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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 1, 1997 COMMISSION FILE NO. 0-
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COLDWATER CREEK INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 82-0419266
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE COLDWATER CREEK DRIVE 83864
SANDPOINT, IDAHO (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (208) 263-2266
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $43,125,000 as of April 30, 1997, based upon the
closing price on the Nasdaq National Market reported for such date. As of April
30, 1997, 10,120,118 shares of the Registrant's $.01 par value Common Stock were
outstanding. Shares of Common Stock held by each executive officer and director
and by each person who beneficially owns more than 5% of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference into
the Parts of this Form 10-K noted:
Part III incorporates by reference from the definitive proxy statement for the
Registrant's 1997 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form.
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COLDWATER CREEK, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 1, 1997
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PART 1
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Item 1. Business.................................. 3
Item 2. Properties................................ 23
Item 3. Legal Proceedings......................... 24
Item 4. Submission of Matters to a Vote of
Security Holders.......................... 24
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............... 28
Item 6. Selected Financial Data................... 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 30
Item 8. Financial Statements...................... 37
Item 9. Change in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................ 38
PART III
Item 10. Directors and Executive Officers of the
Registrant................................ 38
Item 11. Executive Compensation.................... 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................... 38
Item 13. Certain Relationships and Related
Transactions.............................. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................... 39
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PART I
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ITEM 1. BUSINESS
The following discussion may contain forward looking statements which
involve risks and uncertainties. When used in this discussion, the words
"anticipate," "believe," "estimate," "expect," and similar expressions as they
relate to the Company or its management are intended to identify such forward
looking statements. The Company's actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward looking statements. Factors that could cause or contribute to such
differences include, among others, 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 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; and construction costs; as well as those factors
discussed in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation" and elsewhere in this Form 10-K.
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 made timely
investments in its telephone and distribution infrastructure to support its
customer service-based strategy. 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
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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 1984 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 fifteen items including binoculars and bird
feeders. 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 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.
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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,
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. Merchandise 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 1996, the Company achieved average
telephone answer speeds of 4.4 seconds, abandoned call rates of 0.43%,
distribution error rates of 0.17% and shipped 86.4% of in-stock orders within
one shipping day of order processing.
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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. The company 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.
The Company attempts 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 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.
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 fiscal 1996, the Company hired key management personnel and invested
$21.3 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
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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 49.4% over the last three fiscal years, generating a compound annual growth
rate of 65.1% 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
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
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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 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 markets its merchandise to
customers in Canada and Japan. In fiscal 1996, such sales amounted to less than
7% of total net sales. Based on the 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 six to ten 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 in the second quarter of 1997 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
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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 $112 during fiscal 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 and high quality, contemporary 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 $211 during fiscal 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 fiscal 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, tee-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 $58
during fiscal 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,
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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 other photographs, 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,
copywriters 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 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 March 1, 1997, Coldwater Creek had a proprietary mailing list of
approximately 3.7 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
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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 1996, Coldwater Creek
mailed over 63.5 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, 1995 and 1996,
respectively (all figures include international customers):
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FISCAL 1993 FISCAL 1994 FISCAL 1995 FISCAL 1996
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Active Customers 382,862 493,946 747,234 1,100,051
Growth in Active Customers 55% 29% 51% 47%
Average Order $ 73 $ 82 $ 97 $ 128
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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,
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promotes greater customer loyalty and higher retention rates.
Coldwater Creek Credit Card. Since 1994, the Company has issued its own
Coldwater Creek private label credit cards through a bank as part of its
customer retention and brand building strategy. The Company's credit card
carries the Coldwater Creek name and includes a nature-theme 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 1996,
purchases of the Company's merchandise using the Coldwater Creek credit card
accounted for 7.2% of net sales. As of March 1, 1997, the Company had
approximately 62,000 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 twelve 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.
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 1990's, 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
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success that they have achieved, the Company's apparel offering will represent a
greater percentage of the Company's total net sales in fiscal 1997 than
experienced in fiscal 1996. 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.
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 1996, 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.
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<PAGE>
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 1996. 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 with 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 outlet
stores and warehouse sales.
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, order
entry and fulfillment processes, employee and sales agent training programs and
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 1996, approximately 86% of
the Company's orders were received by telephone with the remaining 14% of its
orders received by mail and facsimile. During fiscal 1996, customer calls were
answered at an average rate of 4.4 seconds. The Company's abandoned call rate
was 0.25%, 0.37% and 0.43% during fiscal years 1994, 1995 and 1996,
respectively.
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
15
<PAGE>
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
1996, the Company handled approximately 2.2 million calls and received
approximately 13,039 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 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. 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.
Orders are printed in batches, normally three times a day and more often during
peak periods, then prepared, packed and shipped. Shipped orders are bar-coded
and scanned and
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<PAGE>
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
fifty-six packing stations and seven 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 1996,
approximately 56% of all shipments were sent via first class mail through the
U.S. Postal Service, the remaining shipments are made through Federal Express
and United Parcel Service. Each order is usually charged a shipping and handling
fee which is based upon the total order price. In fiscal 1996, the Company
shipped approximately 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.
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
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<PAGE>
time of promotion and continue throughout the employee's career. Coldwater Creek
provides opportunity for advancement for each employee dependent on his or 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.
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.
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<PAGE>
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 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 fiscal 1995, the Company leased the entire Cedar Street
Bridge, a beautifully renovated covered bridge spanning Sand 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 square 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 1996, 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.
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EMPLOYEES
As of March 1, 1997, the Company had 398 full-time employees and 453
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 are currently covered by collective bargaining agreements. The
Company considers its employee relations to be excellent.
TRADEMARKS
Coldwater Creek(R), Spirit of the West(R) and Ecosong(R) are registered
trademarks of the Company. An application has been filed to register the mark
Milepost FourTM 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.
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 United States, where
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<PAGE>
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.
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,
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<PAGE>
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 an 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.
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.
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ITEM 2. 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 McGhee 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 19,000 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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ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At a special meeting of the Company's stockholders on January 28, 1997, the
stockholders voted unanimously in favor of adopting the Company's Employee Stock
Purchase Plan. No other matters were brought to a vote of the Company's
stockholders in the fourth quarter of the fiscal year ended March 1, 1997.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Below is a table setting forth the name, age and position of the Company's
directors and executive officers:
<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
Mac Morgan 42 Vice President of Advertising
Karen Reed 33 Vice President of Catalog Marketing
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.
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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 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.
Mac Morgan has served as Vice President of Advertising of the Company since
September 1996 and, prior to that, as Senior Art Director since May 1992. Mr.
Morgan was Vice President of Production from 1991 to 1992 of Interlight
International, a producer of interactive CDR titles located in Florida. Prior
to 1991, Mr. Morgan was Director of Marketing for VistaChrome, Inc./The Printing
House, the third largest separator/printer in Florida. From 1980 to 1988 Mr.
Morgan served as Senior Vice President of Operations of Homes & Land Publishing
Corporation, overseeing a graphics design operation of over 150 employees and
300 retail magazines monthly.
Karen Reed has served as Vice President of Catalog Marketing of the Company
since March 1997. From 1995 to 1997, Ms. Reed was the Director of Circulation
and from 1990 to 1995 she was Circulation Manager of Coldwater Creek. Prior to
joining the Company, from 1988 to 1990, Ms. Reed served as a Computer Programmer
for Serac, a ski clothing manufacturer. Prior to that, she worked in the
accounting profession in various capacities.
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.
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<PAGE>
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.
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PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in Coldwater Creek Common Stock commenced on January 28, 1997, and
is quoted on The NASDAQ Stock Market's National Market under the symbol "CWTR".
Prior to January 28, 1997, Coldwater Creek common stock was not publicly traded.
On March 1, 1997, the Company had 1,143 stockholders of record. On March 1,
1997, the Company had 10,120,118 shares of $.01 par value Common Stock.
The following table set forth the high and low sales prices of Coldwater
Creek Common Stock for the period January 28, 1997 through March 1, 1997. The
quotations are as reported in published financial sources.
<TABLE>
<CAPTION>
Coldwater Creek
Common Stock
--------------------------
High Low
<S> <C> <C>
Calendar Quarters -- 1997
First Quarter $21.87 $15.00
</TABLE>
DIVIDEND POLICY
Coldwater Creek does not pay regular dividends and does not anticipate the
declaration of a cash dividend in the foreseeable future.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for
the five fiscal years in the period ended March 1, 1997 for Coldwater Creek.
This selected financial and operating data should be read in conjunction with
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Item 8 - Financial Statements" of Coldwater Creek:
28
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
--------------------------------------------------------------------------
Feb. 27, Feb. 26, March 4, March 2, March 1,
1993 1994 1995 1996 1997
--------- --------- --------------- -------------- ---------------
(in thousands, except per share operating data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 18,785 $ 31,763 $ 45,223 $ 75,905 $ 143,059
Cost of sales 7,712 13,505 19,062 32,786 66,430
-------- -------- -------- -------- ----------
Gross profit 11,073 18,258 26,161 43,119 76,629
Selling, general and administrative expense 9,347 12,937 21,502 37,356 64,463
-------- -------- -------- -------- ----------
Income from operations 1,726 5,321 4,659 5,763 12,166
Interest, net (5) 31 98 (236) (128)
Other income (expense) (37) - - 87 (25)
-------- -------- -------- -------- ----------
Income before provision for income taxes 1,684 5,352 4,757 5,614 12,013
Provision for income taxes:
S Corporation termination - - - - 1,363
C Corporation - - - - (166)
-------- -------- -------- -------- ----------
Net income (2) $ 1,684 $ 5,352 $ 4,757 $ 5,614 $ 10,816
======== ======== ======== ======== ==========
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net income as reported $ 1,684 $ 5,352 $ 4,757 $ 5,614 $ 10,816
Pro forma provision for income taxes (3) 665 2,114 1,879 2,218 4,929
-------- -------- -------- -------- ----------
Pro forma net income $ 1,019 $ 3,238 $ 2,878 $ 3,396 $ 5,887
======== ======== ======== ======== ==========
Pro forma net income per share (4) $0.40 $0.66
======== ==========
Pro forma shares outstanding (4) 8,457 8,881
======== ==========
SELECTED OPERATING DATA:
Net sales growth 69.5% 69.1% 42.4% 67.8% 88.5%
Total catalogs mailed (000s) 12,273 19,045 31,625 45,868 63,520
Total active customers (5) 247,520 382,862 493,946 747,234 1,100,051
Average order (in dollars) (6) $56.26 $72.69 $81.85 $97.16 $128.00
BALANCE SHEET DATA:
Working capital $ 1,857 $ 4,095 $ 623 $ 2,169 $ 13,990
Total assets 5,782 9,820 19,032 23,450 61,974
Long-term debt (net of current maturities) 545 408 248 100 -
Stockholders' equity 4,086 7,698 11,068 14,525 37,187
</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.
(2) For all periods prior to January 28, 1997, 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 39.5% 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 was terminated; at that date, the Company provided 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 Notes 1 and 12 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,
29
<PAGE>
shares deemed to be outstanding and the dilutive effect of shares issuable
under stock options. The shares deemed to be outstanding were 1,227,000 in
fiscal 1996 and 963,000 in fiscal 1995.
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K 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.
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 66.1% from $18.8 million to $143.1 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 62.9% from $1.7
million in fiscal 1992 to $12.2 million in fiscal 1996. The Company markets its
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 1996, increasing total circulation by 38.5% in fiscal 1996 and
building its proprietary mailing list to approximately 3.7 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
30
<PAGE>
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's offering of apparel continued to increase during
fiscal 1996. The Company believes that offering a greater percentage of apparel
merchandise was a significant factor in its strong sales and profit growth
during 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 as a
percentage of sales and increasing its operating costs.
During fiscal 1994, fiscal 1995 and fiscal 1996, the Company hired
additional management personnel and invested $21.3 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 $11.2 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 $4.6
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 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.
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.
31
<PAGE>
Prior to the initial public offering, the Company has operated as an S
corporation and, as a result was not subject to federal or certain state income
taxes. As a result of the initial public offering, the Company has become
subject to federal and state income taxes and recognized a non-recurring, non-
cash charge of $1.4 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 Note 6 to the financial
statements, "Income Taxes."
RESULTS OF OPERATIONS
The following table sets forth information from the Company's statement
of operations and pro forma statement of operations expressed as a percentage of
net sales for the periods indicated.
<TABLE>
<CAPTION>
Fiscal
----------------
1995 1996
------- ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 43.2 46.4
----- -----
Gross profit 56.8 53.6
Selling, general and administrative expense 49.2 45.1
----- -----
Income from operations 7.6 8.5
Interest, net (0.3) (0.1)
Other income (expense) 0.1 -
Provision for income taxes - (0.8)
----- -----
Net income 7.4% 7.6%
===== =====
Pro forma net income 4.4% 4.1%
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $67.2 million, or 88.5%, to $143.1 million
during fiscal 1996 from $75.9 million for 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 and fourth quarters of this fiscal year.
Catalog mailings increased to 63.5 million for fiscal 1996 from
32
<PAGE>
45.9 million for fiscal 1995. The strong response rates and financial results
for fiscal 1996 should not be considered an indication of future performance.
Gross profit increased $33.5 million and 77.7% to $76.6 million in
1996 from $43.1 million for fiscal 1995. Gross profit decreased as a percentage
of net sales to 53.6% of net sales in fiscal 1996 from 56.8% of net sales in
fiscal 1995. The decline in gross profit as a percentage of net sales was
attributable to increased merchandise markdowns associated with offering a
greater percentage of apparel and a decreased proportion of sales of higher net
margin jewelry and gifts. As a result of the shift to a greater percentage of
apparel merchandise, the Company anticipates that its gross profit margins as a
percent of sales will not return to historical levels.
Selling, general and administrative expenses primarily consist of
marketing, distribution and general and administrative expenses. Marketing
expenses primarily consist 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 expenses
increased by $27.1 million to $64.5 million in fiscal 1996 from $37.4 million in
fiscal 1995. Selling, general and administrative expenses decreased as a
percentage of net sales to 45.1% of net sales in fiscal 1996 from 49.2% of net
sales in fiscal 1995. The decrease in selling, general and administrative
expenses 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 coupled with favorable paper prices in catalog production.
Operating income increased by $6.4 million and 110% to $12.2 million
during fiscal 1996 from $5.8 million for the comparable period in fiscal 1995.
For fiscal 1996, the Company took a non-recurring, non-cash charge for the S
corporation termination of $1.4 million. This, along with the recognition of a
fiscal 1996 tax benefit of $0.2 million, resulted in a net income tax provision
of $1.2 million.
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.
33
<PAGE>
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. 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 of 1995. Operating income increased by $1.1
million to $5.8 million in fiscal 1995 from $4.7 million in fiscal 1994.
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 following table contains selected unaudited quarterly financial
data for fiscal 1995 and fiscal 1996. The operating losses recorded during
these quarters are due to lower sales volume 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
normal recurring adjustments necessary to present fairly, in all material
respects, the information set forth therein.
34
<PAGE>
<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
<CAPTION>
FISCAL 1996
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net sales $23,604 $15,781 $45,325 $58,349
Gross profit 12,091 8,262 25,049 31,227
Selling, general and administrative expense 10,540 8,488 20,211 25,224
Income (loss) from operations 1,551 (226) 4,838 6,003
</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 $3.7 million, $6.2 million
and $7.8 million in fiscal 1994, 1995 and 1996, respectively.
Net cash used in investing activities, principally related to capital
expenditures for infrastructure improvements, was approximately $4.6 million,
$1.5 million and $11.9 million in fiscal 1994, 1995, and 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
35
<PAGE>
fiscal 1995 and $11.9 million in fiscal 1996. The Company presently anticipates
that it will spend approximately $3.5 million in capital expenditures in fiscal
1997.
Net cash provided by (used in) financing activities for fiscal 1994,
1995, and 1996 was $2.2 million, ($6.0) million and $12.8 million, respectively.
Distributions to the Company's Existing Stockholders totaled $1.4 million, $2.2
million, and $25.8 million in fiscal 1994, 1995 and 1996. During fiscal 1996,
the Company drew upon its revolving lines of credit primarily to finance the
purchase of property and equipment, net working capital requirements and
distributions to stockholders. The net proceeds from the sale of the 2,875,000
shares of common stock offered was $38.8 million. The Company paid $17.3 million
of the net proceeds to the existing stockholders. An additional $1.1 million,
representing the final distribution of S corporation earnings through the
offering date, was made following the fiscal year end. The Company used $8.0
million to repay outstanding indebtedness and the remainder is being used for
working capital and general corporate purposes. At the end of fiscal 1996, the
Company was free of any long or short-term debt with $9.1 million of cash for
general operating purposes.
In January 1997, the Company amended its revolving lines of credit
agreement with U.S. Bank of Idaho to provide 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 its available cash, together with cash flow
from operations and borrowing capacity under its credit facilities, will be
sufficient to support operations and future growth 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.
36
<PAGE>
ITEM 8. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................................. F-1
Balance Sheets as of March 1, 1997 and March 2, 1996................................................. F-2
Statements of Operations for the fiscal years ended March 1, 1997, March 2, 1996 and March 4, 1995
and unaudited pro forma data for each of the periods presented..................................... F-3
Statements of Stockholders' Equity for the fiscal years ended March 4, 1995, March 2, 1996 and
March 1, 1997...................................................................................... F-4
Statements of Cash Flows for the fiscal years ended March 1, 1997, March 2, 1996 and
March 4, 1995...................................................................................... F-5
Notes to Financial Statements........................................................................ F-6
</TABLE>
37
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrants,
See Item 4A -- "Executive Officers of the registrant" at the end of Part I of
this report. The information required by this Item concerning the Directors and
nominees for Director of the Company is incorporated herein by reference to the
Company's Proxy Statement for its Annual Meeting of Stockholders, to be held on
July 11, 1997, to be filed with the Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated therein by reference
to the Company's Proxy Statement for its Annual Meeting of Stockholders, to be
held on July 11, 1997, to be filed with the Commission pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement for its Annual Meeting of Stockholders to be
held on July 11, 1997, to be filed with the Commission pursuant to Regulation
14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement for its Annual Meeting of Stockholders, to be
held on July 11, 1997, to be filed with the Commission pursuant to Regulation
14A.
38
<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 1, 1997 and March 2, 1996, and the related
statements of operations, stockholders' equity and cash flows for the fiscal
years ended March 1, 1997, March 2, 1996, and March 4, 1995. 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 1, 1997 and March 2, 1996, and the results of its operations and its cash
flows for the fiscal years ended March 1, 1997, March 2, 1996 and March 4, 1995,
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boise, Idaho
April 4, 1997
F-1
<PAGE>
COLDWATER CREEK INC.
BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
March 1, March 2,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,095 $ 418
Receivables 2,342 1,573
Inventories 25,279 8,252
Prepaid expenses 456 174
Prepaid catalog costs 1,375 577
------- -------
Total current assets 38,547 10,994
DEFERRED CATALOG COSTS 3,347 2,082
PROPERTY AND EQUIPMENT, net 20,080 10,374
------- -------
Total assets $61,974 $23,450
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 86 $ 159
Accounts payable 17,975 6,155
Accrued liabilities 6,045 2,511
Income taxes payable 451 -
------- -------
Total current liabilities 24,557 8,825
CAPITAL LEASE OBLIGATIONS, net - 100
DEFERRED INCOME TAXES 230 -
------- -------
Total liabilities 24,787 8,925
------- -------
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,
10,120,118 and 7,245,118 issued and outstanding 101 72
Additional paid-in capital 38,748 1
Retained earnings (accumulated deficit) (1,662) 14,452
------- -------
Total stockholders' equity 37,187 14,525
------- -------
Total liabilities and stockholders' equity $61,974 $23,450
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
COLDWATER CREEK INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
March 1, March 2, March 4,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES $143,059 $75,905 $45,223
COST OF SALES 66,430 32,786 19,062
-------- ------- -------
GROSS PROFIT 76,629 43,119 26,161
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 64,463 37,356 21,502
-------- ------- -------
INCOME FROM OPERATIONS 12,166 5,763 4,659
INTEREST, NET (128) (236) 98
OTHER INCOME (EXPENSE) (25) 87 -
-------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 12,013 5,614 4,757
PROVISION FOR INCOME TAXES
S corporation termination 1,363 - -
C corporation (166) - -
-------- ------- -------
NET INCOME $ 10,816 $ 5,614 $ 4,757
======== ======= =======
PRO FORMA INCOME DATA (Unaudited):
Net Income as reported $ 10,816 $ 5,614 $ 4,757
Pro forma provision for income taxes 4,929 2,218 1,879
-------- ------- -------
Pro forma net income $ 5,887 $ 3,396 $ 2,878
======== ======= =======
Pro forma net income per common
and common equivalent share $ 0.66 $ 0.40
======== =======
Pro forma weighted average number
of shares outstanding 8,881 8,457
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COLDWATER CREEK INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
MARCH 4, 1995, MARCH 2, 1996, AND MARCH 1, 1997
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Retained
Shares Amount Capital Earnings Total
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
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 - - - 5,614 5,614
Distributions to Stockholders - - - (2,157) (2,157)
------ ---- ------- -------- --------
Balance, March 2, 1996 7,245 72 1 14,452 14,525
Net income - - - 10,816 10,816
Issuance of common stock in
initial public offering 2,875 29 38,747 - 38,776
Distributions to Stockholders - - - (26,930) (26,930)
------ ---- ------- -------- --------
Balance, March 1, 1997 10,120 $101 $38,748 $ (1,662) $ 37,187
====== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COLDWATER CREEK INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
March 1, March 2, March 4,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 10,816 $ 5,614 $ 4,757
Noncash items:
Depreciation and amortization 2,146 995 579
Loss on disposal of equipment 30 - -
Deferred income tax provision 746 - -
Net change in current assets and liabilities:
Receivables (769) (1,299) (145)
Inventories (17,027) (2,441) (2,915)
Prepaid catalog costs (797) (189) (286)
Prepaid expenses (308) (5) (143)
Accounts payable 10,715 2,685 2,171
Accrued liabilities 3,019 2,112 120
Income taxes payable 451 - -
Increase in deferred catalog costs (1,265) (1,271) (477)
-------- ------- -------
Net cash provided by operating activities 7,757 6,201 3,661
-------- ------- -------
INVESTING ACTIVITIES:
Sale of short-term investments - - 3,247
Purchase of short-term investments - - (1,026)
Proceeds on sale of equipment - 1,105 89
Purchase of property and equipment (11,883) (2,590) (6,874)
-------- ------- -------
Net cash used in investing activities (11,883) (1,485) (4,564)
-------- ------- -------
FINANCING ACTIVITIES:
Payments of capital leases (173) (136) (149)
Distributions to stockholders (25,800) (2,157) (1,387)
Net proceeds from sale of stock in IPO 38,776 - -
Proceeds from (payments on) revolving lines of credit, net - (3,700) 3,700
-------- ------- -------
Net cash provided by (used in) financing activities 12,803 (5,993) 2,164
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,677 (1,277) 1,261
CASH AND CASH EQUIVALENTS, beginning of the period 418 1,695 434
-------- ------- -------
CASH AND CASH EQUIVALENTS, end of the period $ 9,095 $ 418 $ 1,695
======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 243 $ 339 $ 39
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<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.
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. This did not have a material impact on the comparability of the
Company's results of operations or cash flows for any of the periods presented.
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.
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.
F-6
<PAGE>
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 $38.7 million in fiscal 1996,
$24.8 million in fiscal 1995 and $14.2 million in fiscal 1994.
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.
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
In accordance with Statement of Financial Accounting Standards No. 109
(SFAS 109) "Accounting for Income Taxes," deferred income taxes are provided to
recognize the effect of temporary differences between tax and financial
statement reporting. Prior to its initial public offering, the Company elected
to be treated as an S corporation for federal and state income tax purposes.
Accordingly, the historical statements of operations prior to the initial public
offering do not include a provision for income taxes as the taxable 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.
The consummation of the initial public offering terminated the Company's S
corporation status. The Company retained the tax basis of the assets and
liabilities of the S corporation as of the termination date and has recorded
deferred income taxes of approximately $1.4 million for the tax effect of
cumulative temporary differences in accordance with SFAS 109.
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.
F-7
<PAGE>
2. REVOLVING LINES OF CREDIT
On March 20, 1995, the Company entered into an agreement (amended on
January 10, 1997) with a bank to renew and increase its revolving credit
facilities. The agreement 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 of
credit 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; (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 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. At March 1, 1997 and at March 2, 1996,
there were no amounts outstanding under the line of credit or the letters of
credit and the Company was in compliance with all covenants.
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 1, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1997 minimum lease payments $89
Less amount representing interest (3)
---
Present value of minimum lease payments, all current $86
===
</TABLE>
Operating Leases
The Company leases telephone equipment, office equipment and retail space
under operating leases. Certain of the retail space leases provide for
percentage rentals on sales above specified minimums and contain renewal
options. Rental expense under these leases was $508,000, $356,000 and $85,000
for the fiscal years 1996, 1995 and 1994, respectively. Certain of these
operating leases are noncancellable and have minimum lease payment requirements
as of March 1, 1997 of $877,000 in fiscal 1997, $770,000 in fiscal 1998,
$690,000 in fiscal 1999, $387,000 in fiscal 2000, and $387,000 in fiscal 2001,
with total payments thereafter of $1,925,000. In fiscal 1997, the Company
entered into a lease agreement for retail space located in Seaside, Oregon with
yearly rentals of approximately $66,000 over the five year term of the lease.
F-8
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment, net consists of:
<TABLE>
<CAPTION>
MARCH 1, MARCH 2,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Land $ 150 $ 150
Building and land improvements 11,845 7,625
Furniture and fixtures 1,751 971
Machinery and equipment 10,486 3,821
Construction in progress 183 -
------- ------
24,415 12,567
Less: accumulated depreciation 4,335 2,193
------- -------
$20,080 $10,374
======= =======
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
MARCH 1, MARCH 2,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Accrued payroll, related taxes and $ 2,022 $ 712
benefits
Accrued sales returns 3,309 1,523
Deferred income taxes 516 --
Other 198 276
-------- -------
$ 6,045 $ 2,511
======== =======
</TABLE>
6. INCOME TAXES
The income tax provision for the year ended March 1, 1997, as shown on
the Statement of Operations, includes the following (in thousands) :
<TABLE>
<S> <C>
Current income tax provision $ 451
Deferred income tax provision 746
------
Total income tax provision $1,197
======
</TABLE>
F-9
<PAGE>
A reconciliation of the statutory U.S. Federal tax provision and the Company's
reported tax provision for the fiscal year ended March 1, 1997 is as follows:
<TABLE>
<S> <C>
Statutory rate 34.0%
Current year S corporation income
taxed to S corporation owners (35.3)
State income taxes, net of federal
income tax benefit (0.2)
S corporation termination 11.3
Other 0.2
-----
Effective tax rate 10.0%
=====
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and
amounts as measured for tax purposes. The tax effect of temporary differences
and carryforwards that cause significant portions of the deferred tax assets and
liabilities as of March 1, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities - current:
Prepaid and deferred catalog costs $ 1,865
Inventories (362)
Accrued sales returns (1,307)
Other 320
-------
Total deferred tax liabilities - current 516
Deferred tax (asset) liability - non-current:
Tax basis depreciation 230
-------
$ 746
</TABLE>
7. RETIREMENT 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 may elect to defer their current compensation by
up to certain statutory 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 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 $251,000, $83,000 and $76,000 for the fiscal years 1996, 1995 and 1994,
respectively. The Company does not provide any other post-retirement or post-
employment benefits for employees.
F-10
<PAGE>
8. 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. Under the 1996 Plan, 1,111,847 shares of common stock have been
authorized for issuance. 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.
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 Company applies Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plan, under which no compensation cost has been recognized.
FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
was issued by the FASB in 1995 and, if fully adopted, changes the methods for
recognition of cost on plans similar to that of the Company. Adoption of SFAS
123 is optional; however, pro forma disclosures as if the Company adopted the
compensation cost recognition requirements under SFAS 123 are presented below.
As of March 1, 1997, options to purchase 443,067 shares of Common Stock had
been granted to certain key employees and options to purchase 399,000 shares of
Common Stock had been granted to over 300 employees, under the Discretionary
Option Grant component of the 1996 Plan. Further, options to purchase 40,128
shares of Common Stock had been granted, under the Automatic Option Grant
Program component of the 1996 Plan, to non-employee Board members. Each option
may be tendered, along with $6.58, $15.00 and $15.00, respectively, for one
share of the Company's Common Stock. The options granted become exercisable on
a pro-rata basis over four years under the Discretionary Option Grant Program
and over three years under the Automatic Option Grant Program. The Board of
Directors believes that the exercise price represents the fair market value of
the Company's Common Stock at the dates of the respective grants. The options
expire ten years from date of issue under the Discretionary Option Grant Program
and have a maximum term of ten years under the Automatic Option Grant Program
subject to earlier termination for vested shares not exercised two years
following the optionee's cessation of Board service.
F-11
<PAGE>
A summary of the status of the Company's stock options as of March 1, 1997 and
changes during the year then ended is presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------- --------------
<S> <C> <C>
Outstanding at beginning of year -- --
Granted 882,195* $10.77
Exercised -- --
Canceled -- --
------- ------
Outstanding at end of year 882,195 $10.77
======= ======
Options exercisable at year-end -- --
Weighted average, fair value of
options granted during the year $ 3.86
</TABLE>
* Weighted average remaining contractual life is 9.5 years
Beginning in fiscal 1996, the year the stock option plan was adopted, the
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: (i) risk free interest rate of 6.2%; (ii) expected life of seven
years; (iii) no expected volatility as options were granted prior to and
concurrent with initial public offering; and (iv) no expected dividends.
Had compensation cost for the 1996 Plan been determined consistent with
SFAS 123, the Company's pro forma fiscal 1996 net income would have been reduced
by $179,000 and pro forma earnings per share would have been reduced by $0.02.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are
anticipated.
9. 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.
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 above.
10. DISTRIBUTIONS TO STOCKHOLDERS
Immediately prior to the consummation of the initial public offering, the
stockholders of the Company (the Existing Stockholders) and the Company entered
into an Agreement for Distribution of Retained Earnings and Tax Indemnification
(the "Agreement"). Pursuant to the Agreement, the remaining estimated
undistributed accumulated
F-12
<PAGE>
S corporation earnings of $17.3 million were distributed in the form of
promissory notes issued by the Company as of the date the Company's S
corporation status was terminated. The notes were paid in full promptly after
the closing of the offering. A final distribution, representing the difference
between actual and estimated undistributed accumulated S corporation earnings as
of the termination date, in the amount of approximately $1.1 million was payable
as of March 1, 1997 and is included in accounts payable in the balance sheet.
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 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.
11. 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. The Company has not received an assessment from any state.
12. PRO FORMA ADJUSTMENTS (UNAUDITED)
Unaudited Pro Forma Statement of Operations
The unaudited pro forma income data reflects historical net income adjusted
for pro forma income taxes. Pro forma income taxes are provided at an assumed
39.5% effective rate, as if the Company had been a C corporation rather than an
S corporation for each period presented. The pro forma net income for the
fiscal year ended March 1, 1997 includes a non-recurring, non-cash charge of
$1.4 million to recognize deferred income taxes related to the termination of
the S corporation. 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 were 1,227,000 in fiscal 1996 and 963,000 in fiscal 1995.
F-13
<PAGE>
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<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
<CAPTION>
FISCAL 1996
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net sales $23,604 $15,781 $45,325 $58,349
Gross profit 12,091 8,262 25,049 31,227
Selling, general and administrative expense 10,540 8,488 20,211 25,224
Income (loss) from operations 1,551 (226) 4,838 6,003
</TABLE>
F-14
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report are as follows:
1. Financial Statements.
See listing of Financial Statements included as part of this Form
10-K in Item 8 of Part II.
2. Financial Statement Schedules:
Schedule II - Valuation of Qualifying Accounts
(B) No reports on Form 8-K were filed during the last quarter of the period
covered by this Annual Report.
(C) Exhibits:
1. The following exhibits are incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen of Stock Certificate
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 January 10, 1997 between the Company and
U.S. Bank of Idaho, formerly West One Bank, Idaho
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 Earnings Per Share
24.1* Power of Attorney (included on the signature page to S-1)
27.1 Financial Data Schedule
</TABLE>
* PREVIOUSLY FILED
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Sandpoint, State
of Idaho, on this 30th day of May, 1997.
COLDWATER CREEK INC.
By: * Dennis Pence
-----------------------------------
Dennis Pence
President and Chief Executive Officer
and Vice Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ------------------------------------------ ----
<S> <C> <C>
* Dennis Pence President, Chief Executive Officer, Vice
- ----------------------------- Chairman of the Board of Directors, and
Dennis Pence Director
* Ann Pence Chairman of the Board of Directors,
- ----------------------------- Creative Director and Director
Ann Pence
* Donald Robson Chief Financial Officer, Vice President
- ----------------------------- of Finance and Administration, Treasurer,
Donald Robson Secretary, and Director (Principal
Financial and Accounting Officer)
* Robert H. McCall Director
- -----------------------------
Robert H. McCall
* James R. Alexander Director
- -----------------------------
Dennis Pence
* Curt Hecker Director
- -----------------------------
Curt Hecker
*By: /s/ Donald Robson
-------------------------
Donald Robson
(Attorney-in-fact)
</TABLE>
40
<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 April 4, 1997. Our audit
was made for the purpose of forming an opinion on the basic financial 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 a
part of the basic financial statements. The schedule has been subject to the
auditing procedures applied in the audit 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
April 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>
ACCRUED SALES RETURNS:
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
Fiscal Year Ended March 1, 1997 $1,523,000 $23,397,000 $21,611,000 $3,309,000
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen of Stock Certificate
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 January 10, 1997 between the Company and
U.S. Bank of Idaho, formerly West One Bank, Idaho
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 Earnings Per Share
24.1* Power of Attorney (included on the signature page to S-1)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
<PAGE>
EXHIBIT 10.1.6
LOAN AGREEMENT
Dated as of: JANUARY 10, 1997
Parties: COLDWATER CREEK INC. ("BORROWER")
And: U.S. BANK OF IDAHO ("LENDER")
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Access Laws" means the Americans With Disabilities Act of 1990; the Fair
Housing Amendments Act of 1988; all other federal, state and local laws or
ordinances related to disabled access; and all statutes, rules, regulations,
ordinances, orders of governmental bodies and regulatory agencies and orders and
decrees of any court adopted, enacted or issued with respect thereto; all as now
existing or hereafter amended or adopted.
"Borrower" means Coldwater Creek Inc., a Delaware corporation.
"Debt Service Coverage Ratio" means net income plus depreciation and
amortization minus dividends divided by $3,500,000.00.
"Debt to Tangible Net Worth Ratio" means total liabilities divided by
Tangible Net Worth.
"Default" means any Event of Default or any event which with the giving of
notice or the passage of time, or both, would constitute an Event of Default.
"Environmental Laws" means all local, state or federal laws, rules,
regulations, or ordinances pertaining to Hazardous Substances and environmental
regulation, contamination or clean-up including, without limitation, the federal
statutes commonly known as CERCLA and RCRA and all other federal or state lien
or environmental clean-up statutes, all as now existing or hereafter amended or
adopted.
"GAAP" means generally accepted accounting principles consistently applied.
The definition of any accounting term used in this Agreement that is not
specifically defined shall be the GAAP definition therefor.
"Hazardous Substances" means (a) any substance or material defined or
designated as hazardous or toxic waste, hazardous or toxic material, or a
hazardous, toxic or radioactive substance (or designated by any similar term) by
or for purposes of any applicable Environmental Law; (b) asbestos and any
substance or compound containing asbestos; and (c) any other hazardous, toxic or
dangerous waste, substance or material, including but not limited to gasoline,
crude oil, fuel oil, diesel oil, and any other related petroleum products.
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"L/C Agreements" means the Continuing Agreement for Commercial Letters of
Credit and the Continuing Agreement for Irrevocable Standby Letters of Credit.
"L/C Outstandings" means, as of any date of determination, (a) the
aggregate maximum principal amount available to be drawn under all outstanding
letters of credit issued by Lender for the account of Borrower, plus (b) the
aggregate face amount of all sight or time drafts drawn under letters of credit
which amounts have not been reimbursed by Borrower.
"Loan Documents" means this Agreement, the Notes, and the Security
Documents and all other documents and instruments attached hereto, referred to
herein or heretofore, contemporaneously herewith or hereafter executed or
delivered to Lender by any Person in connection with any indebtedness of
Borrower to Lender.
"Long Term Revolving Loan Review Date" means the earlier of June 30, 2000,
and the date Lender demands payment in full of the then outstanding balance of
the Long Term Revolving Note.
"Maximum Letter of Credit Amount" means $1,000,000.00.
"Maximum Long Term Revolving Loan Amount" means $17,500,000.00.
"Maximum Short Term Revolving Loan Amount" means $17,500,000.00.
"Note(s)" means any one or more of Short Term Revolving Note or the Long
Term Revolving Note.
"Person" means an individual or entity, including without limitation a
corporation, general or limited partnership, limited liability company, trust,
unincorporated association, government or government agency.
"Short Term Revolving Loan Review Date" means the earlier of June 30, 1998,
and the date Lender demands payment in full of the then outstanding balance of
the Short Term Revolving Note.
"Security Documents" means any document or instrument evidencing a security
interest given by the Borrower to the Lender together with all amendments,
replacements, substitutions, or additions thereto.
"Tangible Net Worth" means total assets minus intangible assets minus total
liabilities.
ARTICLE II
SHORT TERM REVOLVING LOANS
2.1 MAXIMUM AMOUNT. Subject to the terms and conditions of this
Agreement, Lender agrees to make loans to Borrower from time to time on a
revolving credit basis (each a "Short Term Revolving Advance", collectively,
"Short Term Revolving Loans"), provided that the aggregate principal amount of
outstanding Short Term Revolving Loans shall at no time
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exceed the Maximum Short Term Revolving Loan Amount. The availability of Short
Term Revolving Advances shall terminate on the Short Term Revolving Loan Review
Date.
2.2 USE OF PROCEEDS. Borrower shall use the proceeds of the Short Term
Revolving Loans for its normal working capital needs.
2.3 SHORT TERM REVOLVING NOTE. The Short Term Revolving Loans shall be
evidenced by a promissory note executed by Borrower in the principal amount of
$17,500,000.00 substantially in the form attached as Exhibit A ("Short Term
Revolving Note"). The Short Term Revolving Loans shall be subject to all terms
and conditions of the Short Term Revolving Note and of this Agreement.
2.4 INTEREST. Interest on the unpaid principal balance of the Short Term
Revolving Note shall be due and payable at the times and at the rates set forth
in the Short Term Revolving Note.
2.5 PRINCIPAL PAYMENTS. The principal balance of the Short Term Revolving
Note shall be due and payable on the Short Term Revolving Note Review Date.
2.6 ADDITIONAL PAYMENTS. In addition to the payments otherwise required
on the Short Term Revolving Note, if at any time the outstanding principal
balance of the Short Term Revolving Note exceeds the Maximum Short Term
Revolving Loan Amount, Borrower shall pay to Lender on demand an amount equal to
the amount by which such principal balance exceeds the Maximum Short Term
Revolving Loan Amount.
2.7 REQUESTS FOR SHORT TERM REVOLVING ADVANCES. Whenever Borrower wishes
to request a Short Term Revolving Advance, Borrower shall give Lender notice
thereof either orally or in writing or by means of a "Zero Balance Account"
where checks written by Borrower are automatically paid so long as the aggregate
amount of checks written and presented for payment do not exceed the Maximum
Short Term Revolving Loan Amount and in accordance with the provisions of the
Short Term Revolving Note. Notwithstanding any other provision herein or in the
Short Term Revolving Note, Lender may in its discretion revoke Borrower's option
to request a Short Term Revolving Advance by means of writing checks on a Zero
Balance Account and require that requests be made either orally or in writing to
a representative of Lender authorized to handle Borrower's requests for a Short
Term Revolving Advance.
2.8 30 DAY REST REQUIREMENT. The Borrower shall maintain a zero balance
on the Short Term Revolving Note for at least 30 consecutive days at any time
during the period from the date hereof and the Short Term Revolving Loan Review
Date.
ARTICLE III
LONG TERM REVOLVING LOANS
3.1 MAXIMUM AMOUNT. Subject to the terms and conditions of this
Agreement, Lender agrees to make loans to Borrower from time to time on a
revolving credit basis (each a "Long Term Revolving Advance", collectively,
"Long Term Revolving Loans"), provided that the aggregate principal amount of
outstanding Long Term Revolving Loans shall at no time
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exceed the Maximum Long Term Revolving Loan Amount. The availability of Long
Term Revolving Advances shall terminate on the Long Term Revolving Loan Review
Date.
3.2 USE OF PROCEEDS. Borrower shall use the proceeds of the Long Term
Revolving Loans for the purchase of fixed assets and to repay a promissory note
owed Lender dated September 9, 1996, in the face amount of $11,500,000.00.
3.3 LONG TERM REVOLVING NOTE. The Long Term Revolving Loans shall be
evidenced by a promissory note executed by Borrower in the principal amount of
$17,500,000.00 substantially in the form attached as Exhibit B ("Long Term
Revolving Note"). The Long Term Revolving Loans shall be subject to all terms
and conditions of the Long Term Revolving Note and of this Agreement.
3.4 INTEREST. Interest on the unpaid principal balance of the
Long Term Revolving Note shall be due and payable at the times and at the rates
set forth in the Long Term Revolving Note.
3.5 PRINCIPAL PAYMENTS. The principal balance of the Long Term Revolving
Note shall be due and payable on the Long Term Revolving Note Review Date.
3.6 ADDITIONAL PAYMENTS. In addition to the payments otherwise required
on the Long Term Revolving Note, if at any time the outstanding principal
balance of the Long Term Revolving Note exceeds the Maximum Long Term Revolving
Loan Amount, Borrower shall pay to Lender on demand an amount equal to the
amount by which such principal balance exceeds the Maximum Long Term Revolving
Loan Amount.
3.7 REQUESTS FOR LONG TERM REVOLVING ADVANCES. Whenever Borrower wishes
to request a Long Term Revolving Advance, Borrower shall give Lender notice
thereof in accordance with the provisions of the Long Term Revolving Note.
ARTICLE IV
LETTERS OF CREDIT
4.1 MAXIMUM AMOUNT OF CREDITS. Subject to the terms and conditions of
this Agreement and the L/C Agreements, Lender in its sole discretion and at its
sole option may issue one or more standby or commercial letters of credit for
the account of Borrower (each a "Letter of Credit"), provided that the L/C
Outstandings shall not exceed at any one time the Maximum Letter of Credit
Amount.
4.2 L/C APPLICATIONS. Whenever Borrower wishes to request the issuance of
a Letter of Credit, Borrower shall execute and deliver to Lender an application
and agreement therefor in Lender's standard form, appropriately completed with
all required information (an "L/C Application"). Each Letter of Credit shall be
subject to all terms and conditions of this Agreement, the L/C Agreements and of
the applicable L/C Application. In the event of any express conflict between
the terms of this Agreement, the L/C Applications or the L/C Agreements, the
terms of this Agreement shall control.
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4.3 EXPIRY DATE. No Letter of Credit shall be issued on or after the L/C
Termination Date. Each Letter of Credit shall have an expiration date no later
than 365 days after the L/C Termination Date. Drafts drawn under a Letter of
Credit may be sight drafts or time drafts; provided, however, that no draft
shall have a maturity date later than 365 days after the L/C Termination Date.
4.4 REIMBURSEMENT. Borrower hereby agrees to reimburse Lender an amount
equal to the face amount of each draft drawn under each Letter of Credit in
accordance with the terms of the L/C Agreements. Notwithstanding the terms of
the applicable L/C Agreement or any L/C Application, in the event Borrower fails
to pay Lender in accordance with the terms of the applicable L/C Agreement or
any L/C Application, Borrower agrees to pay to Lender on demand interest on all
amounts due under such Letter of Credit at the default rate of interest
specified in the applicable L/C Agreement.
4.5 CERTAIN FEES. In addition to any other fees set forth herein,
Borrower agrees to pay to Lender on demand:
4.5.2 With respect to each commercial Letter of Credit, and each
draft drawn thereunder, Lender's customary issuance fees, processing fees,
negotiation commissions and acceptance fees, as applicable.
4.5.3 With respect to each standby Letter of Credit, an issuing fee
of 1% per annum, calculated from and including the date of issuance (or date of
renewal or extension if any) thereof to the expiry date thereof.
ARTICLE V
LOAN FEES
Borrower shall pay to Lender the following fees:
5.1 A non-usage fee of .125% of the daily unused portion of the Short Term
Revolving Loans which fee shall be due and payable quarterly in arrears.
5.2 A non-usage fee of .125% of the daily unused portion of the Long Term
Revolving Loans which fee shall be due and payable quarterly in arrears.
5.3 Letter of Credit fees referred to in Section 5.5.
ARTICLE VI
ADDITIONAL TERMS APPLICABLE TO CERTAIN CREDIT FACILITIES
6.1 REPRESENTATION AND WARRANTY OF CREDIT AVAILABILITY. Each request by
Borrower for a Short Term Revolving Advance, Long Term Revolving Advance, or
Letter of Credit shall be deemed to be its representation and warranty that (a)
such Short Term Revolving Advance or Long Term Revolving Advance may be made or
such Letter of Credit may be issued without exceeding the applicable maximum
amount determined in accordance with the provisions of this Agreement, (b) no
Default has occurred, or will occur as a result of making
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such Short Term Revolving Advance or Long Term Revolving Advance or the issuance
of such Letter of Credit, and (c) all representations and warranties set forth
in this Agreement are true, accurate and complete as of the date of such
request.
ARTICLE VII
SECURITY AND RELATED MATTERS
7.1 SECURITY.
7.1.1 COLLATERAL. The Long Term Revolving Loans shall be secured by
a first priority security interest in the following property and in all such
other real and personal property collateral as Lender may from time to time
require (collectively, "Collateral"):
(a) all of the Borrower's now owned and hereafter acquired equipment
and fixtures;
(b) real property located in Bonner County, State of Idaho; and
(c) all products and proceeds of the foregoing.
7.1.2 SECURITY DOCUMENTS. Lender's security interests in the
Collateral shall be evidenced by the Current Security Documents and by such
other security agreements, Uniform Commercial Code financing statements,
certificates of title, trust deeds, modifications thereto and other security
documents covering the Collateral as Lender may at any time require.
7.1.3 ADDITIONAL ACTS. As a condition precedent to the effectiveness
of this Agreement, and from time to time at Lender's request, Borrower shall
execute and/or deliver to Lender such security agreements, Uniform Commercial
Code financing statements, certificates of title, deeds of trust and any other
documents and instruments (endorsed or assigned to Lender as Lender may
request), which may be required under applicable law or which Lender may
request to effectuate the transactions contemplated hereunder and to grant,
preserve, protect, perfect and continue the validity and first priority of
Lender's security interests.
7.1.4 MAXIMUM SECURITY AMOUNT. Notwithstanding any contrary
provision of any Security Document executed by the Borrower, the security
interest granted to Lender by Borrower under the Security Documents shall be
limited to Collateral having a value equal to the maximum amount which can be
transferred to Lender without rendering Borrower's grant of a security interest
to Lender subject to avoidance as a fraudulent transfer or fraudulent conveyance
or any similar term under any applicable state or federal law.
7.2 NEGATIVE PLEDGE.
7.2.1 Borrower shall not grant, create, assume or permit to exist any
pledge, assignment for security purposes, encumbrance, mortgage, hypothecation,
or any other security interest on any of the Borrower's accounts or inventory.
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ARTICLE VIII
CONDITIONS PRECEDENT
8.1 INITIAL CONDITIONS PRECEDENT. The effectiveness of this Agreement is
subject to satisfaction of each of the following conditions precedent
concurrently with or prior to execution of this Agreement:
8.1.1 Lender shall have received executed originals of this Agreement,
the Notes, and each other Loan Document required by Lender.
8.1.2 Lender shall have received all documents and information Lender
may request relating to the authority for and validity of this Agreement and the
other Loan Documents, and to any other related matters, each in form and
substance satisfactory to Lender.
8.1.3 Lender shall have received such additional documents and
information and the Borrower shall have satisfied such additional requirements
as Lender reasonably requires.
8.2 CONDITIONS PRECEDENT TO EACH SHORT TERM OR LONG TERM REVOLVING ADVANCE
OR THE ISSUANCE OF ANY LETTER OF CREDIT. Lender's Agreement to make a Short Term
or a Long Term Revolving Loan Advance or to issue any Letter of Credit is
subject to satisfaction of the following conditions on the date any loan is made
or any Letter of Credit is issued.
8.2.1 No Default shall have occurred or will occur as a result of the
Borrower's action or inaction.
8.2.2 The representations and warranties in this Agreement shall be
true and correct as of such date.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants:
9.1 EXISTENCE AND POWER. It is a duly organized and validly existing
corporation, is duly qualified and in good standing in each jurisdiction where
the conduct of its business or the ownership of its properties requires such
qualification, and has full power, authority and legal right to carry on its
business as presently conducted, to own and operate its properties and assets,
and to execute, deliver and perform the Loan Documents and all other documents
to be executed and delivered by it.
9.2 AUTHORIZATION. Its execution, delivery and performance of the Loan
Documents and all documents to be executed, delivered or performed by it and any
borrowing in connection therewith have been duly authorized by all necessary
corporate action, do not contravene any law, regulation, rule or order binding
on it or its articles of incorporation, and do not contravene the provisions of
or constitute a default under any agreement or instrument to which it is a party
or by which it may be bound or affected.
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9.3 LITIGATION. There are no actions, proceedings, investigations, or
claims pending against it, or to its knowledge, threatened against or affecting
it, before any court or arbitrator or any governmental body or agency which
would be likely to result in a judgment or order against it (in excess of
insurance coverage) for more than $100,000.00 individually or in the aggregate.
9.4 FINANCIAL CONDITION. Its most recent balance sheet and related
statements of income, retained earnings and changes in financial position
heretofore delivered to Lender fairly present as of the date thereof its
financial condition for the period then ended, all in accordance with GAAP.
Since that date there have been no material adverse changes in its financial
condition or operations, except as disclosed to Lender in writing.
9.5 TAXES. It has filed all tax returns and reports required of it, and has
paid all taxes payable by it which have become due pursuant to such tax returns
and all other taxes and assessments payable by it.
9.6 OTHER AGREEMENTS. It is not in breach of or in default under any
agreement to which it is a party or which is binding on it or any of its assets,
which such breach or default would have a material adverse effect on its
financial condition or operations.
9.7 GOOD TITLE AND VALIDITY. It is the true and lawful owner of and has
good title to all Collateral which it now owns and it will have good title to
all such Collateral acquired hereafter, free of any security interests, liens or
encumbrances, except in favor of Lender.
9.8 FIRST PRIORITY SECURITY INTEREST. The liens created or to be created in
favor of Lender under the Security Documents do and will at all times on and
after the effective date of this Agreement, constitute first priority security
interests in the Collateral as security for the obligations of Borrower under
the Loan Documents.
9.9 COMPLIANCE WITH LAWS. It is in compliance with all applicable federal,
state, regional and local laws, regulations and ordinances, including without
limitation all environmental permits, Environmental Laws and Access Laws.
9.10 ERISA AND FLSA COMPLIANCE. Any employee pension benefit plan ("Plan")
maintained for its employees which is subject to the Employment Retirement
Income Security Act of 1974 and any regulations issued thereto complies in all
material respects with ERISA and any other applicable laws and (a) such Plan has
not incurred any material accumulated "funding deficiency" and (b) with respect
to such Plan, no "reportable event" nor "prohibited transaction" has occurred.
It is in full compliance with the Fair Labor Standards Acts.
9.11 NO MATERIAL MISSTATEMENTS. No report, financial statement,
representation or other information furnished by it to Lender contains any
material misstatement of fact or omits to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
9.12 ENFORCEABILITY. This Agreement constitutes, and each other Loan
Document to which it is a party when executed and delivered to Lender will
constitute a legal, valid and binding obligation of Borrower, enforceable in
accordance with its terms.
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ARTICLE X
FINANCIAL COVENANTS AND INFORMATION
10.1 FINANCIAL COVENANTS. Until payment and performance in full of all
obligations of the Borrower under the Loan Documents, the Borrower agrees that:
10.1.1 DEBT TO TANGIBLE NET WORTH RATIO. The Borrower shall have a
Debt to Tangible Net Worth Ratio not to exceed 1.50 to 1 at the end of
Borrower's first, second, and third fiscal quarter and 1.20 to 1 at the end of
each fiscal year of Borrower. The Debt to Tangible Net Worth Ratio shall be
calculated on the "Compliance Certificate" and measured at the end of each
fiscal quarter of the Borrower.
10.1.2 MINIMUM TANGIBLE NET WORTH. The Borrower shall have Tangible
Net Worth of at least $18,000,000.00 as at the end of Borrower's first, second
and third fiscal quarters and at least $30,000,000.00 as of the Borrower's 1998
fiscal year end and thereafter. Tangible Net Worth shall be calculated on the
"Compliance Certificate" and measured at the end of each fiscal quarter of the
Borrower.
10.1.3 DEBT SERVICE COVERAGE RATIO. The Borrower shall have a Debt
Service Coverage Ratio of at least 1.25:1, which ratio shall be calculated at
the end of each fiscal year of the Borrower.
10.2 FINANCIAL INFORMATION
10.2.1 As soon as available and in any event within 90 days after the
end of each of its fiscal years, the Borrower shall deliver to Lender its CPA
audited balance sheet as at the end of such fiscal year; related statements of
income, retained earnings and changes in financial position for such year; and
report, if any, to management by the accountant who prepared the financial
statements, in each case certified by a certified public accountant acceptable
to Lender. No document or report shall contain a disclaimer of opinion or
adverse opinion except such as Lender in its sole discretion may determine to be
immaterial.
10.2.2. As soon as available and in any event within 30 days after the
end of each of its fiscal quarters, the Borrower shall deliver to Lender its
internally prepared balance sheet and related statements of income, retained
earnings and changes in financial position as at the end of such quarter, and
for the fiscal year to date.
10.2.3 As soon as available and in any event within 30 days after the
end of each of its fiscal quarters, the Borrower shall deliver to Lender, at
Borrower's sole expense, a compliance certificate substantially in the form
attached hereto as Exhibit "C" completed and signed by Borrower's chief
financial officer or other authorized officer acceptable to Lender (the
"Compliance Certificate").
10.2.4 From time to time, Borrower shall provide to Lender such
information as Lender may reasonably request concerning the financial condition
and business affairs of Borrower.
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ARTICLE XI
AFFIRMATIVE COVENANTS
Until payment and performance in full of all obligations of the Borrower
under the Loan Documents, the Borrower agrees that:
11.1 INSPECTION RIGHTS. At any reasonable time, and from time to time, it
will permit Lender to examine and make copies of and abstracts from its records
and books of account, to visit its properties and to discuss its affairs,
finances and accounts with any of its officers or representatives.
11.2 COLLATERAL AUDITS. It will permit Lender by or through any of Lender's
representatives, attorneys or accountants and at the expense of Borrower, at
such intervals as may be required by Lender in its sole discretion, to conduct
audits of and to verify, the Collateral.
11.3 KEEPING OF BOOKS AND RECORDS. It will keep adequate records and books
of account in which complete entries will be made reflecting all material
financial transactions, and except as otherwise specifically provided herein,
will prepare all financial statements, computations and information required
hereunder in accordance with GAAP.
11.4 OTHER OBLIGATIONS. It will pay and discharge before the same shall
become delinquent all indebtedness, taxes and other obligations for which it is
liable or to which its income or property is subject and all claims for labor
and materials or supplies which, if unpaid, might become by law a lien upon its
assets, unless it is contesting the indebtedness, taxes, or other obligations
in good faith and provision has been made to the reasonable satisfaction of
Lender for the payment thereof in the event any such contest is determined
adversely to it.
11.5 INSURANCE. It will provide and maintain policies of insurance on its
properties and operations, carried with companies acceptable to Lender, in such
form and amounts and covering such risks as Lender may require, with loss
payable to Lender.
11.6 ERISA COMPLIANCE. It will cause each Plan to comply in all material
respects with ERISA and any other applicable laws, will promptly make all
contributions necessary to meet the minimum funding standards set forth in ERISA
and will promptly notify Lender of the occurrence of any "reportable event" (as
defined in ERISA) or any other event which might constitute grounds for
termination of any ERISA Plan. It will not terminate any ERISA Plan nor permit
to exist any "termination event" (as defined in ERISA).
11.7 COMPLIANCE WITH LAWS. It shall comply in all material respects with all
federal, state, regional and local laws, regulations and ordinances (including
but not limited to all Environmental Laws, Access Laws and the Fair Labor
Standards Act) and promptly provide written notice to Lender of the receipt of
any notice of violation thereof from any governmental authority which violation,
alone or together with any other such violations, could reasonably be expected
to have a material adverse effect on its business, assets, operations or
condition, financial or otherwise.
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11.8 NOTIFICATION. Promptly after learning thereof, it will notify Lender
in writing of:
11.8.1 The occurrence of any Default, and if such Default is then
continuing, a certificate of its chief financial officer or other authorized
officer setting forth the details thereof and the action which it is taking or
proposes to take with respect thereto;
11.8.2 The occurrence of any release of any Hazardous Substances onto
or affecting any of its property or any adjacent property, any Collateral, or
any other environmental problem or liability with respect to any such property;
and
11.8.3 The details of any claim, lien, litigation, administrative
proceeding or judgment involving $100,000.00 or more individually or in the
aggregate threatened, instituted or completed against Borrower, any Collateral
or any assets of Borrower, including but not limited to any and all
enforcement, cleanup, removal or other governmental or regulatory proceedings
pursuant to any Environmental Laws.
ARTICLE XII
NEGATIVE COVENANTS
Until payment and performance in full of all obligations of Borrower under
the Loan Documents, Borrower agrees that except with the written consent of
Lender:
12.1 LIQUIDATION, MERGER. It shall not liquidate, dissolve or enter into
any merger, consolidation or other combination.
12.2 SALE OF ASSETS. It shall not sell, lease or dispose of any portion of
its business or assets except in the ordinary course of business.
12.3 GUARANTIES, ETC. It shall not assume, guarantee, endorse or otherwise
become directly or contingently liable for, nor obligated to purchase, pay or
provide funds for payment of, any obligation or indebtedness of any other
Person.
12.4 LIENS. It shall not at any time grant a security interest in any or
all of its presently owned or hereafter acquired property which constitutes
Collateral, accounts or inventory except to Lender.
12.5 TYPE OF BUSINESS. It shall not make any material change in the
character of its business.
12.6 STRUCTURE. It shall not make any material change in its corporate
structure.
ARTICLE XIII
DEFAULT
13.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default under this Agreement and each of the Loan
Documents:
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13.1.1 Any default in the payment of any portion of any principal,
interest, fees or any other amount when due under this Agreement, any Note or
any other Loan Document.
13.1.2 Any other default in the performance of or compliance with any term
of this Agreement, any other Loan Document, or any other agreement between
Lender and Borrower.
13.1.3 Any indebtedness of Borrower under any note, indenture, agreement,
undertaking or obligation of any kind to any Person, including Lender, becomes
due by acceleration or otherwise and is not paid.
13.1.4 Any default under any security instrument securing any indebtedness
or obligation of Borrower to Lender or any security interest or lien created or
purported to be created by the Security Document shall cease to be, or shall be
asserted by any Person not to be, a valid, first priority security interest or
lien.
13.1.5 Any warranty, representation, statement, or information made or
furnished to Lender by or on behalf of Borrower proves to have been false or
misleading in any material respect when made or furnished or when deemed made or
furnished.
13.1.6 The commencement of any proceeding under any bankruptcy or
insolvency laws by or against, appointment of a receiver for any part of the
property of, insolvency or business failure of, or any attachment, seizure or
levy on any property of, Borrower.
13.1.7 The dissolution or liquidation of Borrower.
13.1.8 The interruption or cessation of a material portion of Borrower's
ordinary business operations.
13.1.9 Any judgment, writ of attachment or similar process in an amount in
excess of $250,000.00 individually or in the aggregate shall be entered or filed
against Borrower or any property of Borrower and remains unpaid, unvacated,
unbonded or unstayed for a period of 30 days or more.
13.1.10 The failure of Borrower to provide Lender with financial
information promptly when requested.
13.1.11 Any change in ownership of 40% or more of the capital stock of
Borrower in one or more transactions.
13.1.12 Any material adverse change, as determined solely by Lender, in the
financial condition or management of Borrower or Lender reasonably deems itself
insecure with respect to the payment or performance of the obligations of
Borrower to Lender.
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13.2 CURE PERIOD. Notwithstanding the foregoing, the Borrower shall have 30
days to cure any default occurring under Sections 13.1.1, 13.1.2, 13.1.8,
13.1.9, 13.1.10, 13.1.11, or 13.1.12.
13.3 CONSEQUENCES OF DEFAULT; LENDER'S RIGHTS AND REMEDIES. Time is of the
essence of this Agreement.
13.2.1 Without prejudice to any right of Lender to require payment of
any obligations of Borrower to Lender under any of the Loan Documents on
demand, upon the occurrence of any Event of Default and at any time
thereafter Lender may, at its sole option, do any one or more of the
following:
(a) Without notice to Borrower, declare the entire outstanding
balance of principal and interest on the Notes and other Loan
Documents immediately due and payable, whereupon the same shall become
immediately due and payable without presentment, demand, protest or
other requirements of any kind, all of which are expressly waived by
Borrower; and
(b) Exercise any and all other rights and remedies provided in
the Loan Documents and in any related agreements and documents, and as
otherwise provided by law.
13.2.2 Notwithstanding any right to cure events of default provided in
any Note or any of the other Loan Documents, Borrower agrees that Borrower
shall have only such cure rights as may be set forth herein.
ARTICLE XIV
MISCELLANEOUS
14.1 NO WAIVER BY LENDER. No failure or delay of Lender in exercising any
right, power or remedy under this Agreement or any Loan Document shall operate
as a waiver of such right, power or remedy of Lender or of any other right. A
waiver of any provision of any Loan Document shall not constitute a waiver of or
prejudice Lender's right otherwise to demand strict compliance with that
provision or any other provison. Any waiver, permit, consent or approval of any
kind or character on the part of Lender must be in writing and shall be
effective only to the extent specifically set forth in such writing.
14.2 COSTS AND FEES. Without limiting any other provisions of this
Agreement, Borrower hereby agrees to pay Lender on demand an amount equal to
all costs and expenses incurred by Lender in connection with the negotiation,
preparation, execution, administration and enforcement of the Loan Documents,
including without limitation all recording costs, filing fees, costs of
appraisals, collateral audits, costs of perfecting, maintaining and defending
Lender's security interest in the Collateral and fees of in-house and outside
counsel.
14.3 AGREEMENTS ENFORCEABLE. Borrower reaffirms the representations and
warranties in each of the existing Loan Documents and acknowledges that except
as amended previously or
13
<PAGE>
herein, each such Loan Document remains in full force and effect and is and
shall remain valid and enforceable in accordance with its terms.
14.4 NOTICES. Except as otherwise specifically set forth in any Loan
Document, all notices, requests and demands hereunder shall be in writing, and
shall be deemed to have been given when hand-delivered, when deposited in the
mail as first class, registered or certified mail, postage prepaid, or when sent
by telecopier, addressed as set forth below; provided, however, that any notice,
request or demand by Borrower to Lender pursuant to Section 11.8 shall not be
effective until received by Lender. Any party may at any time change its address
for notices by giving notice of such change to the other parties.
If to Borrower: Coldwater Creek Inc.
One Cold Water Creek Drive
Sandpoint, ID 83864
If to Lender: U.S. Bank of Idaho
Corporate Banking Department-IDW 0475
P.O. Box 8247
Boise, Idaho 83733
Facsimile (208) 383-7563
14.5 COLLECTION COSTS AND ATTORNEY FEES. Whether or not litigation or
arbitration is commenced, Borrower promises to pay all costs of collecting any
amounts which may become due to Lender under any of the Loan Documents. Without
limiting the foregoing, if litigation or arbitration is commenced to enforce or
construe any term of any of the Loan Documents, the prevailing party shall be
entitled to recover from the other party all costs thereof, including but not
limited to such sums as the court or arbitrator(s) may adjudge reasonable as
attorney fees at trial, in any appellate proceeding, proceeding under the
bankruptcy code or receivership and post-judgment attorney fees incurred in
enforcing any judgment.
14.6 INTEGRATION; CONFLICTING TERMS. This Agreement together with the other
Loan Documents comprises the entire agreement of the parties on the subject
matter hereof and supersedes and replaces all prior agreements, oral and
written, on such subject matter. If any term of any of the other Loan Documents
expressly conflicts with the provisions of this Agreement, the provisions of
this Agreement shall control; provided, however, that the inclusion of
supplemental rights and remedies of Lender in any of the other Loan Documents
shall not be deemed a conflict with this Agreement.
14.7 GOVERNING LAW. Except to the extent that Lender has greater rights and
remedies under federal law, this Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Idaho without regard to
conflicts of law principles.
14.8 ADDITIONAL ACTS. Upon request by Lender, Borrower will from time to
time provide such information, execute such documents and do such acts as may
reasonably be required by Lender in connection with any indebtedness or
obligations of any of them to Lender.
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<PAGE>
EXHIBIT 11
COLDWATER CREEK INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal Years Ended
March 1,1997 March 2,1996
------------ ------------
<S> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE
Net income as reported $10,816 $5,614
Pro forma income taxes 4,929 2,218
------- ------
Net income available to common stock $ 5,887 $3,396
======= ======
Weighted average shares outstanding
Actual shares outstanding (post split) 7,389 7,245
Deemed shares outstanding for Sub-S distribution 1,227 963
Net effect of dilutive stock options based on the treasury stock
method using average market price 265 249
------- ------
Total common shares and equivalents 8,881 8,457
------- ------
Pro forma primary earnings per share $ 0.66 $ 0.40
======= ======
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
Net income available to common stock $ 5,887 $3,396
======= ======
Weighted average shares outstanding
Actual shares outstanding (post-split) 7,389 7,245
Deemed shares outstanding for Sub-S distribution 1,227 963
Net effect of dilutive stock options based on the treasury stock
method using the higher of quarter-end market price or average
market price 265 249
------- ------
Total common shares and equivalents 8,881 8,457
------- ------
Pro forma fully diluted earnings per share $ 0.66 $ 0.40
======= ======
</TABLE>
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K - F
SECTION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-03-1996
<PERIOD-END> MAR-01-1997
<CASH> 9,095,000
<SECURITIES> 0
<RECEIVABLES> 2,342,000
<ALLOWANCES> 0
<INVENTORY> 25,279,000
<CURRENT-ASSETS> 38,547,000
<PP&E> 24,415,000
<DEPRECIATION> 4,335,000
<TOTAL-ASSETS> 61,974,000
<CURRENT-LIABILITIES> 24,557,000
<BONDS> 0
0
0
<COMMON> 101,000
<OTHER-SE> 37,086,000
<TOTAL-LIABILITY-AND-EQUITY> 61,974,000
<SALES> 143,059,000
<TOTAL-REVENUES> 143,059,000
<CGS> 66,430,000
<TOTAL-COSTS> 130,893,000
<OTHER-EXPENSES> 25,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,000
<INCOME-PRETAX> 12,013,000
<INCOME-TAX> 1,197,000
<INCOME-CONTINUING> 10,816,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,816,000
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
</TABLE>
