Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 27, 1999
Commission File Number 0-26772
---------------
COLDWATER CREEK INC.
(Exact name of registrant as specified in its charter)
DELAWARE 82-0419266
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE COLDWATER CREEK DRIVE
SANDPOINT, IDAHO 83864
(Address of principal executive offices)
(208) 263-2266
(Registrant's telephone number)
---------------
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 preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K [_]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant was approximately $41,132,000 as of May
11, 1999, based upon the closing price on the Nasdaq National Market reported
for such date. As of May 11, 1999, 10,183,117 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 person
may under certain circumstances be deemed to be affiliates. This determination
for 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 1999 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COLDWATER CREEK INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999
Page
----
PART 1
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 18
Item 3. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 23
Item 6. Selected Financial and Operating Data.......................... 24
Item 7. Management's Discussion and Analysis........................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 35
Item 8. Financial Statements and Supplementary Data.................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 54
PART III
Item 10. Directors and Executive Officers of the Registrant............. 54
Item 11. Executive Compensation......................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management. 54
Item 13. Certain Relationships and Related Transactions................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 55
PART I
ITEM 1. BUSINESS
The following discussion may contain forward-looking statements, including
statements regarding the Company's strategy, sales trends and operations,
within the meaning of the federal securities laws 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. These statements are based on management's current expectations
and 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: those associated with offering apparel
merchandise such as long lead times, increased inventory requirements,
merchandise returns, and high shipping costs; general economic and business
conditions and other factors outside the Company's control such as customer
response rates, consumer preferences, and fluctuations in paper and postage
costs; 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 1--Business--Competition; Reliance on
Catalog Operations; and Risks Associated with Growth Strategy," "Item 7--
Management's Discussion and Analysis" and elsewhere in this Form 10-K.
References to a fiscal year refer 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, as is the case with all
periods presented herein except Fiscal 1994 which consisted of 53 weeks.
Overview
Coldwater Creek Inc. (the "Company") is a specialty direct mail retailer of
apparel, gifts, jewelry and home furnishings. The Company markets its
merchandise primarily through three distinct catalogs. Northcountry, which was
introduced in 1985, is the Company's core catalog and features casual,
comfortable apparel, hard-to-find jewelry, distinctive artwork, gifts and
items for the home. The Company's premium catalog for women, Spirit of the
West, was introduced in 1993 and features fashionable, upscale apparel and
hard-to-find jewelry and accessories. In response to customer demand for the
selected, upscale bed and bath products periodically featured in Northcountry
and Spirit of the West, the Company introduced its Bed & Bath catalog in
August of 1997. The Company also maintains an interactive Internet commerce
web site (www.coldwater-creek.com) from which merchandise may be viewed and
purchased.
As part of the Company's brand building strategy, the Company also operates
full-line, catalog-themed retail stores in Sandpoint, Idaho and Jackson Hole,
Wyoming. Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores
Inc., the Company additionally operates twelve outlet stores throughout the
United States. These outlet stores, as well as periodic clearance catalogs and
the web site, serve as the Company's primary promotional vehicles for the
disposition of excess merchandise inventory.
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, have allowed it to develop a unique
brand identity and strong relationships with its loyal customer base.
1
The Company 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 and to strengthen relationships
with existing and new customers. To that end, the Company continuously strives
to make timely investments in its telephone technology and distribution
infrastructure to support its customer service-based strategy. In this regard,
the Company opened an additional customer service call center and distribution
center near Parkersburg, West Virginia in early fiscal 1998 and will
transition these added interim operations into a new 600,000 square foot East
Coast Operations Center during the Summer of 1999. The addition of this new
facility, supported by a new information technology platform, will provide the
Company with a consolidated base of operations capable of processing 120,000
customer orders a day. As a result of this ongoing commitment to customer
service, the Company again achieved faster telephone answer times, lower
abandoned call rates, and faster order processing during fiscal 1998 than the
most recently published industry averages. The Company plans to continue to
stimulate future long-term growth through a variety of strategic initiatives
designed to expand merchandise offerings, yield higher customer response
rates, increase catalog circulation and promote customer use of the Company's
interactive commerce web site.
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 1992 and 1997, consumer catalog sales
volume grew at a compound annual growth rate of 7.5% to $48.3 billion in 1997.
Additional data published by the Direct Marketing Association estimates that
consumer catalog sales will grow to $64.6 billion by 2002. The Company
believes that the catalog industry will continue to grow principally due to
the convenience and security of shopping at home, the increasing time
constraints facing two-career families, the convenience and availability 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
development of a large and loyal customer base and its continuing investments
in technology and infrastructure, it is well positioned to take advantage of
emerging market and distribution opportunities not available to many 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 15 items including binoculars and
birdfeeders. The Company's first customer database consisted of handwritten
customer information on 3x5 index cards. Since its inception, the Company has
remained committed to the vision of providing extraordinary customer service
and offering high value merchandise as the primary means to develop a loyal
customer base. Quick telephone answer speeds and rapid order fulfillment have
also been hallmarks of the Company since its founding. As the Company pursued
its growth, Dennis and Ann hired individuals who shared their commitment to
offering extraordinary customer service.
The Company believes it is more than just a purveyor of goods. The Company's
philosophy is closely aligned with the romance of wide open spaces and the
unhurried approach to living and familiarity found in small town settings.
Apparel and other merchandise is selected and displayed to promote the
Company's philosophy and enhance its image and is presented honestly without
price
2
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 on
the needs of its growing customer base.
The Company believes that its locations in the small town settings of
Sandpoint, Idaho and Parkersburg, West Virginia allow it to draw upon unique
workforces that excel 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 its customers
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, customer service
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 1998, the Company achieved an average telephone answer speed of 4.6
seconds, an abandoned call rate of 0.66%, a distribution error rate of 0.08%
and shipped 93.3% of in-stock orders within one shipping day of order
processing.
Offer a High Quality, Differentiated Merchandise Assortment. Coldwater
Creek's catalogs offer a broad assortment of high quality apparel, gifts,
jewelry and home furnishings which the Company believes is not commonly found
in other consumer catalogs. The Company believes that its customers buy into a
relaxed lifestyle, not just clothing and collectibles, and it seeks to
differentiate its catalogs through the extensive use of spirited merchandise
narratives, thematic and seasonal photographs, and unique yet practical
merchandise displays and layouts. The Company's merchandise mix is structured
to reflect a uniquely American, relaxed style. In addition, the Company
attempts to provide its customers with a dynamic merchandise assortment by
regularly test marketing new merchandise and merchandise concepts and updating
its merchandise selection frequently. In this regard, the Company in recent
years has increasingly shifted its merchandise mix to include a greater
percentage of apparel and home furnishings and has introduced its own line of
private label apparel offerings.
Promote Increased Household Purchasing. 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 use 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.
3
Continue Investment in Technology and Infrastructure. The Company is
committed to ongoing investment in technology and 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 technology and 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. In this regard, during the last five fiscal
years, the Company has recruited and hired key management personnel as well as
invested approximately $42.0 million in technology and infrastructure
improvements and additions. These technology and infrastructure investments
were made primarily to expand the Company's distribution facilities and
customer service call centers, upgrade its telecommunications systems and
install and implement more sophisticated database technologies and management
information systems. For instance, during fiscal 1998, the Company established
interim call center and distribution operations near Parkersburg, West
Virginia in order to alleviate certain capacity constraints being experienced
at the Company's original Sandpoint, Idaho location and to better and more
cost-effectively serve the majority of the Company's customers which are
located on the East Coast. During the Summer of 1999, these interim operations
will be transitioned into a new 600,000 square foot East Coast Operations
Center to be leased by the Company. In connection with the establishment of
these East Coast operations, the Company also implemented new warehouse
management and inventory control systems in order to provide more flexible
tools for managing its inventory. During fiscal 1999, these new systems will
be additionally implemented into the Company's original distribution center in
Sandpoint, Idaho. In addition, the Company recently began making significant
technological improvements to its interactive Internet commerce web site
(www.coldwater-creek.com) in order to better accommodate the significantly
increased activity and sales being experienced in this new channel and to
bring the Coldwater Creek catalog shopping experience on-line.
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 by
offering unique, high quality merchandise assortments in its catalogs. In
addition, the Company believes that increased efforts to develop its private
label apparel and expansion of its Internet and store-based operations will
increase customer awareness of the Coldwater Creek brand.
Growth Strategies
Coldwater Creek believes that it has significant long-term opportunities to
attract and retain new customers and increase sales through several strategic
initiatives which include the following:
Expand Other Distribution Channels. Coldwater Creek is currently focusing
primarily on two additional distribution channels for its merchandise: the
Internet and retail stores. The Company currently maintains an interactive
Internet commerce web site (www.coldwater-creek.com) from which merchandise
may be viewed and purchased. The site also allows potential customers to
review merchandise information, make merchandise inquiries and request one or
more catalogs. The Company's activity and sales through its web site
significantly increased during fiscal 1998 from that experienced during fiscal
1997. While Internet-related sales remained immaterial to the Company's
overall financial results for fiscal 1998, the increase realized from this new
sales channel was substantial on a percentage basis. Therefore, the Company
recently made the commitment to increase the number of products offered for
sale on its web site and to improve the site's structure and capacity to
handle additional customer demand. In this regard, the Company recently formed
an Internet Commerce Division to be personally led by Dennis Pence, the
Company's Co-Founder and Chief Executive Officer. In addition, the Company
currently operates catalog-themed, full-line retail stores in Sandpoint, Idaho
and Jackson Hole, Wyoming. Management believes that the building of a modest
base of highly visible retail stores over time will provide a physical
presence that will help build
4
Coldwater Creek's brand recognition with existing and prospective customers.
Although there are no current commitments to do so, the Company will continue
to consider the selective opening of highly visible retail stores in high
traffic areas, including major urban areas and "destination" locations near
major national parks or other resort areas, when attractive.
Introduce New Catalog Titles. Coldwater Creek intends to periodically offer
new catalog titles featuring complementary and new merchandise concepts that
promote the spirit of Coldwater Creek while allowing the Company to further
penetrate distinct segments of the market. The Company's goal is to create
catalog titles that leverage information gathered by the Company, including
customer characteristics and demographic information, purchase histories and
merchandise performance, to capture distinct and increasingly discrete
segments of the market. As part of this strategy, the Company introduced Bed &
Bath, its newest and fastest growing catalog, in August of 1997. In light of
its strong performance to date, the Company has begun transitioning Bed & Bath
into a more widely circulated, full-line "Home" catalog to be debuted in the
Fall of 1999. The Company continuously evaluates other potential merchandise
categories that may be capable of supporting additional new catalog
introductions.
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 periodically increase catalog page counts
to accommodate new merchandise in its catalogs. The Company believes that a
significant long-term opportunity exists to generate additional sales from
existing customer households by expanding the merchandise selection in its
existing catalogs.
Increase Catalog Circulation. Coldwater Creek pursues an aggressive mailing
strategy when market conditions permit. This strategy is designed to attract
new customers and to generate additional sales from cross-mailings of the
Company's catalogs to existing customer households. The Company continues its
name acquisition and market segmentation program, including the rental of
other catalog customer lists and use of the Company's database technologies to
more efficiently analyze existing and prospective customer files in an effort
to increase response rates to each mailing.
The Coldwater Creek Catalogs
Coldwater Creek currently publishes three 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 has the broadest market appeal and
features merchandise that has demonstrated the most sustainable life cycles.
Most Northcountry items are priced between $10 and $300, generating an average
customer order of $125 during fiscal 1998, as compared to average customer
orders of $123 and $112 during fiscal 1997 and fiscal 1996, respectively.
Spirit of the West. First introduced in the Fall of 1993, Spirit of the West
features upscale women's apparel and jewelry, including dresses and
coordinates, blouses, shirts, jackets, pants and skirts, as well as 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
5
the women's apparel found in the Company's Northcountry catalog. Most items
are priced between $20 and $400, generating an average customer order of $208
during fiscal 1998, as compared to average customer orders of $204 and $211
during fiscal 1997 and fiscal 1996, respectively.
Bed & Bath. In August of 1997, the Company introduced a new catalog
featuring bed and bath products as well as other housewares. Merchandise
offered in Bed & Bath, which currently has the highest rate of sales growth
among the Company's catalogs, includes bed and bath linens, bath accessories,
sleepwear and a variety of decorative accessories such as wall decor, lamps,
rugs and accessory furniture. Most items are priced between $10 and $2,400,
generating an average customer order of $159 during fiscal 1998, as compared
to an average customer order of $137 during fiscal 1997.
Additionally, in connection with the holiday buying season, the Company
offers a "Gifts-to-Go" catalog to its customers. The "Gifts-to-Go" catalog,
which is mailed primarily to the Company's existing customers, consists of
merchandise selected from the Company's various catalogs and has not been
material to the Company's annual sales reported herein.
The Company regularly evaluates the performance of its catalogs and catalog
mailings and adjusts its mailings in response to anticipated market demand. In
this connection, the following catalogs were discontinued during the last two
fiscal years:
Milepost Four. First introduced in the Spring of 1996, Milepost Four was the
Company's men's apparel and accessory catalog. Milepost Four was designed to
reinforce the household relationship by offering merchandise to the male
members of the target customer household. Milepost Four attempted to
capitalize on purchases of the selective men's clothing periodically featured
in Northcountry and the trend towards "casual Friday" office attire. Coldwater
Creek's Milepost Four catalog featured, 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 were priced between
$10 and $300. During the fall of 1998, the Company decided to discontinue
Milepost Four as its long-term growth potential was determined by management
to be substantially less than that of the Company's other catalog titles as
well as certain potential future titles.
Ecosong. First introduced in the Fall of 1994, Ecosong featured merchandise
with environmental, nature and wildlife themes. The merchandise selection in
Ecosong included gifts, tee-shirts, sweatshirts and jewelry designed to appeal
to the Company's early target audience that was drawn to Northcountry's
original emphasis on nature related themes. Most Ecosong items were priced
between $10 and $50. During fiscal 1997, the Company decided to discontinue
Ecosong as a stand-alone catalog and to instead selectively feature such
merchandise items within the Company's other existing catalog titles.
Coldwater Creek catalogs include full color photographs displaying the
merchandise and pricing information and feature original artwork or
photographs on the cover designed to appeal to the targeted customer of each
catalog. Each catalog includes merchandise narratives describing the
merchandise and their specifications in a manner designed to stimulate the
reader's interest, promote purchasing decisions and convey the unique spirit
of each item to the customer. Apparel photographs often include the jewelry
and accessories needed to complete an outfit. In certain catalogs, photographs
of outfits are often placed against lifestyle backgrounds and scenes that
include mountain ranges, streams or tree covered hills, while in others,
apparel is placed against a color-coordinated, textured backdrop to accentuate
the colors of an outfit. Merchandise narratives are presented in a lyrical,
thematic manner designed to deliver the Coldwater Creek experience to each
customer and to personalize the catalog shopping experience. Further,
Coldwater Creek was one of the first catalog companies to show apparel items
"off-figure," leaving the customer to decide if an item of merchandise is
right for him or her based on the item's inherent style and not on how the
item looks on a model.
6
All catalogs are created and designed by an in-house team of artists, copy
writers and editors. From conception to publication, the in-house team uses a
collaborative approach to design the catalog, make merchandise display and
placement decisions and monitor the overall look, feel and quality of each
catalog. The Company maintains a studio for preliminary photographic work but
regularly contracts with independent photographers for final copy photographs.
These capabilities help the Company to preserve each catalog's distinctive
character and also allows the Company greater control over 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
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 achieve the ongoing goals of attracting
new customers and generating additional sales from existing customers.
Attracting new customers is accomplished principally through prospecting using
targeted mailings to individuals identified through rented mailing lists,
outside marketing information services and the Company's own market
segmentation analysis. Generating additional sales from existing customers
involves the use of 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 believes it 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.
Customer Prospecting; Growth of Mailing List and Active Customer
File. Coldwater Creek attempts to attract new customers and generate
additional sales from existing customer households through targeted direct
mailings. A key element of Coldwater Creek's overall marketing strategy has
been to pursue an aggressive circulation strategy when market conditions
permit. During fiscal years 1998, 1997 and 1996, the Company mailed 153.1
million, 113.7 million and 63.5 million catalogs, respectively. Of these
mailings, over 52% were mailed to prospective customers. 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. Despite the need
for and historical success of the Company's customer prospecting efforts, the
Company continues to believe that mailing additional catalog titles to
existing customer households generally produces higher revenue-per-catalog
figures than mailing to prospective customers who have no previous
relationship with the Company.
As a result of the Company's ongoing marketing investment in current and
future customer growth, the costs of which constitute the substantial majority
of each fiscal period's selling, general and administrative expenses, the
Company's proprietary mailing list increased to 7.4 million names at February
27, 1999 as compared to 5.4 million and 3.7 million names at February 28, 1998
and
7
March 1, 1997, respectively. The Company's active customer file, comprised of
customers who have made a purchase during the preceding twelve months, grew to
2.0 million names at February 27, 1999 versus 1.6 million and 1.1 million
names at February 28, 1998 and March 1, 1997, respectively. The average
customer order realized during fiscal 1998 was $142, down 5% from the $149
experienced during fiscal 1997 but up nearly 11% from the $128 realized during
fiscal 1996.
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 as new transactions are recorded. The database also is 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.
The Company utilizes a marketing database system that allows 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 Program. Coldwater Creek 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, preferential
status for back-order items, free gift-wrapping, 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
fiscal 1997, the Company expanded its Preferred Customer Program to include
multiple levels of customized service based on each customer's purchase
history. The Company believes that this program, coupled with the Company's
other customer service strategies, promotes greater customer loyalty and
higher retention rates.
Coldwater Creek Credit Card Program. Coldwater Creek previously offered a
proprietary credit card through a third-party administrator. The proprietary
card historically accounted for less than 8% of annual net sales. During the
Summer of 1997, the Company conducted an extensive review of the various
proprietary and third-party credit card programs available and elected to
convert its proprietary credit card to an affinity card offered by a major
credit card issuer. Credit cards issued under such program depict the
Coldwater Creek name and a nature-theme background.
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
8
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 three catalogs, interactive Internet commerce web site and retail
store operations, Coldwater Creek currently offers over 8,000 different
merchandise items with price points ranging from approximately $5 to $2,400.
Merchandise Mix. Coldwater Creek's merchandise offerings have both evolved
and expanded significantly in recent years. In the early 1990s, the Company's
offerings focused more heavily on jewelry and accessories than apparel. By
1995, the Company's apparel offering represented approximately 50% of the
Company's net sales with jewelry and accessories representing approximately
25% each. With the introduction of a Spring edition of Spirit of the West in
fiscal 1996 and despite the successful introduction of the Company's Bed &
Bath catalog in August of 1997, the growth of the Company's apparel
representation has continued to outpace the growth of its other merchandise
offerings, accounting for approximately 70% of fiscal 1998 net sales. This
increased commitment to apparel continues to be the result of customer
inquiries and Company market research indicating that the Company's customers
are increasingly willing to purchase apparel in the styles, of the quality and
at the price points selected and offered by the Company. The Company believes
that its apparel and home furnishings offering will continue to represent a
greater percentage of the Company's total net sales. The Company believes that
it prices its apparel and home furnishings competitively with that offered by
other retailers. In addition, the Company believes that, because its apparel
and home furnishings 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 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 periodically increases 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, 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 and plan the introduction and testing
of new items. Consequently, the Company's merchandise mix continually is
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 maintains 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 choose color
schemes, materials and designs and to 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 continue 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 1,000 vendors. The Company's merchandise acquisition
strategy emphasizes relationships with domestic vendors, when possible, which
the Company believes supports its inventory management processes, provides for
greater quality control and results in faster turnaround times for merchandise
reorders. The Company's buyers and quality assurance inspectors work closely
with its suppliers to ensure high standards of merchandise quality.
9
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 the identity of the Coldwater Creek brand
and reinforces the uniqueness of the Company's offerings.
The Company believes it maintains satisfactory relationships with its
vendors. No single vendor accounted for more than 5% of total merchandise
purchases in fiscal 1998. 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 to expeditiously liquidate slow moving, discontinued
and discounted merchandise. These strategies include the operation of twelve
outlet stores throughout the United States, the distribution of sale flyers in
shipped merchandise, product inclusion within the Company's other catalogs, in
some cases with price adjustments, and promotions through the Company's
interactive Internet commerce web site.
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 customer service call center
operations, its order entry and fulfillment processes, its employee and sales
agent training programs and its merchandise return policy. In addition, the
Company's infrastructure investments, such as its investment in telephone
technologies 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.
Customer Service 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 1998, approximately 90% of the Company's orders were received by
telephone with the remaining 10% received by mail, facsimile or the Internet.
During fiscal 1998, the Company achieved an average telephone answer speed of
4.6 seconds and an abandoned call rate of 0.66%.
The Company currently operates two customer service call centers which are
organized to provide prompt, seamless response to customer calls. The
Company's customer service call center in Coeur d'Alene, Idaho is
approximately 50 miles from the Company's headquarters in Sandpoint, Idaho.
During fiscal 1998, the Company established a customer service call center in
Parkersburg, West Virginia in order to better serve the majority of its
customers who reside on the East Coast. Backup systems and rerouting
capabilities allow the Coeur d'Alene and Parkersburg customer service call
centers to individually service the Company's entire inbound 1-800 traffic if
required by a system failure at either center. The Company's two customer
service call centers are equipped with a total of 508 stations, 350 of which
are located at the Coeur d'Alene customer service call center and 158 of which
are located at the Company's Parkersburg customer service call center. The
Company monitors and shifts calls between the two customer service call
centers if calls at either center become backlogged. In the event that either
center reaches capacity, an all-hands bell sounds throughout the Company's
other facilities, alerting Company personnel, including middle and senior
level personnel, to answer
10
any waiting incoming calls. During fiscal 1998, the Company handled
approximately 4.6 million calls, including record peak volume of more than
45,000 calls in a single day. At the end of fiscal 1998, the Company closed a
small customer service call center it had maintained at its Sandpoint, Idaho
headquarters and transferred that center's responsibilties to the
substantially larger customer service call centers in Coeur d'Alene and
Parkersburg.
Order Entry. The Company uses an integrated management information system
which allows telephone and Internet orders to be captured on-line and mail
orders to be entered efficiently. 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, telephone and
Internet orders, credit authorization, order processing and distribution. 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
four 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 a major
credit card, check or money order. All credit charges are pre-authorized prior
to shipping the order and credit authorization occurs coincident with order
processing.
Distribution and Order Fulfillment. The Company believes that delivery of
ordered merchandise promptly and in good condition promotes customer loyalty
and repeat buying. During fiscal 1998, approximately 93.3% of in-stock orders
were shipped within one shipping day of order processing. The Company achieved
a low distribution error rate of 0.08% during fiscal 1998, consistent with
rates achieved in prior fiscal years. 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 order is completed, the Company's computer system prints
the order in the appropriate distribution center, where it is proofread and
all necessary distribution and shipping documents, including customs forms for
international orders, are attached to expedite processing. Thereafter, the
orders are prepared, packed and shipped in batches three times a day during
normal operation, with extended distribution hours during peak periods.
Shipped orders are bar-coded and scanned and the merchandise, quantity and
ship date are entered automatically into the customer order file for access by
sales agents.
The Company uses a semi-automated picking, packing and shipping system with
numerous packing and gift wrapping stations. 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 utilized temporary
employees and plans to continue this practice. During fiscal 1998,
approximately 79% of all shipments were sent via first class mail through the
U.S. Postal Service and 21% of all shipments were sent via UPS Ground and
other carriers. Typically, each order is charged a shipping and handling fee
which is based upon the total order price. In fiscal 1998, the Company shipped
approximately 4.2 million packages.
During the second quarter of fiscal 1998, the Company established
distribution operations near Parkersburg, West Virginia in order to alleviate
certain capacity constraints being experienced at the Sandpoint Distribution
Center and to better and more cost-effectively serve the majority of the
11
Company's customers who are located on the East Coast. In exchange for the
Company's willingness to establish a long-term presence in Parkersburg, the
State of West Virginia constructed and made available to the Company, at a
nominal annual lease cost, a temporary 120,000 square foot facility from which
the Company could conduct certain order fulfillment operations until a
permanent facility could be constructed by the Wood County Development
Authority and made available. With the addition of the Parkersburg
distribution operations, the Company implemented new warehouse management and
inventory control systems in order to provide more flexible tools for managing
its inventory. The establishment of interim operations allowed the Company's
management to implement new technologies and train new employees on a reduced
but increasing scale pending completion of the permanent operations center.
During the Summer of 1999, the interim distribution operations will be
transitioned into 542,500 square feet of the new 600,000 square foot East
Coast Operations Center to be leased by the Company. Once transitioned, the
Company's consolidated shipping capacity will approximate 120,000 packages per
day. During fiscal 1999, the aforementioned new warehouse management and
inventory control systems will additionally be implemented into the Sandpoint
Distribution Center.
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
Company's vision and goals emphasizing "customers first" are well communicated
throughout the Company. 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 time of promotion and continue
throughout the employee's career. Coldwater Creek provides opportunity for
advancement for each employee dependent on his/her skill level, personal
effort and future potential. New sales agents participate in a ten-day
training program, which includes merchandise and computer system training,
mock telephone orders and a mentor system for working with more experienced
personnel. Sales agents are monitored to review performance and are retrained
periodically on an as-needed basis.
Return Policy. The Company has an unconditional return policy for all of its
merchandise under which a customer can return an item for any reason at any
time at the Company's expense. The Company believes that its return policy
builds customer loyalty and helps overcome a customer's initial reluctance to
purchase merchandise from catalogs.
Investment in Infrastructure. The Company has historically invested in
technology and infrastructure improvements designed to increase the efficiency
of its operations and the level of customer service provided to its customers.
During the last five fiscal years, the Company invested approximately $42.0
million in technology and infrastructure improvements. These technology and
infrastructure investments were made primarily to expand the Company's
distribution facilities and
12
customer service call centers, upgrade its telecommunications systems and
install and implement more sophisticated database technologies and management
information systems. For instance, during fiscal 1998, the Company established
interim call center and distribution operations near Parkersburg, West
Virginia in order to alleviate certain capacity constraints being experienced
at the Company's original Sandpoint, Idaho location and to better and more
cost-effectively serve the majority of the Company's customers who are located
on the East Coast. During the Summer of 1999, these interim operations will be
transitioned into a new 600,000 square foot East Coast Operations Center to be
leased by the Company. In connection with the establishment of these East
Coast operations, the Company also implemented new warehouse management and
inventory control systems in order to provide more flexible tools for managing
its inventory. During fiscal 1999, these new systems will be additionally
implemented into the Company's original distribution center in Sandpoint,
Idaho. In addition, the Company recently began making significant
technological improvements to its interactive Internet commerce web site
(www.coldwater-creek.com) in order to better accommodate the significantly
increased activity and sales being experienced in this new channel and to
bring the Coldwater Creek catalog shopping experience on-line. The Company
believes its expanded distribution facilities and upgraded telecommunications
and management information systems have increased the efficiency of its
operations and provided the Company with greater market analysis and
segmentation capabilities. As a result, the Company believes it can more
efficiently offer catalogs and merchandise to discrete market segments. The
Company's management remains committed to further investments in technology
and infrastructure development in order to further increase operating
efficiency, provide extraordinary customer service and maximize the Company's
growth potential.
Information Systems and Technology
The Company has adopted a widely used 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 telephone, mail and Internet orders, credit
authorization, order processing and distribution and shipment. In order to
provide a key decision support system, the Company maintains a marketing
database system. This system allows customer data to be searched and segmented
according to different variables and allows 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 systems and technologies 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 investments in the HP/3000 processors
and the installation of a Northern Telecom telephone switch at each customer
service 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
customer service 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 customer service call center in a
process which is transparent to the customer. If neither customer service call
center can be accessed, the Company has contracted with its long-distance
carriers to redirect incoming calls to sales agents' homes to help ensure that
uninterrupted service can be provided to its customers.
The Company's management information system strategy is designed to reduce
the risk of lost data and delays in the order entry or order fulfillment
processes. The Company's system is 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 Coeur d'Alene and Sandpoint data centers. The
Company believes this redundancy reduces the risk of interruption of customer
service or other critical operations due to failure of its computing systems.
13
Coldwater Creek remains engaged in an enterprise-wide Year 2000 project. A
project leader coordinates a team that includes representatives from every
department. A comprehensive project plan that defines each objective and task
in detail is guiding the team in its continuing efforts.
The Company does not sell any products that must be brought into Year 2000
compliance. However, the Company does rely upon many vendors and suppliers for
their products and services. The Company is evaluating key vendor
preparedness, as well as its own, by conducting interviews, obtaining
compliance representation letters, and when deemed necessary, conducting
comprehensive tests. Such vendors include, in addition to significant
merchandise vendors, providers of hardware and software computing products,
telecommunication systems and components, facilities and related systems, and
office equipment.
Although most of the Company's major systems are supplied by third-party
vendors who bear the financial burden of bringing such systems into
compliance, the Company's project team will maintain an active dialog with
these vendors to ensure the adequacy and timeliness of required modifications.
Year 2000 compliance inquiry letters have been sent to all major vendors and
the responses received to date are currently being evaluated. Project team
members have conducted site visits to the Company's two major
telecommunications vendors and its major computer hardware vendor for detailed
briefings on Year 2000 preparedness. Additional follow-up site visits will be
conducted as deemed necessary. Year 2000 compliance provisions have also been
added to all significant contracts and purchase orders.
The project team's initial review of the Company's systems identified two
application systems and two system software components which were not Year
2000 compliant. The first application system, which is an interface to the
Company's accounting system, has been upgraded by the vendor to be Year 2000
compliant at no incremental cost to the Company. The second application
system, which is a payroll system, will either be upgraded or replaced at an
immaterial cost to the Company no later than June 1999. The identified system
software components were already scheduled to be upgraded during 1999 and
represent an immaterial cost to the Company.
The internal testing of all other applications systems for Year 2000
compliance is continuing with the majority of the testing being conducted in
conjunction with regularly scheduled upgrades. The Year 2000 compliance
shortcomings detected to date in these systems have been minor in nature and
readily corrected. As a result, the incremental cost incurred to date in
testing and modifying these systems for Year 2000 compliance has been
immaterial.
The Company's Year 2000 compliance program also includes the testing of all
major systems containing embedded technologies. The Year 2000 compliance
shortcomings detected to date in these systems have generally involved
telecommunications components and have been minor in nature. The correcting
upgrades were completed during the first calendar quarter of 1999 at an
immaterial cost to the Company.
The Company expects to complete its Year 2000 compliance evaluation program,
including the development of contingency plans to manage all identified areas
of high risk, by June 1999. At this time, the Company continues to believe
that the balance of the costs to be incurred in connection with its Year 2000
compliance program will be immaterial to the Company's financial position,
results of operations and cash flows.
Retail Stores
Coldwater Creek maintains retail store operations as part of its brand
building strategy. In 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 approximately 14,000 feet of prime retail space. Over the
course of 1995 and subsequent thereto, the
14
Company developed the 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 Bed & Bath 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.
As a continuation of the Company's retail store strategy, the Company opened
a similar retail store with approximately 16,000 feet of prime retail space in
Jackson Hole, Wyoming during June of 1997. Jackson Hole is the gateway to
Grand Teton and Yellowstone National Parks and a major ski resort.
The Company's full-line retail store operations, which accounted for
approximately 3% of net sales in fiscal 1998, 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 will continue to consider the selective opening of retail stores in
high traffic areas, including major urban areas and "destination locations"
such as near major national parks or other resort areas, where the Company
believes there is the greatest potential for name brand identification. The
Company believes its retail stores provide an additional source of demand for
its catalogs as individuals visit the stores and become acquainted with the
Company's merchandise. In addition, as the peak selling cycle for these stores
include the months of June, July, August and September, the Company's retail
stores provide counter cyclical cash flow that improves overall second fiscal
quarter performance.
Employees
As of February 27, 1999, the Company had 880 full-time employees and 447
temporary employees. During the peak catalog 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 currently are covered by collective bargaining
agreements. The Company considers its employee relations to be satisfactory.
Trademarks
Coldwater Creek(R), Spirit of the West(R) and Milepost Four(R) are
registered trademarks of the Company. The Company believes that its registered
and common law trademarks have significant value and that its Coldwater
Creek(R) and Spirit of the West(R) trademarks are instrumental to its ability
to create and sustain demand for and market its merchandise. During the third
quarter of fiscal 1998, the Company announced that it had decided to
discontinue its Milepost Four mens' apparel catalog as its performance did not
meet the Company's long-term growth expectations. The Company is making the
Milepost Four(R) trademark available as part of any sale of the Milepost Four
catalog business.
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. The recent addition
of Internet commerce operations by a number of these retailers, as well as the
emergence of a number of stand-alone e-commerce companies, has introduced a
further element of competition into the Company's markets. 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
15
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 to compete effectively against such
competitors could have a material adverse affect on the Company's growth and
could adversely affect the Company's business, financial position, results of
operations and cash flows. Many of these competitors are larger and have
significantly greater financial, marketing and other resources than the
Company. Increased catalog mailings and Internet solicitations by the
Company's competitors may adversely affect response rates to the Company's
catalog mailings and Internet offerings. In addition, because the Company
sources the majority of its merchandise from suppliers and manufacturers
located in the United States, where labor and production costs may be higher
than in foreign countries, there can be no assurance that the Company's
merchandise will or can be competitively priced when compared to merchandise
offered by other retailers. 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 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 could
materially and adversely affect the Company's business, financial position,
results of operations and cash flows.
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 when market
conditions permit, 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, results of operations and cash flows could 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. Furthermore, the Company historically has
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 business, financial position, results of operations
and cash flows.
Risks Associated with Growth Strategy
The Company's growth strategy includes primarily the following components:
introducing expanded catalog and merchandise offerings, publishing new catalog
titles, increasing catalog circulation, expanding the Company's customer base
through aggressive prospect mailings when market conditions permit, and
increasing the use of other marketing channels, such as retail stores and the
Internet. The Company's growth strategy involves various risks, including a
reliance on a high degree of prospect mailings when market conditions permit,
which may lead to less predictable response rates. The failure of the Company
to successfully implement any or all of its growth strategies could have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows.
16
The Company believes its growth is 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 through new catalog titles, retail
stores or the Internet, will be successful or profitable, or that any such
efforts will achieve sustainable acceptance in the market. Any 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 or to
leverage the success of existing catalog titles to new merchandise lines,
catalogs, retail stores and the Internet could have a material adverse effect
on the Company's business, financial position, results of operations and cash
flows.
Management's long-term brand building strategy includes the selective
opening of highly visible retail stores in high traffic areas, including major
urban areas and "destination locations" such as locations near major national
parks or other resort areas. The Company currently operates catalog-themed,
full-line retail stores in Sandpoint, Idaho and Jackson Hole, Wyoming.
Management will continue to consider the opening of additional retail stores
in the future as prime locations become available. To date, the Company has
had limited experience operating retail stores, particularly 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. Failure to successfully implement this store-based strategy could
result in significant write-offs of inventory and fixtures and could have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows.
Management's long-term brand building strategy also includes increased
promotion of the Company's interactive Internet commerce web site. While
Internet-related sales remained immaterial to the Company's overall financial
results for fiscal 1998, the increase realized from this new sales channel was
substantial on a percentage basis. Therefore, the Company recently committed
to increase the number of products offered for sale on its web site and to
improve the site's structure and capacity to handle the additional customer
demand. In this regard, the Company has formed an Internet Commerce Division
to be personally led by Dennis Pence, the Company's Co-Founder and Chief
Executive Officer. The development and expansion of the Company's e-commerce
capabilities will entail substantial fixed costs, including costs associated
with computer hardware and software, technical staffing and continuing web
site maintenance and development. Failure to successfully implement this
Internet-based strategy could result in significant write-offs of inventory
and computer hardware and software and could have a material adverse effect on
the Company's business, financial position, results of operations and cash
flows.
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
may require additional capital, including its plans to broaden existing
merchandise lines, including its private label offerings, its plans to
introduce new merchandise and catalog titles and its aggressive mailing
program when market conditions permit. There can be no assurance that funds
will be available to the Company on terms satisfactory to the Company when
needed.
17
ITEM 2. PROPERTIES
The principal executive and administrative offices of the Company are
located at One Coldwater Creek Drive, Sandpoint, Idaho 83864. The telephone
number 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 are set forth below:
Facility Address Owned/Leased Size
-------- ------- ------------ ---------------
Corporate Offices....... One Coldwater Creek Drive Owned 51,000 sq. ft.
Sandpoint, Idaho 83864
Distribution Center..... 3333 McGee Road Owned 150,000 sq. ft.
Sandpoint, Idaho 83864
Retail/Outlet
Distribution Center.... 1402 North Boyer Avenue Leased 36,000 sq. ft.
Sandpoint, Idaho 83864
Coeur d'Alene Customer
Service Call Center.... 1201 Ironwood Drive Leased 24,000 sq. ft.
Coeur d'Alene, Idaho 83814
Interim East Coast
Distribution Center.... 100 Coldwater Creek Drive Leased 120,000 sq. ft.
Mineral Wells, W. Virginia 26160
Interim Parkersburg
Customer Service Call
Center................. 501 Avery St., 6th Floor Leased 16,000 sq. ft.
Parkersburg, W.Virginia 26101
Permanent East Coast
Operations Center,
including Distribution
Center and Customer
Service Call Center
(1).................... 100 Coldwater Creek Drive Leased 600,000 sq. ft.
Mineral Wells, W. Virginia 26160
Sandpoint Retail Store.. 334 North First Street Leased 14,000 sq. ft.
Sandpoint, Idaho 83864
Jackson Hole Retail
Store.................. 10 East Broadway Leased 16,000 sq. ft.
Jackson, Wyoming 83001
Twelve Outlet Stores.... Various U.S. Locations Leased 55,000 sq. ft.
Photo Studio............ 4100 McGee Rd. Leased 4,000 sq. ft.
Sandpoint, ID 83864
- --------
(1) Permanent facility under construction with occupancy and lease commencement
during the Summer of 1999. Leases for interim facilities to terminate
concurrent with relocation to permanent facility.
The Company believes that the above corporate offices, distribution centers
and customer service call centers are adequate to meet its needs for the
foreseeable future. Refer to "Item 7--Management's Discussion and Analysis--
Liquidity and Capital Resources" for further information, including details
regarding the possible future leasing of retail and outlet store properties in
connection with the Company's various growth initiatives.
18
ITEM 3. LEGAL PROCEEDINGS
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 proceeding is not likely
to materially affect its financial position, results of operations or cash
flows.
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 material 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.
The Company's retailing business is based solely in the states of Idaho,
West Virginia and Wyoming, and accordingly, the Company only collects sales
taxes from customers residing in those states. The Company's wholly-owned
subsidiary, Coldwater Creek Outlet Stores Inc., owns and operates outlet
stores throughout the United States and pays sales tax and applicable
corporate income, franchise and other taxes to the states in which outlets are
located. Various states have attempted to collect back sales and use tax from
direct marketers. 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. The Company anticipates that any legislative changes, if adopted,
would be applied only on a prospective basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's stockholders in the
fourth quarter of the fiscal year ended February 27, 1999.
19
MANAGEMENT
Directors and Executive Officers
Below is a table setting forth the name, age and position of the Company's
directors and executive officers:
Name Age Positions held
---- --- --------------
Dennis Pence................. [49] President, Chief Executive Officer,
Secretary, Vice Chairman of the Board of
Directors and President of Internet
Commerce Division
Ann Pence.................... [49] Creative Director and Chairman of the Board
of Directors
Georgia Shonk-Simmons........ [48] Chief Merchant and President of Catalog &
Retail Sales Division
Donald Robson................ [53] Senior Vice President, Chief Financial
Officer and Treasurer
Tom Scott.................... [42] Senior Vice President, Chief Operating
Officer and Chief Information Officer
Robert H. McCall, CPA (1)(2). [53] Director
Curt Hecker (2).............. [38] Director
Michelle Collins (1)......... [39] Director
Duncan Highsmith (3)......... [50] Director
James R. Alexander (4)....... [56] Director
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Mr. Highsmith was appointed as a Director by the Board of Directors on May
22, 1999.
(4) Mr. Alexander's Board and Compensation Committee service terminated on July
11, 1998.
Dennis Pence co-founded the Company in 1984, and has served as President,
Chief Executive Officer and Vice-Chairman of the Board of Directors of the
Company since its incorporation in 1988. Since July 1998, Mr. Pence has also
served as Secretary. In April 1999, Mr. Pence was also appointed as President
of the Company's newly formed Internet Commerce Division. 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, and has served as Creative
Director and Chairman of the Board of Directors of the Company since its
incorporation in 1988. 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.
Georgia Shonk-Simmons was promoted in April 1999 to President of the
Company's Catalog & Retail Sales Division. Ms. Shonk-Simmons continues to
serve, as she has since joining the Company in July 1998, as Chief Merchant of
the Company responsible for all merchandising, inventory planning and quality
control functions. Prior to the above promotion, Ms. Shonk-Simmons held the
title of Vice President of Merchandising. From 1994 to 1998, prior to joining
the Company, Ms. Shonk-Simmons was Executive Vice-President of the Newport
News Catalog Division of Spiegel, a multi-billion dollar international
specialty retailer. Prior to that, from 1981 to 1994, Ms. Shonk-Simmons held a
number of other positions of increasing responsibility with Spiegel, including
Vice-President of Merchandising for Spiegel Catalog beginning in 1991. Prior
to joining Spiegel, Ms. Shonk-Simmons held various buyer positions with
Lytton's, Carson Pirie Scott and Hahne's.
20
Donald Robson was promoted in April 1999 to Senior Vice President. Mr.
Robson continues to serve, as he has since joining the Company in January
1995, as Chief Financial Officer and Treasurer. Prior to the above promotion,
Mr. Robson held the title of Vice President of Finance and Administration.
From January 1995 to July 1998, Mr. Robson also served as a Board member. From
1992 to 1995, prior to joining the Company, Mr. Robson was a Financial
Executive Consultant. From 1978 to 1992, Mr. Robson held a number of
progressively responsible positions with, and ultimately served as Executive
Vice President and Chief Financial Officer for, Neiman Marcus Stores, a
national high-end department store chain and cataloger.
Tom Scott was promoted in April 1999 to Senior Vice President and was
appointed Chief Operations Officer for the Company's Catalog & Retail Sales
Division. Mr. Scott continues to serve, as he has since joining the Company in
November 1997, as Chief Information Officer. Prior to the above promotion, Mr.
Scott held the title of Vice President of Information Services. Prior to
joining the Company, Mr. Scott was President of Gestalt Technologies, Inc., a
developer of high technology business systems. From May 1992 to January 1996,
Mr. Scott served as Vice President of Business Systems for VF Corporation, a
multi-billion dollar international apparel manufacturer. Prior thereto, from
1984 to 1992, Mr. Scott worked in a variety of positions at Nordstrom, Inc., a
multi-billion dollar apparel retailer. From 1981 to 1984, he was a consultant
for Arthur Andersen & Co.
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.
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 US Bank) with which the Company once had its
primary banking relationship.
Michelle Collins has served as a Director since September 1997. Since
January 1998, she has served as Managing Director of Svoboda, Collins L.L.C.
Previously thereto, Ms. Collins was a principal in the corporate finance
department of William Blair & Company, L.L.C., overseeing the firm's specialty
retail sector. Ms. Collins joined William Blair & Company, L.L.C as an
associate in 1986 after obtaining a Masters in Business Administration from
the Harvard Business School.
Duncan Highsmith has served as a Director since May 1999. Since 1987, Mr.
Highsmith has served as President and Chief Executive Officer of Highsmith
Inc., an international direct marketer of products to schools and libraries.
Mr. Highsmith also serves as a director on the boards of a number of
privately-held companies, including Highsmith Inc.
No director or executive officer 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.
21
Other Key Management Employees
Below is a table setting forth the name, age and position of the Company's
other key management employees:
Tony Saulino............ [42] Vice President of Operations
Mac Morgan.............. [44] Vice President of Advertising
Karen Reed.............. [35] Vice President of Catalog Marketing
Arthur "Skip" Jones..... [46] Vice President of Stores
Belinda Richardson...... [35] Vice President of Parkersburg Operations
Robin Sheldon (1)....... [54] Vice President of Merchandising
Randy Long (2).......... [52] Vice President of Human Resources
(1) Ms. Sheldon's employment with the Company terminated on April 15, 1998.
(2) Mr. Long's employment with the Company terminated on March 1, 1999.
Tony Saulino has served as Vice President of Operations of the Company since
March 1993. Mr. 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. From 1988 to 1991,
Mr. Saulino served as Customer Service Manager of Current, Inc., a direct
marketer of social expression and personalized checks.
Mac Morgan has served as Vice President of Advertising of the Company since
September 1996 and, prior to that, as Senior Art Director beginning May 1992.
Mr. Morgan was Vice President of Production from 1991 to 1992 of Interlight
International, a producer of interactive CDR titles. Prior to 1991, Mr. Morgan
was Director of Marketing for VistaChrome, Inc./The Printing House, a large
separator/printer. From 1980 to 1988, Mr. Morgan served as Senior Vice
President of Operations of Homes & Land Publishing Corporation.
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 the Company's Circulation Manager. 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.
Arthur "Skip" Jones has served as Vice President of Store operations since
July 1998 and, prior to that, as Director of Store Operations since May 1996.
From November 1993 to April 1996, prior to joining the Company, Mr. Jones was
Director of Store Operations for Performance Bicycles. Prior to that, from
November 1988 to October 1993, Mr. Jones was Vice-President of Store
Operations for the Nature Company. From September 1983 to October 1988, Mr.
Jones was General Manager of Retail for North Face.
Belinda Richardson has served as Vice President of Parkersburg Operations
since January 1999. From May 1996 to January 1998 and from June 1998 to
January 1999, Ms. Richardson served as a Customer Service Manager in the
Company's Parkersburg and Couer d'Alene Call Centers, respectively. During the
period from January 1998 to June 1998, Ms. Richardson served as the Manager of
Receiving at the Company's Sandpoint Distribution Center. From August 1992
through May 1996, Ms. Richardson held a number of progressively responsible
customer service positions at the Company's Sandpoint Call Center. Prior to
joining the Company in August 1992, Ms. Richardson held managerial positions
with a number of retail and wholesale establishments.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICE HISTORY
The Company's common stock has been quoted on the NASDAQ under the symbol
"CWTR" since the Company's initial public offering on January 29, 1997. On
February 27, 1999, the Company had 130 stockholders of record and 10,183,117
shares of $.01 par value common stock outstanding.
The following table sets forth certain sales price and trading volume data
for the Company's common stock for the periods indicated:
Average
High Low Close Volume
---- ---- ----- -------
Fiscal 1999:
First Quarter (through May 11, 1999)..... $15 1/4 $10 1/8 $14 58,980
Fiscal 1998:
First Quarter............................ $41 3/8 $18 7/8 $22 3/4 135,382
Second Quarter........................... $27 1/2 $15 13/16 $16 46,122
Third Quarter............................ $19 1/2 $11 $12 5/8 52,633
Fourth Quarter........................... $16 9/16 $ 9 9/16 $10 1/16 79,048
Fiscal 1997:
First Quarter............................ $18 5/8 $10 $17 35,502
Second Quarter........................... $30 3/4 $14 $23 1/2 45,794
Third Quarter............................ $35 $24 1/2 $31 27,845
Fourth Quarter........................... $41 5/8 $28 $41 1/2 27,718
Fiscal 1996:
Fourth Quarter (commencing January 29,
1997)................................... $21 7/8 $15 $18 3/8 148,068
DIVIDEND POLICY
The Company does not pay regular dividends and does not anticipate the
declaration of a cash dividend in the foreseeable future.
23
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The selected financial and operating data in the following table sets forth
(i) balance sheet data as of February 27, 1999 and February 28, 1998, and
statement of operations data for the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997, derived from the Company's consolidated
financial statements audited by Arthur Andersen LLP, independent public
accountants, which are included elsewhere in this Form 10-K Annual Report,
(ii) balance sheet data as of March 1, 1997, March 2, 1996 and March 4, 1995,
and statement of operations data for the fiscal years ended March 2, 1996 and
March 4, 1995, derived from the Company's consolidated financial statements
audited by Arthur Andersen LLP which are not presented herein, (iii) unaudited
pro forma statement of operations data, computed as indicated in the footnotes
set forth below, and (iv) selected operating data as of and for the periods
indicated derived or computed from the Company's circulation records or the
statement of operations data identified above. The information below should be
read in conjunction with "Item 7--Management's Discussion and Analysis" and
"Item 8--Financial Statements" included elsewhere.
SELECTED FINANCIAL AND OPERATING DATA
Fiscal Years Ended (1)
--------------------------------------------------------------------------
February 27, February 28, March 1, March 2, March 4,
1999 1998 1997 1996 1995
-------------------------------------------- ------------- -------------
(unaudited, in thousands except per share and selected operating data)
Statement of Operations
Data:
Net sales............... $ 325,231 $ 246,697 $ 143,059 $ 75,905 $ 45,223
Cost of sales........... 156,198 120,126 66,430 32,786 19,062
-------------- -------------- ------------- ------------- -------------
Gross profit............ 169,033 126,571 76,629 43,119 26,161
Selling, general and
administrative
expenses............... 150,655 107,083 64,463 37,356 21,502
-------------- -------------- ------------- ------------- -------------
Income from operations.. 18,378 19,488 12,166 5,763 4,659
Interest, net, and
other.................. (697) 57 (153) (149) 98
-------------- -------------- ------------- ------------- -------------
Income before provision
for income taxes....... 17,681 19,545 12,013 5,614 4,757
Provision for income
taxes (2).............. 6,990 7,857 1,197 -- --
-------------- -------------- ------------- ------------- -------------
Net income.............. $ 10,691 $ 11,688 $ 10,816 $ 5,614 $ 4,757
============== ============== ============= ============= =============
Net income per share--
Basic (3).............. $ 1.05 $ 1.15 $ 1.46 $ 0.77 $ 0.66
============== ============== ============= ============= =============
Weighted average shares
outstanding--Basic (3). 10,167,000 10,120,000 7,390,000 7,245,000 7,245,000
============== ============== ============= ============= =============
Net income per share--
Diluted (3)............ $ 1.02 $ 1.10 $ 1.41 $ 0.77 $ 0.66
============== ============== ============= ============= =============
Weighted average shares
outstanding--
Diluted (3)............ 10,503,000 10,633,000 7,656,000 7,245,000 7,245,000
============== ============== ============= ============= =============
Pro Forma Statement of
Operations Data:
Net income as reported
above.................. n/a n/a $ 10,816 $ 5,614 $ 4,757
Pro forma provision for
income taxes (2)....... n/a n/a 4,929 2,218 1,903
-------------- -------------- ------------- ------------- -------------
Pro forma net income.... n/a n/a $ 5,887 $ 3,396 $ 2,854
============== ============== ============= ============= =============
Pro forma net income per
share--Basic (4)....... n/a n/a $ 0.68 $ 0.41 $ 0.36
============== ============== ============= ============= =============
Pro forma weighted
average shares
outstanding--Basic (4). n/a n/a 8,617,000 8,208,000 7,981,000
============== ============== ============= ============= =============
Pro forma net income per
share--Diluted (4)..... n/a n/a $ 0.66 $ 0.41 $ 0.36
============== ============== ============= ============= =============
Pro forma weighted
average shares
outstanding--
Diluted (4)............ n/a n/a 8,883,000 8,208,000 7,981,000
============== ============== ============= ============= =============
Balance Sheet Data:
Working capital......... $ 24,597 $ 13,949 $ 13,990 $ 2,169 $ 623
Total assets............ 100,621 98,225 61,974 23,450 19,032
Long-term debt (net of
current maturities).... -- -- -- 100 248
Stockholders' equity.... 60,106 48,875 37,187 14,525 11,068
Selected Operating Data:
Net sales growth........ 31.8 % 72.4 % 88.5 % 67.8 % 42.4 %
Total catalogs mailed... 153,057,000 113,717,000 63,520,000 45,868,000 31,625,000
Total active
customers (5).......... 2,017,000 1,614,000 1,100,000 747,000 494,000
Average order (6)....... $ 142.00 $ 149.00 $ 128.00 $ 97.00 $ 82.00
24
- --------
(1) References to a fiscal year refer 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) Prior to the Company's initial public offering on January 29, 1997, the
Company operated as an S-corporation and was not subject to federal and
certain state income taxes. Pro forma income taxes are depicted above at
an assumed 39.5% effective rate as if the Company had been a
C-corporation, rather than an S-corporation, for the pre-offering periods.
Upon terminating the Company's S-corporation status, the Company
recognized a non-recurring, non-cash charge to earnings to recognize
deferred income taxes in accordance with Statement of Financial Accounting
Standard No. 109 ("SFAS No. 109"). See Notes 1, 7 and 13 of Notes to
Consolidated Financial Statements.
(3) In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 supercedes Accounting Principles
Board Opinion No. 15, "Earnings Per Share," and revises the computation
and presentation of earnings per share, and was adopted by the Company as
required during the fourth quarter of fiscal 1997. Net income per share-
Basic, which replaces primary earnings per share, excludes dilution and is
computed by dividing net income by the weighted average number of common
shares outstanding for the period. Net income per share-Diluted, which
replaces fully diluted earnings per share, reflects the potential dilution
that could occur if securities or other contracts to issue common stock
(e.g., stock options) were exercised or converted into common stock. As
required, all previously reported amounts have been restated.
(4) Pro forma net income per share-Basic is based on net income per share-
basic, as computed above, but also gives pro forma effect to (i) income
taxes at an assumed 39.5% effective rate as if the Company had been a C-
corporation, rather than an S-corporation, for the pre-offering periods
and (ii) that number of initial public offering common shares whose net
proceeds were necessary to fund the distribution of the S-corporation
retained earnings balance. Pro forma net income per share-Diluted
additionally reflects the dilutive effect of common shares issuable under
stock options as computed using the treasury stock method.
(5) An "active customer" is defined as a customer who has purchased
merchandise from the Company within the twelve month period 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.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion may contain forward-looking statements, including
statements regarding the Company's strategy, sales trends and operations,
within the meaning of the federal securities laws 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. These statements are based on management's current expectations
and 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: those associated with offering apparel
merchandise such as long lead times, increased inventory requirements,
merchandise returns, and high shipping costs; general economic and business
conditions and other factors outside the Company's control such as customer
response rates, consumer preferences, and fluctuations in paper and postage
costs; 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 below and elsewhere in this Form 10-K Annual
Report. References to a fiscal year refer 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, as is the case with all
periods discussed herein, and occasionally consists of 53 weeks.
Overview
Coldwater Creek Inc. (the "Company") is a specialty direct mail retailer of
apparel, gifts, jewelry and home furnishings. The Company markets its
merchandise primarily through three distinct catalogs. Northcountry, which was
introduced in 1985, is the Company's core catalog and features casual,
comfortable apparel, hard-to-find jewelry, distinctive artwork, gifts and
items for the home. The Company's premium catalog for women, Spirit of the
West, was introduced in 1993 and features fashionable, upscale apparel and
hard-to-find jewelry and accessories. In response to customer demand for the
selected, upscale bed and bath products periodically featured in Northcountry
and Spirit of the West, the Company introduced its Bed & Bath catalog in
August of 1997. The Company also maintains an interactive Internet commerce
web site (www.coldwater-creek.com) from which merchandise may be viewed and
purchased.
As part of the Company's brand building strategy, the Company also operates
full-line, catalog-themed retail stores in Sandpoint, Idaho and Jackson Hole,
Wyoming. Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores
Inc., the Company additionally operates twelve outlet stores throughout the
United States. These outlet stores, as well as periodic clearance catalogs and
the web site, serve as the Company's primary promotional vehicles for the
disposition of excess merchandise inventory.
The Company 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 have allowed it to develop a unique
brand identity and strong relationships with its loyal customer base.
26
A key element of the Company's overall marketing strategy has been to pursue
an aggressive circulation strategy when market conditions permit. During
fiscal years 1998, 1997 and 1996, the Company mailed 153.1 million, 113.7
million and 63.5 million catalogs, respectively. As a result of this ongoing
marketing investment in current and future customer growth, the costs of which
constitute the substantial majority of each fiscal period's selling, general
and administrative expenses, the Company's proprietary mailing list increased
to 7.4 million names at February 27, 1999 as compared to 5.4 million and 3.7
million names at February 28, 1998 and March 1, 1997, respectively. The
Company's active customer file grew to 2.0 million names at February 27, 1999
versus 1.6 million and 1.1 million names at February 28, 1998 and March 1,
1997, respectively.
As previously discussed, the Company 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 and to
strengthen relationships with existing and new customers. To that end, the
Company continuously strives to make timely investments in its telephone
technology and distribution infrastructure to support its customer service-
based strategy. In this connection, the Company opened an additional customer
service call center and distribution center near Parkersburg, West Virginia in
early fiscal 1998 and expects to transition these added interim operations
into a new 600,000 square foot East Coast Operations Center during the Summer
of 1999. The addition of this new facility, supported by a new information
technology platform, will provide the Company with a consolidated base of
operations capable of processing 120,000 customer orders a day. As a result of
this ongoing commitment to customer service, the Company again achieved faster
telephone answer times, lower abandoned call rates, and faster order
processing during fiscal 1998 than the most recently published industry
averages. The Company plans to continue to stimulate future long-term growth
through a variety of strategic initiatives designed to expand merchandise
offerings, yield higher customer response rates, increase catalog circulation
and promote customer use of the Company's interactive commerce web site.
Results of Operations
The following table sets forth certain information regarding the Company's
costs and expenses expressed as a percentage of net sales:
Fiscal
-------------------
1998 1997 1996
----- ----- -----
Net sales............................................. 100.0% 100.0% 100.0%
Cost of sales......................................... 48.0 48.7 46.4
----- ----- -----
Gross profit.......................................... 52.0 51.3 53.6
Selling, general and administrative expenses.......... 46.3 43.4 45.1
----- ----- -----
Income from operations................................ 5.7 7.9 8.5
Interest, net, and other.............................. (0.3) -- (0.1)
----- ----- -----
Income before provision for income taxes.............. 5.4 7.9 8.4
Provision for income taxes............................ 2.1 3.2 0.8
----- ----- -----
Net income............................................ 3.3% 4.7% 7.6%
===== ===== =====
Pro forma provision for income taxes.................. -- -- 3.5
----- ----- -----
Pro forma net income.................................. -- % -- % 4.1%
===== ===== =====
Fiscal 1998 Compared to Fiscal 1997
Coldwater Creek's net sales increased by $78.5 million, or 31.8%, to $325.2
million during fiscal 1998 from $246.7 million during fiscal 1997. This growth
primarily was attributable to the increase in
27
order volume realized from the Company's increased circulation of its core
Northcountry catalog, and to a significantly lesser degree, its newest and
fastest growing catalog, Bed & Bath. The strong performance of Northcountry,
to a certain extent, counterbalanced the continued weaker than expected
performance realized from the Company's Spirit of the West and Milepost Four
catalogs.
Gross profit, as measured by the Company, consists of net sales less cost of
sales, being primarily merchandise acquisition costs, freight in, handling and
storage costs. Outpacing the rate of growth realized for net sales, the
Company's gross profit increased 33.5%, or $42.5 million, to $169.0 million
during fiscal 1998, up from $126.6 million during fiscal 1997. As a result,
the Company's gross margin improved to 52.0% for fiscal 1998 from 51.3% in
fiscal 1997. This improvement in gross margin primarily was attributable to
higher than expected realized margins on sales of excess merchandise inventory
made through the Company's promotional vehicles. The strong performance of
these promotional vehicles, the vast majority of which were implemented for
the first time during fiscal 1998, allowed the Company to reduce the magnitude
of the write-downs required for excess merchandise inventory from that which
was required in prior fiscal years.
Selling, general and administrative expenses ("SG&A") primarily consist of
marketing, distribution and general and administrative expenses. The marketing
expense component primarily consists of catalog production and postage costs.
Production costs primarily consist of paper, printing, computer services and
list rental costs (net of list rental revenue). Selling, general and
administrative expenses increased by $43.6 million, or 40.7%, to $150.7
million during fiscal 1998 from $107.1 million in fiscal 1997. SG&A expenses
also increased as a percentage of net sales to 46.3% during fiscal 1998 from
43.4% during 1997. The dollar and percentage increases primarily were
attributable to the circulation costs incurred in connection with the
Company's ongoing marketing investment in customer growth as well as certain
incremental, yet less profitable, catalog mailings primarily made during the
first quarter of fiscal 1998. The incremental first quarter mailings were made
by the Company in order to expeditiously reduce the level of excess
merchandise inventory realized as a consequence of the lower than expected
performance of Spirit of the West. To a lesser extent, continuing
infrastructure investments made to support the Company's anticipated growth
contributed to the SG&A increase. The incremental infrastructure costs
incurred for the added East Coast customer service call center and
distribution center, and to a lesser extent, outlet stores, will be recurring
in nature.
As a result of the foregoing, income from operations decreased by $1.1
million, or 5.7%, to $18.4 million for fiscal 1998 from $19.5 million for
fiscal 1997. Expressed as a percentage of net sales, income from operations
was 5.7% for fiscal 1998 versus 7.9% in fiscal 1997. Net income for fiscal
1998 was $10.7 million (net income per basic and diluted share of $1.05 and
$1.02, respectively) versus $11.7 million (net income per basic and diluted
share of $1.15 and $1.10, respectively) for fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Net sales increased by $103.6 million, or 72.4%, to $246.7 million during
fiscal 1997 from $143.1 million during fiscal 1996. The growth primarily was
attributable to the increases in order volume and average dollars realized
from the Company's increased circulation of its Northcountry and Spirit of the
West catalogs, and to a lesser extent, the Company's Milepost Four and
recently introduced Bed & Bath catalogs. While the overall growth in net sales
remained strong throughout fiscal 1997, a softening of demand for the upscale
fashion apparel featured in the Spirit of the West catalog was noted during
the fourth quarter.
Gross profit increased $49.9 million, or 65.2%, to $126.6 million during
fiscal 1997 from $76.6 million during fiscal 1996. Gross profit decreased as a
percentage of net sales to 51.3% for fiscal 1997 from 53.6% in fiscal 1996.
The decrease in gross margin primarily was attributable to increased sales of
marked down merchandise associated with a greater percentage of apparel and
management's
28
decision, in light of the continued growth in the Company's overall
merchandise offering, to more aggressively liquidate slow-moving or excess
merchandise inventory. Additionally, the higher gross margins traditionally
realized in the fourth quarter as a result of increased gift and accessories
sales associated with the holiday season were offset substantially by
increased writedowns of Spirit of the West excess inventory.
SG&A expenses increased by $42.6 million, or 66.1%, to $107.1 million during
fiscal 1997 from $64.5 million in fiscal 1996. SG&A expenses decreased as a
percentage of net sales to 43.4% during fiscal 1997 from 45.1% during fiscal
1996. The increase in SG&A expenses primarily was attributable to the
circulation costs incurred in connection with increased catalog mailings and
various infrastructure investments considered necessary to support the
Company's anticipated growth. The decrease in SG&A expenses as a percentage of
net sales primarily was attributable to the growth in net sales and the
leveraging of certain fixed and semi-fixed infrastructure costs.
As a result of the foregoing, income from operations increased by $7.3
million, or 60.2%, to $19.5 million for fiscal 1997 from $12.2 million for
fiscal 1996. As a percentage of net sales, income from operations was 7.9% in
fiscal 1997 as compared to 8.5% in fiscal 1996. Net income increased by $0.9
million to $11.7 million for fiscal 1997 (net income per basic and diluted
share of $1.15 and $1.10, respectively) from $10.8 million for fiscal 1996
(net income per basic and diluted share of $1.46 and $1.41, respectively).
After applying a pro forma combined effective federal and state income tax
rate of 39.5% to fiscal 1996 when the Company operated as an S-corporation for
a substantial portion of the year, the Company realized pro forma net income
of $5.9 million for fiscal 1996 (pro forma net income per basic and diluted
share of $0.68 and $0.66, respectively) for fiscal 1996.
Quarterly and Seasonal Fluctuations
The Company's revenues and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors including, among other things, the timing of new merchandise and
catalog offerings, recognition of costs or net sales contributed by new
merchandise and catalog offerings, fluctuations in response rates,
fluctuations in paper, production and postage costs and expenses, merchandise
returns, adverse weather conditions that affect distribution or shipping,
shifts in the timing of holidays and changes in the Company's merchandise mix.
The Company defers the recognition of the costs of catalog development and
production and records them as sales are recognized. Consequently, quarter to
quarter revenue and expense comparisons will be impacted by the timing of the
mailing of the Company's catalogs. Mailings may occur in different quarters
from year to year depending on the performance of third party couriers, the
day of the week on which certain holidays fall and the Company's assessment of
prevailing market opportunities. Approximately three-quarters of the revenue
generated by each mailing is recognized within 30 to 45 days after such
mailing. A portion of the revenue from a catalog mailing may also 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 are 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, although
to a diminished degree due to the increased representation of apparel and home
furnishings in the Company's overall merchandise mix. 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
29
accessories offered in the second half of the fiscal year related to holiday
gift-giving, the Company normally 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, results of operations and cash
flows could be materially adversely affected.
The following table contains selected unaudited quarterly financial data for
fiscal 1998 and fiscal 1997. The disproportionately lower results of
operations realized during the second fiscal quarters are due to lower sales
volumes realized in such quarters due to seasonal trends. The decreased
profitability evidenced below for the first quarter of fiscal 1998 primarily
was attributable to the incremental catalog circulation costs incurred to
expeditiously liquidate the Spirit of the West excess inventory which resulted
from the aforementioned softening of consumer demand for upscale fashions. In
the opinion of management, this unaudited information has been prepared on the
same basis as the audited information presented elsewhere and includes all
adjustments, solely of a normal recurring nature, necessary to present fairly,
in all material respects, the information set forth therein.
Fiscal 1998
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per
share data)
Net sales....................................... $79,937 $60,952 $94,730 $89,613
Gross profit.................................... 41,812 29,984 48,983 48,254
Selling, general and administrative expenses.... 40,390 28,776 41,094 40,395
Income from operations.......................... 1,422 1,208 7,889 7,859
Net income...................................... $ 703 $ 556 $ 4,513 $ 4,919
Net income per share--Basic..................... $ 0.07 $ 0.05 $ 0.44 $ 0.48
Net income per share--Diluted................... $ 0.07 $ 0.05 $ 0.43 $ 0.48
Fiscal 1997
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per
share data)
Net sales....................................... $51,002 $36,389 $77,242 $82,064
Gross profit.................................... 26,665 18,237 39,544 42,125
Selling, general and administrative expenses.... 23,374 17,495 32,397 33,817
Income from operations.......................... 3,291 742 7,147 8,308
Net income...................................... $ 2,073 $ 415 $ 4,340 $ 4,860
Net income per share--Basic..................... $ 0.20 $ 0.04 $ 0.43 $ 0.48
Net income per share--Diluted................... $ 0.20 $ 0.04 $ 0.41 $ 0.45
- --------
Note: The aggregate of certain of the above amounts differs from that reported
for the full fiscal year due to the effects of rounding.
Liquidity and Capital Resources
Coldwater Creek has historically funded its growth through a combination of
funds generated from operations, trade credit arrangements and short-term bank
credit facilities. Working capital requirements generally precede the
realization of sales. The Company typically draws on its working capital lines
to produce catalogs and increase inventory levels in anticipation of future
sales realization. Standard trade credit arrangements typically require the
net amount due to be paid within sixty days of receipt of the inventory or
services.
On June 29, 1998, the Company executed an agreement with First Security
Bank, N.A., a major Northwest commercial bank, providing for $50.0 million in
credit facilities, consisting of an unsecured
30
revolving line of credit of $47.4 million (with a sub-limit of $7.0 million
for letters of credit) and a term standby letter of credit of $2.6 million. At
the option of the Company, the interest rate is the bank's Prime Rate or
Adjusted LIBOR [i.e., rate per annum equal to the quotient of the London
Interbank Offered Rate divided by one (1) minus the Eurocurrency Reserve
Requirement for the applicable Interest Period, rounded upward, if necessary,
to the nearest one-sixteenth of one percent], increased or decreased by a
margin based upon the Company's then EBITDA Coverage Ratio, as defined. The
agreement provides that the Company must satisfy certain specified EBITDA,
leverage and current ratio requirements and places restrictions on the
Company's ability to, among other things, sell assets, participate in mergers,
incur debt, pay dividends, and make investments or guarantees. The new credit
facility, which replaced the Company's $35.0 million credit facility with US
Bank, has a maturity date of June 30, 2001.
Operating activities generated $9.6 million of positive cash flow during
fiscal 1998 as compared to $6.0 million of negative cash flow during fiscal
1997. On a comparative basis, fiscal 1998 primarily reflects the Company's
lower net income being more than offset by the positive cash flow effects of
decreased inventory purchases. Fiscal 1998 additionally reflects the positive
cash flow effects resulting from increased levels of income tax liabilities
and lower levels of receivables, prepaid expenses and deferred catalog costs.
These positive operating cash flows were partially utilized to substantially
reduce the year-end level of accounts payable, and to a lesser extent, accrued
expenses. The substantial balance of this positive cash flow was used by the
Company in the fourth fiscal quarter to reduce the level of borrowings under
its revolving line of credit to $9.9 million at February 27, 1999 from $15.1
million at the preceding fiscal quarter end.
Investing activities consumed $10.0 million of cash during fiscal 1998
versus $11.9 million during fiscal 1997. Capital expenditures accounted for
$10.3 million in both fiscal years, with the fiscal 1997 difference being
attributable to $1.6 million in loans to executives of which $0.2 million was
received in repayment during fiscal 1998. The fiscal 1998 capital expenditures
primarily reflect the cost of material handling, telecommunication and
information systems for the temporary and permanent East Coast Operations
Centers discussed below, and to a lesser degree, hardware and software
upgrades to corporate systems and leasehold improvements to outlet stores.
Capital expenditures directly attributable to the Company's Year 2000
compliance program discussed below have been, and are expected to remain,
immaterial.
Financing activities during fiscal 1998 were nominal on a net basis whereas
fiscal 1997 financing activities reflected $10.3 million of net advances under
the Company's then revolving line of credit partially offset by a $1.1 million
final distribution to the Company's previous S-corporation shareholders.
As a result of the foregoing, the Company's working capital and current
ratio stood at $24.6 million and 1.6 at February 27, 1999 versus $13.9 million
and 1.3 at February 28, 1998, respectively. Additionally, despite the 31.8%
increase in net sales during fiscal 1998, the Company's overall merchandise
inventory level increased only by 6.5% to $56.5 million at February 27, 1999
as compared to $53.1 million at February 28, 1998. This reflects management's
continuing efforts at increasing the rate of inventory turnover and
productivity.
On June 12, 1998, the Company executed a definitive operating lease
agreement with the Wood County Development Authority to establish an East
Coast Operations Center in Parkersburg, West Virginia. This agreement was
primarily entered into in order to alleviate certain capacity constraints
which were being experienced at the Company's distribution center in
Sandpoint, Idaho and to reduce the costs incurred in shipping certain
merchandise orders to the majority of the Company's customers which are
located in the eastern United States. The new operations center will
approximate 600,000 square feet and be situated on approximately 60 acres,
allowing for future expansion.
31
In exchange for the Company's willingness to establish a long-term presence
in Parkersburg, the State of West Virginia agreed to construct and make
available to the Company, at a nominal annual lease cost, a temporary 120,000
square foot facility in the Parkersburg area from which the Company could
conduct certain order fulfillment operations until the permanent facility was
constructed and available. Construction of the temporary facility was
completed in May 1998 and the Company commenced certain order fulfillment
operations in July 1998. The establishment of these interim East Coast
operations has allowed the Company's management to implement new technologies
and train new employees on a reduced but increasing scale pending completion
of the permanent operations center. Construction by the Wood County
Development Authority of the permanent operations center continues to proceed
on schedule and is nearing completion with order fulfillment operations
targeted to commence during the Summer of 1999. Once completed, the Company
will also transition the operations of its Parkersburg customer service call
center, currently residing in other leased premises, into the new operations
center. The Company will incur annual lease expense for the permanent
operations center of approximately $2.2 million over the twenty year lease
term. The lease allows the Company, at its option, to (i) purchase the
underlying land and facility at a then determined fair market value or (ii)
exercise up to four successive five-year extensions.
Management's long-term brand building strategy includes the selective
opening of highly visible retail stores in high traffic areas, including major
urban areas and "destination" locations near major national parks or other
resort areas. The Company currently operates two retail store complexes
located in Sandpoint, Idaho and Jackson Hole, Wyoming. Management will
continue to consider the opening of retail stores in the future as prime
locations become available. It is contemplated that each such retail store
would be leased with an average initial cash investment per store being
limited to leasehold improvements and inventory in the approximate range of $2
million to $4 million.
As an integral part of management's planned strategy for efficiently
liquidating excess merchandise inventory, the Company's wholly-owned
subsidiary, Coldwater Creek Outlet Stores Inc., opened an outlet store in
Seaside, Oregon in April of 1997. As a continuation of this strategy, the
Company's subsidiary subsequently opened eleven additional outlet stores in
the United States. Based on management's current assessment of the Company's
needs, only one additional outlet store is planned to be opened during fiscal
1999. Consistent with the Company's experience to date, it is contemplated
that any additional outlet stores would be leased with the initial cash
investment per store being limited to approximately $50,000 to $100,000 in
leasehold improvements.
During fiscal 1999, the Company plans to make between $9 million and $11
million in additional capital expenditures to support its anticipated
continued growth. The majority of these capital expenditures will constitute
equipment and technology required for the Company's new East Coast Operations
Center as well as for the upgrading and expansion of the Company's interactive
commerce web site. These expenditures are expected to be funded from available
cash balances, and to the extent necessary, the Company's existing bank credit
facility.
The Company believes that cash flow from operations and borrowing capacity
under its bank credit facility will be sufficient to support operations and
future growth for the foreseeable future. Thereafter, the Company may be
required to seek additional sources of funds for continued or accelerated
growth 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 position, results of operations and cash flows.
Other Matters
Future Outlook
Beginning in the fourth quarter of fiscal 1997, the Company began to
experience, as did other direct retailers, a significant softening of consumer
demand particularly for upscale womens' fashions
32
such as those featured by the Company in its Spirit of the West catalog.
Although this downturn has subsequently subsided, consumer demand for upscale
womens' fashions remains soft and inconsistent. In light of the continuing
uncertain state of this niche of the marketplace, the Company has modified its
growth expectations and proceeded cautiously in its mailings of Spirit of the
West. Particularly, the Company has curtailed its previously aggressive
prospect mailings of Spirit of the West until a reasonably sustained
improvement in consumer demand for upscale womens' fashions is noted. However,
pending such upturn, the Company and its new chief merchant have embarked on a
program to significantly revamp the Spirit of the West fashions. Until
consumer demand for upscale womens' apparel recovers and the Company begins to
debut its new Spirit of the West fashions beginning in the Fall of 1999, the
growth and financial performance of the Company's Northcountry and Bed & Bath
catalogs will likely be diminished by the financial performance of Spirit of
the West.
During the third quarter of fiscal 1998, the Company announced that it had
decided to discontinue its Milepost Four mens' apparel catalog as its
performance did not meet the Company's long-term growth expectations.
Management of the Company is continuing to evaluate proposals it has received
from parties interested in purchasing the Milepost Four catalog and expects to
reach a decision in the first quarter of fiscal 1999. The Company does not
expect any material loss to be realized from this disposition.
The Company's activity and sales through its web site increased during
fiscal 1998 from that experienced during fiscal 1997. While Internet-related
sales remained immaterial to the Company's overall financial results for
fiscal 1998, the increase realized from this new sales channel was substantial
on a percentage basis. Therefore, the Company recently committed to increase
the number of products offered for sale on its web site and to improve the
site's structure and capacity to handle the additional customer demand. In
this connection, the Company has formed an Internet Commerce Division to be
personally led by Dennis Pence, the Company's Co-Founder and Chief Executive
Officer.
Year 2000 Compliance
Coldwater Creek remains engaged in an enterprise-wide Year 2000 project. A
project leader coordinates a team that includes representatives from every
department. A comprehensive project plan that defines each objective and task
in detail is guiding the team in its continuing efforts.
The Company does not sell any products that must be brought into Year 2000
compliance. However, the Company does rely upon many vendors and suppliers for
their products and services. The Company is evaluating key vendor
preparedness, as well as its own, by conducting interviews, obtaining
compliance representation letters, and when deemed necessary, conducting
comprehensive tests. Such vendors include, in addition to significant
merchandise vendors, providers of hardware and software computing products,
telecommunication systems and components, facilities and related systems, and
office equipment.
Although most of the Company's major systems are supplied by third-party
vendors who bear the financial burden of bringing such systems into
compliance, the Company's project team will maintain an active dialog with
these vendors to ensure the adequacy and timeliness of required modifications.
Year 2000 compliance inquiry letters have been sent to all major vendors and
the responses received to date are currently being evaluated. Project team
members have conducted site visits to the Company's two major
telecommunications vendors and its major computer hardware vendor for detailed
briefings on Year 2000 preparedness. Additional follow-up site visits will be
conducted as deemed necessary. Year 2000 compliance provisions have also been
added to all significant contracts and purchase orders.
The project team's initial review of the Company's systems identified two
application systems and two system software components which were not Year
2000 compliant. The first application system,
33
which is an interface to the Company's accounting system, has been upgraded by
the vendor to be Year 2000 compliant at no incremental cost to the Company.
The second application system, which is a payroll system, will either be
upgraded or replaced at an immaterial cost to the Company no later than June
1999. The identified system software components were already scheduled to be
upgraded during 1999 and represent an immaterial cost to the Company.
The internal testing of all other applications systems for Year 2000
compliance is continuing with the majority of the testing being conducted in
conjunction with regularly scheduled upgrades. The Year 2000 compliance
shortcomings detected to date in these systems have been minor in nature and
readily corrected. As a result, the incremental cost incurred to date in
testing and modifying these systems for Year 2000 compliance has been
immaterial.
The Company's Year 2000 compliance program also includes the testing of all
major systems containing embedded technologies. The Year 2000 compliance
shortcomings detected to date in these systems have generally involved
telecommunications components and have been minor in nature. The correcting
upgrades were completed during the first calendar quarter of 1999 at an
immaterial cost to the Company.
The Company expects to complete its Year 2000 compliance evaluation program,
including the development of contingency plans to manage all identified areas
of high risk, by June 1999. At this time, the Company continues to believe
that the balance of the costs to be incurred in connection with its Year 2000
compliance program will be immaterial to the Company's financial position,
results of operations and cash flows.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 is effective for the
Company's fiscal 2000 financial statements. As the Company currently is not a
party to any derivative financial instruments and does not anticipate becoming
a party to any derivative instruments, management does not currently expect
the adoption of SFAS No. 133 to have a material impact on the Company's
consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities". SOP 98-5 requires that the costs of start-up activities,
including organizational costs, be expensed as incurred and is effective for
the Company's fiscal 1999 consolidated financial statements. As the Company
did not have any significant deferred start-up costs at February 27, 1999, the
adoption of SOP 98-5 will not have a material impact on the Company's
consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Under the provisions of SOP
98-1, software development is divided into three phases: the preliminary
project stage, which includes conceptual formulation and selection of
alternatives; the application development stage, which includes design of
chosen path, coding, installation of hardware and testing; and the post-
implementation/operation stage, which includes training and application
maintenance. Generally, only internal and external costs incurred during the
second phase, the application development stage, are capitalizable with the
exception of data conversion and training costs, which, when incurred during
this phase, are to be expensed. SOP 98-1 is effective for the Company's fiscal
1999 consolidated financial statements. Management does not expect the
adoption of SOP 98-1 to have a material impact on the Company's consolidated
financial statements.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Coldwater Creek is not exposed to financial market risks from changes in
foreign currency exchange rates and is only minimally impacted by changes in
interest rates. Borrowings under the Company's bank credit facility are at a
variable rate of interest and, based on the current level of borrowings, the
Company experiences only modest changes in interest expense when market
interest rates change. However, in the future, the Company may enter into
transactions denominated in non-U.S. currencies or increase the level of its
borrowings, which could increase the Company's exposure to these market risks.
The Company has not used, and currently does not contemplate using, any
derivative financial instruments.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................. 37
Consolidated Balance Sheets as of February 27, 1999 and February 28,
1998.................................................................... 38
Consolidated Statements of Operations for the fiscal years ended February
27, 1999, February 28, 1998 and March 1, 1997........................... 39
Consolidated Statements of Stockholders' Equity for the fiscal years
ended February 27, 1999, February 28, 1998 and March 1, 1997............ 40
Consolidated Statements of Cash Flows for the fiscal years ended February
27, 1999, February 28, 1998 and March 1, 1997........................... 41
Notes to Consolidated Financial Statements............................... 42
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Coldwater Creek Inc.:
We have audited the accompanying consolidated balance sheets of Coldwater
Creek Inc. (a Delaware corporation) and subsidiary as of February 27, 1999 and
February 28, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended February 27, 1999,
February 28, 1998 and March 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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. and
subsidiary as of February 27, 1999 and February 28, 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended February 27, 1999, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boise, Idaho
April 23, 1999
37
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
February 27, February 28,
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 149 $ 331
Receivables........................................ 2,683 4,019
Inventories........................................ 56,474 53,051
Prepaid expenses................................... 1,234 2,729
Prepaid catalog costs.............................. 4,274 2,794
-------- -------
TOTAL CURRENT ASSETS............................. 64,814 62,924
Deferred catalog costs............................... 3,195 7,020
Property and equipment, net.......................... 31,236 26,661
Executive loans...................................... 1,376 1,620
-------- -------
TOTAL ASSETS..................................... $100,621 $98,225
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit........................... $ 9,938 $10,264
Accounts payable................................... 17,086 27,275
Accrued liabilities................................ 7,668 10,517
Income taxes payable............................... 4,445 --
Deferred income taxes.............................. 1,080 919
-------- -------
TOTAL CURRENT LIABILITIES........................ 40,217 48,975
Deferred income taxes................................ 298 375
-------- -------
TOTAL LIABILITIES................................ 40,515 49,350
-------- -------
Commitments and contingencies
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, 10,183,117 and 10,120,118 issued and
outstanding, respectively......................... 102 101
Additional paid-in capital......................... 39,287 38,748
Retained earnings.................................. 20,717 10,026
-------- -------
TOTAL STOCKHOLDERS' EQUITY....................... 60,106 48,875
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $100,621 $98,225
======== =======
The accompanying notes are an integral part of these financial statements.
38
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Fiscal Year Ended
----------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ --------
Net sales.................................. $325,231 $246,697 $143,059
Cost of sales.............................. 156,198 120,126 66,430
-------- -------- --------
GROSS PROFIT............................. 169,033 126,571 76,629
Selling, general and administrative ex-
penses.................................... 150,655 107,083 64,463
-------- -------- --------
INCOME FROM OPERATIONS................... 18,378 19,488 12,166
Interest, net, and other................... (697) 57 (153)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES. 17,681 19,545 12,013
Provision for income taxes................. 6,990 7,857 1,197
-------- -------- --------
NET INCOME............................... $ 10,691 $ 11,688 $ 10,816
======== ======== ========
NET INCOME PER SHARE--BASIC.............. $ 1.05 $ 1.15 $ 1.46
======== ======== ========
NET INCOME PER SHARE--DILUTED............ $ 1.02 $ 1.10 $ 1.41
======== ======== ========
PRO FORMA INCOME DATA (UNAUDITED):
Net income as reported above............. n/a n/a $ 10,816
Pro forma provision for income taxes..... n/a n/a 4,929
--------
PRO FORMA NET INCOME..................... n/a n/a $ 5,887
========
PRO FORMA NET INCOME PER SHARE--BASIC.... n/a n/a $ 0.68
========
PRO FORMA NET INCOME PER SHARE--DILUTED.. n/a n/a $ 0.66
========
The accompanying notes are an integral part of these financial statements.
39
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Retained
Common Stock Additional Earnings
---------------- Paid-in (Accumulated
Shares Par Value Capital Deficit) Total
------ --------- ---------- ------------ -------
BALANCE, MARCH 2, 1996....... 7,245 $ 72 $ 1 $ 14,452 $14,525
Net income................... -- -- -- 10,816 10,816
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
Net income................... -- -- -- 11,688 11,688
------ ---- ------- -------- -------
BALANCE, FEBRUARY 28, 1998... 10,120 $101 $38,748 $ 10,026 $48,875
Net income................... -- -- -- 10,691 10,691
Net proceeds from exercise of
stock options............... 63 1 539 -- 540
------ ---- ------- -------- -------
BALANCE, FEBRUARY 27, 1999... 10,183 $102 $39,287 $ 20,717 $60,106
====== ==== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
40
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
-----------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ ---------
OPERATING ACTIVITIES:
Net income.............................. $ 10,691 $ 11,688 $ 10,816
--------- --------- ---------
Noncash items:
Depreciation and amortization........... 5,691 3,738 2,176
Deferred income tax (benefit) provision. (100) 988 746
Net change in current assets and liabili-
ties:
Receivables............................. 1,336 (1,677) (769)
Inventories............................. (3,423) (27,772) (17,027)
Prepaid expenses........................ 1,495 (2,273) (308)
Prepaid catalog costs................... (1,480) (1,419) (797)
Accounts payable........................ (10,189) 9,924 10,715
Accrued liabilities..................... (2,849) 4,968 3,019
Current and deferred income tax liabili-
ties................................... 4,629 (451) 451
Decrease (increase) in deferred catalog
costs.................................... 3,825 (3,673) (1,265)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERAT-
ING ACTIVITIES....................... $ 9,626 $ (5,959) $ 7,757
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment...... $ (10,266) $ (10,319) $ (11,883)
Repayments of (loans to) executives..... 244 (1,620) --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES. $ (10,022) $ (11,939) $ (11,883)
--------- --------- ---------
FINANCING ACTIVITIES:
Net (repayments of) advances under re-
volving line of credit................. $ (326) $ 10,264 $ --
Payments on capital leases.............. -- -- (173)
Net proceeds from exercise of stock op-
tions.................................. 540 -- --
Net proceeds from initial public offer-
ing of common shares................... -- -- 38,776
Distributions to stockholders........... -- (1,130) (25,800)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVI-
TIES................................. $ 214 $ 9,134 $ 12,803
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS..................... (182) (8,764) 8,677
Cash and cash equivalents, beginning.. 331 9,095 418
--------- --------- ---------
CASH AND CASH EQUIVALENTS, ENDING..... $ 149 $ 331 $ 9,095
========= ========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid for interest.................. $ 1,012 $ 99 $ 243
Cash paid for income taxes.............. 1,546 8,170 --
The accompanying notes are an integral part of these financial statements.
41
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organizational Structure and Nature of Operations
Coldwater Creek Inc. (the "Company"), a Delaware corporation headquartered
in Sandpoint, Idaho, is a specialty direct mail retailer of apparel, gifts,
jewelry and home furnishings, primarily marketing its merchandise through
regular catalog mailings. The Company also operates full-line retail stores in
Sandpoint, Idaho and Jackson Hole, Wyoming where it primarily sells catalog
items and unique store merchandise. Additionally, the Company maintains an
interactive Internet web site (www.coldwater-creek.com) from which merchandise
may be viewed and purchased.
Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores Inc., the
Company also operates twelve outlet stores in the United States as disposition
vehicles for excess merchandise inventory. This subsidiary is consolidated in
these financial statements and all material intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of consolidated 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 consolidated financial statements. Actual results could differ
from those estimates.
Fiscal Periods
References to a fiscal year refer 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, as is the case with all
periods presented, and occasionally consists of 53 weeks.
Reclassifications
Certain amounts in the consolidated financial statements for the prior
fiscal year periods have been reclassified to be consistent with the current
fiscal year's presentation.
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 and future expectations. Shipping and
handling fees charged to customers and list rental income are netted against
selling, general and administrative expenses in the accompanying consolidated
statements of operations. Collections for unshipped orders are reflected as a
component of accounts payable.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with a maturity
date of three months or less at the date of purchase.
Inventories
Inventories primarily consist of merchandise purchased for resale and are
stated at the lower of first-in, first-out cost or market.
42
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Catalog Costs
Catalog costs include all direct costs associated with the production and
mailing of the Company's direct mail catalogs and are classified as prepaid
catalog costs until the catalogs are mailed.
When the Company's catalogs are mailed, these costs are reclassified as
deferred catalog costs and amortized over the periods in which the related
revenues are expected to be realized. Substantially all revenues are generated
within the first three months after a catalog is mailed. Catalog expenses were
$95.7 million in fiscal 1998, $66.6 million in fiscal 1997 and $38.7 million
in fiscal 1996.
Property and Equipment
Property and equipment are recorded at cost. Cost includes expenditures for
major additions and improvements as well as any incremental interest costs
incurred during the period in which activities necessary to get the asset
ready for its intended use are in progress (interest not significant for any
period presented). Maintenance and repairs which do not extend the useful life
of property or equipment are charged to operations as incurred.
The net book value of property or equipment sold or retired is removed from
the asset and related depreciation accounts with the resulting net gain or
loss 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 thirty years for buildings and land
improvements and three to seven years for furniture and fixtures and machinery
and equipment, including immaterial assets under capital leases.
Leases
Any leased asset for which the Company assumes substantially all risks and
rewards of ownership is capitalized as property and equipment with a
corresponding liability recorded (amounts not significant for any period
presented). All other leases are accounted for as operating leases with the
related rental expenses charged to operations as incurred.
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 of common stock on January 29, 1997, the Company
elected to be treated as an S-corporation for federal and state income tax
purposes. Accordingly, the consolidated statement of operations for fiscal
1996 does not include a provision for income taxes for results relating to the
period in which the Company was an S-corporation 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 consolidated
statement of operations for fiscal 1996 represents the estimated federal and
state income tax provision that would have been incurred had the Company been
treated as a C-corporation for tax purposes.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, trade receivables and payables, executive loans and borrowings
under the revolving line of credit for which the carrying amounts approximate
fair value in all material respects.
43
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". The statement superceded Accounting Principles
Board Opinion No. 15, "Earnings Per Share," and revised the computation and
presentation of earnings per share. Basic earnings per share, which replaced
primary earnings per share, excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share, which replaced fully diluted earnings per
share, reflects the potential dilution that could occur under the treasury
stock method if securities or other contracts to issue common stock (e.g.,
stock options) were exercised or converted into common stock. As required, all
previously reported amounts have been restated.
Segment Reporting
As of February 27, 1999, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 requires public companies
to disclose financial and descriptive information about their reportable
operating segments as regularly evaluated by the chief operating decision
makers. The Company's chief operating decision makers consist of senior
management that work together to allocate resources to, and assess the
performance of, the Company's business. Senior management believes that it
manages the Company's business, assesses its performance, and allocates its
resources as a single operating segment.
The Company's products are principally marketed to individuals within the
United States. Net sales realized from other geographic markets, principally
Canada and Japan, have been less than ten percent of net sales in each
reported period. Net sales of apparel products represented 70%, 71% and 65% of
the Company's total consolidated net sales during fiscal years 1998, 1997 and
1996, respectively. The remaining net sales were made up of gifts, jewelry and
home furnishings.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 is effective for the
Company's fiscal 2000 financial statements. As the Company currently is not a
party to any derivative financial instruments and does not anticipate becoming
a party to any derivative instruments, management does not currently expect
the adoption of SFAS No. 133 to have a material impact on the Company's
consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities". SOP 98-5 requires that the costs of start-up activities,
including organizational costs, be expensed as incurred and is effective for
the Company's fiscal 1999 consolidated financial statements. As the Company
did not have any significant deferred start-up costs at February 27, 1999, the
adoption of SOP 98-5 will not have a material impact on the Company's
consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for
44
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Internal Use". Under the provisions of SOP 98-1, software development is
divided into three phases: the preliminary project stage, which includes
conceptual formulation and selection of alternatives; the application
development stage, which includes design of chosen path, coding, installation
of hardware and testing; and the post-implementation/operation stage, which
includes training and application maintenance. Generally, only internal and
external costs incurred during the second phase, the application development
stage, are capitalizable with the exception of data conversion and training
costs, which, when incurred during this phase are to be expensed. SOP 98-1 is
effective for the Company's fiscal 1999 consolidated financial statements.
Management does not expect the adoption of SOP 98-1 to have a material impact
on the Company's consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of:
February 27, February 28,
1999 1998
------------ ------------
(in thousands)
Land............................................. $ 1,899 $1 ,899
Building and land improvements................... 14,769 14,383
Furniture and fixtures........................... 3,461 2,434
Machinery and equipment.......................... 24,871 16,018
------- -------
45,000 34,734
Less: accumulated depreciation................... 13,764 8,073
------- -------
$31,236 $26,661
======= =======
Historically, the Company has leased primarily retail and outlet store space
under operating leases. Certain of these leases provide for percentage rentals
on sales above specified minimums and contain renewal options. Aggregate rent
expense incurred under these operating leases was $1,824,000, $1,042,000 and
$508,000 for fiscal years 1998, 1997 and 1996, respectively. Certain of these
leases, as well as the lease for the Company's new East Coast Operations
Center scheduled to commence operations during the Summer of 1999, are
noncancellable and have aggregate minimum lease payment requirements as of
February 27, 1999 of $3,420,000 in fiscal 1999, $3,746,000 in fiscal 2000,
$3,558,000 in fiscal 2001, $3,450,000 in fiscal 2002, and $3,036,000 in fiscal
2003, with total payments thereafter of $36,254,000.
3. REVOLVING LINE OF CREDIT
On June 29, 1998, the Company executed an agreement with First Security
Bank, N.A., a major Northwest commercial bank, providing for $50.0 million in
credit facilities, consisting of an unsecured revolving line of credit of
$47.4 million (with a sub-limit of $7.0 million for letters of credit) and a
term standby letter of credit of $2.6 million. At the option of the Company,
the interest rate is the bank's Prime Rate or Adjusted LIBOR [i.e., rate per
annum equal to the quotient of the London Interbank Offered Rate divided by
one (1) minus the Eurocurrency Reserve Requirement for the applicable Interest
Period, rounded upward, if necessary, to the nearest one-sixteenth of one
percent], increased or decreased by a margin based upon the Company's then
EBITDA Coverage Ratio, as defined. The agreement provides that the Company
must satisfy certain specified EBITDA, leverage and current ratio requirements
and places restrictions on the Company's ability to, among other things, sell
assets, participate in mergers, incur debt, pay dividends, and make
investments or guarantees. The new credit
45
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
facility, which replaced the Company's $35.0 million credit facility with US
Bank, has a maturity date of June 30, 2001.
At February 27, 1999, the Company had outstanding letters of credit totaling
$5.3 million. In the Company's past experience, no material claims have been
made against these financial instruments. Management does not expect any
material losses to result from these off-balance sheet instruments because
performance is not expected to be required.
4. ACCRUED LIABILITIES
Accrued liabilities consist of:
February 27, February 28,
1999 1998
------------ ------------
(in thousands)
Accrued payroll, related taxes and benefits..... $4,031 $ 3,754
Accrued sales returns........................... 3,384 6,035
Other........................................... 253 728
------ -------
$7,668 $10,517
====== =======
5. EXECUTIVE LOAN PROGRAM
Effective June 30, 1997, the Company established an Executive Loan Program
under which the Company may make, at its sole discretion and with prior
approvals from the Chief Executive Officer and the Board of Directors'
Compensation Committee, secured long-term loans to key executives. Each loan
is secured by the executive's personal net assets, inclusive of all vested
stock options in the Company, bears interest at three percent per annum, and
becomes due and payable on the earlier of (i) the date ten days before the
date on which the vested stock options serving as partial security expire or
(ii) ninety days from the date on which the executive's employment with the
Company terminates for any reason.
46
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. EARNINGS PER SHARE
The following is a reconciliation of net income and the number of common
shares used in the computations of historical and pro forma net income per
basic and diluted share (in thousands):
Fiscal Years Ended
-------------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ -----------
(pro forma,
unaudited)
Net income............................... $10,691 $11,688 $10,816
======= ======= =======
Average shares outstanding used to
determine net income per basic common
share................................... 10,167 10,120 7,390
Net effect of dilutive stock options
based on the treasury
stock method using average market price
(1)..................................... 336 513 266
------- ------- -------
Average shares used to determine net
income per diluted common share......... 10,503 10,633 7,656
======= ======= =======
Pro forma net income..................... $ -- $ -- $ 5,887
======= ======= =======
Average shares outstanding used to
determine net income per basic common
share................................... -- -- 7,390
Initial public offering common shares
necessary to fund
distribution of S-corporation retained
earnings................................ -- -- 1,227
------- ------- -------
Average shares used to determine pro
forma net income per basic common share. -- -- 8,617
Net effect of dilutive stock options
based on the treasury
stock method using average market price
(1)..................................... -- -- 266
------- ------- -------
Average shares used to determine pro
forma net income
per diluted common share................ -- -- 8,883
======= ======= =======
- --------
(1) Anti-dilutive stock options excluded from the above computations were 354,
227 and 0 for fiscal years 1998, 1997 and 1996, respectively.
7. INCOME TAXES
The Company's income tax provisions include the following:
Fiscal Years Ended
----------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ --------
(in thousands)
Current income tax provision:
Federal.................................... $5,816 $5,980 $ 388
State...................................... 1,274 889 63
Deferred income tax (benefit) provision
Federal.................................... (82) 860 642
State...................................... (18) 128 104
------ ------ ------
Total income tax provision................ $6,990 $7,857 $1,197
====== ====== ======
47
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliations of the statutory U.S. federal income tax rate and the
Company's effective income tax rates are as follows:
Fiscal Years Ended
----------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ --------
Statutory income tax rate.................... 35.0% 35.0% 34.0%
State income taxes, net of federal benefit... 4.5 5.2 (0.2)
S-corporation income taxed to shareholders... -- -- (35.3)
S-corporation termination.................... -- -- 11.3
Other........................................ -- -- 0.2
---- ---- -----
Effective income tax rate.................. 39.5% 40.2% 10.0%
==== ==== =====
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 February 27, 1999 and February 28, 1998 are
as follows (in thousands):
February 27, 1999 February 28, 1998
------------------- -------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
Assets:
Inventories........................... $ -- $-- $ (362) $--
Accrued sales returns................. (1,340) -- (2,426) --
Other................................. (537) -- (238) --
------- ---- ------- ----
Total deferred tax assets........... $(1,877) $-- $(3,026) $--
======= ==== ======= ====
Liabilities:
Prepaid and deferred catalog costs.... $ 2,957 $-- $ 3,945 $--
Tax basis depreciation................ -- 298 -- 375
------- ---- ------- ----
Total deferred tax liabilities...... $ 2,957 $298 $ 3,945 $375
------- ---- ------- ----
Net deferred tax liabilities........ $ 1,080 $298 $ 919 $375
======= ==== ======= ====
8. 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 statutorily prescribed annual limits and to
contribute such amounts to the 401(k) Plan. Contributions to the 401(k) Plan
and income earned on the contributions are not taxable to employees until
withdrawn from the 401(k) Plan. All employees 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. The
Company recognized contribution expense of $589,000, $445,000 and $251,000 for
the fiscal years 1998, 1997 and 1996, respectively.
9. 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,
48
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1,111,847 shares of common stock were initially authorized for issuance. On
February 13, 1998, the Company's Board of Directors authorized an additional
350,000 shares of common stock for issuance which was approved by a majority
of shareholders on July 11, 1998. 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, at 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 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.
Under the Discretionary Option Grant component of the 1996 Plan, certain key
management employees and several hundred other employees have been granted
options which remain outstanding at February 27, 1999 to purchase 557,970
shares and 622,175 shares of common stock, respectively. Similarly, under the
Automatic Option Grant Program component of the 1996 Plan, non-employee Board
members have been granted options which remain outstanding at February 27,
1999 to purchase 63,536 shares of common stock. Options granted under the
Discretionary Option Grant Program to employees vest and become exercisable on
a pro rata basis over either four or five years. The initial and subsequent
annual allotments of options granted under the Automatic Option Grant Program
to non-employee directors are immediately exercisable and vest on a pro rata
basis over three years and one year, respectively. The options expire ten
years from date of issue under the Discretionary Option Grant Program subject
to earlier expiration for vested options not exercised following termination
of employment and have a maximum term of ten years under the Automatic Option
Grant Program subject to earlier expiration for vested options not exercised
two years following the optionee's cessation of Board service.
A summary of the status of the Company's stock options as of February 27,
1999 and February 28, 1998, and changes during the fiscal years then ended,
are presented below:
February 27, 1999 February 28, 1998
--------------------------------- ---------------------------------
Weighted Weighted
Average Average
Exercise Exercise Exercise Exercise
Options Price Price Options Price Price
--------- ------------- -------- --------- ------------- --------
Outstanding at beginning
of period.............. 1,137,687 $ 6.58--41.50 $15.77 874,795 $ 6.58--20.25 $10.77
Granted................. 279,616 10.06--27.50 17.23 346,792 12.38--41.50 28.55
Exercised............... (62,999) 6.58--17.50 8.57 -- -- --
Forfeited............... (110,623) 6.58--41.50 17.97 (83,900) 12.38--29.00 16.22
--------- ------------- ------ --------- ------------- ------
Outstanding at end of
period................. 1,243,681 $ 6.58--41.50 $16.27 1,137,687 $ 6.58--41.50 $15.77
========= ============= ====== ========= ============= ======
Exercisable............. 447,908 $ 6.58--41.50 $14.06 218,699 $ 6.58--20.25 $10.75
========= ============= ====== ========= ============= ======
49
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Financial Accounting Standards Board issued Statement No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation", in 1995. As allowed by SFAS
No. 123, the Company elected to retain the compensation measurement principles
of Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees", and its related interpretations, for stock
options. Under APB No. 25, compensation expense is recognized based upon the
difference between the market value of the stock and the option exercise price
at the measurement date. The measurement date is the date at which both the
number of options and the exercise price for each option are known.
Beginning in fiscal 1996, the year the stock option plan was adopted, the
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model and the following weighted average
assumptions:
Fiscal Years Ended
----------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ --------
Risk free interest rate...................... 5.2% 6.0% 6.2%
Expected volatility.......................... 72.3% 54.7% *
Expected life (in years)..................... 7 7 7
Expected dividends........................... None None None
- --------
* No expected volatility for fiscal 1996 as options were granted prior to and
concurrent with the initial public offering.
Had compensation cost for the 1996 Plan been determined consistent with SFAS
No. 123, the Company's net income, pro forma net income and related net income
per basic and diluted share amounts would have been reduced as follows:
Fiscal Years Ended
-------------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ -----------
(pro forma,
unaudited)
Net income (in thousands)................. $(1,680) $ (811) $ (296)
Net income per share--Basic............... $ (0.17) $(0.08) $(0.04)
Net income per share--Diluted............. $ (0.16) $(0.08) $(0.04)
Pro forma net income (in thousands)....... -- -- $ (179)
Pro forma net income per share--Basic..... -- -- $(0.02)
Pro forma net income per share--Diluted... -- -- $(0.02)
The above effects of applying SFAS No. 123 are not indicative of future
amounts. Additional awards in future years are anticipated.
50
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides summarized information about stock options
outstanding at February 27, 1999:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Contractual Average Average
Options Life Exercise Options Exercise
Outstanding (Years) Price Exercisable Price
Range of Exercise Prices ----------- ----------- -------- ----------- --------
$00.00--$09.99........... 352,969 7.1 $ 6.58 176,485 $ 6.58
$10.00--$19.99........... 568,379 8.5 $14.65 201,709 $15.06
$20.00--$29.99........... 163,857 8.9 $25.13 27,638 $26.63
$30.00--$39.99........... 128,176 8.8 $32.95 42,076 $32.33
$40.00--$49.99........... 30,300 9.0 $41.50 -- --
10. 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
consolidated financial statements have been adjusted retroactively to give
effect to this stock split and the stock conversion discussed above.
11. DISTRIBUTIONS TO STOCKHOLDERS
Immediately prior to the consummation of the Company's initial public
offering of common stock on January 29, 1997, the then stockholders of the
Company and the Company entered into an Agreement for Distribution of Retained
Earnings and Tax Indemnification (the "Agreement"). Pursuant to the Agreement,
the undistributed accumulated S-corporation earnings as of the date the
Company's S-corporation status was terminated were distributed in the form of
promissory notes which were paid in full promptly after the closing of the
offering.
The Agreement continues to provide 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.
12. 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
51
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's liability, if any, under any pending litigation or administrative
proceedings would not materially affect its financial position, results of
operations or cash flows.
The Company's retailing business is based solely in the states of Idaho,
West Virginia and Wyoming, and accordingly, the Company only collects sales
taxes from customers residing in those states. The Company's wholly-owned
subsidiary, Coldwater Creek Outlet Stores Inc., owns and operates outlet
stores throughout the United States and pays sales tax and applicable
corporate income, franchise and other taxes to the states in which outlets are
located. Various states have attempted to collect back sales and use tax from
direct marketers. 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. The Company anticipates that any legislative changes, if adopted,
would be applied only on a prospective basis.
13. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS DATA (UNAUDITED)
The unaudited pro forma income data appearing on the consolidated statements
of operations reflects historical net income adjusted for pro forma income
taxes. Pro forma income taxes are reported at an assumed 39.5% effective rate,
reflecting prevailing federal and state statutory rates at the time of the
Company's initial public offering, as if the Company had been a C-corporation
rather than an S-corporation for the fiscal periods preceding its initial
public offering on January 29, 1997. The historical and pro forma net income
for fiscal year 1996 includes a non-recurring, non-cash charge of $1.4 million
to recognize deferred income taxes related to the termination of the Company's
S-corporation status. Pro forma net income per share--Basic is based on the
pro forma weighted average number of common shares outstanding consisting of
(i) the actual weighted average shares outstanding and (ii) the additional
shares from which the net proceeds, based on the Company's initial public
offering price of $15 per share, would have been necessary to fund an assumed
distribution of the S-corporation retained earnings balance at January 29,
1997 and March 2, 1996, as applicable. Pro forma net income per share--Diluted
additionally includes the dilutive effects of common shares issuable under
outstanding stock options based on the treasury stock method. The funding
shares deemed to have been outstanding were 1,227,000 in fiscal 1996.
52
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Quarterly Results of Operations (unaudited)
Fiscal 1998
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per
share data)
Net sales....................................... $79,937 $60,952 $94,730 $89,613
Gross profit.................................... 41,812 29,984 48,983 48,254
Selling, general and administrative expense..... 40,390 28,776 41,094 40,395
Income from operations.......................... 1,422 1,208 7,889 7,859
Net income...................................... $ 703 $ 556 $ 4,513 $ 4,919
Net income per share--Basic..................... $ 0.07 $ 0.05 $ 0.44 $ 0.48
Net income per share--Diluted................... $ 0.07 $ 0.05 $ 0.43 $ 0.48
Fiscal 1997
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per
share data)
Net sales....................................... $51,002 $36,389 $77,242 $82,064
Gross profit.................................... 26,665 18,237 39,544 42,125
Selling, general and administrative expense..... 23,374 17,495 32,397 33,817
Income from operations.......................... 3,291 742 7,147 8,308
Net income...................................... $ 2,073 $ 415 $ 4,340 $ 4,860
Net income per share--Basic..................... $ 0.20 $ 0.04 $ 0.43 $ 0.48
Net income per share--Diluted................... $ 0.20 $ 0.04 $ 0.41 $ 0.45
- --------
Note: The aggregate of certain of the above amounts may differ from that
reported for the full fiscal year due to the effects of rounding.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrants,
See Item 4--"Directors and Executive Officers" 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 10, 1999, to be filed with the Commission pursuant to Regulation
14A.
ITEM 11. EXECUTIVE COMPENSATION
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 10, 1999, 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 10, 1999, 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 10, 1999, to be filed with the Commission pursuant to Regulation
14A.
54
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:
None Required
(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:
Exhibit
Number Description of Document
------- -----------------------
3.1 * Amended and Restated Certificate of Incorporation
3.2 * Bylaws
4.1 * Specimen of Stock Certificate
10.1 * Form of Indemnity Agreement between the Registrant and each of its
Directors
10.2 * Form of Agreement for Distribution of Retained Earnings and Tax
Indemnification between the Company and Dennis and Ann Pence
10.3 * Lease to Coeur d'Alene Call Facility
10.4 * Lease to Cedar Street Bridge Store
10.5 * Lease to Jackson Hole Retail Store
10.6 * Loan Agreement dated September 9, 1996 between the Company and U.S.
Bank of Idaho, formerly West One Bank, Idaho
10.7 * 1996 Stock Option/Stock Issuance Plan
10.8 * Form of Stock Option Agreement under 1996 Stock Option/Stock Issuance
Plan
10.9 * Parkersberg Distribution Center Operating Lease
10.10* Credit Agreement With First Security Bank, N.A.
23 Consent of Arthur Andersen LLP
24.1 * Power of Attorney (included on the signature page to S-1)
27.1 Financial Data Schedule
- --------
* PREVIOUSLY FILED
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sandpoint, State of Idaho, on this 28th day of May, 1999.
COLDWATER CREEK INC.
*Dennis Pence
By: _________________________________
Dennis Pence
President, Chief Executive
Officer, Secretary 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:
Signature Title Date
--------- ----- ----
*Dennis Pence President, Chief Executive May 28, 1999
____________________________________ Officer, Secretary and Vice
Dennis Pence Chairman of the Board of
Directors
*Ann Pence Creative Director and May 28, 1999
____________________________________ Chairman of the Board of
Ann Pence Directors
*Donald Robson Senior Vice President, Chief May 28, 1999
____________________________________ Financial Officer and
Donald Robson Treasurer (Principal
Financial and Accounting
Officer)
*Robert H. McCall Director May 28, 1999
____________________________________
Robert H. McCall
*Curt Hecker Director May 28, 1999
____________________________________
Curt Hecker
*Michelle Collins Director May 28, 1999
____________________________________
Michelle Collins
*Duncan Highsmith Director May 28, 1999
____________________________________
Duncan Highsmith
/s/ Donald Robson
*By: __________________________
Donald Robson
(Attorney-in-fact)
56
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
3.1 * Amended and Restated Certificate of Incorporation
3.2 * Bylaws
4.1 * Specimen of Stock Certificate
10.1 * Form of Indemnity Agreement between the Registrant and each of its
Directors
10.2 * Form of Agreement for Distribution of Retained Earnings and Tax
Indemnification between the Company and Dennis and Ann Pence
10.3 * Lease to Coeur d'Alene Call Facility
10.4 * Lease to Cedar Street Bridge Store
10.5 * Lease to Jackson Hole Retail Store
10.6 * Loan Agreement dated September 9, 1996 between the Company and U.S.
Bank of Idaho, formerly West One Bank, Idaho
10.7 * 1996 Stock Option/Stock Issuance Plan
10.8 * Form of Stock Option Agreement under 1996 Stock Option/Stock Issuance
Plan
10.9 * Parkersberg Distribution Center Operating Lease
10.10* Credit Agreement With First Security Bank, N.A.
23 Consent of Arthur Andersen LLP
24.1 * Power of Attorney (included on the signature page to S-1)
27.1 Financial Data Schedule
- --------
* PREVIOUSLY FILED