in acts, practices, and a course of business that operated as a fraud or deceit upon plaintiff and others similarly situated in connection with their purchases of Sharper Image common stock during the Class Period.

40. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Sharper Image common stock. Plaintiff and the Class would not have purchased Sharper Image common stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.

41. As a direct and proximate result of these defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their purchases of Sharper Image common stock during the Class Period.

COUNT II
For Violation of §20(a) of the 1934 Act
Against All Defendants

42. Plaintiff incorporates ¶¶1-41 by reference.

43. The Individual Defendants acted as controlling persons of Sharper Image within the meaning of §20(a) of the 1934 Act. By reason of their positions as officers and/or directors of Sharper Image, and their ownership of Sharper Image stock, the Individual Defendants had the power and authority to cause Sharper Image to engage in the wrongful conduct complained of herein. Sharper Image controlled each of the Individual Defendants and all of its employees. By reason of such conduct, the Individual Defendants and Sharper Image are liable pursuant to §20(a)of the 1934 Act.

CLASS ACTION ALLEGATIONS

44. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of all persons who purchased Sharper Image common stock on the open market during the Class Period (the "Class"). Excluded from the Class are defendants.

45. The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. Sharper Image had more than 15 million shares of stock outstanding, owned by hundreds if not thousands of persons.

46. There is a well-defined community of interest in the questions of law and fact involved in this case. Questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include:

(a) Whether the 1934 Act was violated by defendants;

(b) Whether defendants omitted and/or misrepresented material facts;

(c) Whether defendants ' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

(d) Whether defendants knew or deliberately disregarded that their statements were false and misleading;

(e) Whether the price of Sharper Image common stock was artificially inflated;

and

(f) The extent of damage sustained by Class members and the appropriate measure of damages.

47. Plaintiff's claims are typical of those of the Class because plaintiff and the Class sustained damages from defendants' wrongful conduct.

48. Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests which conflict with those of the Class.

49. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

PRAYER FOR RELIEF

WHEREFORE, plaintiff prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to FRCP 23;

B. A warding plaintiff and the members of the Class damages, including interest;

C. Awarding plaintiff reasonable costs and attorneys' fees; and

D. A warding such equitable/injunctive or other relief as the Court may deem just and proper.

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: April__, 2005

LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP
PATRICK J. COUGHLIN
100 Pine Street, Suite 2600
San Francisco, CA 94111
Telephone: 415/288-4545
415/288-4534 (fax)

LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP
WILLIAM S. LERACH
DARREN J. ROBBINS
401 B Street, Suite 1600
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)

LAW OFFICES OF MARC S. HENZEL
MARC S. HENZEL
273 Montgomery Avenue, Suite 202
Bala Cynwyd, PA 19004
Telephone: 610/660-8000
610/660-8080 (fax)

Attorneys for Plaintiff

CERTIFICATION OF INTERESTED ENTITIES OR PERSONS

Pursuant to Civil L.R. 3-16, the undersigned certifies that as of this date, other than the named parties, there is no such interest to report.

_______________________________________
ATTORNEY OF RECORD FOR PLAINTIFF
ROSENBAUM CAPITAL, LLC

This page was posted on April 20, 2005.

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