<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 17, 1997
REGISTRATION NO. 333-16651
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)
--------------------------
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<S> <C> <C>
DELAWARE 5961 82-0419266
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
--------------------------
ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864, (208) 263-2266
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
DENNIS PENCE, PRESIDENT
COLDWATER CREEK INC.
ONE COLDWATER CREEK DRIVE
SANDPOINT, IDAHO 83864
(208) 263-2266
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS A. BEVILACQUA, ESQ. EDWARD S. ROSENTHAL, ESQ.
BROBECK PHLEGER & HARRISON LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
TWO EMBARCADERO PLACE, 2200 GENG ROAD 350 SOUTH GRAND AVE., 32ND FLOOR
PALO ALTO, CALIFORNIA 94303 LOS ANGELES, CALIFORNIA 90071
(415) 424-0160 (213) 473-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form is to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
COLDWATER CREEK INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Facing Page of Registration Statement and Outside
Front Cover Page of the Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page of the Prospectus; Table of
Contents; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Prospectus Summary; S Corporation Distributions; Use
of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover and Inside Front Cover of the
Prospectus; Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; Dividend Policy;
Capitalization; Selected Financial and Operating
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale; Experts;
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act
Liabilities........................................ Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 17, 1997
2,500,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON
STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE FOR THE COMMON STOCK WILL BE BETWEEN $13.00 AND $15.00 PER SHARE. SEE
"UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NASDAQ NATIONAL
MARKET, UPON COMPLETION OF THIS OFFERING, UNDER THE SYMBOL "CWTR."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
PER SHARE....................................... $ $ $
TOTAL(3)........................................ $ $ $
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</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES ESTIMATED AT $1,000,000, PAYABLE BY THE COMPANY.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
375,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO
PUBLIC, UNDERWRITING DISCOUNT AND PROCEEDS TO COMPANY WILL TOTAL $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO
THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF THE CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST
PAYMENT THEREFOR AT THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT ,
1997.
-------------------
MONTGOMERY SECURITIES WILLIAM BLAIR & COMPANY
, 1997
<PAGE>
[INSIDE FRONT COVER]
[WATERFALL SCENE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE TERMS "COLDWATER CREEK" AND "COMPANY" INCLUDE COLDWATER CREEK INC.
AND INCLUDE THE BUSINESS OF THE COMPANY'S PREDECESSOR. UNLESS OTHERWISE
INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND GIVES RETROACTIVE
EFFECT TO (I) THE REINCORPORATION INTO DELAWARE OF THE COMPANY ON APRIL 17, 1996
AND (II) A 1.67 FOR 1 STOCK SPLIT OF THE COMMON STOCK EFFECTED IN JANUARY 1997.
SEE NOTES 8 AND 12 OF NOTES TO FINANCIAL STATEMENTS. REFERENCES TO "FISCAL YEAR"
REFER TO THE CALENDAR YEAR IN WHICH SUCH FISCAL YEAR COMMENCES. FOR EXAMPLE,
FISCAL 1995 BEGAN ON MARCH 5, 1995 AND ENDED ON MARCH 2, 1996.
THE COMPANY
Coldwater Creek is a specialty direct mail retailer of apparel, gifts and
jewelry. The Company currently markets its merchandise primarily through a
family of four distinctive catalogs. Coldwater Creek targets well-educated,
middle- to upper-income households and seeks to differentiate itself from other
retail and catalog operations by offering exceptional value through superior
customer service and a merchandise assortment that reflects a casual, uniquely
American spirit. The Company believes that the successful execution of its
marketing and merchandising strategies coupled with its high customer service
standards and efficient order entry and fulfillment operations has allowed it to
develop a unique brand identity and strong relationships with its loyal customer
base.
Coldwater Creek's rapid growth has been accompanied by a consistently high
degree of profitability. The Company has increased sales every year since it
commenced operations in 1984 and has been profitable every year since fiscal
1986. Over the past five fiscal years, the Company's net sales have grown at a
compound annual growth rate of 61.8% from $11.1 million to $75.9 million.
Despite significant increases in paper and postage costs in recent years, the
Company's operating income has grown at a compound annual growth rate of 36.8%
from $1.6 million in fiscal 1991 to $5.8 million in fiscal 1995. During fiscal
1995, the Company's mailing list grew 45.2% to include approximately 2.5 million
names.
During the first nine months of fiscal 1996, the Company successfully
introduced a men's apparel catalog, re-merchandised and initiated a Spring
edition of its women's apparel catalog and expanded and broadened its
merchandise offerings in its core catalog. These merchandising changes have
resulted in dramatic growth in sales and profitability. Net sales during the
first nine months of fiscal 1996 grew 90.1% to $84.7 million from $44.6 million
during the same period in fiscal 1995, while operating income grew to $6.2
million from $1.8 million. In addition, the average order increased to $133 in
the first nine months of fiscal 1996 from $91 during the same period in fiscal
1995. At the end of the third quarter of fiscal 1996, the number of active
customers was 947,051, an increase of 292,563 from the end of the third quarter
of fiscal 1995.
During fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996,
the Company hired additional key management personnel and invested $19.7 million
in infrastructure improvements. These investments were made to expand the
Company's distribution facilities, upgrade its telecommunications systems and
install and implement more sophisticated database technologies and management
information systems. Coldwater Creek believes that this timely investment of
capital in its infrastructure has been critical in successfully executing its
customer service-based strategy and supporting its rapid growth.
Coldwater Creek focuses on providing customer service well above industry
standards. All aspects of the Company's operations are designed to provide a
superior catalog buying experience as well as strengthen relationships with
existing and new customers. During fiscal 1995, the Company achieved faster
telephone answer times, lower abandoned call rates, and faster order processing
than industry averages. The Company plans to stimulate future growth through a
variety of strategic initiatives designed to increase catalog circulation, yield
higher customer response rates and expand merchandise offerings. In
3
<PAGE>
addition, the Company believes that significant opportunities exist to expand
its customer base by targeting new members of existing customer households with
additional merchandise offerings and catalog titles.
DECEMBER SALES RESULTS
The Company's net sales for the calendar month of December 1996 were
approximately $30.5 million, an increase of 52.5% over net sales of $20.0
million for the calendar month of December 1995.
THE OFFERING
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<S> <C>
Common Stock offered by the Company............ 2,500,000 shares
Common Stock to be outstanding after the
offering..................................... 9,745,118 shares(1)
Use of proceeds................................ To fund a distribution of approximately
$16.2 million in S corporation earnings,
repay certain outstanding indebtedness and
for working capital and other general
corporate purposes.
Proposed Nasdaq National Market symbol......... CWTR
</TABLE>
- ------------------------------
(1) Excludes (i) 443,067 shares of Common Stock issuable upon exercise of stock
options, outstanding as of November 30, 1996, at an average exercise price
of $6.58 per share and (ii) an additional 668,780 shares of Common Stock
reserved for future issuance under the Company's stock option plan, of which
options to purchase 40,127 shares of Common Stock will be granted to non-
employee directors and options to purchase an estimated 400,000 shares of
Common Stock will be granted to over 75 employees of the Company who have
not received options from the Company in the past, all upon the execution of
the Underwriting Agreement at an exercise price equal to the offering price.
See "Management--1996 Stock Option/Stock Issuance Plan."
------------------------------
REPORTS TO SECURITY HOLDERS
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and an opinion thereon expressed by its independent
public accountants and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
------------------------
Coldwater Creek-Registered Trademark-, SPIRIT OF THE WEST-Registered
Trademark- and ECOSONG-Registered Trademark- are registered trademarks of the
Company. An application has been filed to register the mark MILEPOST FOUR-TM- as
a trademark of the Company. Tradenames and trademarks of other companies
appearing in this Prospectus are the property of their respective holders.
------------------------
NOTWITHSTANDING THE COMPANY'S DRAMATIC GROWTH IN SALES AND PROFITABILITY
DURING RECENT PERIODS, THE COMPANY FACES SIGNIFICANT RISKS SUCH AS INTENSE
COMPETITION, RELIANCE ON ITS CATALOG OPERATIONS AND FLUCTUATIONS IN CONSUMER
PREFERENCES AND CATALOG COSTS, AND, AS A RESULT OF THESE AND OTHER RISKS, THERE
CAN BE NO ASSURANCE THAT THE COMPANY'S HISTORICAL GROWTH IS INDICATIVE OF FUTURE
PERFORMANCE. IN ADDITION, THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND
THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS."
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED(1)
FISCAL YEAR ENDED(1)
--------------------------------------------------------- --------------------
FEB. 29, FEB. 27, FEB. 26, MARCH 4, MARCH 2, DEC. 2, NOV. 30,
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $ 11,085 $ 18,785 $ 31,763 $ 45,223 $ 75,905 $ 44,572 $ 84,710
Gross profit................................. 6,534 11,073 18,258 26,161 43,119 25,274 45,402
Income from operations....................... 1,644 1,726 5,321 4,659 5,763 1,830 6,163
Net income(2)................................ 1,702 1,684 5,352 4,757 5,614 1,643 5,963
PRO FORMA STATEMENT OF OPERATIONS DATA:
Pro forma net income(3)...................... $ 1,021 $ 1,010 $ 3,211 $ 2,854 $ 3,368 $ 986 $ 3,578
Pro forma net income per share(4)............ $ 0.40 $ 0.43
Pro forma shares outstanding(4).............. 8,514 8,331
SELECTED OPERATING DATA:
Net sales growth............................. n/a 69.5% 69.1% 42.4% 67.8% 61.3% 90.1%
Total catalogs mailed (000s)................. n/a 12,273 19,045 31,625 45,868 36,349 63,684
Total active customers(5).................... n/a 247,520 382,862 493,946 747,234 654,488 947,051
Average order (in dollars)(6)................ n/a $ 56.26 $ 72.69 $ 81.85 $ 97.16 $ 91.01 $ 133.28
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(7)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................... $ (3,044) $ 5,091
Total assets.............................................................................. 53,358 57,493
Long-term debt (net of current maturities)................................................ 11,515 15
Stockholders' equity...................................................................... 11,988 30,584
</TABLE>
- ------------------------------
(1) References to a fiscal year refers to the calendar year in which such fiscal
year commences. The Company has a 52/53 week fiscal year that ends on the
Saturday closest to February 28. Fiscal 1994 is the only fiscal year
presented that consists of 53 weeks. References to a nine month period refer
to the 39 weeks ended on the date indicated.
(2) For all periods indicated, the Company has operated as an S corporation and
has not been subject to federal and certain state income taxes.
(3) Pro forma net income reflects historical net income less pro forma income
taxes. Pro forma income taxes are provided at an assumed 40% effective rate,
as if the Company had been a C corporation rather than an S corporation for
the above periods. Prior to the closing of this offering, the Company's S
corporation status will terminate; at that date, the Company will provide a
non-recurring, non-cash charge to earnings to recognize deferred income
taxes in accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"). See "S Corporation Distributions" and Notes 1 and 11 of Notes
to Financial Statements.
(4) Pro forma net income per share is based on the weighted average shares of
Common Stock and stock equivalents outstanding, including actual shares
outstanding, shares deemed to be outstanding and the dilutive effect of
shares issuable under stock options. The shares deemed to be outstanding
represent the number of shares being offered by the Company hereby
sufficient to fund an assumed S corporation distribution of approximately
$14.5 million at March 2, 1996 or approximately $11.9 million at November
30, 1996 (based on the amount of previously undistributed S corporation
earnings at such dates). Supplemental earnings per share for the periods
ended March 2, 1996 and November 30, 1996 would have been $0.40 and $0.40,
respectively, had the Company also assumed issuance of common shares at the
beginning of those periods sufficient to retire the debt outstanding (shares
outstanding would have been approximately 8.5 million and 9.2 million,
respectively). See "S Corporation Distributions."
(5) An "active customer" is defined as a customer who has purchased merchandise
from the Company within the 12 months preceding the end of the period
indicated.
(6) An "order" is defined as the dollar amount of a processed customer invoice
or a pending order on file. The "average order" is calculated by dividing
the aggregate amount of all customer invoices and pending orders processed
in a period by the number of customer orders placed in such period.
(7) As adjusted to reflect (i) the sale of 2.5 million shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$14.00 per share and the application of the estimated net proceeds
therefrom, including the assumed November 30, 1996 distribution of an
estimated $11.9 million to stockholders upon termination of the Company's S
corporation status (further distributions of approximately $4.3 million are
expected to be made related to earnings for the period December 1, 1996
through the assumed termination of the Company's S corporation status) and
the repayment of the $11.5 million outstanding under the long-term revolving
line of credit as of November 30, 1996, and (ii) recognition of
approximately $1.0 million of deferred income taxes for the net effect of
cumulative temporary differences upon termination of the Company's S
corporation status in accordance with SFAS 109. See "S Corporation
Distributions" and "Use of Proceeds."
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS." IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, SET FORTH
BELOW ARE THE PRINCIPAL RISK FACTORS THAT SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS.
RELIANCE ON CATALOG OPERATIONS
The Company's success depends predominately on the success of its catalog
operations, which the Company believes is achieved through the efficient
targeting of its mailings, a high volume of prospect mailing, appropriate shifts
in the Company's merchandise mix and the Company's ability to achieve adequate
response rates to its mailings. Catalog mailings entail substantial paper,
postage, merchandise acquisition and human resource costs, including costs
associated with catalog development and increased inventories, virtually all of
which are incurred prior to the mailing of each catalog. As a result, the
Company is not able to adjust the costs being incurred in connection with a
particular mailing to reflect the actual performance of the catalog. If, for any
reason, the Company were to experience a significant shortfall in anticipated
revenue from a particular mailing, and thereby not recover the costs associated
with that mailing, the Company's financial condition and results of operations
would be adversely affected. In addition, response rates to the Company's
mailings and, as a result, revenues generated by each mailing can be affected by
factors such as consumer preferences, economic conditions, the timing and mix of
catalog mailings and changes in the merchandise mix, several of which may be
outside the Company's control. Further, the Company has historically experienced
fluctuations in the response rates to its catalog mailings. Any inability of the
Company to accurately target the appropriate segment of the consumer catalog
market or to achieve adequate response rates could result in lower sales,
significant markdowns or write-offs of inventory, increased merchandise returns,
and lower margins, which would have a material adverse effect on the Company's
results of operations and financial condition.
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company's growth strategy primarily includes the following components:
increasing catalog circulation, expanding the Company's customer base through
aggressive prospect mailings, introducing expanded catalog and merchandise
offerings, publishing new catalog titles, expanding international sales and
increasing the use of other marketing channels, such as retail stores and the
Internet. The Company's growth strategy involves various risks, including a
reliance on a high degree of prospect mailings, which may lead to less
predictable response rates. The failure of the Company to successfully implement
any or all of its growth strategies would have a material adverse effect on the
Company's financial condition and results of operations.
The Company believes its growth has been attributable in large part to the
Company's success in meeting the merchandise, timing and service demands of an
expanding customer base with certain demographic characteristics. There can be
no assurance that the Company will be able to continually identify and offer new
merchandise that appeals to its customer base or that the introduction of new
merchandise categories or new marketing or distribution strategies, such as the
sale of the Company's merchandise in retail stores or through new catalog
titles, will be successful or profitable, or that any such efforts will achieve
sustainable acceptance in the market. Any substantial inability on the part of
the Company to sustain the growth of its catalog operations and sales, to
maintain its current average order size and response rates, to leverage the
success of existing catalog titles to new merchandise lines, catalogs and retail
stores or to cross sell the Company's merchandise to different members of the
target customer household would have a material adverse effect on the Company's
financial condition and results of operations.
6
<PAGE>
As part of its brand-building strategy, the Company plans to open 6 to 10
additional retail stores over the course of the next five years, including one
such store in Jackson Hole, Wyoming in the second quarter of fiscal 1997. To
date, the Company has had limited experience operating retail stores and has no
experience operating stores outside the vicinity of its headquarters. The cost
of opening a retail store varies dramatically depending on several factors such
as whether the Company purchases or leases the facilities in which the store
will be placed, the size of the store, the location of the store as well as the
attendant differences in the cost of real estate and the type and range of
merchandise to be offered at the store. In addition, retail store operations
entail substantial fixed costs, including costs associated with real estate,
inventory maintenance and staffing. There can be no assurance that the planned
number of stores will be opened, will be opened in a timely manner, or, if
opened, that these stores will be profitable. Failure to successfully implement
this store-based strategy could result in significant write-offs of inventory
and fixtures and would have a material adverse effect on the Company's financial
condition and results of operations.
The Company may need to raise additional funds in order to support greater
expansion, develop enhanced services, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated or seasonal requirements.
In addition, various elements of the Company's growth strategies, including its
aggressive mailing program, its plans to broaden existing merchandise lines
including its private label offerings and its plans to introduce new
merchandise, may require additional capital. There can be no assurance that
funds will be available to the Company on terms satisfactory to the Company when
needed. See "Business--Growth Strategies."
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's revenue and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors including, among other things, the timing of new merchandise and
catalog offerings, recognition of costs or net sales contributed by new
merchandise and catalog offerings, fluctuations in response rates, fluctuations
in paper, production and postage costs and expenses, merchandise returns,
adverse weather conditions that affect distribution or shipping, shifts in the
timing of holidays and changes in the Company's merchandise mix. In addition,
the Company maintains a common industry policy of deferring the recognition of
the costs of catalog development and production until sales are realized on each
mailing and recognizes such costs as sales are realized. Consequently, quarter
to quarter revenue and expense comparisons will be impacted by the timing of the
mailing of the Company's catalogs. Catalog mailings may occur in different
quarters from year to year depending on the performance of third party couriers,
the day of the week on which certain holidays fall and the Company's assessment
of prevailing market opportunities. A portion of the revenue from a catalog
mailing may be recognized in the quarter after the quarter in which the catalog
was mailed and the revenue from a particular catalog offering may be recognized
in a quarter different from the quarter in which the revenue from the offering
was recognized in the previous year.
During the first six months of fiscal 1996, the Company introduced a men's
apparel catalog, re-merchandised and initiated a Spring edition of its women's
apparel catalog and expanded and broadened its merchandise offerings in its core
catalog. These merchanding changes resulted in dramatic growth in the Company's
sales, profitability and average order size. Notwithstanding this dramatic
growth, the Company faces several significant risks such as intense competition,
reliance on its catalog operations and fluctuations in consumer preferences and
catalog costs, and there can be no assurance that such growth will continue. In
addition, this growth should not be considered as an indication of the Company's
future performance.
The Company has experienced, and may continue to experience, seasonal
fluctuations in its sales and operating results, which is typical of many
specialty retailers. In past fiscal years, the Company's net sales and profits
have been heavily reliant on the November and December holiday season. The
Company believes that in the future this seasonality will continue. In
anticipation of increased sales activity during
7
<PAGE>
November and December, the Company incurs significant additional expenses,
including the hiring of a substantial number of temporary employees to
supplement its permanent, full-time staff. If, for any reason, the Company's
sales were to fall below its expectations during November and December, the
Company's financial condition and results of operations would be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly and Seasonal Fluctuations."
LIMITED HISTORY OF OFFERING APPAREL MERCHANDISE
The Company believes that its recent growth has been driven in significant
part by the Company's recent shift toward offering a much greater percentage of
apparel, including private label apparel. In the past two years, the Company has
offered an increasing amount of apparel merchandise in all of its catalogs.
Prior to these efforts, the Company has had limited experience selling apparel
and there can be no assurance that the Company will be able to successfully
continue the integration of an increasing percentage of apparel merchandise into
its merchandise mix and operations. Apparel merchandise, particularly private
label apparel, generally requires longer lead times, increased inventory and
high shipping costs. There can be no assurance that the Company will be able to
accurately or efficiently predict appropriate lead times and inventory levels to
meet consumer demand. As a result of offering increasing amounts of apparel
merchandise, the Company has experienced a significant increase in the level of
back orders for its apparel merchandise. In the event the Company is unable to
satisfy such back orders in a timeframe comparable to the satisfaction of orders
of its other merchandise, such orders may be lost, and delays may result in the
impairment of the Company's customer service reputation. The increase in apparel
merchandise as a percentage of total merchandise, including the Company's
private label apparel offerings, has also had the effect, and may continue to
have the effect, of increasing merchandise return rates. In addition, the
increased offering of apparel merchandise, including the Company's private label
apparel offerings, has and may continue to lead to increased markdowns of
merchandise prices resulting in lower margins. As a result of the shift to a
greater percentage of apparel merchandise, the Company anticipates that its
gross profit margins will not return to historical levels. The Company plans to
seek alternative methods for disposing of an anticipated increase in the volume
of clearance merchandise (such as outlet stores). This increasing volume may
make it difficult for the Company to realize its current margins on clearance
merchandise. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
MERCHANDISE RETURNS
As part of its customer service commitment, the Company maintains a liberal
merchandise return policy which allows customers to return any merchandise,
virtually at any time and for any reason, and regardless of merchantable
condition. The Company makes allowances in its financial statements for
anticipated merchandise returns based on historical return rates. There can be
no assurance that actual merchandise returns will not exceed the Company's
allowances. In addition, because the Company's allowances are based on
historical return rates, there can be no assurance that the introduction of new
merchandise in existing catalogs or the introduction of new catalogs, changes in
the merchandise mix or other factors will not cause actual returns to exceed
return allowances. Any significant increase in merchandise returns or
merchandise returns that exceed the Company's allowances could materially
adversely affect the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PAPER, POSTAGE AND SHIPPING COSTS
Paper and postage, as well as packaging and shipping supplies, are
significant cost components of the Company's catalog operations. The Company's
paper costs have historically been quite volatile. In particular, the Company's
paper costs increased dramatically in 1995. Although paper prices stabilized
late in 1995 and declined in 1996, paper prices have historically been cyclical
and any future increases, despite
8
<PAGE>
any offsetting measures implemented by the Company, may have an adverse effect
on the Company's financial condition and results of operations. Postage for
catalog mailings is also a significant expense of the Company and effective
January 1, 1995, postage rates for mailing the Company's catalogs in the U.S.
increased approximately 14%. The Company generally mails its catalogs by third
class mail service. Postage prices increase periodically and can be expected to
increase in the future. Further, although the Company mails the majority of its
merchandise through the U.S. Postal Service, the Company also maintains a
contract with Federal Express for the delivery of its merchandise. There can be
no assurance that, once this contract expires or is terminated, the Company will
be able to negotiate similar or better terms with Federal Express or another
shipping company or that the resulting contract(s) will be on terms favorable to
the Company. Any inability of the Company to secure suitable or commercially
favorable contracts for the delivery of its merchandise could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANAGEMENT OF EXPANDING OPERATIONS
The Company's growth has resulted in an increased demand on the Company's
managerial, operational and administrative resources. The Company has recently
invested significant resources in physical plant, management information systems
and telephone infrastructure and has hired additional management personnel.
However, in order to manage currently anticipated levels of future demand, the
Company will be required to continue, among other things, to (i) improve and
integrate its management information systems and controls, including inventory
management, (ii) expand its distribution capabilities and (iii) attract and
retain qualified personnel, including middle management. In addition, there can
be no assurance that any upgrades, improvements and expansions in the Company's
information or telephone systems or its distribution facilities and operations
will increase the productivity or efficiency of the Company's operations or that
the same will be adequate to meet the present or future needs of the Company.
Continued growth could result in a strain on the Company's management,
financial, merchandising, marketing, distribution and other resources and the
Company may experience operating difficulties, including difficulties in
training and managing an increasing number of employees, difficulties in
obtaining sufficient materials and manufacturing capacity to produce its
merchandise, problems in upgrading its management information systems and delays
in production and shipments. There can be no assurance that the Company will be
able to manage future growth effectively and any failure to manage growth
effectively could have a material adverse effect on the Company's results of
operations and financial condition. The inability of the Company to respond to
and manage these changing business conditions could have a material adverse
impact on the Company. See "Business--Growth Strategies."
COMPETITION
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new competitors
as well as increased competition from established companies. Although the
Company believes that it does not compete directly with any single company with
respect to its entire range of merchandise, within each merchandise category the
Company has significant competitors and may face new competition from new
entrants or existing competitors who focus on market segments currently served
by the Company. These competitors include large retail operations, including
some with catalog operations, other catalog and direct marketing companies and
international competitors. In addition, since fiscal 1995, the Company has
offered an increasingly higher volume and percentage of apparel merchandise.
With respect to the apparel merchandise offered by the Company, the Company is
in direct competition with more established catalog operations, some with
substantially greater experience in selling apparel merchandise and which may
focus on prospective customers sharing some of the demographic characteristics
of the Company's customers. Any failure on the part of the Company to
successfully market its apparel merchandise or compete effectively against such
competitors would have a material adverse effect on the Company's growth and
could adversely affect the
9
<PAGE>
Company's financial condition and results of operations. Many of these
competitors are larger and have significantly greater financial, marketing and
other resources than the Company. Increased catalog mailings by the Company's
competitors may adversely affect response rates to the Company's own catalog
mailings. In addition, because the Company sources its merchandise from
suppliers and manufacturers located in the United States, where labor and
production costs may be higher than in foreign countries, there can be no
assurance that the Company's merchandise will or can be competitively priced
when compared to merchandise offered by other retailers. There can be no
assurance that the Company will be able to maintain or increase its market share
in the future. The failure of the Company to compete successfully would
materially and adversely affect the Company's financial condition and results of
operations. See "Business--Competition."
CHANGING CONSUMER PREFERENCES; GENERAL ECONOMIC CONDITIONS
The Company believes that its merchandise appeals to an increasing consumer
interest in casual and relaxed styles. However, there can be no assurance that
this belief is correct or that such interest will continue. Any change in these
trends could have a material adverse effect on the Company's results of
operations and financial condition. In addition, all of the Company's
merchandise is subject to changing consumer preferences. A shift in consumer
preferences away from the merchandise which the Company offers could have a
material adverse effect on the Company's results of operations and financial
condition. The Company's future success depends in part on its ability to
anticipate and respond to changes in consumer preferences and there can be no
assurance that the Company will respond in a timely or commercially appropriate
manner to such changes. Failure to anticipate and respond to changing consumer
preferences could lead to, among other things, lower sales of the Company's
products, significant markdowns or write-offs of inventory, increased
merchandise returns, and lower margins, which would have a material adverse
effect on the Company's results of operations and financial condition. The
Company's business is sensitive to regional changes in customers' spending and
discretionary income patterns which, in turn, are controlled to a large extent
by prevailing economic conditions. Adverse economic conditions in one or more
regions in which it has significant sales could have a material adverse effect
on sales of the Company's merchandise and, as a result, on the Company's
financial condition and results of operations.
POTENTIAL DISRUPTIONS IN THE COMPANY'S ABILITY TO FULFILL ORDERS
The Company's ability to provide superior customer service and efficiently
fulfill orders and distribute catalogs depends, to a large degree, on the
efficient and uninterrupted operation of its two call centers, one distribution
center, management information systems and on the timely performance of third
parties such as shipping companies and the United States Postal Service. Any
material disruption or slowdown in the Company's order processing or fulfillment
systems resulting from strikes or labor disputes, telephone down times,
electrical outages, mechanical problems, human error or accidents, fire, natural
disasters, adverse weather conditions or comparable events could cause delays in
the Company's ability to receive and distribute orders and may cause orders to
be lost or to be shipped or delivered late. As a result, customers may cancel
orders or refuse to receive goods on account of late shipments which would
result in a reduction of net sales and could mean increased administrative and
shipping costs. The Company experienced telephone call volumes in excess of its
telephone system capacity during peak portions of one two-day period during
fiscal 1995. Such excess call volume resulted in telephone answer delays and
delays in placing orders. There can be no assurance that telephone call volumes
will not exceed present telephone system capacity and that, as a result,
telephone answer delays and delays in placing orders will not occur. As the
Company's strategies depend in part on maintaining its reputation for levels of
customer service substantially superior to that in the catalog industry, any
impairment of its customer service reputation could have a material adverse
effect on the Company's business. In addition, the Company currently maintains a
single distribution and packaging center at its headquarters in Sandpoint,
Idaho. Any material disruption in or destruction of part or all of the Company's
distribution and packaging center caused by
10
<PAGE>
strike, fire or natural disaster would have a material adverse effect on the
Company's ability to provide the timely delivery of merchandise and its
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends largely on the efforts of its key personnel,
including Dennis and Ann Pence, the Company's founders. Dennis and Ann Pence
have been involved in all aspects of the Company's business, including
marketing, merchandising and operations. The loss of either of their services
would have a material adverse effect on the Company's financial condition and
results of operations. In addition, the Company believes several other key
employees, including Vice President and Chief Financial Officer Don Robson, Vice
President of Merchandising Robin Sheldon, Vice President of Operations Tony
Saulino and other operational, marketing and merchandising personnel are
important to the Company's financial condition and results of operations. The
Company's ability to attract and retain well-qualified key personnel, including,
but not limited to, the above-named individuals, is crucial to the Company's
successful continued operations and expansion, and the loss of any such key
personnel could have a material adverse effect on the Company's financial
condition and results of operations. In addition, the Company's relatively
remote location may make it more difficult to replace key employees who leave
the Company, or to add the employees required to manage the Company's further
growth. See "Management," "Business" and "Principal Stockholders."
MANAGEMENT OF CREDIT CARD PROGRAM; CREDIT RISKS
As part of its brand building strategy, Coldwater Creek offers its customers
a Coldwater Creek credit card. The Company has historically relied on third
party administrative, managerial and monitoring services in connection with the
operation of its credit card program. During the next 12 months, the Company
plans to assume the responsibility for qualifying the Company's credit card
customers and may retain additional or alternative third party service providers
for credit processing. As the Company's credit card program expands, the Company
will increasingly be subject to greater credit risks and risks associated with
forecasting adequate reserves for uncollected or uncollectible amounts. Any
inability on the part of the Company to manage such risks may adversely affect
the Company's operating results. The Company has no prior history of managing
this component of the Company's credit card program or in estimating adequate
reserves in connection therewith. There can be no assurance that the Company
will be able to manage this component of its credit card program effectively or
efficiently or that reserves will be adequate to cover uncollected or
uncollectible amounts.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company intends to increase its catalog mailings in Japan and Canada and
to introduce its catalogs in selected European countries. As a result, the
Company's business is subject to the risks generally associated with doing
business abroad, such as foreign governmental regulations, political unrest and
disruptions or delays in shipments. These factors, among others, could influence
the Company's ability to sell its merchandise in international markets. If any
such factors were to render the conduct of business in a particular country
undesirable or impractical, there could be a material adverse effect on the
Company's results of operations and financial condition. Because the majority of
the Company's sales are in the United States, most of the Company's current
information on customer preferences and buying patterns are based on sales and
customers in the United States. As a result, predicting foreign consumer
preferences may be harder for the Company than predicting United States consumer
preferences. There can be no assurance that the Company's merchandise or
marketing efforts will be successful in foreign markets. Further, because the
Company currently prices its merchandise exclusively in United States dollars
for international sales, fluctuations causing the relative value of the United
States dollar to increase when compared to foreign currency may cause the
Company's merchandise to be perceived as too
11
<PAGE>
expensive relative to its value or competitive merchandise. As a consequence,
sales of the Company's merchandise may be adversely affected.
COLLECTION OF STATE SALES TAXES
Various states have sought to impose on direct marketers the burden of
collecting state sales and use taxes on the sale of merchandise shipped to that
state's residents. The U.S. Supreme Court has held that the various states,
absent Congressional legislation, may not impose tax collection obligations on
an out-of-state mail order company whose only contacts with the taxing state are
the distribution of catalogs and other advertisement materials through the mail,
and whose subsequent delivery of purchased goods is by mail or interstate common
carriers. In November 1995, however, the Supreme Court let stand a decision of
New York's highest state court requiring an out-of-state catalog company to
collect a use tax (including a retroactive assessment, plus interest) on its
mail order sales in the state, where the catalog company's reported contacts
with New York included a limited number of visits by salesforce employees. In
fiscal 1995, 0.9% of the Company's net catalog sales were subject to state sales
tax, all in Idaho. If such legislation (or similar legislation) is ultimately
enacted or if the Company otherwise becomes subject to payment of additional
sales or use tax, the imposition of additional tax collection obligations could
have a material adverse effect on the Company's financial condition and results
of operations.
BENEFITS TO STOCKHOLDERS
The consummation of this offering will result in certain benefits to Dennis
and Ann Pence. The Company will use a portion of the proceeds from this offering
to make a distribution to Dennis and Ann Pence of S corporation retained
earnings as a result of the termination of the Company's S corporation status.
See "S Corporation Distributions."
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER DEVICES
Upon the consummation of this offering, Dennis and Ann Pence will
beneficially own approximately 74.3% of the issued and outstanding shares of
Common Stock of the Company (approximately 71.6% if the underwriters'
over-allotment option is exercised in full). If they were to act in concert,
they would be able to elect all of the Company's directors, increase the
Company's authorized capital stock, dissolve, merge or sell the assets of the
Company, or effect other fundamental corporate transactions requiring
stockholder approval, and generally direct the affairs of the Company. See
"Principal Stockholders." Such control by Dennis and Ann Pence may discourage
certain types of transactions involving an actual or potential change of control
of the Company, including transactions in which the holders of Common Stock
might receive a premium for their shares over prevailing market prices.
Certain provisions of the Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and bylaws (the "Bylaws") of the Company
may be deemed to have anti-takeover effects and may delay, deter or prevent a
change in control of the Company that stockholders purchasing shares in this
offering may consider to be in their best interest. These provisions (i)
classify the Company's Board of Directors into three classes, each of which will
serve for different three-year periods; (ii) provide that only the Board of
Directors or certain members thereof or officers of the Company may call special
meetings of the stockholders; (iii) eliminate the ability of stockholders to
take any action without a meeting; (iv) establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders meetings and (v)
authorize the issuance of "blank check" preferred stock having such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. See "Description of Capital Stock--Preferred Stock,"
"--Certain Effects of Authorized But Unissued Stock" and "--Certain Certificate
of Incorporation and Bylaw Provisions."
12
<PAGE>
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market for the
Common Stock will develop after this offering or that, if developed, it will be
sustained. The initial public offering price of the Common Stock will be
determined by negotiation between the Company and the Underwriters based on
several factors and does not necessarily reflect the market price of the Common
Stock after this offering or the price at which the Common Stock may be sold in
the public market after this offering. See "Underwriting."
The market price for the Common Stock may be significantly affected by such
factors as the Company's quarterly operating results, changes in any earnings
estimates publicly announced by the Company or by analysts, announcements of new
merchandise offerings by the Company or its competitors, seasonal effects on
sales and various factors affecting the economy in general. In addition, the
Nasdaq National Market has experienced a high level of price and volume
volatility and market prices for the stock of many companies have experienced
wide price fluctuations not necessarily related to the operating performance of
such companies.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE REDUCTION OF STOCK PRICE
Assuming the Underwriters do not exercise the over-allotment option,
following this offering the Company will have outstanding 9,745,118 shares of
Common Stock. Of such shares, the 2,500,000 shares of Common Stock offered
hereby will be freely tradeable. Of the 7,245,118 remaining shares, 6,963,260
are held by Dennis and Ann Pence and 281,858 are held by the Dennis C. Pence
Lead Annuity Trust and the Elizabeth Ann Pence Lead Annuity Trust. Dennis and
Ann Pence, together with the Company, have agreed not to sell, contract to sell,
or otherwise dispose of any shares of Common Stock without the consent of
Montgomery Securities for a period of 180 days after the date of this
Prospectus. Upon expiration of such agreements, all of such shares will be
eligible for sale in the public markets in accordance with Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). The Company
currently has outstanding options to purchase a total of 443,067 shares of
Common Stock and may issue additional options to purchase a total of 668,780
shares of Common Stock (or 1,111,847 shares in the aggregate). Upon the
execution of the Underwriting Agreement associated with this offering, options
to purchase an additional 40,128 shares of Common Stock will be granted to non-
employee directors under the Company's automatic option grant program. Of the
shares underlying these options, all are subject to the agreements described
above. Also upon the execution of the Underwriting Agreement, the Company plans
to grant options to purchase an estimated 400,000 shares of Common Stock to over
75 employees of the Company who have not received options from the Company in
the past. Future sales of substantial amounts of Common Stock in the open
market, or the availability of such shares for sale following this offering,
could adversely affect the prevailing market price of the Common Stock. See
"Description of Capital Stock," "Shares Eligible for Future Sale," "Management"
and "Underwriting."
DILUTION
The amount by which the initial public offering price per share of Common
Stock exceeds the pro forma net tangible book value per share after this
offering constitutes dilution to investors in this offering. Investors
purchasing shares of Common Stock in this offering will experience immediate and
substantial dilution in net tangible book value of $10.86 per share (assuming an
initial public offering price of $14.00 per share). See "Dilution."
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<PAGE>
S CORPORATION DISTRIBUTIONS
Since January 4, 1988, until prior to the closing date of the offering, the
Company has been and will be treated for federal and Idaho income tax purposes
as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code"), and comparable tax laws in the State of Idaho. As a
result, the Company's earnings from January 4, 1988 through the date preceding
the date of termination of the Company's S corporation status (the "Termination
Date") have been and will be taxed, with certain exceptions, for federal and
Idaho income tax purposes directly to Dennis and Ann Pence (the "Existing
Stockholders") rather than to the Company. The Termination Date will occur on or
immediately prior to the date of closing of the offering. On the Termination
Date, the Company will become subject to Idaho and federal income taxes and will
adopt Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." See Note 1 of Notes to Financial Statements.
STOCKHOLDER DISTRIBUTIONS. The Company has historically paid distributions
to the Existing Stockholders to enable them to pay their income tax liabilities
as a result of the Company's status as an S corporation and, from time to time,
to distribute previously undistributed accumulated S corporation earnings.
During fiscal 1993, fiscal 1994, fiscal 1995 and the first nine months of fiscal
1996, the Company has made S corporation distributions to the Existing
Stockholders of $1,740,000, $1,387,000, $2,157,000 and $8,500,000 respectively.
Immediately prior to the consummation of the offering, the Existing
Stockholders and the Company intend to enter into an Agreement for Distribution
of Retained Earnings and Tax Indemnification (the "Agreement"). Pursuant to the
Agreement, the Existing Stockholders will receive a distribution (the
"Distribution") of the Company's remaining undistributed accumulated S
corporation earnings, in the form of promissory notes (the "Distribution Notes")
issued by the Company, prior to the Termination Date. The Distribution Notes
will be paid in full promptly after the closing of the offering. Based on the
present estimate of the Termination Date, the Company estimates that the
distribution to be paid will approximate $16.2 million and will be paid from a
portion of the net proceeds of the offering. Purchasers of Common Stock in this
offering will not receive any portion of the Distribution. No additional S
corporation distributions will be made subsequent to the Distribution (although
the Distribution Notes will be paid in full). However, under certain
circumstances, payments may be made to the Existing Stockholders from the
Company to satisfy certain tax liabilities with respect to pre-offering tax
periods resulting from adjustments to the Company's tax returns. In addition,
under certain circumstances, the Existing Stockholders may make payments to the
Company to satisfy any tax liabilities (i) resulting from an unexpected
pre-offering loss of S corporation status and/or (ii) with respect to
post-offering taxable periods for which the Existing Stockholders receive a tax
benefit, provided however that the indemnity provided by the Existing
Stockholders is limited to any federal and state refunds they receive as a
result of a loss of S corporation status or other tax adjustments for such
taxable periods. See "Use of Proceeds" and "Certain Transactions."
ACCOUNTING EFFECT. The termination of the Company's S corporation status
will result in a non-cash, non-recurring charge to earnings in the quarter in
which the offering closes. This charge will reflect the tax effect of cumulative
temporary differences between financial and tax reporting. The actual current
and deferred income tax assets and liabilities and the related income tax
provision will be recorded in the Company's financial statements based on
temporary differences as of the Termination Date currently expected to occur in
the fourth quarter of fiscal 1996, the period in which the Company will elect to
terminate its S corporation status. If the offering had closed and the Company
had terminated its S corporation status on November 30, 1996, the Company
currently estimates the net charge to earnings would have been approximately
$1.0 million. The Company currently estimates that the net charge to be
recognized upon the termination of the Company's S corporation status in the
fourth quarter of fiscal 1996 will be approximately $700,000. The actual amount
of the net charge to earnings will depend on a number of factors, including the
actual closing date of the offering and its effect on the actual S corporation
termination date, seasonality and other factors. Several of these factors are
beyond the control of the
14
<PAGE>
Company and there can be no assurance that the actual net charge to earnings
will not exceed $700,000. Such net charge will have a material adverse impact on
the Company's reported results of operations for the quarter and year in which
the offering closes. See Notes 1 and 11 of Notes to Financial Statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be $31.5 million ($36.4 million if
the Underwriters' over-allotment option is exercised in full), based upon an
assumed initial public offering price of $14.00 per share and after deducting
underwriting discounts and estimated offering expenses. The Company intends to
use approximately $16.2 million of the net proceeds to pay the Distribution
Notes to the Existing Stockholders in full (representing a distribution of S
corporation earnings to the Existing Stockholders). See "S Corporation
Distributions."
The Company intends to use the remaining net proceeds of this offering,
estimated to be $15.3 million, to repay outstanding indebtedness due March 31,
1999 of approximately $13.6 million (at an interest rate, at the option of the
Company, which is five basis points below the prevailing bank reference rate or
LIBOR plus one and three quarters percent) and for working capital and other
general corporate purposes. Pending such uses, the net proceeds will be invested
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
Following the offering, the Company intends to retain its earnings, if any,
for use in operation and expansion of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. The payment of
the future dividends, if any, will be made at the discretion of the Company's
Board of Directors and will depend upon, among other things, the future
earnings, operations, capital requirements, general financial condition of the
Company, general business conditions and other factors. Historically, the
Company made dividend distributions to the Existing Stockholders as a result of
the Company's status as an S corporation. See "S Corporation Distributions" and
Note 9 of Notes to Financial Statements.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 30, 1996 (i) on an actual basis, and (ii) as adjusted to reflect the
sale of the 2,500,000 shares of Common Stock offered by the Company hereby
assuming an initial public offering price of $14.00 per share, after deducting
underwriting discounts and estimated offering expenses, and the application of
the estimated net proceeds therefrom. The table should be read in conjunction
with the financial statements of the Company and related Notes thereto included
elsewhere in this Prospectus. See "Use of Proceeds," "Selected Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
(IN THOUSANDS)
Short-term obligations:
Revolving line of credit............................................................. $ -- $ --
Current portion of capital lease obligations......................................... 113 113
--------- -------
Total short-term obligations..................................................... $ 113 $ 113
--------- -------
--------- -------
Long-term liabilities:
Revolving line of credit............................................................. 11,500 --
Capital lease obligations, less current portion...................................... 15 15
Stockholders' equity:
Preferred Stock, $.01 par value per share; 1,000,000 shares authorized, no shares
issued and outstanding............................................................. -- --
Common Stock, $.01 par value per share, one vote per share; 15,000,000 shares
authorized, 7,245,118 shares issued and outstanding and 9,745,118 shares issued and
outstanding on an as adjusted basis(2)............................................. 72 97
Additional paid-in capital........................................................... 1 31,526
Retained earnings (deficit).......................................................... 11,915 (1,039)
--------- -------
Total stockholders' equity......................................................... 11,988 30,584
--------- -------
Total capitalization............................................................. $ 23,503 $ 30,599
--------- -------
--------- -------
</TABLE>
- ------------------------------
(1) As adjusted to reflect (i) the sale of 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$14.00 per share and the application of the estimated net proceeds
therefrom, including the assumed November 30, 1996 distribution of an
estimated $11.9 million to the Existing Stockholders upon termination of the
Company's S corporation status (further distributions of approximately $4.3
million are expected to be made related to earnings for the period December
1, 1996 through the assumed termination of the Company's S corporation
status) and the repayment of the $11.5 million outstanding under the
long-term revolving line of credit as of November 30, 1996, and (ii)
recognition of approximately $1.0 million of deferred income taxes for the
net effect of cumulative temporary differences upon termination of the
Company's S corporation status in accordance with SFAS 109. See "S
Corporation Distributions" and "Use of Proceeds."
(2) Excludes (i) 443,067 shares of Common Stock issuable upon exercise of stock
options, outstanding as of November 30, 1996, at an average exercise price
of $6.58 per share and (ii) an additional 668,780 shares of Common Stock
reserved for future issuance under the Company's stock option plan, of which
options to purchase 40,128 shares of Common Stock will be granted to non-
employee directors and options to purchase an estimated 400,000 shares of
Common Stock will be granted to over 75 employees of the Company who have
not received options from the Company in the past, all upon the execution of
the Underwriting Agreement at an exercise price equal to the offering price.
See "Management--1996 Stock Option/Stock Issuance Plan."
16
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at November 30,
1996 was $12.0 million or $1.65 per share. Net tangible book value per share
represents the amount of the Company's net tangible book value (total net
tangible assets less total liabilities) divided by 7.2 million shares of Common
Stock outstanding as of November 30, 1996. Net tangible book value dilution per
share represents the difference between the amount per share paid by purchasers
of Common Stock in this offering and the pro forma net tangible book value per
share of Common Stock immediately after completion of the offering.
After giving effect to (i) the sale of 2,500,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $14.00 per share
and the deduction of underwriting discounts and estimated offering expenses,
(ii) a distribution declared prior to the offering of $11.9 million to the
Existing Stockholders of undistributed accumulated S corporation earnings as of
November 30, 1996, and (iii) the recording of a $1.0 million deferred tax
liability as of November 30, 1996 in connection with the termination of the
Company's S corporation status, the pro forma net tangible book value as of
November 30, 1996 would have been $30.6 million or $3.14 per share. This
represents an immediate increase in net tangible book value of $1.49 per share
to the Existing Stockholders and immediate dilution of net tangible book value
of $10.86 per share to purchasers of Common Stock in the offering, as
illustrated by the following table, See "S Corporation Distributions," "Selected
Financial and Operating Data," and Note 1 of Notes to Financial Statements.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 14.00
Net tangible book value per share at November 30, 1996.................... $ 1.65
Increase per share attributable to sales of shares to new investors....... 1.49
---------
Pro forma net tangible book value per share after offering.................. 3.14
---------
Dilution per share to new investors......................................... $ 10.86
---------
---------
</TABLE>
The following table sets forth, as of November 30, 1996, the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share of Common Stock paid by the Existing
Stockholders and new investors purchasing shares of Common Stock in this
offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................................. 7,245,118 74.3% 25,000 0.1% $ 0.01
New investors(1)...................................... 2,500,000 25.7% 35,000,000 99.9% $ 14.00
---------- ----- ------------ ----- -----------
Total............................................. 9,745,118 100.0% 35,025,000 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
- ------------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares to be purchased by new investors will increase to 2,875,000 or
28.4% of the total number of shares of Common Stock to be outstanding after
this offering.
The foregoing discussion and tables assume no exercise of any outstanding
stock options. As of November 30, 1996, options to purchase 443,067 shares of
Common Stock at $6.58 per share were outstanding. To the extent such options are
exercised, there will be further dilution to new investors in the offering. See
"Management--Directors, Executive Officers and Key Employees" and "Management--
1996 Stock Option/Stock Issuance Plan" and Note 7 of Notes to Financial
Statements for additional information regarding the Company's outstanding stock
options.
17
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
The selected financial and operating data in the following table sets forth
(i) statement of operations data and balance sheet data of the Company as of and
for each of the periods ended February 26, 1994, March 4, 1995, March 2, 1996,
December 2, 1995 and November 30, 1996 derived from the Company's financial
statements audited by Arthur Andersen LLP, independent public accountants, which
are included elsewhere in this Prospectus, (ii) statement of operations data and
balance sheet data of the Company as of and for each of the fiscal years ended
February 29, 1992 and February 27, 1993, derived from the Company's unaudited
financial statements, (iii) pro forma statement of operations data, computed as
indicated in the footnotes set forth below, and (iv) selected operating data as
of and for the periods indicated derived or computed from the Company's
circulation records or the statement of operations data identified above. The
unaudited financial data has been prepared on the same basis as the audited
financial statements and, in the opinion of management, contain all normal
recurring adjustments necessary for a fair presentation of the data. The
Company's business is impacted by seasonal fluctuations and, therefore, interim
results are not necessarily indicative of results to be expected for the full
year. The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED(1) ENDED(1)
--------------------------------------------------------------- -----------
FEB. 29, FEB. 27, FEB. 26, MARCH 4, MARCH 2, DEC. 2,
1992 1993 1994 1995 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 11,085 $ 18,785 $ 31,763 $ 45,223 $ 75,905 $ 44,572
Cost of sales.................................... 4,551 7,712 13,505 19,062 32,786 19,298
----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................................... 6,534 11,073 18,258 26,161 43,119 25,274
Selling, general and administrative expense...... 4,890 9,347 12,937 21,502 37,356 23,444
----------- ----------- ----------- ----------- ----------- -----------
Income from operations........................... 1,644 1,726 5,321 4,659 5,763 1,830
Interest, net.................................... 58 (5) 31 98 (236) (274)
Other income (expense)........................... -- (37) -- -- 87 87
----------- ----------- ----------- ----------- ----------- -----------
Net income(2).................................... $ 1,702 $ 1,684 $ 5,352 $ 4,757 $ 5,614 $ 1,643
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net income as reported........................... $ 1,702 $ 1,684 $ 5,352 $ 4,757 $ 5,614 $ 1,643
Pro forma provision for income taxes(3).......... 681 674 2,141 1,903 2,246 657
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income............................. $ 1,021 $ 1,010 $ 3,211 $ 2,854 $ 3,368 $ 986
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income per share(4)................ $ 0.40
-----------
-----------
Pro forma shares outstanding(4).................. 8,514
-----------
-----------
SELECTED OPERATING DATA:
Net sales growth................................. n/a 69.5% 69.1% 42.4% 67.8% 61.3%
Total catalogs mailed (000s)..................... n/a 12,273 19,045 31,625 45,868 36,349
Total active customers(5)........................ n/a 247,520 382,862 493,946 747,234 654,488
Average order (in dollars)(6).................... n/a $ 56.26 $ 72.69 $ 81.85 $ 97.16 $ 91.01
BALANCE SHEET DATA:
Working capital.................................. $ 1,248 $ 1,857 $ 4,095 $ 623 $ 2,169 $ (4,792)
Total assets..................................... 4,016 5,782 9,820 19,032 23,450 29,960
Long-term debt (net of current maturities)....... -- 545 408 248 100 142
Stockholders' equity............................. 2,874 4,086 7,698 11,068 14,525 11,107
<CAPTION>
NOV. 30,
1996
----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 84,710
Cost of sales.................................... 39,308
----------
Gross profit..................................... 45,402
Selling, general and administrative expense...... 39,239
----------
Income from operations........................... 6,163
Interest, net.................................... (175)
Other income (expense)........................... (25)
----------
Net income(2).................................... $ 5,963
----------
----------
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net income as reported........................... $ 5,963
Pro forma provision for income taxes(3).......... 2,385
----------
Pro forma net income............................. $ 3,578
----------
----------
Pro forma net income per share(4)................ $ 0.43
----------
----------
Pro forma shares outstanding(4).................. 8,331
----------
----------
SELECTED OPERATING DATA:
Net sales growth................................. 90.1%
Total catalogs mailed (000s)..................... 63,684
Total active customers(5)........................ 947,051
Average order (in dollars)(6).................... $ 133.28
BALANCE SHEET DATA:
Working capital.................................. $ (3,044)
Total assets..................................... 53,358
Long-term debt (net of current maturities)....... 11,515
Stockholders' equity............................. 11,988
</TABLE>
- ------------------------------
(1) References to a fiscal year refers to the calendar year in which such fiscal
year commences. The Company has a 52/53 week fiscal year that ends on the
Saturday closest to February 28. Fiscal 1994 is the only fiscal year
presented that consisted of 53 weeks. References to a nine month period
refer to the 39 weeks ended on the date indicated.
(2) For all periods indicated, the Company has operated as an S corporation and
has not been subject to federal and certain state income taxes.
(3) Pro forma income taxes are provided at an assumed 40% effective rate, as if
the Company had been a C corporation rather than an S corporation for the
above periods. Prior to the closing of this offering, the Company's S
corporation status will terminate; at that date, the Company will provide a
non-recurring non-cash charge to earnings to recognize deferred income taxes
in accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"). See "S Corporation Distributions" and Notes 1 and 11 of Notes
to Financial Statements.
(4) Pro forma net income per share is based on the weighted average shares of
Common Stock and stock equivalents outstanding, including actual shares
outstanding, shares deemed to be outstanding and the dilutive effect of
shares issuable under stock options. The shares deemed to be outstanding
represent the number of shares being offered by the Company hereby
sufficient to fund an assumed S corporation distribution of approximately
$14.5 million at March 2, 1996 or approximately $11.9 million at November
30, 1996 (based on the amount of previously undistributed S corporation
earnings at such dates). Supplemental earnings per share for the periods
ended March 2, 1996 and November 30, 1996 would have been $0.40 and $0.40,
respectively, had the Company also assumed issuance of common shares at the
beginning of those periods sufficient to retire the debt outstanding (shares
outstanding would have been approximately 8.5 million and 9.2 million,
respectively). See "S Corporation Distributions."
(5) An "active customer" is defined as a customer who has purchased merchandise
from the Company within the 12 months preceding the end of the period
indicated.
(6) An "order" is defined as the dollar amount of a processed customer invoice
or a pending order on file. The "average order" is calculated by dividing
the aggregate amount of all customer invoices and pending orders processed
in a period by the number of customer orders placed in such period.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
GENERAL
Coldwater Creek is a specialty direct mail retailer of apparel, gifts and
jewelry. The Company has increased its net sales every year since it commenced
operations in 1984 and has been profitable every year since fiscal 1986. Over
the past five fiscal years, the Company's net sales have grown at a compound
annual growth rate of 61.8% from $11.1 million to $75.9 million. Despite
significant increases in paper and postage costs in recent years, the Company's
operating income has grown at a compound annual growth rate of 36.8% from $1.6
million in fiscal 1991 to $5.8 million in fiscal 1995. The Company markets it
merchandise primarily through four distinct catalogs and operates a retail store
as part of its brand building strategy.
A key element of Coldwater Creek's strategy has been to pursue an aggressive
circulation strategy. In anticipation of the January 1995 postage increase, the
Company significantly increased its catalog circulation during fiscal 1994 and,
as a result, experienced lower overall response rates and recorded lower
operating income of $4.7 million in fiscal 1994 versus $5.3 million in fiscal
1993. In January 1995, postage prices associated with mailing the Company's
catalogs increased approximately 14%. In addition, paper prices increased by
approximately 44% during the course of the calendar year. Despite these
increased operating costs, Coldwater Creek continued its growth in target
mailings in 1995, increasing total circulation by 45.0% in fiscal 1995 and
building its proprietary mailing list to approximately 2.5 million names.
As a result of the Company's introduction of a line of private label
apparel, the introduction of its MILEPOST FOUR men's apparel catalog and the
Company's decision to offer a broader range of merchandise in its SPIRIT OF THE
WEST women's apparel catalog and its NORTHCOUNTRY catalog, the Company began
offering a substantially greater percentage of apparel merchandise in fiscal
1995 than in prior periods. The Company expects that its offering of apparel
merchandise will continue to increase during fiscal 1996. The Company believes
that offering a greater percentage of apparel merchandise was a significant
factor in its strong sales growth during fiscal 1995 and the first nine months
of fiscal 1996. However, the continuing increase in offering apparel has had the
effect, and may continue to have the effect, of increasing merchandise return
rates and markdowns, thereby reducing the Company's gross margins. See "Risk
Factors--Limited History of Offering Apparel Merchandise."
During fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996,
the Company hired additional management personnel and invested $19.7 million in
infrastructure improvements such as expanded distribution and headquarters
facilities and telecommunications and management information systems to support
its customer service and marketing programs, inventory management and market
analysis. Key components of the infrastructure investment consisted of expanded
distribution and customer service facilities, on which the Company expended
$10.0 million, two new, higher capacity telephone switches, on which the Company
expended $1.3 million and the purchase of software and corresponding hardware
upgrades to the Company's management information systems, on which the Company
expended $4.2 million.
Quarter to quarter comparisons will be impacted by the timing of the mailing
of the Company's catalogs. Approximately 75% of the revenue generated by each
mailing is recognized within 30 to 45 days after such mailing. Mailings may
occur in different quarters from year to year depending on the day of the week
on which certain holidays fall and the Company's assessment of prevailing market
opportunities. As a
19
<PAGE>
result, a portion of the revenue from a catalog mailing may be recognized in the
quarter after the quarter in which the catalog was mailed and the revenue from a
particular catalog offering may be recognized in a quarter different from the
quarter in which the revenue from the offering was recognized in the previous
year. See "Risk Factors--Quarterly and Seasonal Fluctuations."
The Company has operated as an S corporation and, as a result has not been
subject to federal or certain state income taxes. Prior to the consummation of
this offering, the Company will become subject to federal and state income taxes
and will recognize an estimated non recurring, non-cash charge of $1.0 million
to earnings in the fourth quarter of fiscal 1996 to record deferred income taxes
for the tax effect of cumulative temporary differences between financial and tax
reporting. See "S Corporation Distributions."
DECEMBER SALES RESULTS
The Company's net sales for the calendar month of December 1996 were
approximately $30.5 million, an increase of 52.5% over net sales of $20.0
million for the calendar month of December 1995.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information from
the Company's statement of operations and pro forma statement of operations
expressed as a percentage of net sales.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL ------------------------
------------------------------- DEC. 2, NOV. 30,
1993 1994 1995 1995 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales....................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................... 42.5 42.2 43.2 43.3 46.4
--------- --------- --------- ----- -----
Gross profit.................................................... 57.5 57.8 56.8 56.7 53.6
Selling, general and administrative expense..................... 40.7 47.5 49.2 52.6 46.3
--------- --------- --------- ----- -----
Income from operations.......................................... 16.8 10.3 7.6 4.1 7.3
Interest, net................................................... 0.1 0.2 (0.3) (0.6) (0.2)
Other income (expense).......................................... -- -- 0.1 0.2 (0.1)
--------- --------- --------- ----- -----
Net income...................................................... 16.9% 10.5% 7.4% 3.7% 7.0%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
Pro forma net income............................................ 10.1% 6.3% 4.4% 2.2% 4.2%
</TABLE>
NINE MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 2,
1995
Net sales increased by $40.1 million, or 90.1%, to $84.7 million during the
nine months ended November 30, 1996 from $44.6 million for the comparable period
in fiscal 1995. This increase was attributable to unusually strong response
rates and higher average orders to the Company's SPIRIT OF THE WEST catalog and
to certain new merchandise offerings in the Company's NORTHCOUNTRY catalog. In
addition, the Company introduced a new men's apparel catalog in the 1996 Spring
season and completed additional mailings of this catalog in the third quarter of
this fiscal year. Catalog mailings increased to 63.7 million for the nine months
ended November 30, 1996 from 36.3 million for the comparable period in fiscal
1995. The strong response rates and financial results for the nine months ended
November 30, 1996 should not be considered an indication of future performance.
See "Risk Factors--Quarterly and Seasonal Fluctuations."
Gross profit consists of net sales minus cost of sales, which primarily
consists of merchandise acquisition costs, freight in and storage costs. Gross
profit increased $20.1 million to $45.4 million for the nine months ended
November 30, 1996 from $25.3 million for the comparable period in fiscal 1995.
Gross profit decreased as a percentage of net sales to 53.6% of net sales for
the nine months ended November 30, 1996 from 56.7% of net sales for the
comparable period in fiscal 1995. The decline in gross profit as
20
<PAGE>
a percentage of net sales was attributable to increased sales of marked down
merchandise associated with offering a greater percentage of apparel and a
decreased proportion of sales of higher margin jewelry and gifts. As part of the
Company's marketing strategy, the Company also reduced prices on selected items
in its catalogs. As a result of the shift to a greater percentage of apparel
merchandise, the Company anticipates that its gross profit margins will not
return to historical levels. See "Risk Factors--Limited History of Offering
Apparel Merchandise."
Selling, general and administrative expense primarily consists of marketing,
distribution and general and administrative expenses. Marketing expense
primarily consists of catalog production and postage costs. Production costs
primarily consist of paper, printing, computer services and list rental costs
(net of list rental revenue). Selling, general and administrative expense
increased by $15.8 million to $39.2 million for the nine months ended November
30, 1996 from $23.4 million for the comparable period in fiscal 1995. Selling,
general and administrative expense decreased as a percentage of net sales to
46.3% of net sales for the nine months ended November 30, 1996 from 52.6% of net
sales for the comparable period in fiscal 1995. The decrease in selling, general
and administrative expense as a percentage of net sales was primarily
attributable to operating leverage from increased sales due to strong customer
response to the Company's catalog offerings.
Operating income increased by $4.4 million to $6.2 million during the nine
months ended November 30, 1996 from $1.8 million for the comparable period in
fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased by $30.7 million, or 67.8%, to $75.9 million in fiscal
1995 from $45.2 million in fiscal 1994. This increase was attributable to a
45.0% increase in catalog mailings to 45.9 million in fiscal 1995 from 31.6
million in fiscal 1994, higher response rates and average orders as a result of
an increase in targeted mailings to existing customer households as a percentage
of total mailings, and merchandise and price point changes in the Company's
NORTHCOUNTRY and SPIRIT OF THE WEST catalogs.
Gross profit increased $17.0 million to $43.1 million in fiscal 1995 from
$26.1 million in fiscal 1994. Gross profit decreased as a percentage of net
sales to 56.8% of net sales in fiscal 1995 from 57.8% of net sales in fiscal
1994. The decline in gross profit as a percentage of net sales was attributable
to increased sales of marked down apparel merchandise. See "Risk
Factors--Limited History of Offering Apparel Merchandise." During fiscal 1994,
sales of discontinued items did not have a significant effect on the Company's
operating performance.
Selling, general and administrative expense increased $15.9 million to $37.4
million in fiscal 1995 from $21.5 million in fiscal 1994. Selling, general and
administrative expense increased as a percentage of net sales to 49.2% of net
sales in fiscal 1995 from 47.5% of net sales in fiscal 1994. The increase in
selling, general and administrative expense as a percentage of net sales was
primarily attributable to increased paper and postage costs which affected the
industry generally as well as the Company's decision to pursue an aggressive
mailing program and to increase the page counts of all of its catalogs to
accommodate new merchandise offerings. The increase as a percentage of net sales
was also attributable to infrastructure investments including the addition of a
new administration center and the costs associated with relocating certain of
the Company's operations to the new administration center, continued hiring of
personnel, costs associated with implementing new technologies, consulting costs
and upgrades to software. The Company also entered into a lease agreement to
open a new retail store in February.
Operating income increased by $1.1 million to $5.8 million in fiscal 1995
from $4.7 million in fiscal 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased by $13.4 million, or 42.4%, to $45.2 million in fiscal
1994 from $31.8 million in fiscal 1993. The increase was primarily attributable
to a 66.1% increase in catalog mailings to 31.6 million in fiscal 1994 from 19.0
million in fiscal 1993. However, the Company experienced lower response rates
21
<PAGE>
primarily due to heavy industry 1994 fall mailings, unfavorable economic
conditions during the fiscal 1994 holiday season and the Company's strategy of
mailing its catalogs to an expanded set of customers in anticipation of heavy
industry mailings.
Gross profit increased $7.9 million to $26.2 million in fiscal 1994 from
$18.3 million in fiscal 1993. Gross profit increased as a percentage of net
sales to 57.8% of net sales in fiscal 1994 from 57.5% of net sales in fiscal
1993. The increase in gross profit as a percentage of net sales was attributable
to changes in the Company's merchandise mix resulting primarily from the
introduction of a new catalog.
Selling, general and administrative expense increased $8.6 million to $21.5
million in fiscal 1994 from $12.9 million in fiscal 1993. Selling, general and
administrative expense increased as a percentage of net sales to 47.5% of net
sales in fiscal 1994 from 40.7% of net sales in fiscal 1993. The increase in
selling, general and administrative expenses as a percentage of net sales was
primarily attributable to the Company's decision to increase and broaden its
catalog mailings and catalog production in anticipation of the postal increase
in January 1995 as well as the Company's introduction of its SPIRIT OF THE WEST
catalog. This increase was also attributable to the addition of new
merchandising and senior level personnel, duplicate costs associated with the
opening of the newly expanded distribution center and retention of the existing
space which was not sold until fiscal 1995.
Operating income decreased by $0.6 million to $4.7 million in fiscal 1994
from $5.3 million in fiscal 1993.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's revenue and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors including, among other things, the timing of new merchandise and
catalog offerings, recognition of costs or net sales contributed by new
merchandise and catalog offerings, fluctuations in response rates, fluctuations
in paper, production and postage costs and expenses, merchandise returns,
adverse weather conditions that affect distribution or shipping, shifts in the
timing of holidays and changes in the Company's merchandise mix.
The Company maintains a common industry policy of deferring the recognition
of the costs of catalog development and production until sales are recognized on
each mailing and records such costs as sales are recognized. Consequently,
quarter to quarter revenue and expense comparisons will be impacted by the
timing of the mailing of the Company's catalogs. Mailings may occur in different
quarters from year to year depending on the performance of third party couriers,
the day of the week on which certain holidays fall and the Company's assessment
of prevailing market opportunities. A portion of the revenue from a catalog
mailing may be recognized in the quarter after the quarter in which the catalog
was mailed and the revenue from a particular catalog offering may be recognized
in a quarter different from the quarter in which the revenue from the offering
was recognized in the previous year.
The Company has experienced, and may continue to experience, seasonal
fluctuations in its sales and operating results, which is typical of many
specialty retailers. In past fiscal years, the Company's net sales and profits
have been heavily reliant on the November and December holiday season. The
Company believes that in the future this seasonality will continue. In
anticipation of increased sales activity during November and December, the
Company incurs significant additional expenses, including the hiring of a
substantial number of temporary employees to supplement its permanent, full-time
staff. In addition, due to the larger percentage of gifts and accessories
offered in the second half of the fiscal year related to holiday gift-giving,
the Company expects higher gross margins in the second half of the fiscal year
than in the first half. If, for any reason, the Company's sales were to fall
below its expectations during November and December, the Company's financial
condition and results of operations would be adversely affected.
The following table contains selected unaudited quarterly financial data for
fiscal 1994 and 1995 and for the first nine months of fiscal 1996. The operating
losses recorded during these quarters are due to reduced sales which are
primarily attributable to seasonal trends. In the opinion of management, this
unaudited information has been prepared on the same basis as the audited
information and includes all
22
<PAGE>
normal recurring adjustments necessary to present fairly, in all material
respects, the information set forth therein.
<TABLE>
<CAPTION>
FISCAL 1994
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................................................... $ 6,057 $ 3,590 $ 17,979 $ 17,597
Gross profit............................................................ 3,498 1,974 10,287 10,402
Selling, general and administrative expense............................. 3,420 2,220 7,666 8,196
Income (loss) from operations........................................... 78 (246) 2,621 2,206
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.............................................................. $ 9,496 $ 6,657 $ 28,419 $ 31,333
Gross profit........................................................... 5,594 3,363 16,317 17,845
Selling, general and administrative expense............................ 6,144 4,394 12,905 13,913
Income (loss) from operations.......................................... (550) (1,031) 3,412 3,932
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
-------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................................................. $ 23,604 $ 15,781 $ 45,325
Gross profit.......................................................... 12,091 8,262 25,049
Selling, general and administrative expense........................... 10,540 8,488 20,211
Income (loss) from operations......................................... 1,551 (226) 4,838
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Coldwater Creek has historically funded its growth through a combination of
funds generated from operations and short term bank credit facilities. Working
capital requirements generally precede the realization of sales on a monthly
basis. The Company draws on its working capital lines to produce catalogs and
increase inventory levels in anticipation of future sales realization. In
addition, the Company regularly relies on standard trade credit arrangements in
purchasing inventory and services. These arrangements typically require the net
amount due to be paid within sixty days of shipment of ordered merchandise.
Net cash provided by operating activities was $4.9 million, $3.7 million and
$6.2 million in fiscal 1993, 1994 and 1995, respectively. For the first nine
months of fiscal 1996, cash provided by operations was $5.2 million versus
$27,000 used in the comparable period in fiscal 1995.
Net cash used in investing activities, principally related to capital
expenditures for infrastructure improvements, was approximately $3.9 million,
$4.6 million, $1.5 million and $10.2 million in fiscal 1993, 1994, 1995 and the
first nine months of fiscal 1996, respectively.
Capital expenditures for infrastructure improvements such as expanded
distribution facilities, administrative offices, upgrades in telecommunications
and management information systems were $6.9 million in fiscal 1994, $2.6
million in fiscal 1995 and $10.2 million in the first nine months of fiscal
1996. The Company presently anticipates that it will spend approximately $2.6
million in capital expenditures in the fourth quarter of fiscal 1996 and
approximately $3.5 million in fiscal 1997.
Net cash provided by (used in) financing activities for fiscal 1993, 1994,
1995, and the first nine months of 1996 was ($1.9) million, $2.2 million, ($6.0)
million and $6.9 million, respectively. Distributions to the Company's Existing
Stockholders totaled $1.7 million, $1.4 million, $2.2 million, and $4.5 million
in fiscal 1993, 1994, 1995, and the first nine months of fiscal 1996. During the
first nine months of fiscal 1996, the
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Company drew upon its revolving lines of credit in the amount of $11.5 million
primarily to finance the purchase of property and equipment, net working capital
requirements and distributions to stockholders.
On March 20, 1995, the Company entered into an agreement (amended on
September 9, 1996) with a bank to renew and increase its revolving credit
facilities. The agreement provides for an unsecured line of credit which allows
the Company to borrow up to $8,500,000 at an interest rate which is five basis
points below the bank's prevailing reference rate or LIBOR plus one and three
quarters percent (1.75%). The unsecured line of credit expires on June 1, 1997.
The agreement also provides for a secured revolving line of credit which allows
the Company to borrow up to $11,500,000 at an interest rate which is equal to
the bank's prevailing reference rate or LIBOR plus one and eighty-five
hundredths percent (1.85%) and is secured by certain real property, equipment
and fixtures of the Company. The secured line of credit expires on March 31,
1999. At November 30, 1996, the Company had $11,500,000 outstanding under its
secured line of credit at interest rates ranging from 7.29% to 7.85%. The
agreement provides that the Company must maintain specified levels of insurance,
tangible net worth and debt service coverage. The agreement also places
restrictions on indebtedness to tangible net worth, mergers and other items.
In December 1996, the Company received a commitment letter from U.S. Bank of
Idaho which provides for: (i) an unsecured revolving line of credit allowing the
Company to borrow up to $17,500,000 at an interest rate, at the option of the
Company, which is five basis points below the bank's Prime rate or LIBOR plus
one and three quarters percent (1.75%); the unsecured line expires on June 30,
1998; (ii) a secured line of credit which allows the Company to borrow up to
$17,500,000 at an interest rate equal to the bank's Prime rate or LIBOR plus one
and eighty five hundredths percent (1.85%) and is secured with certain real
property, equipment and fixtures of the Company; the secured line expires on
June 30, 2000; and (iii) a separate unsecured line of credit exclusively for the
purpose of issuing standby and commercial letters of credit with an aggregate
face value of no more than $1,000,000. Letters of credit under this facility can
be issued up through June 30, 1998 for expiration by no later than June 30,
1999. As a condition of the unsecured line of credit only, borrowings thereunder
must be fully repaid for at least thirty consecutive days during each twelve
month period. The Company believes that definitive documentation evidencing this
committed facility will be executed by the end of January 1997.
Immediately prior to the consummation of the offering, the Company will make
the Distribution to the Existing Stockholders of all of the Company's remaining
accumulated undistributed S corporation earnings through the Termination Date
pursuant to an Agreement for Distribution of Retained Earnings and Tax
Indemnification. Based on the present estimate of the Termination Date, the
Company estimates that the distribution to be paid will approximate $16.2
million and will be paid from a portion of the net proceeds of the offering. The
Agreement for Distribution of Retained Earnings and Tax Indemnification also
provides for indemnification of the Company and the Existing Stockholders which
could result in payments to or from the Company following the consummation of
this offering. See "S Corporation Distributions."
The Company's current plans involve the opening of 6 to 10 Coldwater Creek
stores at "destination locations" such as near major national parks or other
resort areas which the Company believes have the greatest potential for name
brand identification, including one such store in Jackson Hole, Wyoming in the
second quarter of fiscal 1997. The cost of opening a retail store varies
dramatically depending on several factors such as whether the Company purchases
or leases the facilities in which the store will be placed, the size of the
store, the location of the store as well as the attendant differences in the
cost of real estate and the type and range of merchandise offered at the store.
The Company believes that its available cash after this offering, together
with cash flow from operations and borrowing capacity under its credit
facilities, will be sufficient to support operations and future growth at least
through fiscal 1997. The Company may be required to seek additional sources of
funds for accelerated growth or continued growth after that point, and there can
be no assurance that such funds will be available on satisfactory terms. Failure
to obtain such financing could delay or prevent the Company's planned growth,
which could adversely affect the Company's business, financial condition and
results of operations.
24
<PAGE>
BUSINESS
OVERVIEW
Coldwater Creek is a specialty direct mail retailer of apparel, gifts and
jewelry. The Company currently markets its merchandise primarily through a
family of four distinctive catalogs. Coldwater Creek targets well-educated,
middle-to upper-income households and seeks to differentiate itself from other
retail and catalog operations by offering exceptional value through superior
customer service and a merchandise assortment that reflects a casual, uniquely
American spirit. The Company believes that the successful execution of its
marketing and merchandising strategies coupled with its high customer service
standards and efficient order entry and fulfillment operations has allowed it to
develop a unique brand identity and strong relationships with its loyal customer
base.
Coldwater Creek focuses on providing extraordinary customer service well
above industry standards. All aspects of the Company's operations are designed
to provide a superior catalog buying experience as well as strengthen
relationships with existing and new customers. Coldwater Creek has strived to
make timely investments in its telephone and distribution infrastructure to
support its customer service-based strategy. During fiscal 1995, the Company
achieved faster telephone answer times, lower abandoned call rates and faster
order processing than industry averages. The Company plans to stimulate future
growth through a variety of strategic initiatives designed to increase catalog
circulation, yield higher customer response rates and expand merchandise
offerings. In addition, the Company believes that significant opportunities
exist to expand its customer base by targeting new members of existing customer
households with additional merchandise offerings and catalog titles.
INDUSTRY OVERVIEW
The direct marketing industry has experienced substantial growth over the
past decade as many retail customers have migrated toward the convenience and
service offered by home shopping. According to statistics published by the
Direct Marketing Association, between 1990 and 1995, consumer catalog sales
volume grew at a rate of 5.5% annually to $38.6 billion in 1995. Additional data
published by the Direct Marketing Association estimates that consumer catalog
sales will grow to $51.9 billion by 2000. Between 1990 and 1995, catalog sales
growth outpaced the growth of traditional retail sales. The Company believes
that the catalog industry will continue to experience substantial growth
principally due to the convenience and security of shopping at home, the
increasing time constraints facing two-career families, the availability and
convenience of overnight delivery and favorable demographic trends.
The direct marketing industry is highly fragmented, with over 7,000 catalog
titles currently in circulation, many of which generate limited revenue and
profitability. Many smaller catalog companies are facing substantial challenges
in the current environment, including declines in profitability due to
significant fluctuations in postage, paper and other operating costs and
insufficient capital necessary to provide for growth or to access
technologically advanced database and customer service systems required in an
increasingly competitive market. The Company believes that, as a result of its
having developed a large and loyal customer base and its recent investments in
infrastructure, it is well positioned to take advantage of emerging market and
distribution opportunities not available to smaller catalog companies.
HISTORY AND PHILOSOPHY OF COLDWATER CREEK
Coldwater Creek was founded on a shoestring budget in 1983 by Dennis and Ann
Pence. In its infancy, Coldwater Creek operated out of a small apartment in
Sandpoint, Idaho, had one phone line and, through the use of flyers and magazine
advertisements, sold approximately 15 items including binoculars and
birdfeeders. The Company's first customer database consisted of handwritten
customer information on 3x5 index cards. Since its inception, the Company has
remained committed to the vision of providing extraordinary customer service and
offering high value merchandise as the primary means to develop a loyal customer
base. Quick telephone answer speeds and rapid order fulfillment have also been
hallmarks
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of the Company since its founding. As the Company pursued its growth, Dennis and
Ann hired individuals who shared their commitment to offering extraordinary
customer service.
The Company believes it is more than just a purveyor of goods. The Company's
philosophy is closely aligned with the romance of wide open spaces and the
unhurried approach to living and familiarity found in small town settings.
Apparel and other merchandise is selected and displayed to promote the Company's
philosophy and enhance its image and is presented honestly without price
inflation in anticipation of planned sales. The merchandise offering has evolved
over time away from the Company's original emphasis on nature related gifts to a
broader range of merchandise focusing on a casual lifestyle and the needs of its
growing customer base.
The Company believes that its location in a small town setting in the
mountains of Northern Idaho allows it to draw upon a dedicated, unique workforce
that excels in delivering an enjoyable shopping and catalog buying experience to
its customers. The Coldwater Creek philosophy is team-oriented, friendly, honest
and casual, with a commitment to building a loyal, actively purchasing customer
base within a rapidly growing, profitable enterprise.
BUSINESS STRATEGIES
Coldwater Creek's objective is to become the highest quality service
provider in the consumer catalog industry. The Company attributes its success
primarily to its ability to execute this customer service objective and to offer
a unique assortment of high quality merchandise that appeals to a large,
targeted group of existing and new customers. Each of the Company's catalog
titles seeks to convey a unique spirit and lifestyle orientation which the
Company believes attracts a distinct customer demographic and results in a
larger overall customer base. The key elements of the Company's business
strategy are set forth below:
PROVIDE SUPERIOR CATALOG BUYING EXPERIENCE THROUGH EXCEPTIONAL CUSTOMER
SERVICE. Offering a superior catalog buying experience through exceptional
customer service has been the hallmark of the Coldwater Creek strategy since its
inception. The Company believes that consistently providing every customer with
prompt, knowledgeable and courteous service as well as rapid order fulfillment
increases the Company's ability to attract and retain customers, builds customer
loyalty and promotes the purchase of its merchandise by the customer household.
The Company's employee training programs, call centers, telephone and management
information systems, as well as its order fulfillment and return policy, are all
designed to carry out this strategy through adherence to strict operating
standards. For example, during fiscal 1995, the Company achieved average
telephone answer speeds of 3.8 seconds, abandoned call rates of 0.37%,
distribution error rates of 0.14% and shipped 92.6% of in-stock orders within
one shipping day of order processing.
OFFER A HIGH QUALITY, DIFFERENTIATED MERCHANDISE ASSORTMENT. Coldwater
Creek's catalogs offer a broad assortment of high quality apparel, gifts and
jewelry which the Company believes is not commonly found in other consumer
catalogs. The Company believes that its customers buy into a relaxed lifestyle,
not just clothing and collectibles, and it seeks to differentiate its catalogs
through the extensive use of spirited merchandise narratives, thematic and
seasonal photographs, and unique yet practical merchandise displays and layouts.
The Company's merchandise mix is structured to reflect a uniquely American,
relaxed style. In addition, the Company attempts to provide its customers with a
dynamic merchandise assortment by regularly test marketing new merchandise and
merchandise concepts and updating its merchandise selection frequently. For
example, in recent years the Company has shifted its merchandise mix to include
a greater percentage of apparel and introduced its own line of private label
apparel offerings.
PROMOTE INCREASED HOUSEHOLD PURCHASING. The Company attempts to promote
purchase relationships with different members of the target customer household
and to increase customer retention by increasing the frequency and variety of
its catalog mailings, by frequent merchandise turns and through the increased
usage of its customer file and purchase analysis. In addition, the Company's
marketing efforts are designed
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to promote additional purchase relationships within each customer household by
selectively cross-mailing the Company's other catalog titles to existing
customer households based on past merchandise purchases and demographic overlay
data. The Company also maintains a Preferred Customer Program which is designed
to offer its best customers an enhanced level of customer service including
special purchasing and packaging services. As a result of these and other
programs, the Company's customer retention rate increased approximately 20%
between fiscal 1994 and fiscal 1995.
CONTINUE INVESTMENT IN INFRASTRUCTURE. The Company is committed to ongoing
investment in infrastructure development in order to increase operating
efficiency, provide extraordinary customer service and maximize the Company's
growth potential. The Company believes that investing in infrastructure in
anticipation of customer and sales growth allows it to maintain operational
flexibility to capture strategic or market opportunities, including increased
sales volumes and shifts in consumer preferences. During fiscal 1994, fiscal
1995 and the first nine months of fiscal 1996, the Company hired key management
personnel and invested $19.7 million in infrastructure improvements. These
investments were made to expand the Company's distribution facilities, upgrade
its telecommunications systems and install and implement more sophisticated
database technologies and management information systems. The Company plans to
continue to invest in improving its management information systems, inventory
controls and distribution capabilities to support its growth.
ADVANCE THE COLDWATER CREEK BRAND. In all aspects of its operations, from
catalog design to order fulfillment, the Company is committed to promoting
Coldwater Creek as a name that represents a superior catalog purchasing
experience. The Company seeks to promote this brand image through its high level
of customer service and strict operating standards as well as offering the
unique, high quality merchandise assortments in its catalogs. In addition, the
Company believes that increased efforts to develop its private label apparel and
expansion of its store-based operations will increase customer awareness of the
Coldwater Creek brand. The Company recently launched a national advertising
campaign designed to build the Coldwater Creek brand as a name synonymous with
exemplary customer service. The advertising campaign commenced in the Fall of
1996 and appeared in such major national publications as Smithsonian Magazine
and The New Yorker.
GROWTH STRATEGIES
Coldwater Creek believes that it has significant opportunities to attract
and retain new customers and increase sales through several strategic
initiatives including the following:
INCREASE CATALOG CIRCULATION. Coldwater Creek plans to pursue an aggressive
mailing strategy designed to attract new customers and to generate additional
sales from cross-mailings of the Company's catalogs to existing customer
households. The Company also intends to continue its name acquisition and market
segmentation program, including the rental of other catalog customer lists and
use of the Company's new database technologies to more efficiently analyze
existing and prospective customer files in an effort to increase response rates
to each mailing. In addition, since the Company's MILEPOST FOUR and SPIRIT OF
THE WEST catalog titles are at the beginning of their respective life cycles,
the Company believes that they have significant opportunities for growth.
Circulation of the Company's catalogs has grown at a compound annual growth rate
of 55.2% over the last three fiscal years, generating a compound annual growth
rate of 54.6% in net sales over the same period.
EXPAND MERCHANDISE SELECTION; INCREASE PAGE COUNT OF CATALOGS. Coldwater
Creek believes that an important part of its overall growth strategy involves
expanding its merchandise selection and refining its existing assortment with
merchandise lines that can leverage the Company's purchase relationship with,
and understanding of, the target customer household. The Company regularly
evaluates new merchandise in an effort to increase the appeal of its merchandise
offerings and expects to increase catalog page counts to accommodate new
merchandise in its catalogs. The Company believes that a significant opportunity
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exists to generate additional sales from existing customer households by
expanding the merchandise selection in its existing catalogs.
INTRODUCE NEW CATALOG TITLES. Coldwater Creek intends to periodically offer
new catalog titles featuring complementary and new merchandise concepts that
promote the spirit of Coldwater Creek while allowing the Company to further
penetrate distinct segments of the market. The Company's goal is to create
catalog titles that leverage information gathered by the Company, including
customer characteristics and demographic information, purchase histories and
merchandise performance, to capture distinct and increasingly discrete segments
of the market. As part of this strategy, the Company recently introduced
MILEPOST FOUR, its men's apparel and accessory catalog. Based on the successful
introduction of this catalog, the Company intends to expand the circulation of
MILEPOST FOUR during fiscal 1996 and 1997. The Company is currently evaluating
other potential merchandise categories that may be capable of supporting
additional new catalog introductions.
EXPAND INTERNATIONAL SALES. Coldwater Creek sells its merchandise to
customers in Japan and Canada. In fiscal 1995 and during the first nine months
of fiscal 1996, such sales amounted to less than 10% of total net sales. During
the next twelve months, the Company expects to increase its mailing efforts in
these countries and also begin mailing its catalogs in selected countries in
Europe. Based on the strong initial response to the Company's merchandise in
Japan and Canada, the Company believes that a significant opportunity exists to
generate additional sales in international markets. To accommodate this growth,
the Company employs sales agents who are fluent in foreign languages, including
Japanese and French.
EXPAND OTHER DISTRIBUTION CHANNELS. Coldwater Creek is currently pursuing
two additional distribution channels for its merchandise: retail stores and the
Internet. The Company believes that a small base of retail stores provides a
physical presence that helps build Coldwater Creek's brand recognition with
prospective and existing customers. The Company's current plans include
expanding its retail operations by 6 to 10 stores, in addition to its retail
store in Sandpoint, Idaho, in the next five years. All of the Company's stores
will be located in areas that have a high volume of tourist traffic and are near
"destination points" such as national parks. This expansion will begin with the
opening of the Company's second store within the next twelve months in Jackson
Hole, Wyoming. In addition, the Company has recently developed and posted a
"home-page" on the world-wide web through which potential customers can receive
and view general Company and merchandise information, make merchandise inquiries
and request a catalog. The Company believes its current order entry, credit
approval and distribution capabilities position it to take advantage of on-line
ordering of merchandise, if and when such on-line commerce becomes commercially
viable.
THE COLDWATER CREEK CATALOGS
Coldwater Creek currently publishes four primary catalogs, each with a
distinct merchandise mix and each designed to appeal to a different segment of
the target customer household. The Company's family of catalogs include the
following:
NORTHCOUNTRY. First introduced in 1985, NORTHCOUNTRY is the Company's most
established and highest volume catalog and features the broadest selection of
merchandise, including affordable natural fiber apparel, jewelry, art and gift
items, reflecting a uniquely American spirit and a casual and open lifestyle.
The Company believes that NORTHCOUNTRY, its core catalog, has the broadest
market appeal and attempts to feature merchandise in NORTHCOUNTRY that has
demonstrated the most sustainable life cycles. Most NORTHCOUNTRY items are
priced between $15 and $90, generating an average customer order of $115 during
the nine months ended November 30, 1996.
SPIRIT OF THE WEST. First introduced in the Fall of 1993, SPIRIT OF THE
WEST is the Company's fastest growing catalog. SPIRIT OF THE WEST currently
features upscale women's apparel and jewelry, including dresses and coordinates,
blouses, shirts, jackets, pants and skirts, as well as high quality,
contemporary
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jewelry. The apparel is office-appropriate, can also serve as weekend-wear, and
is typically made of linens, silks and cottons. The quality is typically higher
than the women's apparel found in the Company's other catalogs. Intended as the
Company's premium women's apparel and jewelry catalog, the merchandise selection
in SPIRIT OF THE WEST has evolved towards a greater selection of more popular
priced merchandise. The Company believes that this new merchandising strategy,
coupled with the introduction of a Spring edition of SPIRIT OF THE WEST in 1996,
contributed significantly to the Company's particularly strong performance
during the first nine months of fiscal 1996. Most items are now priced between
$30 and $135, generating an average customer order of $216 during the nine
months ended November 30, 1996.
MILEPOST FOUR. First introduced in the Spring of 1996, MILEPOST FOUR is the
Company's men's apparel and accessory catalog. MILEPOST FOUR is designed to
reinforce the household relationship by offering merchandise to the male members
of the target customer household. MILEPOST FOUR attempts to capitalize on
purchases of men's clothing featured in NORTHCOUNTRY and the trend towards
"casual Friday" office attire. Coldwater Creek's MILEPOST FOUR catalog features,
among other things, traditional, natural fiber, casual yet office-appropriate
apparel, shoes and accessory items including shirts, shorts, pants, jackets,
caps, belts, ties, shoes, socks, watches, and carrying items such as shaving
kits and brief bags in varying earth tones and muted but rich colors. Most items
are priced between $15 and $110, generating an average customer order of $138
during the nine months ended November 30, 1996.
ECOSONG. First introduced in the Fall of 1994, ECOSONG features merchandise
with environmental, nature and wildlife themes. The merchandise selection in
ECOSONG currently includes gifts, T-shirts, sweatshirts and jewelry designed to
appeal to the Company's early targeted audience that was drawn to NORTHCOUNTRY'S
original emphasis on nature related themes. Most ECOSONG items are priced
between $10 and $50, generating an average customer order of $59 during the nine
months ended November 30, 1996. The lower price points are designed to widen the
Company's target audience by appealing to a younger customer.
The Company regularly evaluates the performance of its catalogs and catalog
mailings and adjusts its mailings in response to anticipated market demand. In
addition, in connection with the holiday buying season, the Company offers a
"Gifts-to-Go" catalog to its customers. The "Gifts-to-Go" catalog is mailed
primarily to the Company's existing customers, consists of merchandise selected
from the Company's various catalogs and is not material to the Company's total
net sales.
Coldwater Creek catalogs include full color photographs displaying the
merchandise and pricing information and features original artwork or photographs
on the cover designed to appeal to the targeted customer of each catalog. Each
catalog includes merchandise narratives describing the merchandise and their
specifications in a manner designed to stimulate the reader's interest, promote
purchasing decisions and convey the unique spirit of each item to the customer.
Apparel photographs often include the jewelry and accessories needed to complete
an outfit. In certain catalogs, photographs of outfits are often placed against
lifestyle backgrounds and scenes that include mountain ranges, streams or tree
covered hills, while in others, apparel is placed against a color-coordinated,
textured backdrop to accentuate the colors of an outfit. Merchandise narratives
are presented in a lyrical, thematic manner designed to deliver the Coldwater
Creek experience to each customer and to personalize the catalog shopping
experience. Further, Coldwater Creek was one of the first catalog companies to
show apparel items "off-figure," leaving the customer to decide if an item of
merchandise was right for him or her based on the item's inherent style and not
how the item looked on a model.
All catalogs are created and designed by an in-house team of artists, copy
writers and editors. From conception to publication, the in-house team uses a
collaborative approach to design the catalog, make merchandise display and
placement decisions and monitor the overall look, feel and quality of each
catalog. The Company also maintains its own in-house photographic studio and
regularly contracts with independent photographers for all the Company's
photographic needs. These capabilities allow the Company to preserve each
catalog's distinctive character and also allow the Company greater control of
the catalog production schedule, which the Company believes reduces the lead
time necessary to produce
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catalogs and reduces the costs of preparing pages for printing. These
capabilities also provide the Company with greater flexibility and creativity in
catalog production and in selecting the merchandise to be included in its
catalogs. The Company continually strives to reduce the production time for its
catalogs.
DEVELOPMENT OF CUSTOMER BASE AND MARKETING
As of November 30, 1996, Coldwater Creek had a proprietary mailing list of
approximately 3.2 million individuals. The Company believes that building a
large and loyal customer base is critical to its growth strategy. Coldwater
Creek's various marketing programs and catalog mailings are designed to
accomplish the following three goals with respect to the Company's customer
base: (i) attract new customers, (ii) generate additional sales from existing
customers and (iii) generate sales from additional members of the target
customer household. Attracting new customers is principally accomplished through
prospecting using targeted mailings to individuals identified through rented
mailing lists, outside marketing information services and the Company's own
market segmentation analysis. Generating sales from existing customers and
additional members of the target customer household involves using selective,
directed mailings of the Company's catalogs based on existing customers' past
purchase histories and household demographic and other data.
THE COLDWATER CREEK CUSTOMER. Coldwater Creek sells its merchandise
primarily to, and has gained a unique understanding of, a set of actively
purchasing customers with distinct demographic characteristics. The typical
Coldwater Creek customer is a 35 to 65 year old college educated female and is
part of a dual income household with annual income above $50,000. This customer
has a strong interest in such areas as culture, the arts, gourmet cooking, and
politics. The Company's analysis also indicates that the typical customer has
owned his or her home for at least five years. The Company believes that it can
leverage its current customer base by targeting other members of the existing
customer household with additional catalogs that extend the unique Coldwater
Creek experience to such new members and which offer other related merchandise
lines. The Company also plans to target customers in foreign markets that share
many of the demographic characteristics of its current customer base.
CUSTOMER PROSPECTING; GROWTH OF MAILING LIST. Coldwater Creek attempts to
attract new customers and generate additional sales from existing customer
households through targeted direct mailings. During fiscal 1995, Coldwater Creek
mailed over 45.8 million copies of three different catalog titles, of which over
50% were mailed to prospective customers. The Company's catalog mailings to
prospective customers historically have made a positive contribution to
operating income. The Company believes that mailing additional catalog titles to
existing customer households produces higher revenue-per-catalog figures than
mailing to prospective customers who have no previous relationship with the
Company. Since fiscal 1993, the Company has added over 2.0 million individuals
to its proprietary mailing list.
The Company uses its NORTHCOUNTRY catalog as its primary prospecting
catalog. The merchandise selection in NORTHCOUNTRY is competitively priced and
includes merchandise styles and types reflective of the Company's other
catalogs. Customers generally receive additional catalog titles and other
mailings based on past purchases, a strategy designed to promote continued
merchandise purchases and enhance the Company's understanding of the buying
patterns of each customer. In addition, the Company regularly test-markets its
catalogs to large groups of prospective customers based on research conducted by
third-party marketing information services using criteria specified by the
Company. The following table sets forth certain information with respect to the
Company's customer base during the fiscal years 1993, 1994,
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1995 and for the nine months ended December 2, 1995 and November 30, 1996,
respectively (all figures include international customers):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
DEC. 2, NOV. 30,
FISCAL 1993 FISCAL 1994 FISCAL 1995 1995 1996
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Active Customers...................................... 382,862 493,946 747,234 654,488 947,051
Growth in Active Customers............................ 55% 29% 51% 47% 45%
Average Order......................................... $ 72.69 $ 81.85 $ 97.16 $ 91.01 $ 133.28
</TABLE>
CUSTOMER DATABASE MANAGEMENT; CUSTOMER SEGMENTATION. Coldwater Creek uses a
proprietary customer database which stores detailed information on each customer
in the Company's customer file, including personal information, demographic data
and purchase history. The customer database is updated regularly with
information as new transactions are recorded. The database is also supplemented
with names of prospective customers obtained through rented and exchanged
mailing lists, outside marketing information services and other sources. These
lists include other catalog and retail subscription lists and lists of compiled
names from businesses offering merchandise in the same broad categories as that
of the Company's merchandise. The use of these outside sources for names of
additional prospective customers has been and is expected to continue to be a
key component of the Company's efforts to attract new customers.
In fiscal 1996, the Company began using a marketing database system to allow
its marketing and merchandising personnel to use more sophisticated and
efficient methods of analysis to determine the performance of each catalog
mailing. The Company's marketing database system allows the Company to segment
its customer base according to many variables and analyze each segment's
performance and buying patterns. The resulting information is used to refine the
frequency and selectivity of Coldwater Creek's various catalog mailings to
maximize the productivity of its mailings. This analysis also enables the
Company to strengthen the merchandising of its catalogs through an analysis of
product profitability.
CUSTOMER RETENTION PROGRAMS. Coldwater Creek currently offers customers who
have met certain purchase levels a unique customer service program called the
"Preferred Customer Program." Services provided under the Preferred Customer
Program include correspondence tailored to repeat purchasers, pre-approved
credit, preferential status for back-order items, free gift-wrapping and special
packaging services, and a single shipping and handling charge for multiple
shipments. The program also includes personalized follow-up letters and
telephone calls, and a preferred shopping program that assists customers in
locating and purchasing merchandise not found in the Company's catalogs,
including competitors' merchandise. The Company believes the Preferred Customer
Program has resulted in higher retention rates and higher average orders per
customer. During the next twelve months, the Company expects to expand its
Preferred Customer Program to include multiple levels of customized service
based on each customer's purchase history. The Company believes that this
program, coupled with the Company's other customer service strategies, promotes
greater customer loyalty and higher retention rates.
COLDWATER CREEK CREDIT CARD. Since 1994, the Company has issued its own
Coldwater Creek credit cards as part of its customer retention and brand
building strategy. The Company's credit card carries the Coldwater Creek name
and includes a nature-themed background. The Company believes that, by providing
its customers with an available credit line against which purchases of the
Company's merchandise may be made, the Coldwater Creek credit card reinforces
the purchase relationship with existing customers and promotes additional
purchases from these customers. During fiscal 1995, purchases of the Company's
merchandise using the Coldwater Creek credit card accounted for 7.4% of net
sales. As of November 30, 1996, the Company had approximately 51,000 Coldwater
Creek credit card customers.
The Company currently relies on third party managerial, administrative,
qualification and monitoring services in connection with the operation of its
credit card program. During the next 12 months, the
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Company plans to assume the responsibility for qualifying the Company's credit
card customers and may retain additional or alternative third party service
providers for credit processing. See "Risk Factors -- Management of Credit Card
Program; Credit Risks."
MERCHANDISING
Coldwater Creek's merchandising strategy is to provide a differentiated
selection of high quality, casual merchandise which reflects a uniquely
American, relaxed lifestyle. The Company markets each of its catalogs with a
distinct merchandise mix and each catalog title seeks to convey a unique spirit
and lifestyle orientation which the Company believes attracts a distinct
customer demographic. All aspects of the Company's merchandising strategy are
designed to promote the Company's brand identity and make customers feel that
they are not just buying clothing and collectibles, but that they are buying
into a relaxed lifestyle. Through its family of four catalogs and retail store
operation, Coldwater Creek currently offers over 4,200 different merchandise
items with price points ranging from approximately $6.50 to $500.00.
MERCHANDISE MIX. Coldwater Creek's merchandise offerings have both evolved
and expanded significantly in recent years. In the early 1990s, the Company's
offerings focused more heavily on jewelry and accessories than apparel. By
calendar 1995, the Company's apparel offering represented approximately 50% of
the Company's net sales with the other two categories representing approximately
25% each. The Company has shifted its merchandise mix towards a greater
percentage of apparel as customer inquiries and the Company's market research
indicated that the Company's customers were willing to purchase apparel in the
styles, of the quality and at the price points selected and offered by the
Company. During fiscal 1996, Coldwater Creek introduced a Spring edition of its
SPIRIT OF THE WEST women's apparel catalog as well as MILEPOST FOUR, its men's
apparel catalog. Management believes that as a result of these new catalogs and
the initial success that they have achieved, the Company's apparel offering will
represent a greater percentage of the Company's total net sales in fiscal 1996
than experienced in fiscal 1995. The Company believes it prices its apparel
competitively with apparel offered by other retailers. In addition, the Company
believes that, because its apparel merchandise provides a counter cyclical
source of revenue, it will become less reliant on sales generated during the
holiday buying season.
NEW PRODUCT INTRODUCTION. A critical element of the Company's successful
merchandising strategy is the dynamic nature of its product assortment. The
Company seeks to continually add new merchandise and to refine existing
merchandise categories in an effort to promote additional purchases from the
target customer households and increase retention rates by responding to
customers' changing preferences. The Company expects to increase the page counts
of its catalogs to accommodate the introduction of new, related or similar
merchandise and merchandise categories. The Company's merchandising personnel
continually evaluate the performance of the Company's existing products and make
merchandise placement and promotion decisions based on item quality, sales
trends, customer demand, performance histories, current inventory positions and
the projected success of each item as well as plan the introduction and testing
of new items. Consequently, the Company's merchandise mix is continually refined
as new items are introduced and tested and as items which do not meet the
Company's performance standards are replaced.
PRIVATE LABEL MERCHANDISE. The Company recently introduced its own line of
private label apparel. Management believes that the Company's commitment to
offering a line of high quality, Company-developed apparel is an important
element in differentiating its merchandise from other retailers. The Company's
design and buying teams work closely together with selected vendors to select
color schemes, materials and designs and create an image consistent with the
theme for the Company's merchandise offerings. The Company generally is able to
exercise greater control of these aspects of the merchandise development process
with its private label merchandise than with third party-sourced merchandise.
Management plans to expand its private label offerings and believes that such
merchandise will represent a larger percentage of total net sales in the future.
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MERCHANDISE SOURCING AND VENDOR RELATIONSHIPS. The Company purchases its
merchandise from over 400 vendors. The Company's merchandise acquisition
strategy emphasizes relationships with domestic vendors which the Company
believes supports its just-in-time inventory management processes, provides for
greater quality control and results in faster turnaround times for merchandise
reorders. In fiscal 1995, approximately 75% of the Company's merchandise was
manufactured in the United States with the remaining portion manufactured in
Canada. The Company's buyers work closely with its suppliers to ensure high
standards of merchandise quality.
In addition, Coldwater Creek seeks to offer unique merchandise which the
Company believes is not commonly found in other consumer catalogs. Approximately
70% of the merchandise purchased from its vendors is acquired with exclusive
rights to the Company's catalog distribution. The Company believes such
exclusivity enhances identity of the Coldwater Creek brand and reinforces the
uniqueness of the Company's offerings.
The Company believes it has an excellent relationship with its vendors. No
single vendor accounted for more than 6% of total merchandise purchases in
fiscal 1995. The Company does not have any long-term or exclusive commitments
with any of its vendors.
ALTERNATIVE DISTRIBUTION STRATEGIES. The Company employs several
alternative distribution strategies in connection with the sale of slow
performing, discontinued and discounted catalog merchandise. These strategies
include distributing a sale flyer in shipped merchandise, selling such
merchandise through the Company's other catalogs, in some cases with price
adjustments, and selling such merchandise through the Company's retail stores,
as well as a planned outlet store.
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CUSTOMER SERVICE AND OPERATIONS
Coldwater Creek believes that its emphasis on extraordinary customer service
and customer relations is critical to its ability to expand its customer base
and build brand recognition. This customer service focus can be found at every
level of operations, including the Company's call center operations, its order
entry and fulfillment processes, its employee and sales agent training programs
and its merchandise return policy. In addition, the Company's infrastructure
investments, such as its investment in telephone and management information
systems, have enabled the Company to continue to provide high levels of customer
service and adhere to strict operating standards throughout its development.
CALL CENTERS. The Company offers prompt, knowledgeable and courteous order
entry services through the use of its toll-free telephone numbers which may be
called 24 hours a day, seven days a week to place orders, request a catalog, or
make merchandise or catalog inquiries. During fiscal 1995, approximately 80% of
the Company's orders were received by telephone with the remaining 20% of its
orders received by mail and facsimile. During fiscal 1995, customer calls were
answered at an average rate of 3.8 seconds. The Company's abandoned call rate
was 0.25% and 0.37% during fiscal years 1994 and 1995, respectively. The
following graphs show the Company's telephone answer and abandoned call rates as
compared to industry averages during the third and fourth quarters of calendar
1995:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TELEPHONE ANSWER SPEED
<S> <C> <C> <C>
(in seconds)
Coldwater Creek Industry Average
3 4 25 31
Abandoned Customer Call Rate
Coldwater Creek Industry Average
.40% .60% 3.77% 4.54%
Source: F. Curtis Barry & Company
</TABLE>
The Company's two call centers are organized to provide prompt, seamless
response to customer calls. The Company recently expanded its telephone system
capabilities by opening a new call center in Coeur d'Alene, Idaho, approximately
50 miles from the call center at the Company's headquarters in Sandpoint, Idaho.
Backup systems and rerouting capabilities allow the Coeur d'Alene call center to
service the Company's entire inbound 1-800 traffic if required by a failure of
the Sandpoint system. As the Company grows, the Company expects the majority of
calls to be directed to the Coeur d'Alene call center to take advantage of its
larger facilities and labor pool, and the facility's extensive rerouting
capabilities. The Company's two call centers are equipped with a total of 315
stations, 120 of which are located at the Sandpoint call center and 195 of which
are located at the Company's Coeur d'Alene call center. The Company monitors and
shifts calls between the two call centers if calls at either center become
backlogged. In the event that either center reaches capacity, an all-hands bell
sounds throughout the facility, alerting Company personnel, including middle and
senior level personnel, to answer any waiting incoming calls. During fiscal
1995, the Company handled approximately 1.1 million calls and received
approximately 9,000 calls per day during peak sales periods.
ORDER ENTRY. The Company uses an integrated management information system
which allows telephone orders to be captured on-line and mail orders to be
efficiently entered. The Company's system is an on-line transaction processing
system which handles all order entry and fulfillment tasks. Specifically, this
includes the inputting of mail and telephone orders, credit authorization, order
processing and distribution, and shipment. The Company's sales agents process
orders directly into the Company's on-line data
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<PAGE>
processing system which provides, among other things, customer history
information, merchandise availability information, merchandise specifications,
available substitutes and accessories, expected ship date and order number. The
Company's sales agents are knowledgeable in key merchandise specifications and
features, and have ready access to samples of the entire merchandise line, which
enables the agents to answer detailed merchandise inquiries from customers
on-line. The Company completes telephone orders in approximately three and a
half minutes depending upon the nature of the order and whether the customer is
a first-time buyer or a repeat customer. Customers can pay with the Coldwater
Creek credit card, major credit cards, checks or money orders. All credit
charges are pre-authorized prior to shipping the order and credit authorization
occurs coincident with order processing.
DISTRIBUTION AND ORDER FULFILLMENT. The Company believes that delivery of
ordered merchandise promptly and in good condition promotes customer loyalty and
repeat buying. During fiscal 1995, approximately 92.6% of in-stock orders were
shipped within one shipping day of order processing. The Company has achieved
low distribution error rates of 0.16%, 0.22% and 0.14% during fiscal years 1993,
1994 and 1995, respectively. The Company's customers normally receive their
items within three to five business days after shipping, although customers may
request overnight delivery for an extra charge.
Once a customer's telephone order is completed, the Company's computer
system prints the order in the Company's distribution center, where it is
proofread and all necessary distribution and shipping documents, including
customs forms for international orders, are attached to expedite processing.
Thereafter, the orders are prepared, packed and shipped in batches three times a
day during normal operation, with extended distribution hours during peak
periods. Shipped orders are bar-coded and scanned and the merchandise, quantity,
and ship date are entered automatically into the customer order file for access
by sales agents.
The Company uses a semi-automated picking, packing and shipping system with
56 packing stations and 7 gift wrapping sections. Gift orders are gift wrapped
and handwritten notes accompany each gift as per the customer's instructions.
Employees process orders and generate warehouse selection tickets and packing
slips for order fulfillment operations. The Company adjusts the number of
employees and the processing system to meet variable demand levels, particularly
during the peak selling season. To meet increased order volume during the
Company's peak selling season, the Company has successfully utilized temporary
employees and plans to continue this practice. During fiscal 1995, approximately
55% of all shipments were sent via first class mail through the U.S. Postal
Service, with which the Company believes it has an excellent relationship. Each
order is usually charged a shipping and handling fee which is based upon the
total order price. In fiscal 1995, the Company shipped over 1.2 million
packages.
The Company recently expanded its distribution facility and capabilities to
add approximately 48,000 square feet and a semi-automated system for order
processing. The Company believes that this expansion increased its capacity to
ship up to approximately 30,000 packages per day.
EMPLOYEE AND SALES AGENT TRAINING. The Company's training is designed to
instill in each employee a commitment to provide a consistently high level of
prompt, knowledgeable and personal service to each customer. The Company
reinforces this emphasis with internal programs, including posting customer
comments and operating statistics, which are designed to recognize and
illustrate exceptional service provided by the Company's personnel. The Company
does not maintain a separate customer service department. Instead, each sales
agent receives training to allow him/her to handle customer complaints and
inquiries, ensuring that a customer does not need to be transferred or placed on
hold.
The Company seeks to create a supportive working environment. When possible,
it is the philosophy of the Company to empower line employees to make decisions,
reducing the need for several management levels. The Company encourages its
sales agents to seek out creative solutions to customer problems and concerns
and to remain responsive to each customer's needs. The vision and Company goals
emphasizing "customers first" are well communicated throughout the Company and
are shared by all employees. This vision drives the training programs for new
and existing employees.
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Ongoing employee training at Coldwater Creek addresses professional and
personal development. Training for all new employees, including temporary
employees, emphasizes serving the customer and seeks to instill in each employee
the commitment to deliver the Coldwater Creek experience. Supervisory and
management training programs begin at the time of promotion and continue
throughout the employee's career. Coldwater Creek provides opportunity for
advancement for each employee dependent on his/her skill level, personal effort,
and future potential. New sales agents participate in a ten-day training
program, which includes merchandise and computer system training, mock telephone
orders and a mentor system for working with more experienced personnel. Sales
agents are monitored to review performance and are retrained periodically on an
as-needed basis.
RETURN POLICY. The Company has an unconditional return policy for all of
its merchandise under which a customer can return an item for any reason at any
time at the Company's expense. The Company believes that its return policy
builds customer loyalty and helps overcome a customer's initial reluctance to
purchase merchandise from catalogs.
INVESTMENT IN INFRASTRUCTURE. The Company has consistently invested in
infrastructure improvements designed to increase the efficiency of its
operations and the level of customer service provided to its customers. During
fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996, the Company
invested $19.7 million in infrastructure improvements such as expanded
distribution facilities and upgraded telecommunications and management
information systems which the Company believes increases the efficiency of its
operations, positions the Company to efficiently process up to 25,000 orders per
day, and provides the Company with greater market analysis and segmentation
capabilities which allow the Company to more efficiently offer catalogs and
merchandise to discrete market segments.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has adopted a widely used, state of the art, catalog order
processing system as the cornerstone of its software strategy. This system is
widely used by leading companies in the direct marketing industry for all order
entry and fulfillment tasks, the inputting of mail and telephone orders, credit
authorization, order processing and distribution and shipment. In order to
provide a key decision support system, the Company recently installed a
marketing database system. This system allows customer data to be searched and
segmented according to different variables, as well as allowing application of
demographic overlays. The system is fully compatible and interfaces with the
Company's catalog system to perform monthly batch downloads of ordering
information into the database. The Company believes these improvements will help
Coldwater Creek improve customer retention through more efficient market
modeling and segmentation.
Coldwater Creek's main hardware platform is the Hewlett Packard 3000 series
of computers. The Company believes its recent investments in the HP/3000
processors and the installment of a Northern Telecom telephone switch at each
call center provide the Company with a scaleable platform to accommodate future
growth.
The Company's telecommunications system strategy is designed to reduce the
risk of telephone delays and capacity constraints. In the event either call
center is unable to receive incoming calls due to factors such as natural
disasters, equipment or electrical problems or failures, calls are routed to the
other call center. If neither center can be accessed, the Company has contracted
with its long-distance carriers to redirect incoming calls to sales agents'
homes to ensure that uninterrupted service can be provided to its customers.
The Company's management information system strategy is designed to reduce
the risk of lost data and delays in the order entry or order fulfillment
processes. In 1996, the Company installed information systems processors in its
Coeur d'Alene center that are largely identical to those in the Sandpoint
headquarters. Software implemented in July 1996 renders the system fully
mirrored on a real-time basis such that customer orders as well as all other
operational data are entered simultaneously in each of the
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<PAGE>
Sandpoint and Coeur d'Alene centers. The entire process is transparent, within
minutes, to the order entry process, such that customers and sales agents in the
event of disabled lines, limited power outages or natural disasters are unaware
of the rerouting. The Company believes this redundancy reduces the risk of
interruption of customer service or other critical operations due to failure of
its computing system.
RETAIL STORES
Coldwater Creek maintains a retail store operation as part of its brand
building strategy. In 1995, the Company leased the entire Cedar Street Bridge, a
beautifully renovated covered bridge spanning Cedar Creek in Sandpoint, Idaho,
and created its first destination shopping environment for the Company's
customers. The Company's store at the Cedar Street Bridge is a two level
structure with over 14,000 feet of prime retail space. Over the course of 1995,
the Company developed Cedar Street Bridge into a unique Coldwater Creek shopping
experience, with separate stores for each of the NORTHCOUNTRY, SPIRIT OF THE
WEST, MILEPOST FOUR and ECOSONG merchandise lines as well as an outlet store.
Each store at the Cedar Street Bridge is designed and fixtured different from
the others, with basic themes consistent with each catalog's image and customer
segmentation. During fiscal 1995, the stores at the Cedar Street Bridge
accounted for 3.0% of the total net sales of the Company.
The Company's Cedar Street Bridge operations leverage the success of the
Company's catalog operations by offering, in some circumstances, a greater
selection of catalog-based merchandise as well as non-catalog merchandise. The
Company's current plans involve the opening of 6 to 10 Coldwater Creek stores at
"destination locations" such as near major national parks or other resort areas
which the Company believes have the greatest potential for name brand
identification, including one such store in Jackson Hole, Wyoming in the second
quarter of fiscal 1997. The Company expects its stores to provide an additional
source of demand for its catalogs as vacationers visit the stores and become
acquainted with the Company's merchandise. In addition, the Company anticipates
the peak selling cycle for many of these stores to include the months of June,
July, August and September and, as a result, the Company expects this strategy
to provide counter cyclical cash flow that may improve overall second quarter
performance. The Company is currently evaluating several potential locations and
has recently entered into a lease for a store in Jackson Hole, Wyoming, the
gateway to Grand Teton and Yellowstone National Parks and a major ski resort.
COMPETITION
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new competitors
as well as increased competition from established companies. Although the
Company believes that it does not compete directly with any single company with
respect to its entire range of merchandise, within each merchandise category the
Company has significant competitors and may face new competition from new
entrants or existing competitors who focus on market segments currently served
by the Company. These competitors include large retail operations, including
some with catalog operations, other catalog and direct marketing companies and
international competitors. In addition, since fiscal 1995, the Company has
offered an increasingly higher volume and percentage of apparel merchandise.
With respect to the apparel merchandise offered by the Company, the Company is
in direct competition with more established catalog operations, some with
substantially greater experience in selling apparel merchandise and which may
focus on prospective customers sharing some of the demographic characteristics
of the Company's customers. Any failure on the part of the Company to
successfully market its apparel merchandise or compete effectively against such
competitors would have a material adverse affect on the Company's growth and
could adversely affect the Company's business and results of operations. Many of
these competitors are larger and have significantly greater financial, marketing
and other resources than the Company. Increased catalog mailings by the
Company's competitors may adversely affect response rates to the Company's own
catalog mailings. In addition, because the Company sources its merchandise from
suppliers and manufacturers located in the
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<PAGE>
United States, where labor and production costs may be higher than in foreign
countries, there can be no assurance that the Company's merchandise will or can
be competitively priced when compared to merchandise offered by other retailers.
While the Company believes that it has been able to compete successfully because
of its brand recognition, the exclusivity and broad range and quality of its
merchandise, including its private label merchandise offerings, and its
extraordinary customer service policies, there can be no assurance that the
Company will be able to maintain or increase its market share in the future. The
failure of the Company to compete successfully would materially and adversely
affect the Company's business and results of operations.
EMPLOYEES
As of November 30, 1996, the Company had 316 full-time employees and 745
temporary employees. During the peak selling season, which for the Company
includes the months of November and December, the Company utilizes a substantial
number of temporary employees, many of whom return year after year. None of
these employees is currently covered by collective bargaining agreements. The
Company considers its employee relations to be excellent.
TRADEMARKS
Coldwater Creek-Registered Trademark-, SPIRIT OF THE WEST-Registered
Trademark- and ECOSONG-Registered Trademark- are registered trademarks of the
Company. An application has been filed to register the mark MILEPOST FOUR-TM- as
a trademark of the Company. The Company believes that its registered and common
law trademarks have significant value and that all of its trademarks are
instrumental to its ability to create and sustain demand for and market its
merchandise.
PROPERTIES
The principal executive and administrative offices of the Company are
located at 1 Coldwater Creek Drive, Sandpoint, Idaho 83864. The telephone
numbers of the Company's principal executive and administrative offices is (208)
263-2266. The general location, use and approximate size of the Company's
principal properties, all of which, other than the retail stores at the Cedar
Street Bridge and in Jackson Hole and the call center at Coeur d'Alene, are
owned by the Company, are set forth below:
<TABLE>
<CAPTION>
FACILITY ADDRESS SIZE
- ------------------------------------------- -------------------------------- --------------------
<S> <C> <C>
Corporate Offices 1 Coldwater Creek Drive 33,000 sq. ft.
Sandpoint, Idaho 83864
Distribution/Warehousing 3333 McGee Road 150,000 sq. ft.
Sandpoint, Idaho 83864
Sandpoint Customer Service Center 2 Coldwater Creek Drive 14,000 sq. ft.
Sandpoint, Idaho 83864
Human Resources Building 3 Coldwater Creek Drive 3,500 sq. ft.
Sandpoint, Idaho 83864
Cedar Street Bridge Retail Store 334 North First Street 14,000 sq. ft.
Sandpoint, Idaho 83864
Coeur d'Alene Customer Service Center 1201 Ironwood Drive 24,000 sq. ft.
Coeur d'Alene, Idaho 83814
Jackson Hole Retail Store 10 East Broadway 10,000 sq. ft.
Jackson, Wyoming 83001
</TABLE>
The Company believes that its properties are adequate to meet its needs in the
reasonably foreseeable future. In addition, the Company plans to open a limited
number of retail stores.
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LEGAL PROCEEDINGS
The Company is party to claims and litigation that arise in the normal
course of business. Management believes that the ultimate outcome of these
claims and litigation will not have a material impact on the financial position
or results of operations of the Company.
The direct response business as conducted by the Company is subject to the
merchandise Mail Order Rule and related regulations promulgated by the Federal
Trade Commission. While the Company believes it is in compliance with such
regulations, no assurance can be given that new laws or regulations will not be
enacted or adopted which might adversely affect the Company's operations.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Below is a table setting forth the name, age and position of the Company's
directors, executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- ------------------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Dennis Pence................................................ 47 President, Chief Executive Officer, Vice Chairman of the
Board of Directors, and Director
Ann Pence................................................... 47 Chairman of the Board of Directors and Director
Donald Robson............................................... 50 Chief Financial Officer, Treasurer, Secretary, and
Director
Tony Saulino................................................ 39 Vice President of Operations
Robin Sheldon............................................... 51 Vice President of Merchandising
Robert H. McCall, CPA(1)(2)................................. 51 Director
James R. Alexander(1)....................................... 54 Director
Curt Hecker(2).............................................. 36 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DENNIS PENCE co-founded the Company in 1984, and has served as President and
Chief Executive Officer and as a Director since its incorporation in 1988. Prior
to co-founding Coldwater Creek Mr. Pence was employed by Sony Corp of America
from 1975 to 1983, where his final position was National Marketing Manager,
Consumer Video Products.
ANN PENCE co-founded the Company in 1984, where she has acted as its
Creative Director. Since its incorporation in 1988, she has also served as a
Director and as the Chairman of the Board of the Company. Prior to co-founding
Coldwater Creek, Mrs. Pence had an eleven year career in retail advertising, and
was employed by Macy's California from 1974 to 1982 where her final position was
Copy Director.
DONALD ROBSON has served as Chief Financial Officer, Vice President of
Finance and Administration, Secretary, Treasurer and as a Director of the
Company since January 1995. From 1992 to 1995, prior to joining the Company, Mr.
Robson was a Financial Executive Consultant. From 1978 to 1992, Mr. Robson
served as Executive Vice President and Chief Financial Officer for Neiman Marcus
Stores, a nationally established high-end department store chain and cataloger.
His responsibilities included managing the Company's financial operations,
information services, merchandise distribution and investment strategies, as
well as its substantial credit portfolio, central and store operations, and
telemarketing and distribution in the Direct Marketing Division.
TONY SAULINO has served as Vice President of Operations of the Company since
March 1993. Tony Saulino joined Coldwater Creek in September of 1992 as
Operations Manager. Prior to joining the Company, from 1991 to 1992, Mr. Saulino
was the Customer Service Director of Bear Creek Operations, Inc., servicing the
Harry & David and Jackson & Perkins catalogs where he managed a seasonal staff
of 75-250 employees. From 1988 to 1991, Mr. Saulino served as Customer Service
Manager of Current, Inc., a direct marketer of social expression and
personalized checks, where he managed a seasonal staff of 100-250 employees.
ROBIN SHELDON has served as Vice President of Merchandising of the Company
since June 1994. From 1989 to 1994, prior to joining the Company, Ms. Sheldon
served as Director of Catalogs and managed development and production of five
direct mail catalogs for the National Wildlife Federation where she also served
as Senior Merchant from 1988 to 1989. Prior to that, from 1983 to 1988, Ms.
Sheldon was
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President of Robin Clark Designs, Inc., an interior design firm. In 1979, Ms.
Sheldon founded, developed and managed THE MIXED BAG, an upscale gift catalog
business, where she served as President until 1983.
ROBERT H. MCCALL, a Certified Public Accountant, has served as a Director
since 1994 and since February 1995 has served as Chairman of the Audit Committee
and as a member of the Compensation Committee. Since 1981 he has been President
of McCall & Landwehr, P.A., an accounting firm based in Hayden Lake, Idaho,
which provided accounting, tax and auditing services to the Company from 1984 to
1993, and has provided a limited amount of other services since that time.
JAMES R. ALEXANDER has served as a Director since 1994 and is Chairman of
the Compensation Committee. He has been an independent consultant for the past
17 years, serving a variety of high ticket mail order companies selling apparel,
home decor and gift merchandise. Mr. Alexander currently resides in New York
City.
CURT HECKER has served as a Director since August 1995 and is a member of
the Audit Committee. Since August 1995, his principal occupation has been
President and Chief Executive Officer of Panhandle State Bank in Sandpoint,
Idaho. Prior to Mr. Hecker's employment with Panhandle, he served as Vice
President of West One Bank (now U.S. Bank) with which the Company has had its
primary banking relationship.
No executive officer or director of the Company bears any relation by blood,
marriage or adoption to any other executive officer or director, except for
Dennis and Ann Pence, who are married to each other.
The Company's Board of Directors, in accordance with the Bylaws of the
Company, has fixed the size of the Board at six directors. The Company's Board
of Directors is divided into three classes with the members of each class
serving for terms of office expiring at the third annual meeting of stockholders
following their election and until successors are duly qualified, except that
the terms of office of the Class I, II, and III directors serving as of June 1,
1996 expire at the annual meetings of stockholders in 1999, 1998 and 1997,
respectively. As of June 1, 1996, the Class III directors are Dennis Pence and
Robert H. McCall; Class II directors are James R. Alexander and Donald Robson;
and Class I directors are Curt Hecker and Ann Pence.
The President, Treasurer and Secretary are elected each year at the first
meeting of directors following the annual meeting of the stockholders and each
holds office until resignation, death or removal at the discretion of the Board
of Directors or until the Board of Directors appoints a different person to the
office. Other officers may be appointed by the Board of Directors at any
meeting.
BOARD COMMITTEES
The Company's Board of Directors has a Compensation Committee and an Audit
Committee. The Audit Committee is responsible for recommending to the Board of
Directors the appointment of independent public accountants, reviewing and
approving the scope of audit activities of the auditors, reviewing accounting
practices and controls, performing independent director duties and reviewing
audit results. The Audit Committee is composed of Robert H. McCall (Chairman)
and Curt Hecker. The Compensation Committee is responsible for reviewing and
establishing the compensation structure for the Company's officers and
directors, including salary rates, participation in incentive compensation and
benefit plans, 401(k) plans, stock purchase plans and other forms of
compensation, and, after the effective date of the initial registration of the
Company's Common Stock under Section 12(g) of the Securities Exchange Act of
1934, administering the Company's 1996 Stock Option/Stock Issuance Plan. See
"1996 Stock Option/Stock Issuance Plan." The Compensation Committee is composed
of Mr. Alexander (Chairman) and Mr. McCall.
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<PAGE>
DIRECTOR COMPENSATION
The directors currently receive an annual retainer of $10,000. In addition,
each director received a fee of $1,000 for each regular Board of Directors
meeting attended. Any director who was a committee chair received an annual
retainer in the amount of $1,500, and any director who was a committee member
received an annual retainer of $1,000. During fiscal 1997, non-employee
directors will receive annual compensation of $12,000, plus each chairperson of
each committee will receive an additional $1,500 per year and each committee
member will receive an additional $1,000 per year, and each director will
receive an additional $1,000 per regular quarterly meeting attended. Directors
are also reimbursed for certain expenses in connection with attendance at Board
of Directors and committee meetings.
Under the Company's 1996 Stock Option/Stock Issuance Plan automatic option
grant program, each non-employee director of the Company upon execution of the
Underwriting Agreement associated with the Company's initial public offering or
at the date such person first becomes a director if after the effective date of
this offering will receive options to purchase 13,376 shares of Common Stock at
an exercise price per share equal to the fair market price of the Company's
Common Stock on such date. On the date of each annual stockholders meeting
beginning with the first annual meeting following this offering, each
non-employee director who has served for at least six months and continues to
serve at that meeting will receive an automatic option grant for an additional
1,672 shares of Common Stock exercisable at the fair market value of such stock
as of the date of the option grant. See "1996 Stock Option/Stock Issuance Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee is Mr. Alexander, and Mr. McCall
is a member of the Compensation Committee. No member of the Compensation
Committee was at any time during the fiscal year ended March 2, 1996, or at any
other time, an officer or employee of the Company. However, Robert H. McCall has
provided accounting, tax and auditing services to the Company in the past,
including acting as the Company's principal outside accountant from 1984 to 1993
and providing a limited amount of other services since 1993. In addition, Mr.
McCall performed personal tax accounting services for Dennis and Ann Pence from
1984 through the 1995 tax year.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to, earned by or awarded to the Company's Chief Executive Officer and each
of the Company's three other most highly compensated executive officers or
employees for the fiscal year ended March 2, 1996. No other employee of the
Company received salary and bonus of $100,000 or more during the fiscal year
ended March 2, 1996. The persons named in the table are sometimes referred to
herein as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(2) OPTIONS (#) COMPENSATION($)
- -------------------------------------- --------- ----------- ------------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Dennis Pence(3)....................... 207,372 21,000 3,600 -- --
President, Chief Executive
Officer and Vice Chairman of the
Board
Ann Pence(3).......................... 207,372 21,000 3,600 -- --
Chairman of the Board and Creative
Director
Donald Robson......................... 146,538 15,750 -- -- --
Chief Financial Officer, Vice
President of Finance and
Administration, Secretary and
Treasurer
Robin Sheldon......................... 104,647 11,550 2,150 -- --
Vice President of Merchandising
</TABLE>
- ------------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance, or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company, and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) Contributions by the Company to individuals' 401(k) accounts.
(3) Compensation in this table does not include S Corporation Distributions. See
"S Corporation Distributions."
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") was
adopted by the Board of Directors and approved by the stockholders on March 4,
1996. 1,111,847 shares of Common Stock have been authorized for issuance under
the 1996 Plan.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals, which
include officers and other key employees, non-employee directors and consultants
and other independent advisors, may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock at an
exercise price not less than 85% of their fair market value for non-statutory
options and 100% of their fair market value for incentive options on the grant
date, (ii) the Stock Issuance Program under which such individuals may, in the
Plan Administrator's discretion, be issued shares of Common Stock directly at a
price not less than 100% of their fair market
43
<PAGE>
value at the time of issuance or as a bonus tied to the performance of services
and/or the achievement of performance goals and (iii) the Automatic Option Grant
Program under which option grants will automatically be made at periodic
intervals to eligible non-employee Board members to purchase shares of Common
Stock at an exercise price equal to 100% of their fair market value on the grant
date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion (subject to the provisions of
the 1996 Plan) to determine (i) with respect to options, which eligible
individuals are to receive option grants, the time or times when such option
grants are to be made, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the Federal tax laws, the vesting schedule to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding, and (ii) with respect to stock issuances, the
number of shares to be issued to each eligible person, any vesting schedule to
be applicable and consideration for such shares.
Common Stock purchased upon the exercise of an option must be paid for by
cash or by delivery of certain previously acquired shares of Common Stock with a
fair market value (as of the exercise date) equal to the option exercise price
or, with the consent of the Compensation Committee under the Discretionary
Option Grant Program, by delivery of the optionee's promissory note. With the
Compensation Committee's approval, the employee option holder may elect to
satisfy tax withholding obligations by directing the Company to withhold shares
valued at the amount of the withholding obligation from the number purchased or
by delivery of previously acquired shares of Common Stock.
Upon certain acquisitions of the Company by merger, consolidation or asset
sale, outstanding options and unvested stock issuances will be subject to
accelerated vesting under certain circumstances.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share of 85%, 100% or 110% (under certain circumstances)
of the fair market value of the Common Stock on the new grant date.
Under the Automatic Option Grant Program, each individual serving as a
non-employee Board member on the date the Underwriting Agreement for this
Offering is executed will receive an option grant on such date for 13,376 shares
of Common Stock, provided such individual has not otherwise been in the prior
employ of the Company. Each individual who first becomes a non-employee Board
member thereafter will receive a 13,376-share option grant on the date such
individual joins the Board, provided such individual has not been in the prior
employ of the Company. In addition, at each Annual Stockholders Meeting,
beginning with the first Annual Meeting held after the offering, each individual
who is to continue to serve as a non-employee Board member after the meeting
will receive an additional option grant to purchase 1,672 shares of Common Stock
whether or not he or she is standing for reelection at that meeting or has been
in the prior employ of the Company, provided such individual has served as a
non-employee Board member for at least six months.
Each automatic grant will have a maximum term of 10 years, subject to
earlier termination for vested shares not exercised two years following the
optionee's cessation of Board service. The initial 13,376-share grant will vest
in three equal and successive annual installments over the optionee's period of
Board service. Each additional 1,672-share grant will vest upon the optionee's
completion of one year of Board service measured from the grant date. However,
each outstanding option will immediately vest upon (i) certain changes in the
ownership or control of the Company or (ii) the death or disability of the
optionee while serving as a Board member.
The Board may amend or modify the 1996 Plan at any time, subject to certain
limitations. The 1996 Plan will terminate on March 3, 2006, unless sooner
terminated by the Board.
44
<PAGE>
On March 4, 1996, the Board granted options to purchase 443,067 shares of
Common Stock in the aggregate under the 1996 Plan to certain employees of the
Company, including grants to the following executive officers: Donald Robson,
100,317 shares; Tony Saulino, 83,598 shares; and Robin Sheldon, 83,598 shares.
The options vest over a four-year period measured from the grant date and have
an exercise price of $6.58 per share. Such exercise price is equal to the fair
market value of the Common Stock on the grant date, as determined by the Board
on the basis of a number of factors, including the anticipated offering price,
and reflects the volatile nature of the stock market and the uncertainty which
existed at the time of grant as to the ultimate completion of the offering.
Upon the execution of the Underwriting Agreement, the Company plans to grant
options to purchase an estimated 400,000 shares of Common Stock to over 75
employees of the Company who have not received options from the Company in the
past. The exercise price for the options will be equal to the initial public
offering price. The options vest over a four-year period measured from the grant
date.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any of the other executive officers named in the
Summary Compensation Table.
The Compensation Committee as Plan Administrator of the 1996 Plan will have
the authority to provide for the accelerated vesting of the shares of Common
Stock subject to outstanding options held by the Chief Executive Officer and any
other executive officer or the shares of Common Stock subject to direct
issuances held by such individual, in connection with certain changes in control
of the Company or the subsequent termination of the officer's employment
following the change in control event.
401(K) PLAN
Effective October 1, 1988, and as amended from time to time, the Company
adopted a tax-qualified employee savings, retirement and profit sharing plan
qualified under Section 401(k) of the Internal Revenue Code (the "401(k) Plan")
under which eligible employees defer their current compensation by up to certain
statutorily prescribed annual limits and contribute such amounts to the 401(k)
Plan. Contributions to the 401(k) Plan and income earned on the contributions
are not taxable to employees until withdrawn from the 401(k) Plan. All employees
twenty-one years of age and older with 1,000 hours of service who have been
working with the Company for one year are eligible to participate in the 401(k)
Plan. The Company matches a certain percentage of the employees' contribution
and provides a discretionary profit sharing contribution based on overall
profitability of the Company. Company contributions to the 401(k) Plan were
$119,000, $76,000, and $83,000 for the fiscal years 1993, 1994 and 1995,
respectively, and $69,000 and $205,000 for the nine months ended December 2,
1995 and November 30, 1996, respectively.
45
<PAGE>
CERTAIN TRANSACTIONS
As a result of the Company's status as an S corporation, the Company has
historically paid distributions to its stockholders to enable them to pay their
income tax liabilities and, from time to time, to distribute previously
undistributed S corporation earnings. During fiscal 1993, fiscal 1994, fiscal
1995 and the first nine months of fiscal 1996, the Company has made S
corporation distributions to the Existing Stockholders of $1,740,000,
$1,387,000, $2,157,000 and $8,500,000, respectively. Immediately prior to the
consummation of the offering, the Company will make the Distribution to the
Existing Stockholders of all of the Company's remaining accumulated
undistributed S corporation earnings through the Termination Date pursuant to an
Agreement for Distribution of Retained Earnings and Tax Indemnification. See "S
Corporation Distributions."
The Agreement for Distribution of Retained Earnings and Tax Indemnification
provides that the Existing Stockholders will be indemnified by the Company with
respect to any federal and state income tax liability (including penalties,
interest and any taxes resulting from the payments under the indemnity) incurred
by the Existing Stockholders as a result of a final determination of an
adjustment to the Company's tax returns for any period ending prior to the
Termination Date. The Agreement for Distribution of Retained Earnings and Tax
Indemnification also provides that the Existing Stockholders will indemnify the
Company from and against any and all taxes of the Company (i) for any periods
ending prior to the Termination Date for which it is determined that the Company
was not an S corporation, and (ii) for any and all taxes arising from
adjustments to the Company's tax returns which increase the Company's tax
liability for a taxable period ending after the Termination Date and decrease
the Existing Stockholders' tax liability for a taxable period ending prior to
the Termination Date, provided however that the indemnity provided by the
Existing Stockholders is limited to any federal and state refunds they receive
as a result of a loss of S corporation status or other tax adjustments for such
taxable periods.
Any future transactions between the Company and its officers, directors, and
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions with such persons
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies approved by such outside directors.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of December 31, 1996, and as adjusted to
reflect the sale of Common Stock offered by the Company hereby, for (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors with
beneficial ownership, (iii) each Named Executive Officer and (iv) all directors
and executive officers as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES ---------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
- ------------------------------------------------------------------------------ ----------- ------------ -------------
<S> <C> <C> <C>
Dennis Pence(3)(4) ........................................................... 3,622,559 50% 37%
c/o Coldwater Creek Inc.
One Coldwater Creek Drive
Sandpoint, Idaho 83864
Ann Pence(3)(4) .............................................................. 3,622,559 50% 37%
c/o Coldwater Creek Inc.
One Coldwater Creek Drive
Sandpoint, Idaho 83864
Donald Robson(5).............................................................. 25,079 * *
Robin Sheldon(6).............................................................. 20,899 * *
All Directors and Executive Officers as a group(8 persons)(7)................. 7,311,995 100% 75%
</TABLE>
- ------------------------------
* Less than one (1) percent
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Subject to community property laws where applicable, the Company
believes, based on information furnished by such persons, that the persons
named in the table above have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 7,245,118 shares of Common
Stock outstanding as of December 31, 1996 and 9,745,118 shares of Common
Stock outstanding after the completion of this offering.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Dennis and Ann Pence are husband and wife.
(4) On December 31, 1996, Dennis C. Pence transferred 140,929 shares of
Coldwater Creek Common Stock to the Dennis C. Pence Lead Annuity Trust. Ann
Pence transferred the same number of shares to the Elizabeth Ann Pence Lead
Annuity Trust on the same date. Both Trusts qualify under the Federal tax
code as Charitable Lead Annuity Trusts.
(5) Represents options to purchase Common Stock vesting on March 4, 1997. Mr.
Robson has an additional 75,238 options which will not vest within sixty
days of the offering.
(6) Represents options to purchase Common Stock vesting on March 4, 1997. Ms.
Sheldon has an additional 62,699 options which will not vest within sixty
days of the offering.
(7) Includes 66,877 options that will have vested within sixty days of the date
of the offering.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Certificate of Incorporation and Bylaws, copies of
which will be filed as exhibits to the Registration Statement of which this
Prospectus is a part. References herein to the Company's Certificate of
Incorporation and Bylaws refer to the Certificate of Incorporation as filed with
the Delaware Secretary of State on March 1, 1996, and the Bylaws as adopted by
the Board of Directors of the Company on March 4, 1996. The Company was
originally incorporated in Idaho on January 4, 1988.
The authorized capital stock of the Company currently consists of 15,000,000
shares of Common Stock, par value $0.01 per share, and 1,000,000 shares of
Preferred Stock, par value $0.01 per share. Immediately after the completion of
the offering, the Company estimates that there will be outstanding an aggregate
of 9,745,118 shares of Common Stock, approximately 883,200 shares issuable upon
exercise of outstanding options and no shares of Preferred Stock will be issued
or outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share and to receive
ratably such dividends if, as and when declared by the Company's Board of
Directors out of funds legally available therefor, subject to preferences that
may be applicable to any outstanding Preferred Stock. There are no cumulative
voting rights, the absence of which will, in effect, allow the holders of a
majority of the outstanding shares of Common Stock to elect all the directors
then standing for election. The absence of cumulative voting rights could have
the effect of delaying, deterring or preventing a change of control of the
Company. According to the Delaware General Corporation Law ("DGCL"), in the
event of any liquidation, dissolution or winding up of the Company, each holder
of the Company's Common Stock will be entitled to participate, subject to the
rights of the outstanding Preferred Stock, ratably in all assets of the Company
remaining after payment of liabilities and preferences of the holders of
Preferred Stock. Holders of Common Stock have no preemptive or conversion
rights. All outstanding shares of Common Stock are, and all shares of Common
Stock offered in this offering will be, fully paid and nonassessable.
The provisions described above will result in Dennis and Ann Pence, the sole
stockholders of the Company, retaining substantial control over the Company. See
"Risk Factors--Control by Existing Stockholders; Anti-Takeover Devices."
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "CWTR."
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is expressly authorized, in the resolution or resolutions
providing for the issuance of any wholly unissued series of Preferred Stock, to
fix, state and express the powers, rights, designations, preferences,
qualifications, limitations and restrictions thereof, including without
limitation, the rate of dividends upon which and the times at which dividends on
shares of such series shall be payable and the preference, if any, which such
dividends shall have relative to dividends on shares of any other class or
classes or any other series of stock of the Company; whether such dividends
shall be cumulative or noncumulative, and if cumulative, the date or dates from
which dividends on shares of such series shall be cumulative; the voting rights,
if any, to be provided for shares of such series; the rights, if any, which the
holders of shares of such series shall have in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company; the rights, if any, which the holders of shares of such series shall
have to convert such shares into or exchange such shares for shares of stock of
the Company, and the terms and conditions, including price and rate of exchange
of such conversion or exchange; the redemption rights (including sinking fund
provisions), if any, for shares of such series; and such other powers, rights,
designations,
48
<PAGE>
preferences, qualifications, limitations and restrictions as the Board of
Directors may desire to so fix. The Board of Directors is also expressly
authorized to fix the number of shares constituting such series and to increase
or decrease the number of shares of any series prior to the issuance of shares
of that series and to increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not to decrease such
number below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of the Certificate of Incorporation and Bylaws of the
Company as summarized in the following paragraphs, may be deemed to have an
anti-takeover effect and may delay, deter or prevent an attempt to obtain
control of the Company by means of a proxy contest, tender offer, merger or
other transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation provides
for the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, one-third of the Board of Directors
will be elected each year. In addition, the Certificate of Incorporation
provides that any Director or the entire Board of Directors may be removed by
the affirmative vote of the holders of at least a majority of the combined
voting power of all shares of the Company entitled to vote generally in the
election of directors, voting together as a single class. Under the DGCL, in the
case of a corporation having a classified board and not having a provision in
its Certificate of Incorporation to the contrary (as is the case with the
Company), stockholders may remove a director only for cause.
Under the Bylaws, any vacancy in the Board of Directors unless and until
filled by the stockholders, however occurring, may be filled by majority vote of
the remaining Directors, except that a vacancy created by the removal of a
director by the vote of the stockholders or by court order may be filled only by
the affirmative vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present. These provisions, together with
the constraints placed on calling stockholder meetings as discussed below, may
preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
SPECIAL MEETING OF STOCKHOLDERS. The Certificate of Incorporation provides
that special meetings of stockholders of the Company may be called only by the
Chairman of the Board of Directors or Vice Chairman of the Board of Directors,
or by the Chairman, the Vice Chairman or the Secretary at the written request of
a majority of the total number of Directors the Company would have if there were
no vacancies on the Board. The request shall be sent to the Chairman, Vice
Chairman and the Secretary and shall state the purposes of the proposed meeting.
Special meetings of holders of the outstanding Preferred
49
<PAGE>
Stock may be called in the manner and for the purposes provided in the
resolutions of the Board of Directors providing for the issue of such stock.
Business transacted at special meetings shall be confined to the purpose or
purposes stated in the notice of meeting. These provisions will make it more
difficult for stockholders to take actions opposed by the Board of Directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company must be effected at an annual or special meeting of the
stockholders of the Company and may not be effected by any consent in writing of
such stockholders.
ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. The Bylaws
provide that stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at a meeting
of stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 60 days nor more than
90 days prior to the meeting; provided, however, that in the event public
announcement of the date of such annual meeting is first made by the Company
fewer than 70 days prior to the date of such annual meeting, notice by the
stockholder to be timely must be received no later than the close of business on
the tenth (10th) day following the day on which such public announcement was
made by the Company. The Bylaws also specify certain requirements for a
stockholder's notice to be in proper written form. These provisions may preclude
some stockholders from bringing matters before the stockholders at an annual
meeting or from making nominations for directors at a stockholders meeting.
VOTING REQUIREMENTS REGARDING CERTAIN ACTIONS. Certain provisions of the
Certificate of Incorporation require the affirmative vote of the holders of at
least two-thirds of the combined voting power of all shares of the Company
entitled to vote generally in the election of directors, voting together as a
single class, for certain activities. Such an affirmative vote is required for
any Business Combination (as defined in the Certificate of Incorporation)
(unless the Business Combination has been approved by two-thirds of the whole
Board of Directors) and for the adoption of new Bylaws or the repeal or
amendment of existing Bylaws by the stockholders. Similarly, such a vote is
required for alteration, change, amendment, or repeal of, or adoption of any
provision inconsistent with, the provisions of the Certificate of Incorporation
relating to classification, terms and removal of directors, provisions relating
to special meetings of stockholders, and provisions defining certain key terms.
LIMITATION OF LIABILITY
The Certificate of Incorporation provides that to the fullest extent
permitted by the DGCL, as that law may be amended and supplemented from time to
time, a Director of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability (i) for any breach of the Director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which
the Director derived any improper personal benefit. The effect of the provision
of the Certificate of Incorporation is to eliminate the rights of the Company
and its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent behavior) except in the situations described in clauses (i) through
(iv) above. The Bylaws also set forth certain indemnification provisions. The
foregoing provision of the Certificate of Incorporation may reduce the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breaches of their fiduciary duties, even though such an action, if successful,
otherwise might have benefited the Company and its stockholders.
50
<PAGE>
INDEMNIFICATION AGREEMENTS
In addition, the Company has entered into agreements (the "Indemnification
Agreements") with each of its directors and certain of its officers pursuant to
which the Company agrees to indemnify such director or officer against expenses,
judgments, fines or amounts paid in settlement incurred by such director or
officer and arising out of his capacity as a director, officer, employee and/or
agent of the Company or other enterprise of which he is a director, officer,
employee or agent acting at the request of the Company to the maximum extent
permitted by applicable law, subject to certain limitations. In addition, such
director or officer shall be entitled to an advance of expenses, to the maximum
extent authorized or permitted by law, to meet the obligations indemnified
against, subject to certain limitations. Finally, under Delaware law, the
Company may purchase and maintain insurance for the benefit and on behalf of its
directors and officers insuring against all liabilities that may be incurred by
such director or officer in or arising out of his capacity as a director,
officer, employee and/or agent of the Company.
CERTAIN STATUTORY PROVISIONS
Section 203 of the DGCL contains certain provisions that may make more
difficult the acquisition of control of the Company by means of a tender offer,
open market purchase, proxy fight or otherwise. These provisions are designed to
encourage persons seeking to acquire control of the Company to negotiate with
the Board of Directors. However, these provisions could have the effect of
discouraging a prospective acquirer from making a tender offer or otherwise
attempting to obtain control of the Company. To the extent that these provisions
discourage takeover attempts, they could deprive stockholders of opportunities
to realize takeover premiums for their shares or could depress the market price
of shares. Set forth below is a description of the relevant provisions of
Section 203 of the DGCL. This description is intended as summary only and is
qualified in its entirety by reference to Section 203 of the DGCL.
Section 203 of the DGCL prohibits certain "business combination"
transactions between a publicly held Delaware corporation, such as the Company
after the Offering, and any "interested stockholder" for a period of three years
after the date on which such stockholder became an interested stockholder (the
"Time"), unless (i) the board of directors approves, prior to the Time, either
the proposed business combination or the proposed acquisition of stock which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by persons who are both directors and officers or by certain
employee stock plans, or (iii) on or subsequent to the Time, the business
combination with the interested stockholder is approved by the board of
directors and also approved at a stockholders' meeting by the affirmative vote
of the holders of at least two-thirds of the outstanding shares of the
corporation's voting stock other than shares held by the interested stockholder.
For purposes of Section 203, a "business combination" includes certain mergers,
asset sales or other transactions resulting in a financial benefit to the
interested stockholder. The Company, at its option, may exclude itself from the
coverage of Section 203 by amending its charter or Bylaws by action of its
stockholders to exempt itself from coverage, provided that such Bylaw or charter
amendment shall not become effective until 12 months after the date it is
adopted and shall not apply to any business combination between the Company and
any person who became an interested stockholder on or prior to such adoption
(unless the Company, among other things, does not have a class of voting stock
listed on a national securities exchange or on the NASDAQ Stock Market). In
addition, the restrictions of Section 203 may not be applicable to Dennis and
Ann Pence. To date, the Company has not elected to opt out of Section 203 of the
DGCL pursuant to its terms.
In addition to the requirements of Section 203, under the Certificate of
Incorporation, the approval of the holders of two-thirds of the voting power in
the Company is required for certain business combinations involving the Company
and "interested stockholders," defined as persons who, together with affiliates
and associates, own (or within two years, did own) 10% or more of the Company's
voting stock.
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<PAGE>
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
9,745,118 shares of Common Stock. Of these shares, the 2,500,000 shares sold in
this offering plus any additional shares sold upon exercise of the Underwriters'
over allotment option will be freely tradable without restriction or further
registration under the Securities Act except for any of such shares held by
"affiliates" of the Company.
The remaining 7,245,118 shares of Common Stock held by the Existing
Stockholders are "restricted securities" under the Securities Act. Of these
restricted securities 6,963,260 are held by Dennis and Ann Pence and 281,858 are
held by the Dennis C. Pence Lead Annuity Trust and the Elizabeth Ann Pence Lead
Annuity Trust. Dennis and Ann Pence, together with the Company, have agreed not
to sell, contract to sell, or otherwise dispose of any shares of Common Stock
without the consent of Montgomery Securities for a period of 180 days after the
date of this Prospectus. Upon expiration of such agreements, all of such shares
will be eligible for sale in the public markets in accordance with Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the conclusion of this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least two years,
including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of Common stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the three months immediately
preceding the sale is entitled to sell restricted shares pursuant to Rule 144(k)
without regard to the limitations described above, provided that three years
have expired since the later of the date on which such restricted shares were
first acquired from the Company or from an affiliate of the Company.
The Company has granted options to purchase 443,067 shares of Common Stock
to certain officers and key employees of the Company pursuant to the 1996 Plan
and an additional 668,780 shares are available for the grant of future options
under the 1996 Plan. Upon the execution of the Underwriting Agreement associated
with this offering, options to purchase an additional 40,128 shares of Common
Stock will be granted to non-employee directors under the Company's automatic
option grant program. All of the shares underlying these options are subject to
the agreements described above restricting the sale of such shares for a period
of 180 days after the date of this Prospectus. Also upon the execution of the
Underwriting Agreement, the Company plans to grant options to purchase an
estimated 400,000 shares of Common Stock to over 75 employees of the Company who
have not received options from the Company in the past. Following this offering,
the Company intends to file a Registration Statement under the Securities Act to
register shares of Common Stock issuable upon the exercise of stock options
granted under the Company's 1996 Plan. Except as limited by the agreements
described above, shares issued upon the exercise of stock options after the
effective date of such registration statement generally will be available for
sale in the open market. See "Management."
Because there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect the sales made under Rule
144, pursuant to future registration statements, or otherwise may have on any
then-prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
52
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Montgomery Securities and William Blair & Company, L.L.C. (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares if they
purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------ --------------
<S> <C>
Montgomery Securities.........................................................
William Blair & Company, L.L.C................................................
--------------
Total....................................................................... 2,500,000
--------------
--------------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share; and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the initial public offering, the offering price and
other selling terms may be changed by the Representatives. The Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part. The
Representatives have advised the Company that they intend to make a market in
the Common Stock after the effective date of this offering.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of an aggregate of 375,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the shares initially to
be purchased by the Underwriters. To the extent that the Underwriters exercise
this option, the Underwriters will be committed, subject to certain conditions,
to purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and Dennis and Ann
Pence will indemnify the Underwriters and their controlling persons against
certain liabilities, including civil liabilities under the Securities Act, or
will contribute to payments the Underwriters may be required to make in respect
thereof.
The Company's Existing Stockholders have agreed that, subject to certain
limited exceptions, for a period of 180 days after the date of this Prospectus,
they will not offer, sell or dispose of any shares of their Common Stock without
the prior written consent of Montgomery Securities.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
53
<PAGE>
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock will
be determined by negotiations among the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and the
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, the Company's past and present operations, its past
and present earnings and the trend of such earnings, the general conditions of
the securities markets at the time of the offering and the market prices of
publicly traded common stocks of comparable companies in recent periods.
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for the
Company by Brobeck Phleger & Harrison LLP, Palo Alto, California. Certain legal
matters will be passed upon for the Underwriters by Fried, Frank, Harris,
Shriver & Jacobson (a partnership including professional corporations), Los
Angeles, California.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and in the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement, exhibits and schedules. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each such instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. This
Registration Statement and the exhibits and schedules thereto may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. Also, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of that Web site is (http://www.sec.gov).
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent public accountants and
with quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited financial information.
54
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this prospectus, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those described under "Risk Factors" and the following: general
economic and business conditions; competition; success of operating initiatives;
development and operating costs; advertising and promotional efforts; brand
awareness; the existence or adherence to development schedules; the existence or
absence of adverse publicity; availability, locations and terms of sites for
store development; changes in business strategy or development plans; quality of
management; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; labor and
employee benefit costs; changes in, or the failure to comply with, government
regulations; construction costs and other factors referenced in this Prospectus.
See "Risk Factors."
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheet as of March 4, 1995, March 2, 1996 and November 30, 1996, and Unaudited Pro Forma Balance
Sheet as of November 30, 1996............................................................................. F-3
Statement of Operations for the fiscal years ended February 26, 1994, March 4, 1995 and March 2, 1996 and
for the nine months ended December 2, 1995 and November 30, 1996 and unaudited pro forma data for each of
the periods presented..................................................................................... F-4
Statement of Stockholders' Equity for the fiscal years ended February 26, 1994, March 4, 1995 and March 2,
1996, and for the nine months ended December 2, 1995 and November 30, 1996................................ F-5
Statement of Cash Flows for the fiscal years ended February 26, 1994, March 4, 1995 and March 2, 1996, and
for the nine months ended December 2, 1995 and November 30, 1996.......................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Coldwater Creek Inc.:
We have audited the accompanying balance sheets of Coldwater Creek Inc. (a
Delaware corporation) as of March 4, 1995, March 2, 1996 and November 30, 1996,
and the related statements of operations, stockholders' equity and cash flows
for the fiscal years ended February 26, 1994, March 4, 1995 and March 2, 1996,
and the nine month periods ended December 2, 1995 and November 30, 1996. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Coldwater Creek Inc. as of
March 4, 1995, March 2, 1996 and November 30, 1996, and the results of its
operations and its cash flows for the fiscal years ended February 26, 1994,
March 4, 1995 and March 2, 1996, and the nine month periods ended December 2,
1995 and November 30, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Boise, Idaho
December 20, 1996
(except for the subsequent events discussed
in Note 12, as to which the date is
January 4, 1997)
F-2
<PAGE>
COLDWATER CREEK INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
MARCH 4, MARCH 2, ----------------------
1995 1996 ACTUAL
--------- --------- --------- PRO FORMA
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NOTE 11
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 1,695 $ 418 $ 2,276 $ 2,276
Receivables....................................................... 275 1,573 3,553 3,553
Inventories....................................................... 5,811 8,252 20,322 20,322
Prepaid expenses.................................................. 169 174 470 470
Prepaid catalog costs............................................. 389 577 190 190
--------- --------- --------- -----------
Total current assets............................................ 8,339 10,994 26,811 26,811
DEFERRED CATALOG COSTS.............................................. 810 2,082 7,342 7,342
PROPERTY AND EQUIPMENT, net......................................... 9,883 10,374 19,205 19,205
--------- --------- --------- -----------
Total assets.................................................... $ 19,032 $ 23,450 $ 53,358 $ 53,358
--------- --------- --------- -----------
--------- --------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations...................... $ 148 $ 159 $ 113 $ 113
Revolving line of credit.......................................... 3,700 -- -- --
Accounts payable.................................................. 3,469 6,155 19,220 19,220
Accrued liabilities............................................... 399 2,511 6,522 6,522
Distributions payable to stockholders............................. -- -- 4,000 15,915
--------- --------- --------- -----------
Total current liabilities....................................... 7,716 8,825 29,855 41,770
REVOLVING LINE OF CREDIT............................................ -- -- 11,500 11,500
CAPITAL LEASE OBLIGATIONS, net of current portion................... 248 100 15 15
DEFERRED INCOME TAXES............................................... -- -- -- 1,039
--------- --------- --------- -----------
Total liabilities............................................... 7,964 8,925 41,370 54,324
--------- --------- --------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
issued and outstanding.......................................... -- -- -- --
Common Stock, $.01 par value, 15,000,000 shares authorized,
7,245,118 issued and outstanding................................ 72 72 72 72
Additional paid-in capital........................................ 1 1 1 1
Retained earnings (deficit)....................................... 10,995 14,452 11,915 (1,039)
--------- --------- --------- -----------
Total stockholders' equity...................................... 11,068 14,525 11,988 (966)
--------- --------- --------- -----------
Total liabilities and stockholders' equity...................... $ 19,032 $ 23,450 $ 53,358 $ 53,358
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COLDWATER CREEK INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------- -------------------------
FEBRUARY 26, MARCH 4, MARCH 2, DECEMBER 2, NOVEMBER 30,
1994 1995 1996 1995 1996
------------ --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES........................................ $ 31,763 $ 45,223 $ 75,905 $ 44,572 $ 84,710
COST OF SALES.................................... 13,505 19,062 32,786 19,298 39,308
------------ --------- --------- ----------- ------------
GROSS PROFIT..................................... 18,258 26,161 43,119 25,274 45,402
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE...... 12,937 21,502 37,356 23,444 39,239
------------ --------- --------- ----------- ------------
INCOME FROM OPERATIONS........................... 5,321 4,659 5,763 1,830 6,163
INTEREST, NET.................................... 31 98 (236) (274) (175)
OTHER INCOME (EXPENSE)........................... -- -- 87 87 (25)
------------ --------- --------- ----------- ------------
NET INCOME....................................... $ 5,352 $ 4,757 $ 5,614 $ 1,643 $ 5,963
------------ --------- --------- ----------- ------------
------------ --------- --------- ----------- ------------
PRO FORMA INCOME DATA--Note 11 (Unaudited):
Net income as reported......................... $ 5,352 $ 4,757 $ 5,614 $ 1,643 $ 5,963
Pro forma provision for income taxes........... 2,141 1,903 2,246 657 2,385
------------ --------- --------- ----------- ------------
Pro forma net income........................... $ 3,211 $ 2,854 $ 3,368 $ 986 $ 3,578
------------ --------- --------- ----------- ------------
------------ --------- --------- ----------- ------------
Pro forma net income per share................. $ 0.40 $ 0.43
--------- ------------
--------- ------------
Pro forma weighted average number of common
shares outstanding........................... 8,514 8,331
--------- ------------
--------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COLDWATER CREEK INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
FEBRUARY 26, 1994, MARCH 4, 1995 AND MARCH 2, 1996
AND THE NINE MONTHS ENDED DECEMBER 2, 1995 AND NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, February 27, 1993................................... 7,245 $ 72 $ 1 $ 4,013 $ 4,086
Net income................................................... -- -- -- 5,352 5,352
Distributions to Stockholders................................ -- -- -- (1,740) (1,740)
----- ----- ----- --------- ---------
Balance, February 26, 1994................................... 7,245 72 1 7,625 7,698
Net income................................................... -- -- -- 4,757 4,757
Distributions to Stockholders................................ -- -- -- (1,387) (1,387)
----- ----- ----- --------- ---------
Balance, March 4, 1995....................................... 7,245 72 1 10,995 11,068
Net income................................................... -- -- -- 1,643 1,643
Distributions to Stockholders................................ -- -- -- (1,603) (1,603)
----- ----- ----- --------- ---------
Balance, December 2, 1995.................................... 7,245 72 1 11,035 11,108
Net income................................................... -- -- -- 3,971 3,971
Distributions to Stockholders................................ -- -- -- (554) (554)
----- ----- ----- --------- ---------
Balance, March 2, 1996....................................... 7,245 72 1 14,452 14,525
Net income................................................... -- -- -- 5,963 5,963
Distributions to Stockholders................................ -- -- -- (8,500) (8,500)
----- ----- ----- --------- ---------
Balance, November 30, 1996................................... 7,245 $ 72 $ 1 $ 11,915 $ 11,988
----- ----- ----- --------- ---------
----- ----- ----- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COLDWATER CREEK INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------- -------------------------
FEB. 26, MARCH 4, MARCH 2, DECEMBER 2, NOVEMBER 30,
1994 1995 1996 1995 1996
--------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $ 5,352 $ 4,757 $ 5,614 $ 1,643 $ 5,963
Noncash items:
Depreciation and amortization................. 325 579 995 712 1,327
Loss on disposal of equipment................. -- -- -- -- 30
Net change in current assets and liabilities:
Accounts receivable........................... 48 (145) (1,299) (3,267) (1,980)
Inventories................................... (1,445) (2,915) (2,441) (3,773) (12,070)
Prepaid catalog costs......................... (103) (286) (189) 248 387
Prepaid expenses.............................. 47 (143) (5) (408) (296)
Accounts payable.............................. 594 2,171 2,685 8,204 13,065
Accrued liabilities........................... (40) 120 2,112 1,508 4,011
(Increase) decrease in deferred catalog costs... 86 (477) (1,271) (4,894) (5,260)
--------- ----------- ------------- ----------- ------------
Net cash provided by (used in) operating
activities.................................... 4,864 3,661 6,201 (27) 5,177
--------- ----------- ------------- ----------- ------------
INVESTING ACTIVITIES:
Sale of short-term investments.................. 700 3,247 -- -- --
Purchase of short-term investments.............. (2,921) (1,026) -- -- --
Proceeds on sale of equipment................... -- 89 1,105 1,105 --
Purchase of property and equipment.............. (1,647) (6,874) (2,590) (2,258) (10,187)
--------- ----------- ------------- ----------- ------------
Net cash used in investing activities........... (3,868) (4,564) (1,485) (1,153) (10,187)
--------- ----------- ------------- ----------- ------------
FINANCING ACTIVITIES:
Payments on capital leases...................... (128) (149) (136) (110) (132)
Distributions to stockholders................... (1,740) (1,387) (2,157) (1,603) (4,500)
Proceeds from (payments on) revolving lines of
credit, net................................... -- 3,700 (3,700) 1,274 11,500
--------- ----------- ------------- ----------- ------------
Net cash provided by (used in) financing
activities.................................... (1,868) 2,164 (5,993) (439) 6,868
--------- ----------- ------------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (872) 1,261 (1,277) (1,619) 1,858
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 1,306 434 1,695 1,695 418
--------- ----------- ------------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period........ $ 434 $ 1,695 $ 418 $ 76 $ 2,276
--------- ----------- ------------- ----------- ------------
--------- ----------- ------------- ----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest........ $ 53 $ 39 $ 339 $ 335 $ 141
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Coldwater Creek Inc. (the "Company") is a specialty direct mail retailer of
apparel, gifts and jewelry, marketing its merchandise through regular catalog
mailings. The principal markets for the Company's merchandise are individuals
within the United States and Canada, with expansion into Japan in fiscal 1995.
In addition, the Company operates a retail store in Sandpoint, Idaho where it
sells catalog items and unique store merchandise.
INTERIM FINANCIAL INFORMATION
The interim financial statements reflect all adjustments which are of a
normal recurring nature and which are necessary to present fairly, in all
material respects, the results for the periods presented. The results of
operations for the nine months ended November 30, 1996 are not necessarily
indicative of the results to be expected for the entire year. Historically, a
disproportionately higher amount of the Company's net sales and net income have
been realized during its third and fourth fiscal quarters.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
FISCAL PERIODS
References to a fiscal year refers to the calendar year in which such fiscal
year commences. The Company's fiscal year ends on the Saturday closest to
February 28. The fiscal year is generally 52 weeks and periodically consists of
53 weeks. Fiscal 1994 is the only fiscal year presented that consists of 53
weeks. References to a nine month period refer to the 39 weeks ended on the date
indicated.
REVENUE RECOGNITION
The Company recognizes sales and the related cost of sales at the time
merchandise is shipped to customers. The Company provides an allowance for
returns, based on historical experience. Shipping and handling fees charged to
customers and list rental income are netted against selling, general and
administrative expenses in the accompanying statement of operations. Collections
for unshipped orders are reflected as a component of accounts payable.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments that
had a maturity date of three months or less at the date of purchase.
INVENTORIES
Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of first-in, first-out cost or market.
F-7
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CATALOG COSTS
Catalog costs include all costs associated with the production and mailing
of the Company's direct mail catalogs and are classified as prepaid catalog
costs until they are mailed.
When the Company's direct mail catalogs are mailed, catalog costs associated
with the production and mailing are classified as deferred catalog costs and
amortized over the periods in which the related revenues are generated.
Substantially all revenues are generated within the first three months after the
catalog is mailed. In accordance with SEC requirements, deferred catalog costs
are classified as noncurrent assets.
Amortization of deferred catalog costs was $8.5 million in fiscal 1993,
$14.2 million in fiscal 1994 and $24.8 million in fiscal 1995. For the first
nine months of fiscal 1995 and 1996, amortization of deferred catalog costs was
$15.7 million and $22.7 million, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Cost includes expenditures for
major additions and improvements and the interest cost associated with
significant capital additions (not significant for any periods presented).
Maintenance and repairs, which do not increase the useful life of the property,
are charged to operations as incurred.
The net book value of property sold or retired is removed from the asset and
related depreciation accounts, and the net gain or loss is included in the
determination of net income.
The provision for depreciation is computed using the straight-line method.
The estimated useful lives are fifteen to forty years for buildings and land
improvements, and three to seven years for furniture and fixtures and machinery
and equipment, including assets under capital leases.
Effective as of the beginning of fiscal 1996, Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting For the Impairment of
Long-lived Assets and For Long-lived Assets to be Disposed Of" was adopted. The
adoption of this standard did not impact the financial statements.
LEASES
Leases for which the Company assumes substantially all property rights and
risks of ownership are considered capital leases and are capitalized as property
and equipment. The related obligation, net of the current portion, is shown as a
long-term liability. All other leases are considered operating leases and rental
payments are charged to operations as incurred.
INCOME TAXES
For all periods presented, the Company elected to be treated as an S
corporation for federal and state income tax purposes. Accordingly, the
historical statements of operations do not include a provision for income taxes
as the net income of the Company was included in the individual tax returns of
the stockholders. The unaudited pro forma provision for income taxes included in
the statements of operations represent federal and state income taxes that would
have been required had the Company been treated as a C corporation for tax
purposes.
F-8
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The consummation of this offering will terminate the Company's S corporation
status and the Company will thereafter be treated as a C corporation. The
Company will retain the tax basis of the assets and liabilities of the S
corporation as of the Termination Date and will record deferred income taxes for
the tax effect of cumulative temporary differences in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Had
the Company become a C corporation as of November 30, 1996, a provision for
deferred income taxes of $1.0 million would have been recorded, arising from the
following temporary differences (in millions):
<TABLE>
<S> <C>
Prepaid and deferred catalog costs................................... $ 3.0
Accrued sales returns................................................ (1.7)
Other................................................................ (0.3)
---------
$ 1.0
---------
---------
</TABLE>
STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS
The Company accounts for its stock-based employee compensation arrangements
under the provisions of Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." APB 25 recognizes compensation
expense based upon the difference between the market value of the stock and the
option price at the measurement date. The measurement date is the date at which
both the number of options and the exercise price for each option are known. The
Company is not required to and does not intend to adopt the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," but will make additional disclosure in its fiscal 1996 annual
report.
POST-RETIREMENT/POST-EMPLOYMENT BENEFITS
The Company does not provide any post-retirement or post-employment benefits
for employees, other than a qualified profit sharing plan.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash, short-term trade
receivables and payables, borrowing under its revolving lines of credit and a
capital lease for which carrying amounts approximate fair value.
2. REVOLVING LINES OF CREDIT
On March 20, 1995, the Company entered into an agreement (amended on
September 9, 1996) with a bank to renew and increase its revolving credit
facilities. The agreement provides for an unsecured line of credit which allows
the Company to borrow up to $8,500,000 at an interest rate which is five basis
points below the bank's prevailing reference rate or LIBOR plus one and three
quarters percent (1.75%). The unsecured line of credit expires on June 1, 1997.
The agreement also provides for a secured revolving line of credit which allows
the Company to borrow up to $11,500,000 at an interest rate which is equal to
the bank's prevailing reference rate or LIBOR plus one and eighty-five
hundredths percent (1.85%) and is secured by certain real property, equipment
and fixtures of the Company. The secured line of credit
F-9
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. REVOLVING LINES OF CREDIT (CONTINUED)
expires on March 31, 1999. At November 30, 1996, the Company had $11,500,000
outstanding under its secured line of credit at interest rates ranging from
7.29% to 7.85%. The agreement provides that the Company must maintain specified
levels of insurance, tangible net worth and debt service coverage. The agreement
also places restrictions on indebtedness to tangible net worth, mergers and
other items.
In December 1996, the Company received a commitment letter from U.S. Bank of
Idaho which provides for: (i) an unsecured revolving line of credit allowing the
Company to borrow up to $17,500,000 at an interest rate, at the option of the
Company, which is five basis points below the bank's Prime rate or LIBOR plus
one and three quarters percent (1.75%); the unsecured line expires on June 30,
1998; (ii) a secured line of credit which allows the Company to borrow up to
$17,500,000 at an interest rate equal to the bank's Prime rate or LIBOR plus one
and eighty five hundredths percent (1.85%) and is secured with certain real
property, equipment and fixtures of the Company; the secured line expires on
June 30, 2000; and (iii) a separate unsecured line of credit exclusively for the
purpose of issuing standby and commercial letters of credit with an aggregate
face value of no more than $1,000,000. Letters of credit under this facility can
be issued up through June 30, 1998 for expiration by no later than June 30,
1999. As a condition of the unsecured line of credit only, borrowings thereunder
must be fully repaid for at least thirty consecutive days during each twelve
month period.
3. LEASES
CAPITAL LEASES
Certain computer equipment is leased under capital leases. At the end of the
lease term, ownership of the equipment reverts to the Company. The minimum
future lease payments under the capital leases as of March 2, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1996............................................. $ 173
Fiscal 1997............................................. 103
---------
Total minimum lease payments............................ 276
Less amount representing interest....................... (17)
---------
Present value of minimum lease payments................. 259
Less current maturities of capital lease obligations.... (159)
---------
Capital lease obligations, net of current portion....... $ 100
---------
---------
</TABLE>
OPERATING LEASES
The Company leases telephone equipment, office equipment and retail space
under operating leases. Rental expense under these leases was $52,000, $85,000
and $356,000 for the fiscal years 1993, 1994 and 1995, respectively, and
$284,000 and $365,000 for the nine months ended December 2, 1995 and November
30, 1996, respectively. Certain of these operating leases are noncancellable and
have minimum lease payment requirements of $550,000 in fiscal 1996, $804,000 in
fiscal 1997, $645,000 in fiscal 1998, $567,000 in fiscal 1999 and $262,000 in
fiscal 2000.
F-10
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment, net consists of:
<TABLE>
<CAPTION>
MARCH 4, MARCH 2, NOVEMBER 30,
1995 1996 1996
--------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Land..................................................... $ 266 $ 150 $ 150
Building and land improvements........................... 4,187 7,625 11,086
Furniture and fixtures................................... 462 971 1,251
Machinery and equipment.................................. 2,504 3,821 9,469
Construction in progress................................. 3,753 -- 763
--------- --------- ------------
11,172 12,567 22,719
Less: accumulated depreciation........................... 1,289 2,193 3,514
--------- --------- ------------
$ 9,883 $ 10,374 $ 19,205
--------- --------- ------------
--------- --------- ------------
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
MARCH 4, MARCH 2, NOVEMBER 30,
1995 1996 1996
----------- ----------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
Accrued payroll, related taxes and benefits............... $ 181 $ 712 $ 1,695
Accrued sales returns..................................... 150 1,523 4,343
Other..................................................... 68 276 484
----- ----------- ------
$ 399 $ 2,511 $ 6,522
----- ----------- ------
----- ----------- ------
</TABLE>
6. RETIREMENT PLAN
Effective October 8, 1991, and as amended from time to time, the Company
adopted a tax-qualified employee savings, retirement and profit sharing plan
qualified under Section 401(k) of the Internal Revenue Code (the "401(k) Plan")
under which eligible employees may elect to defer their current compensation by
up to certain statutorily prescribed annual limits and to contribute such
amounts to the 401(k) Plan. Contributions to the 401(k) Plan and income earned
on the contributions are not taxable to employees until withdrawn from the
401(k) Plan. All employees with 1,000 hours of service who have been working
with the Company for one year are eligible to participate in the 401(k) Plan.
The Company matches a certain percentage of the employees' contribution and
provides a discretionary profit sharing contribution based on overall
profitability of the Company. Company contributions to the 401(k) Plan were
$119,000, $76,000, and $83,000 for the fiscal years 1993, 1994 and 1995,
respectively, and $69,000 and $205,000 for the nine months ended December 2,
1995 and November 30, 1996, respectively.
F-11
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. 1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") was
adopted by the Board of Directors and approved by the stockholders on March 4,
1996. 1,111,847 shares of Common Stock have been authorized for issuance under
the 1996 Plan.
Options to purchase 443,067 shares of Common Stock have been granted under
the discretionary option grant component of the 1996 Plan, described below, to
certain key employees. Each option may be tendered, along with $6.58, for one
share of the Company's Common Stock. The options granted become exercisable on a
pro-rata basis over four years. The Board of Directors believes that the
exercise price represents the fair market value of the Company's Common Stock at
the date of grant. No compensation expense has been recorded related to these
options.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals, which
include officers and other key employees, non-employee directors and consultants
and other independent advisors, may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock at an
exercise price not less than 85% of their fair market value for non-statutory
options and 100% of their fair market value for incentive options on the grant
date, (ii) the Stock Issuance Program under which such individuals may, in the
Plan Administrator's discretion, be issued shares of Common Stock directly at a
price not less than 100% of their fair market value at the time of issuance or
as a bonus tied to the performance of services and/or the achievement of
performance goals and (iii) the Automatic Option Grant Program under which
option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of their fair market value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion (subject to the provisions of
the 1996 Plan) to determine (i) with respect to options, which eligible
individuals are to receive option grants, the time or times when such option
grants are to be made, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the Federal tax laws, the vesting schedule to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding, and (ii) with respect to stock issuances, the
number of shares to be issued to each eligible person, any vesting schedule to
be applicable and consideration for such shares.
Common Stock purchased upon the exercise of an option must be paid for by
cash or by delivery of certain previously acquired shares of Common Stock with a
fair market value (as of the exercise date) equal to the option exercise price
or, with the consent of the Compensation Committee under the Discretionary
Option Grant Program, by delivery of the optionee's promissory note. With the
Compensation Committee's approval, the employee option holder may elect to
satisfy tax withholding obligations by directing the Company to withhold shares
valued at the amount of the withholding obligation from the number purchased or
by delivery of previously acquired shares of Common Stock.
Upon certain acquisitions of the Company by merger, consolidation or asset
sale, outstanding options and unvested stock issuances will be subject to
accelerated vesting under certain circumstances.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different
F-12
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. 1996 STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
number of option shares with an exercise price per share of 85%, 100% or 110%
(under certain circumstances) of the fair market value of the Common Stock on
the new grant date.
Under the Automatic Option Grant Program, each individual serving as a
non-employee Board member on the date the Underwriting Agreement for this
Offering is executed will receive an option grant on such date for 13,376 shares
of Common Stock, provided such individual has not otherwise been in the prior
employ of the Company. Each individual who first becomes a non-employee Board
member thereafter will receive a 13,376-share option grant on the date such
individual joins the Board, provided such individual has not been in the prior
employ of the Company. In addition, at each Annual Stockholders' Meeting,
beginning with the first Annual Meeting held after the offering, each individual
who is to continue to serve as a non-employee Board member after the meeting
will receive an additional option grant to purchase 1,672 shares of Common Stock
whether or not he or she is standing for reelection at that meeting or has been
in the prior employ of the Company, provided such individual has served as a
non-employee Board member for at least six months.
Each automatic grant will have a maximum term of 10 years, subject to
earlier termination for vested shares not exercised two years following the
optionee's cessation of Board service. The initial 13,376-share grant will vest
in three equal and successive annual installments over the optionee's period of
Board service. Each additional 1,672-share grant will vest upon the optionee's
completion of one year of Board service measured from the grant date. However,
each outstanding option will immediately vest upon (i) certain changes in the
ownership or control of the Company or (ii) the death or disability of the
optionee while serving as a Board member.
The Board may amend or modify the 1996 Plan at any time, subject to certain
limitations. The 1996 Plan will terminate on March 3, 2006, unless sooner
terminated by the Board.
8. REINCORPORATION, COMMON AND PREFERRED STOCK
On March 4, 1996, the Board approved the reincorporation of the Company in
Delaware and the merger of Coldwater Creek Inc. (an Idaho corporation) with and
into Coldwater Creek Inc. (a Delaware corporation), effective April 17, 1996.
The Certificate of Incorporation filed with the State of Delaware authorized
15,000,000 shares of $.01 par value common stock and 1,000,000 shares of $.01
par value preferred stock. As a result of the merger, each share of the Idaho
corporation common stock, $1.00 par value, issued and outstanding was converted
into and exchanged for 140 shares (pre-split) of $.01 par value common stock of
the Delaware corporation.
9. DISTRIBUTIONS TO STOCKHOLDERS
Immediately prior to the consummation of the offering, the stockholders of
the Company (the Existing Stockholders) and the Company intend to enter into an
Agreement for Distribution of Retained Earnings and Tax Indemnification (the
"Agreement"). Pursuant to the Agreement, the remaining undistributed accumulated
S corporation earnings will be distributed in the form of promissory notes
issued by the Company, as of the date of the Company's S corporation status is
terminated. The notes will be paid in full promptly after the closing of the
offering.
The Agreement also provides that (i) the Existing Stockholders will be
indemnified by the Company with respect to federal and state income tax
liabilities as a result of an adjustment to the Company's taxable
F-13
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. DISTRIBUTIONS TO STOCKHOLDERS (CONTINUED)
income which increases the tax liability of the Existing Stockholders for
taxable periods ending prior to the termination of the S corporation status, and
(ii) the Existing Stockholders will indemnify the Company with respect to any
federal and state tax liabilities as a result of an adjustment which decreases
the Existing Stockholders' tax liability for taxable periods ending prior to the
termination of the Company's S corporation status and correspondingly increases
the tax liability of the Company for a taxable period commencing on or after the
termination of the Company's S corporation status.
10. CONTINGENCIES
The Company is involved in litigation and administrative proceedings
primarily arising in the normal course of its business. In the opinion of
management, the Company's recovery, if any, or the Company's liability, if any,
under any pending litigation or administrative proceedings would not materially
affect its financial condition, operations or liquidity.
The Company's direct mail business is based solely in the state of Idaho and
sales taxes are collected solely from customers in the state of Idaho. Various
states have sought to impose on direct marketers the burden of collecting state
sales taxes on the sale of merchandise shipped to that state's residents. The
U.S. Supreme Court has held that the various states, absent Congressional
legislation, may not impose tax collection obligations on an out-of-state mail
order company whose only contacts with the taxing state are the distribution of
catalogs and other advertisement materials through the mail, and whose
subsequent delivery of purchased goods is by mail or interstate common carriers.
In November 1995, however, the Supreme Court let stand a decision of New York's
highest state court requiring an out-of-state catalog company to collect a use
tax (including a retroactive assessment, plus interest) on its mail order sales
in the State, where the Catalog Company's reported contacts with New York
included a limited number of visits by salesforce employees. The Company has not
received an assessment from any state. The Company anticipates that any
legislative changes, if adopted, would be applied only on a prospective basis.
11. PRO FORMA ADJUSTMENTS (UNAUDITED)
UNAUDITED PRO FORMA BALANCE SHEET
The unaudited pro forma balance sheet as of November 30, 1996 reflects an
assumed S corporation distribution to the Existing Stockholders of the Company
of $11.9 million, which represents the accumulated undistributed earnings of the
Company as of that date, and this distribution has been included in
distributions payable to stockholders in the unaudited pro forma balance sheet.
Distributions of approximately $4.3 million are expected to be made related to
earnings for the period from December 1, 1996 through the termination of the S
corporation status. The unaudited pro forma balance sheet as of November 30,
1996 also reflects an estimated deferred income tax liability of $1.0 million
that would be recorded if the Company terminated its S corporation status at
that date.
If the unaudited pro forma balance sheet had included the sale of 2.5
million shares of the Company's common stock at an assumed initial public
offering price of $14 per share and the application of the estimated net
proceeds therefrom of $31.5 million to pay the unaudited pro forma distributions
payable to stockholders of $15.9 million and amounts outstanding under the
long-term revolving line of credit of $11.5 million, then as of November 30,
1996, unaudited pro forma working capital, total assets, total liabilities, and
total stockholders' equity would have been $5.1 million, $57.5 million, $26.9
million, and $30.6 million, respectively.
F-14
<PAGE>
COLDWATER CREEK INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
11. PRO FORMA ADJUSTMENTS (UNAUDITED) (CONTINUED)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
The unaudited pro forma income data presents the pro forma effects on
historical net income adjusted for pro forma provision for income taxes. Such
provision reflects the income taxes had the Company been taxed as a C
corporation for all periods presented at the statutory rates in effect at the
time. The effective tax rate is 40% for all periods presented. The pro forma
provision for income taxes varies from the amount which would be provided by
applying the statutory federal rate to historic net income. The primary reason
for this difference is the effect of state of Idaho income taxes.
Pro forma net income per share is based on the weighted average shares of
Common Stock and stock equivalents outstanding, including actual shares
outstanding, shares deemed to be outstanding and the dilutive effect of shares
issuable under stock options. The shares deemed to be outstanding represent the
number of shares being offered by the Company hereby sufficient to fund an
assumed S corporation distribution of approximately $14.5 million at March 2,
1996 or approximately $11.9 million at November 30, 1996 (based on the amount of
previously undistributed S corporation earnings at such dates). Supplemental
earnings per share for the periods ended March 2, 1996 and November 30, 1996
would have been $0.40 and $0.40, respectively, had the Company also assumed
issuance of common shares at the beginning of those periods sufficient to retire
the debt outstanding (shares outstanding would have been approximately 8.5
million and 9.2 million, respectively). See "S Corporation Distributions."
12. SUBSEQUENT EVENTS
In January 1997, the Company's Board of Directors approved a 1.67 for 1
stock split, in the form of a stock dividend, of the Company's outstanding
Common Stock. All common share and per share amounts in the accompanying
financial statements have been adjusted retroactively to give effect to this
stock split and the stock conversion discussed in Note 8.
Upon the execution of the Underwriting Agreement, the Company plans to grant
options under the 1996 Plan to purchase an estimated 400,000 shares of Common
Stock to over 75 employees of the Company who have not received options from the
Company in the past. The exercise price for the options will be equal to the
initial public offering price. The options vest over a four-year period measured
from the grant date.
F-15
<PAGE>
[INSIDE BACK COVER]
[collage of Company merchandise]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 6
S CORPORATION DISTRIBUTIONS.................... 14
USE OF PROCEEDS................................ 15
DIVIDEND POLICY................................ 15
CAPITALIZATION................................. 16
DILUTION....................................... 17
SELECTED FINANCIAL AND OPERATING DATA.......... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 19
BUSINESS....................................... 25
MANAGEMENT..................................... 40
CERTAIN TRANSACTIONS........................... 46
PRINCIPAL STOCKHOLDERS......................... 47
DESCRIPTION OF CAPITAL STOCK................... 48
SHARES ELIGIBLE FOR FUTURE SALE................ 52
UNDERWRITING................................... 53
LEGAL MATTERS.................................. 54
EXPERTS........................................ 54
ADDITIONAL INFORMATION......................... 54
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS................................... 55
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
----------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,500,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of Common Stock being registered. All the amounts shown are estimates except for
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
application fee.
<TABLE>
<S> <C>
SEC Registration Fee.................................................. $ 12,196.97
NASD Filing Fee....................................................... 4,525.00
Nasdaq National Market Application Fee................................ 40,862.80
Blue Sky Qualification Fee and Expenses............................... 20,000.00
Printing and Engraving Expenses....................................... 125,000.00
Legal Fees and Expenses............................................... 330,000.00
Accounting Fees and Expenses.......................................... 280,000.00
Transfer Agent and Registrar Fees..................................... 750.00
Directors and Officers Insurance Premium.............................. 150,000.00
Miscellaneous......................................................... 36,665.23
------------
Total............................................................. 1,000,000.00
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. The
Registrant's Certificate of Incorporation and/or Bylaws provide for mandatory
indemnification of its directors, officers and certain fiduciaries to the
maximum extent permitted by the Delaware General Corporation Law. The Registrant
has entered into indemnification agreements with certain of its officers and
directors, a form of which is attached as Exhibit 10.1.1 hereto and incorporated
herein by reference. The indemnification agreements provide the Registrant's
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. The Company has also obtained directors and
officers insurance to insure its directors and officers against certain
liabilities, including certain liabilities under the Securities Laws. Reference
is also made to the Underwriting Agreement, to be filed as Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1993, the Company has issued options to purchase securities
without registration under the Securities Act of 1933, as amended (the "Act") in
the transactions and in reliance on the exemptions from registration described
below.
On March 4, 1996, the Company issued options to purchase an aggregate of
443,067 shares of Common Stock pursuant to the 1996 Stock Option/Stock Issuance
Plan in reliance on Rule 701 promulgated under the Act. These options were
granted to employees and certain executive officers of the Company.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen Stock Certificate
5.1* Opinion of Brobeck Phleger & Harrison LLP
10.1.1* Form of Indemnity Agreement between the Registrant and each of its Directors
10.1.2* Form of Agreement for Distribution of Retained Earnings and Tax Indemnification between the Company and
Dennis and Ann Pence
10.1.3* Lease to Coeur d'Alene Call Facility
10.1.4* Lease to Cedar Street Bridge Store
10.1.5* Lease to Jackson Hole Retail Store
10.1.6* Loan Agreement dated September 9, 1996 between the Company and U.S. Bank of Idaho, formerly West One
Bank, Idaho
10.1.7* Commitment Letter between U.S. Bank of Idaho and the Company dated December 18, 1996
10.2* 1996 Stock Option/Stock Issuance Plan
10.2.1* Form of Stock Option Agreement under 1996 Stock Option/Stock Issuance Plan
11* Computation of Pro Forma and Supplemental earnings per share
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Brobeck Phleger & Harrison LLP (included in Exhibit 5.1)
23.3* Consent of F. Curtis Barry & Company
24.1* Power of Attorney (included on the signature page to the Registration Statement)
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Previously Filed
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the
II-2
<PAGE>
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sandpoint,
State of Idaho, on this 17th day of January, 1997.
COLDWATER CREEK INC.
By: * DENNIS PENCE
-----------------------------------------
Dennis Pence
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
* DENNIS PENCE Officer, Vice Chairman
- ------------------------------ of the Board of January 17, 1997
Dennis Pence Directors, and Director
* ANN PENCE Chairman of the Board of
- ------------------------------ Directors, Creative January 17, 1997
Ann Pence Director and Director
Chief Financial Officer,
Vice President of
Finance and
* DONALD ROBSON Administration,
- ------------------------------ Treasurer, Secretary, January 17, 1997
Donald Robson and Director (PRINCIPAL
FINANCIAL AND ACCOUNTING
OFFICER)
* ROBERT H. MCCALL
- ------------------------------ Director January 17, 1997
Robert H. McCall
* JAMES R. ALEXANDER
- ------------------------------ Director January 17, 1997
James R. Alexander
* CURT HECKER
- ------------------------------ Director January 17, 1997
Curt Hecker
*By /s/ DONALD ROBSON
- ----------------------------- January 17, 1997
Donald Robson
(Attorney-in-fact)
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Coldwater Creek Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Coldwater Creek Inc. included in this Registration
Statement, and have issued our report thereon dated December 20, 1996 (except
for the subsequent events discussed in Note 12, as to which the date is January
4, 1997). Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule on page S-2 of this Registration
Statement is the responsibility of the Company's management and is presented for
the purpose of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boise, Idaho
December 20, 1996
(except for the subsequent events discussed
in Note 12, as to which the date is
January 4, 1997)
S-1
<PAGE>
COLDWATER CREEK INC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS WRITE-OFFS BALANCE AT
BEGINNING CHARGED TO AGAINST END OF
OF PERIOD OPERATIONS RESERVE PERIOD
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Reserve for Returns:
Fiscal Year Ended February 26, 1994........................ $ 72,000 $ 762,000 $ 756,000 $ 78,000
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
Fiscal Year Ended March 4, 1995............................ $ 78,000 $ 2,355,000 $ 2,283,000 $ 150,000
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
Fiscal Year Ended March 2, 1996............................ $ 150,000 $ 6,245,000 $ 4,872,000 $ 1,523,000
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement.................................................................
3.1* Amended and Restated Certificate of Incorporation..............................................
3.2* Bylaws.........................................................................................
4.1* Specimen Stock Certificate.....................................................................
5.1* Opinion of Brobeck Phleger & Harrison LLP......................................................
10.1.1* Form of Indemnity Agreement between the Registrant and each of its Directors...................
10.1.2* Form of Agreement for Distribution of Retained Earnings and Tax Indemnification between the
Company and Dennis and Ann Pence...............................................................
10.1.3* Lease to Coeur d'Alene Call Facility...........................................................
10.1.4* Lease to Cedar Street Bridge Store.............................................................
10.1.5* Lease to Jackson Hole Retail Store.............................................................
10.1.6* Loan Agreement dated September 9, 1996 between the Company and U.S. Bank of Idaho, formerly
West One Bank, Idaho...........................................................................
10.1.7* Commitment Letter between U.S. Bank of Idaho and the Company dated December 18, 1996...........
10.2* 1996 Stock Option/Stock Issuance Plan..........................................................
10.2.1* Form of Stock Option Agreement under 1996 Stock Option/Stock Issuance Plan.....................
11* Computation of Pro Forma and Supplemental earnings per share...................................
23.1 Consent of Arthur Andersen LLP.................................................................
23.2* Consent of Brobeck Phleger & Harrison LLP (included in Exhibit 5.1)............................
23.3* Consent of F. Curtis Barry & Company...........................................................
24.1* Power of Attorney (included on the signature page to the Registration Statement)...............
27.1* Financial Data Schedule........................................................................
</TABLE>
- ------------------------
* Previously Filed
<PAGE>
2,500,000 SHARES
COLDWATER CREEK INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED JANUARY ___, 1997
<PAGE>
TABLE OF CONTENTS
SECTION 1. REPRESENTATIONS AND WARRANTIES............... 2
COMPLIANCE WITH REGISTRATION REQUIREMENTS........... 2
OFFERING MATERIALS FURNISHED TO UNDERWRITERS........ 3
DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY.... 3
THE UNDERWRITING AGREEMENT.......................... 3
AUTHORIZATION OF THE COMMON SHARES.................. 3
NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS.. 3
NO MATERIAL ADVERSE CHANGE.......................... 3
INDEPENDENT ACCOUNTANTS............................. 4
PREPARATION OF THE FINANCIAL STATEMENTS............. 4
INCORPORATION AND GOOD STANDING OF THE COMPANY...... 4
CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS...... 4
STOCK EXCHANGE LISTING; NASD APPROVAL MATTERS....... 5
NON-CONTRAVENTION OF EXISTING INSTRUMENTS;
NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED... 5
NO MATERIAL ACTIONS OR PROCEEDINGS.................. 6
INTELLECTUAL PROPERTY RIGHTS........................ 6
ALL NECESSARY PERMITS, ETC.......................... 6
TITLE TO PROPERTIES................................. 6
TAX LAW COMPLIANCE.................................. 6
COMPANY NOT AN INVESTMENT COMPANY................... 7
INSURANCE........................................... 7
NO PRICE STABILIZATION OR MANIPULATION.............. 7
RELATED PARTY TRANSACTIONS.......................... 7
NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS......... 7
COMPANY'S ACCOUNTING SYSTEM......................... 7
COMPLIANCE WITH ENVIRONMENTAL LAWS.................. 8
ERISA COMPLIANCE.................................... 8
SECTION 2. PURCHASE, SALE AND DELIVERY OF COMMON SHARES. 9
THE FIRM COMMON SHARES.............................. 9
THE FIRST CLOSING DATE.............................. 9
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. 9
PUBLIC OFFERING OF THE COMMON SHARES................ 10
PAYMENT FOR THE COMMON SHARES.......................
DELIVERY OF THE COMMON SHARES.......................
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS.......... 11
SECTION 3. ADDITIONAL COVENANTS......................... 11
REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND
SUPPLEMENTS....................................... 11
SECURITIES ACT COMPLIANCE........................... 11
AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND
OTHER SECURITIES ACT MATTERS...................... 12
COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO
THE PROSPECTUS.................................... 12
BLUE SKY COMPLIANCE................................. 12
USE OF PROCEEDS..................................... 13
TRANSFER AGENT...................................... 13
EARNINGS STATEMENT.................................. 13
PERIODIC REPORTING OBLIGATIONS...................... 13
AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES 13
<PAGE>
FUTURE REPORTS TO THE REPRESENTATIVES............... 13
SECTION 4. PAYMENT OF EXPENSES.......................... 14
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE
UNDERWRITERS................................. 14
ACCOUNTANTS' COMFORT LETTER......................... 15
COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP
ORDER, NO OBJECTION FROM NASD..................... 15
NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE. 15
OPINION OF COUNSEL FOR THE COMPANY.................. 16
OPINION OF COUNSEL FOR THE UNDERWRITERS............. 16
OFFICERS' CERTIFICATE............................... 16
BRING-DOWN COMFORT LETTER........................... 16
LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE
COMPANY........................................... 17
ADDITIONAL DOCUMENTS................................ 17
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES...... 17
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.............. 17
SECTION 8. INDEMNIFICATION.............................. 18
INDEMNIFICATION OF THE UNDERWRITERS................. 18
INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND
OFFICERS.......................................... 19
NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES.. 20
SETTLEMENTS......................................... 20
SECTION 9. CONTRIBUTION................................. 21
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL
UNDERWRITERS................................ 22
SECTION 11. TERMINATION OF THIS AGREEMENT............... 23
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE
DELIVERY.................................... 24
SECTION 13. NOTICES..................................... 24
SECTION 14. SUCCESSORS.................................. 25
SECTION 15. PARTIAL UNENFORCEABILITY.................... 25
SECTION 16. GOVERNING LAW PROVISIONS.................... 25
SECTION 17. GENERAL PROVISIONS.......................... 25
<PAGE>
UNDERWRITING AGREEMENT
January __, 1997
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY, L.L.C.
As Representatives of the Several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Coldwater Creek Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 2,500,000 shares (the "Firm
Common Shares") of its Common Stock, par value $0.01 per share (the "Common
Stock"). In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 375,000 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2. The Firm Common Shares and, if and to
the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares." Montgomery Securities and William
Blair & Company, L.L.C. have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File
No. 333-16651), which contains a form of prospectus to be used in connection
with the public offering and sale of the Common Shares. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of effectiveness pursuant
to Rule 430A or Rule 434 under the Securities Act, is called the "Registration
Statement." Any registration statement filed by the Company pursuant to
Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement," and from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include the
Rule 462(b) Registration Statement. Such prospectus, in the form first used by
the Underwriters to confirm sales of the Common Shares, is called the
"Prospectus"; PROVIDED, HOWEVER, if the Company has elected to rely upon
Rule 434 under the Securities Act (and has obtained Montgomery Securities'
consent), the term "Prospectus" shall mean the Company's prospectus subject to
<PAGE>
completion (each, a "preliminary prospectus") dated [___] (such preliminary
prospectus is called the "Rule 434 preliminary prospectus"), together with the
applicable term sheet (the "Term Sheet") prepared and filed by the Company with
the Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus,
the Prospectus or the Term Sheet, or any amendments or supplements to any of
the foregoing, shall include any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval System
("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been
instituted or are pending or, to the best knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation
S-T under the Securities Act), was identical to the copy thereof delivered
to the Underwriters for use in connection with the offer and sale of the
Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective, complied in all material respects with the
Securities Act and did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus, as amended
or supplemented, as of its date, did not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The representations and warranties set forth in
the two immediately preceding sentences do not apply to statements in or
omissions from the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment thereto, or the Prospectus, or
any amendments or supplements thereto, made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by the
2
<PAGE>
Representatives expressly for use therein. There are no contracts or
other documents required to be described in the Prospectus or to be
filed as exhibits to the Registration Statement which have not been
described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to each Representative one complete manually signed copy of the
Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company
has not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with
the offering and sale of the Common Shares other than a preliminary
prospectus, the Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement, will be validly issued, fully paid
and nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are
no persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the earnings,
business or operations, whether or not arising from transactions in the
ordinary course of business, of the Company (any such change is called a
"Material Adverse Change"); (ii) the Company has not incurred any material
liability or obligation, indirect, direct or contingent, not in the ordinary
course of business nor entered into any material transaction or agreement not
in the ordinary course of business; and (iii) there has been no dividend or
3
<PAGE>
distribution of any kind declared, paid or made by the Company on any class
of capital stock or repurchase or redemption by the Company of any class of
capital stock.
(h) INDEPENDENT ACCOUNTANTS. Arthur Andersen LLP, who have
expressed their opinion with respect to the financial statements (which term
as used in this Agreement includes the related notes thereto) filed with the
Commission as a part of the Registration Statement and included in the
Prospectus and in the Registration Statement, are independent public or
certified public accountants as required by the Securities Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial
statements filed with the Commission as a part of the Registration Statement
and included in the Prospectus present fairly the financial position of the
Company as of and at the dates indicated and the results of its operations
and cash flows for the periods specified. Such financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved, except as may
be stated in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration
Statement. The financial data set forth in the Prospectus under the captions
"Prospectus Summary--Summary Financial and Operating Data," "Selected
Financial and Operating Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY. The Company
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement. The Company is duly qualified
as a foreign corporation to transact business and is in good standing in the
State of Idaho and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the State of
Idaho) where the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity.
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The
authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" (other than for
subsequent issuances, if any, pursuant to employee benefit plans described in
the Prospectus or upon exercise of outstanding options described in the
Prospectus). The rights, preferences and privileges of the Common Stock
(including the Common Shares) conforms in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and non-assessable and have been issued in compliance
with federal
4
<PAGE>
and state securities laws. None of the outstanding shares of Common
Stock were issued in violation of any preemptive rights, rights of
first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable
for, any capital stock of the Company other than those accurately described
in the Prospectus. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(l) STOCK EXCHANGE LISTING; NASD APPROVAL. The Common Shares have
been approved for inclusion on the Nasdaq National Market, subject only to
official notice of issuance. The National Association of Securities Dealers,
Inc. (the "NASD") has approved the Underwriters' participation in the
offering and distribution of the Common Shares.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. The Company is not in violation of
its charter or by-laws or is in default (or, with the giving of notice or
lapse of time, would be in default) ("Default") in the performance or
observance of any obligation, agreement, covenant or condition contained in
any indenture, mortgage, loan or credit agreement, note, contract, franchise,
lease or other instrument to which the Company is a party or by which it may
be bound (including, without limitation, the Company's Revolving Credit
Facility with U.S. Bank of Idaho, as lender), or to which any of the property
or assets of the Company is subject (each, an "Existing Instrument"), except
for such Defaults as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus (i) have been duly authorized by all necessary
corporate action and will not result in any violation of the provisions of
the charter or by-laws of the Company, (ii) will not conflict with or
constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company pursuant to, any Existing Instrument, except for such conflicts,
breaches, Defaults, liens, charges or encumbrances as would not, individually
or in the aggregate, result in a Material Adverse Change and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company. No consent,
approval, authorization or other order of, or registration or filing with,
any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and by the
Prospectus, except such as have been obtained or made by the Company and are
in full force and effect under the Securities Act, applicable state
securities or blue sky laws and from the NASD.
5
<PAGE>
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened, (i) against or affecting the Company,
(ii) which has as the subject thereof any officer or director of, or property
owned or leased by, the Company or (iii) relating to environmental or
discrimination matters, where in any such case, (A) there is a reasonable
possibility that such action, suit or proceeding might be determined
adversely to the Company and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the employees
of the Company exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses
sufficient trademarks, trade names, patent rights, mask works, copyrights,
licenses, approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct its business
as now conducted; and the timely expiration of any of such Intellectual
Property Rights in accordance with its terms would not result in a Material
Adverse Change. The Company has not received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, could
result in a Material Adverse Change.
(p) ALL NECESSARY PERMITS, ETC. The Company possesses such valid
and current certificates, authorizations or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to conduct
its business, and the Company has not received any notice of proceedings
relating to the revocation or modification of, or non-compliance with, any
such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could result in
a Material Adverse Change.
(q) TITLE TO PROPERTIES. The Company has good and marketable
title to all the properties and assets reflected as owned in the financial
statements referred to in Section 1(j) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects, except
such as do not materially and adversely affect the value of such property and
do not materially interfere with the use made or proposed to be made of such
property by the Company. The real property, improvements, equipment and
personal property held under lease by the Company are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company.
(r) TAX LAW COMPLIANCE. The Company has filed all necessary
federal, state and foreign income and franchise tax returns and has paid all
taxes required to be paid by it and, if due and payable, any related or
similar assessment, fine or penalty levied against it. The Company has made
adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(j) above in
6
<PAGE>
respect of all federal, state and foreign income and franchise taxes
for all periods as to which the tax liability of the Company has not been
finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY." The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not an
"investment company" or an entity "controlled" by an "investment company"
within the meaning of Investment Company Act and will conduct its business in
a manner so that it will not become subject to the Investment Company Act.
(t) INSURANCE. The Company is insured by recognized financially
sound and reputable institutions with policies in such amounts and with such
deductibles and covering such risks generally deemed adequate and customary
for its business including, but not limited to, policies covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and such other risks. The Company has no
reason to believe that it will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change in the Company. The Company has not
been denied any insurance coverage which it has sought or for which it has
applied.
(u) NO PRICE STABILIZATION OR MANIPULATION. The Company has not
taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(v) RELATED PARTY TRANSACTIONS. There are no business
relationships or related-party transactions involving the Company or any
other person required to be described in the Prospectus which have not been
described as required.
(w) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the
Company nor, to the best of the Company's knowledge, any employee or agent of
the Company, has made any contribution or other payment to any official of,
or candidate for, any federal, state or foreign office in violation of any
law or of the character required to be disclosed in the Prospectus.
(x) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system
of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
7
<PAGE>
(y) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i) the
Company is not in violation of any federal, state, local or foreign law or
regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including
without limitation, laws and regulations relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances, petroleum and petroleum
products (collectively, "Materials of Environmental Concern"), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental
authorizations required for the operation of the business of the Company
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company received any written communication,
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company is in violation of any Environmental Law;
(ii) there is no claim, action or cause of action filed with, or
investigation commenced by, a court or governmental authority with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment,
of any Material of Environmental Concern at any location owned, leased or
operated by the Company, now or in the past (collectively, "Environmental
Claims"), pending or, to the best of the Company's knowledge, threatened
against the Company or any person or entity whose liability for any
Environmental Claim the Company has retained or assumed either contractually
or by operation of law; and (iii) to the best of the Company's knowledge,
there are no past or present actions, activities, circumstances, conditions,
events or incidents, including, without limitation, the release, emission,
discharge, presence or disposal of any Material of Environmental Concern,
that reasonably could result in a violation of any Environmental Law or form
the basis of a potential Environmental Claim against the Company or against
any person or entity whose liability for any Environmental Claim the Company
has retained or assumed either contractually or by operation of law.
(z) ERISA COMPLIANCE. The Company and any "employee benefit plan"
(as defined under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company or its
"ERISA Affiliates" (as defined below) are in compliance in all material
respects with ERISA. "ERISA Affiliate" means, with respect to the Company,
any member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the regulations
and published interpretations thereunder (the "Code") of which the Company is
a member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the
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Company or any of its ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company or any of its ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount
of unfunded benefit liabilities" (as defined under ERISA). Neither the
Company nor any of its ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect
to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit
plan" established or maintained by the Company or any of its ERISA Affiliates
that is intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
THE FIRM COMMON SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth.
On the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Underwriters agree, severally and not jointly, to purchase from the Company
the respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
THE FIRST CLOSING DATE. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made
at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Representatives) at 6:00 a.m., Pacific Time, on [___], or such other time and
date not later than 10:30 a.m., Pacific Time, on [___] as the Representatives
shall designate by notice to the Company (the time and date of such closing are
called the "First Closing Date"). The Company hereby acknowledges that
circumstances under which the Representatives may provide notice to postpone
the First Closing Date as originally scheduled include, but are in no way
limited to, any determination by the Company or the Representatives to
recirculate to the public copies of an amended or supplemented Prospectus or a
delay as contemplated by the provisions of Section 10.
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 375,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the
Underwriters solely in covering any over-allotments in connection with the sale
and distribution of the Firm Common Shares. The option granted hereunder may
be exercised at any time (but not more than once) upon notice
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by the Representatives to the Company, which notice may be given at any time
within 30 days from the date of this Agreement. Such notice shall set forth
(i) the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, (ii) the names and denominations in
which the certificates for the Optional Common Shares are to be registered
and (iii) the time, date and place at which such certificates will be
delivered (which time and date may be simultaneous with, but not earlier
than, the First Closing Date; and in such case the term "First Closing Date"
shall refer to the time and date of delivery of certificates for the Firm
Common Shares and the Optional Common Shares). Such time and date of
delivery, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of
such notice of exercise. If any Optional Common Shares are to be purchased,
each Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Representatives may determine) that bears the same proportion
to the total number of Optional Common Shares to be purchased as the number
of Firm Common Shares set forth on Schedule A opposite the name of such
Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
PUBLIC OFFERING OF THE COMMON SHARES. The Representatives hereby
advise the Company that the Underwriters intend to offer for sale to the
public, as described in the Prospectus, their respective portions of the Common
Shares as soon after this Agreement has been executed and the Registration
Statement has been declared effective as the Representatives, in their sole
judgment, have determined is advisable and practicable. The Representatives
hereby further advise the Company that (i) the Underwriters will offer the
Common Shares for sale to the public initially at a price of $[___] per share
and to certain dealers selected by the Representatives at a price that
represents a concession of not more than $[___] per share from such initial
public offering price and (ii) any Underwriter may allow, and such dealers may
reallow, a concession of not more than $[___] per share to any other
Underwriter or to certain other dealers.
PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares shall
be made at the First Closing Date (and, if applicable, at the Second Closing
Date) by wire transfer of immediately available funds to the order of the
Company.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as a Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have
been received by the Representatives by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
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DELIVERY OF THE COMMON SHARES. The Company shall deliver, or cause
to be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters, certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form
and registered in such names and denominations as the Representatives shall
have requested at least two full business days prior to the First Closing Date
(or the Second Closing Date, as the case may be) and shall be made available
for inspection on the business day preceding the First Closing Date (or the
Second Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. Time shall be of the essence, and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 4:00 p.m.
on the business day following the date the Common Shares are released by the
Underwriters for sale to the public, the Company shall delivery or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS.
The Company further covenants and agrees with each Underwriter as
follows:
(a) REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND
SUPPLEMENTS. During such period, beginning on the date hereof and ending on
a date no earlier than the First Closing Date, as in the opinion of counsel
for the Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or
supplement, and the Company shall not file any such proposed amendment or
supplement to which the Representatives reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of this Agreement,
the Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing of
any post-effective amendment to the Registration Statement or any amendment
or supplement to any preliminary prospectus or the Prospectus, (iii) of the
time and date that any post-effective amendment to the Registration Statement
becomes effective and (iv) of the
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issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereto or
of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend
or terminate from listing or quotation the Common Stock from any
securities exchange upon which the it is listed for trading or included
or designated for quotation, or of the threatening or initiation of any
proceedings for any of such purposes. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. Additionally, the
Company agrees that it shall comply with the provisions of Rules 424(b), 430A
and 434, as applicable, under the Securities Act and will use its reasonable
efforts to confirm that any filings made by the Company under such
Rule 424(b) were received in a timely manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER
SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period, any event
shall occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(a) hereof), file with the Commission and furnish at its
own expense to the Underwriters and to dealers, amendments or supplements to
the Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the Prospectus
is delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS.
The Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the Blue Sky or state securities laws of those jurisdictions designated by
the Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Common Shares. The Company shall not be required
to qualify as a foreign corporation or to take any action that would subject
it to general service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Representatives promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company
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shall use its best efforts to obtain the withdrawal thereof at the
earliest possible moment.
(f) USE OF PROCEEDS. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under
the caption "Use of Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company will
make generally available to its security holders and to the Representatives
an earnings statement (which need not be audited) covering the twelve-month
period ending _______________, 1998 that satisfies the provisions of Section
11(a) of the Securities Act.
(i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents required
to be filed under the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder (collectively, the "Exchange Act").
Additionally, the Company shall file with the Commission all reports on
Form SR as may be required under Rule 463 under the Securities Act.
(j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During
the period of 180 days following the date of the Prospectus, the Company
agrees that it will not, without the prior written consent of Montgomery
Securities (which consent may be withheld at the sole discretion of
Montgomery Securities), on behalf of the several Underwriters, directly or
indirectly, sell, offer or contract to sell, grant any option for the sale
of, or otherwise dispose of or transfer, or announce the offering of, or file
any registration statement under the Securities Act in respect of, any shares
of Common Stock or any debt or equity securities convertible into or
exchangeable or exercisable for Common Stock (other than as contemplated by
this Agreement with respect to the Common Shares); PROVIDED, HOWEVER, that
the Company may issue shares of its Common Stock or options to purchase its
Common Stock, or Common Stock upon exercise of options, pursuant to any stock
option, stock bonus or other stock plan or arrangement described in the
Prospectus.
(k) FUTURE REPORTS TO THE REPRESENTATIVE. During the period of
five years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111 Attention: John Berg: (i) as soon
as practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close of
such fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by
the Company with the Commission, the NASD or any securities
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exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common Stock.
The Representatives, on behalf of the several Underwriters, may, in their
sole discretion, waive in writing the performance by the Company of any one or
more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all
costs, fees and expenses incurred in connection with the performance of its
obligations hereunder and in connection with the transactions contemplated
hereby, including without limitation (i) all expenses incident to the issuance
and delivery of the Common Shares (including all printing and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the Common
Stock, (iii) all necessary issue, transfer and other stamp taxes in connection
with the issuance and sale of the Common Shares to the Underwriters, (iv) all
fees and expenses of the Company's counsel, independent public or certified
pubic accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement (including financial statements, exhibits,
schedules, consents and certificates of experts), each preliminary prospectus
and the Prospectus, and all amendments and supplements thereto, and this
Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the Blue Sky laws, and, if
requested by the Representatives, preparing and printing a "Blue Sky Survey" or
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident
to, and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the NASD's review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii) the
fees and expenses associated with including the Common Shares on the Nasdaq
National Market and (ix) all other fees, costs and expenses referred to in
Item 14 of Part II of the Registration Statement. Except as provided in this
Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall
pay all of their own expenses, including the fees and disbursements of their
counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing
Date as though then made and, with respect to the Optional Common Shares, as of
the Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
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(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the
Representatives shall have received from Arthur Andersen LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance satisfactory
to the Representatives, containing statements and information of the type
ordinarily included in accountant's "comfort letters" to underwriters with
respect to the audited and unaudited financial statements and certain
financial information contained in the Registration Statement and the
preliminary prospectus in the Registration Statement when declared effective
(and the Representatives shall have received at least an additional two
original or conformed copies of such accountants' letter for each of the
several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective amendment
shall have become effective; or, if the Company elected to rely upon
Rule 434 under the Securities Act, and obtained the Representatives'
consent thereto, the Company shall have filed a Term Sheet with the
Commission in the manner and within the time period required by such
Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect
and no proceedings for such purpose shall have been instituted or
threatened by the Commission; and
(iii) The NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and arrangements.
(c) NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE. For the
period from and after effectiveness of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Representatives there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction of
the possible change, in the rating accorded any securities of the Company
by any "nationally
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recognized statistical rating organization" as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Company, dated as of such Closing Date, the form of which is attached
as Exhibit A (and the Representatives shall have received at least an
additional two original or conformed copies of such counsel's legal opinion
for each of the several Underwriters).
(e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters set
forth in paragraphs (i), (iv) through (xi), inclusive, and the next-to-last
paragraph of Exhibit A (and the Representatives shall have received at least
an additional two original or conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(f) OFFICERS' CERTIFICATE. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set
forth in subsections (b)(ii) and (c) of this Section 5, and further to the
effect that:
(i) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and correct with
the same force and effect as though expressly made on and as of such
Closing Date; and
(ii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to such Closing Date.
(g) BRING-DOWN COMFORT LETTER. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received from
Arthur Andersen LLP, independent public or certified public accountants for
the Company, a letter dated such date, in form and substance satisfactory to
the Representatives, to the effect that they reaffirm the statements made in
the letter furnished by them pursuant to subsection (a) of this Section 5,
except that the specified date referred to therein for the carrying out of
procedures shall be no more than three business days prior to the First
Closing Date or Second Closing Date, as the case may be, and statements and
information of the type included in such letter with respect to financial
information included in the Prospectus but not in the preliminary prospectus
referred to in subsection (a) of this Section 5 (and the Representatives
shall have received at least an additional two original or conformed copies
of such accountants' letter for each of the several Underwriters).
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(h) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY.
On the date hereof, the Company shall have furnished to the Representatives
an agreement in the form of Exhibit B hereto from each director, officer and
each beneficial owner of more than one percent of the Common Stock (as
defined and determined according to Rule 13d-3 under the Exchange Act, except
that a one hundred eighty day period shall be used rather than the sixty day
period set forth therein), and such agreement shall be in full force and
effect on each of the First Closing Date and the Second Closing Date.
(i) ADDITIONAL DOCUMENTS. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon
the issuance and sale of the Common Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties,
or the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6,
Section 8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this
Agreement is terminated by the Representatives pursuant to Section 5, Section 7
or Section 10, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all out-of-
pocket expenses that shall have been reasonably incurred by the Representatives
and the Underwriters in connection with the proposed purchase and the offering
and sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
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Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof,
(b) of any Underwriter to the Company, or (c) of any party hereto to any other
party except that the provisions of Section 8 and Section 9 shall at all times
be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company, Dennis C.
Pence and E. Ann Pence, jointly and severally, agree to indemnify and
hold harmless each Underwriter, its officers and employees, and each
person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, or at common law
or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of the Company), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arise out of or are based (i) upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; or (iii) in
whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act
or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Common Stock or the
offering contemplated hereby, and which is included as part of or referred to
in any loss, claim, damage, liability or action arising out of or based upon
any matter covered by clause (i) or (ii) above, provided that none of the
Company, Dennis C. Pence nor E. Ann Pence shall not be liable under this
clause (v) to the extent that a court of competent jurisdiction shall
have determined by a final judgment that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its
gross negligence or willful misconduct; and to reimburse each Underwriter
and each such controlling person for any and all expenses (including the
fees and disbursements of counsel chosen by Montgomery Securities) as
such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense
or action; provided, however, that the foregoing indemnity agreement shall
not apply to any loss, claim,
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damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon
and in conformity with written information furnished to the Company
by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any
preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Common Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or
on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense. Notwithstanding anything in this Section
8(a) to the contrary, (i) the liability of each of Dennis C. Pence and E.
Ann Pence under this Section 8(a) shall be limited to the amount of net
after-tax proceeds received by such person from the notes issued by the
Company pursuant to Article 1 of the Agreement for Distribution of Retained
Earnings and Tax Indemnification, dated the date hereof, between the
Company and Dennis C. Pence and E. Ann Pence, representing, in the
aggregate, the Company's retained earnings as of the Termination Date, as
defined therein (the "Notes"), and (ii) neither Dennis C. Pence nor E. Ann
Pence shall be required to provide indemnification under this Section 8(a)
until the Underwriter or controlling person seeking indemnification shall
have first made a demand for payment on the Company with respect any such
loss, claim, damage, liability or expense and the Company shall have
either rejected such demand or failed to make such requested payment
within ninety days after receipt thereof. The indemnity agreement set forth
in this Section 8(a) shall be in addition to any liabilities that the
Company, Dennis C. Pence or E. Ann Pence may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who signed
the Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act, against any
loss, claim, damage, liability or expense, as incurred, to which the Company,
or any such director, officer or controlling person may become subject, under
the Securities Act, the Exchange Act, or other federal or state statutory law
or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arise out of or are based
upon any untrue or alleged untrue statement of a material fact contained in
the Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by the Representatives expressly
for use therein; and to reimburse the Company, or any such director, officer
or controlling person for any legal and other expense reasonably incurred by
the Company, or any such director, officer or controlling person in
connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action. The Company
hereby acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) on the inside front cover page of
the Prospectus concerning
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stabilization by the Underwriters and (B) in the table in the first
paragraph, in the second paragraph and in the next-to-last paragraph under
the caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in
this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in
this Section 8 or to the extent it is not prejudiced as a proximate result of
such failure. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate
in, and, to the extent that it shall elect, jointly with all other
indemnifying parties similarly notified, by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, if the defendants
in any such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that a
conflict may arise between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the indemnifying
party, the indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to otherwise participate
in the defense of such action on behalf of such indemnified party or parties.
Upon receipt of notice from the indemnifying party to such indemnified party
of such indemnifying party's election so to assume the defense of such action
and approval by the indemnified party of counsel, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel (together with
local counsel), approved by the indemnifying party (Montgomery Securities in
the case of Section 8(b) and Section 9), representing the indemnified parties
who are parties to such action) or (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall be
at the expense of the indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the
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<PAGE>
indemnifying party agrees to indemnify the indemnified party against any
loss, claim, damage, liability or expense by reason of such settlement
or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as
contemplated by Section 8(c) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than
30 days after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified party
in accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement, compromise or consent to the entry
of judgment in any pending or threatened action, suit or proceeding in
respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION
If the indemnification provided for in Section 8 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute
to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, Dennis C. Pence and E. Ann Pence,
on the one hand, and the Underwriters, on the other hand, from the offering
of the Common Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company,
Dennis C. Pence and E. Ann Pence, on the one hand, and the Underwriters, on
the other hand, in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, Dennis C. Pence and E. Ann Pence, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Common Shares pursuant to this Agreement (before deducting expenses) received
by the Company, Dennis C. Pence and E. Ann Pence, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is
used, the corresponding location on the Term Sheet) bear to the aggregate
initial public offering price of the Common Shares as set forth on such
cover. The relative fault of the Company, Dennis C. Pence and E. Ann Pence,
on the one hand, and the Underwriters, on the other hand, shall be determined
by reference to, among other things, whether any such untrue or alleged
untrue statement of a material fact or omission or alleged omission to state
a material fact or any such inaccurate or alleged inaccurate representation
or warranty relates to
21
<PAGE>
information supplied by the Company, Dennis C. Pence or E. Ann Pence, on the
one hand, or the Underwriters, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding anything in this Section
9 to the contrary, (i) neither Dennis C. Pence nor E. Ann Pence shall be
required to contribute any amount in excess of the net after-tax proceeds
received by such person from the Notes, (ii) the Underwriters shall be
entitled to contribution from Dennis C. Pence and E. Ann Pence only to the
extent that contribution from the Company to the Underwriters does not fully
hold harmless the Underwriters in respect of all losses, claims, damages,
liabilities or expenses referred to in this Section 9.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply
if a claim for contribution is to be made under this Section 9; PROVIDED,
HOWEVER, that no additional notice shall be required with respect to any action
for which notice has been given under Section 8(c) for purposes of
indemnification.
The Company, Dennis C. Pence, E. Ann Pence and the Underwriters
agree that it would not be just and equitable if contribution pursuant to
this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the underwriting
commissions received by such Underwriter in connection with the Common Shares
underwritten by it and distributed to the public. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several, and not joint, in proportion
to their respective underwriting commitments as set forth opposite their names
in Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights
to contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company with the meaning of the Securities Act and the
Exchange Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If,
on the First Closing Date or the Second Closing Date, as the case may be, any
one or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of
the aggregate number of the Common Shares to be purchased on such date, the
other Underwriters shall be obligated, severally, in the proportions that the
number of Firm Common Shares set forth opposite their respective names on
Schedule A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representatives with the consent of the
22
<PAGE>
non-defaulting Underwriters, to purchase the Common Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date. If, on the First Closing Date or the Second Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Common Shares and the aggregate number of Common Shares with respect
to which such default occurs exceeds 10% of the aggregate number of Common
Shares to be purchased on such date, and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares are not
made within 48 hours after such default, this Agreement shall terminate without
liability of any party to any other party except that the provisions of
Section 4, Section 6, Section 8 and Section 9 shall at all times be effective
and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event
for longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this
Section 10. Any action taken under this Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First
Closing Date this Agreement maybe terminated by the Representatives by notice
given to the Company if at any time during such period (i) trading or quotation
in any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally on
either of the Nasdaq Stock Market or the New York Stock Exchange shall have
been suspended or limited, or minimum or maximum prices shall have been
generally established on any of such stock exchanges by the Commission or the
NASD; (ii) a general banking moratorium shall have been declared by any of
federal, New York, Delaware or California authorities; (iii) there shall have
occurred any outbreak or escalation of national or international hostilities or
any crisis or calamity, or any change in the United States or international
financial markets, or any substantial change or development involving a
prospective substantial change in United States' or international political,
financial or economic conditions, as in the judgment of the Representatives, is
material and adverse and makes it impracticable to market the Common Shares in
the manner and on the terms described in the Prospectus or to enforce contracts
for the sale of securities; (iv) there shall have occurred any Material Adverse
Change; or (v) the Company shall have sustained a loss by strike, fire, flood,
earthquake, accident or other calamity of such character as to interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (a) the Company to any Underwriter, except that the Company shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or
(c) of any party hereto to any other party except that the provisions of
Section 8 and Section 9 shall at all times be effective and shall survive such
termination.
23
<PAGE>
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in
writing and shall be mailed, delivered or telecopied and confirmed to the
parties hereto as follows:
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Coldwater Creek Inc.
One Coldwater Creek Drive
Sandpoint, Idaho 83864
Facsimile: (208) 265-3162
Attention: Dennis Pence
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
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<PAGE>
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit
of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 10 hereof, and to the benefit of the
employees, officers and directors and controlling persons referred to in
Section 8 and Section 9, and in each case their respective successors and
personal representatives, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Common
Shares as such from any of the Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement may not be amended or modified unless in writing by
all of the parties hereto, and no condition herein (express or implied) may be
waived unless waived in writing by each party whom the condition is meant to
benefit. The Table of Contents and the Section headings herein are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement. Unless otherwise specified, times of day
shall mean San Francisco time.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the
parties hereto further acknowledges that the provisions of Sections 8 and 9
hereto fairly allocate the risks in light of the ability of the parties to
investigate the Company, its affairs and its business in order to assure that
adequate disclosure has been made in the Registration Statement, any
preliminary prospectus and the Prospectus (and any amendments and supplements
thereto), as required by the Securities Act and the Exchange Act.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
COLDWATER CREEK INC.
By:___________________________
Dennis C. Pence, President
______________________________
DENNIS C. PENCE
______________________________
E. ANN PENCE
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
WILLIAM BLAIR & COMPANY, L.L.C.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By: __________________________________________
Richard A. Smith
Authorized Signatory
26
<PAGE>
SCHEDULE A
UNDERWRITERS NUMBER OF
FIRM COMMON
SHARES
TO BE PURCHASED
Montgomery Securities.................... [___]
William Blair & Company, L.L.C........... [___]
[___].................................... [___]
[___].................................... [___]
[___].................................... [___]
Total............................... [___]
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<PAGE>
EXHIBIT A
THE FINAL OPINION IN DRAFT FORM SHOULD BE ATTACHED AS EXHIBIT A AT THE TIME
THIS AGREEMENT IS EXECUTED.
Opinion of counsel for the Company to be delivered pursuant to
Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in
the Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of Idaho and in each
other jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except
for such jurisdictions (other than the State of Idaho) where the failure to
so qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.
(iv) The authorized capital stock of the Company (including
the Common Stock) conforms as to legal matters to the description thereof set
forth in the Prospectus. All of the shares of Common Stock have been duly
authorized and validly issued, are fully paid and non-assessable and, to the
best of such counsel's knowledge, have been issued in compliance with the
federal and state securities laws. The form of certificate used to evidence
the Common Stock is in due and proper form and complies with all applicable
requirements of the charter and by-laws of the Company and the General
Corporation Law of the State of Delaware. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(v) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe
for or purchase securities of the Company arising (i) by operation of the
charter or by-laws of the Company or the General Corporation Law of the State
of Delaware or (ii) to the best knowledge of such counsel, otherwise.
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<PAGE>
(vi) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(vii) The Common Shares to be purchased by the Underwriters
from the Company have been duly authorized for issuance and sale pursuant to
the Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.
(viii) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the Commission
under the Securities Act. To the best knowledge of such counsel, no stop
order suspending the effectiveness of either of the Registration Statement or
the Rule 462(b) Registration Statement, if any, has been issued under the
Securities Act and no proceedings for such purpose have been instituted or
are pending or are contemplated or threatened by the Commission. Any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and within
the time period required by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements and supporting
schedules included therein or in exhibits to or excluded from the
Registration Statement, as to which no opinion need be rendered) comply in
all material respects with the applicable requirements of the Securities Act.
(x) The Common Shares have been approved for listing on the
Nasdaq National Market.
(xi) The statements (i) in the Prospectus under the captions
"Risk Factors--State Sales Tax Collection," "-- Control by Existing
Stockholders; Anti-Takeover Devices," "--Shares Eligible for Future Sale," "S
Corporation Distributions," "Capitalization," "Management's Discussion and
Analysis and Results of Operations--Liquidity and Capital Resources,"
"Business--Trademarks," "--Legal Proceedings," "Management -- Director
Compensation," "-- 1996 Stock Option/Stock Issuance Plan," "-- Employment
Contracts and Change of Control Arrangements," "-- 401(k) Plan," "Certain
Transactions," "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting" and (ii) in Item 14 of the Registration Statement,
insofar as such statements constitute matters of law, summaries of legal
matters, the Company's charter or by-law provisions, documents or legal
A-2
<PAGE>
proceedings, or legal conclusions, has been reviewed by such counsel and
fairly present and summarize, in all material respects, the matters referred
to therein.
(xii) To the best knowledge of such counsel, there are no legal
or governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xiii) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto; and the
descriptions thereof and references thereto are correct in all material
respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of
the Underwriting Agreement and consummation of the transactions contemplated
thereby and by the Prospectus, except such as have been obtained by the
Company and are in full force and effect under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(xv) The execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated
thereby (other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no opinion
need be rendered) and by the Prospectus (i) have been duly authorized by all
necessary corporate action on the part of the Company; (ii) will not result
in any violation of the provisions of the charter or by-laws of the Company;
(iii) will not conflict with or constitute a breach of, or Default under, or
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to, (A) the Company's
Revolving Credit Facility with U.S. Bank of Idaho, as lender, or (B) any
other material Existing Instrument known to such counsel; or (iv) will not
result in any violation of any law, administrative regulation or
administrative or court decree known to such counsel to be applicable to the
Company.
(xvi) The Company is not an "investment company" or an entity
"controlled" by an "investment company" within the meaning of Investment
Company Act.
(xvii) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale," to the best knowledge of such counsel,
there are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement, except for such rights as have been duly waived.
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<PAGE>
(xviii) To the best knowledge of such counsel, the Company
is not in violation of its charter or by-laws or any law, administrative
regulation or administrative or court decree applicable to the Company and is
not in Default in the performance or observance of any obligation, agreement,
covenant or condition contained in any material Existing Instrument, except
in each such case for such violations or Defaults as would not, individually
or in the aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified above), and any supplements or amendments thereto, on the basis of
the foregoing, nothing has come to their attention which would lead them to
believe that either the Registration Statement or any amendments thereto, at
the time the Registration Statement or such amendments became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or
at the First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no belief as to the financial
statements or schedules or other financial data included in the Registration
Statement or the Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the law of the State of California or
the State of New York or the federal law of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall
be dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them and shall be furnished to the Representatives) of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; PROVIDED, HOWEVER, that such
counsel shall further state that they believe that they and the Underwriters
are justified in relying upon such opinion of other counsel, and (B) as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials.
A-4
<PAGE>
EXHIBIT B
January ___, 1997
Montgomery Securities
William Blair & Company, L.L.C.
As Representatives of the Several Underwriters
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
RE: Coldwater Creek Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act
as the representatives (the "Representatives") of the underwriters. The
undersigned recognizes that the Offering will be of benefit to the undersigned
and will benefit the Company by, among other things, raising additional capital
for its operations. The undersigned acknowledges that you and the other
underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery
Securities or each of the Representatives (which consent may be withheld in its
or their sole discretion), directly or indirectly, sell, offer, contract or
grant any option to sell (including without limitation any short sale) pledge,
transfer, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act
of 1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date
hereof and continuing to a date 180 days after the first date any of the Common
Stock to be sold in the Offering is released by you for sale to the public. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the
foregoing restrictions.
B-1
<PAGE>
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
_________________________________________________________________
Printed Name of Holder
By: _____________________________________________________________
Signature
_________________________________________________________________
Printed Name of Person Signing and Capacity (if other than Holder)
B-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Boise, Idaho
January 16, 1997
