<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED AUGUST 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares outstanding as of August 29, 1998
- ---------------------------------- ----------------------------------------
Common Stock ($.01 par value) 10,183,117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at August 29, 1998 and February 28, 1998........................................ 4
Consolidated Statements of Operations for the three and six month periods ended
August 29, 1998 and August 30, 1997........................................................................ 5
Consolidated Statements of Cash Flows for the six month periods ended
August 29, 1998 and August 30, 1997........................................................................ 6
Notes to Consolidated Financial Statements.................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................19
Item 2. Changes in Securities and Use of Proceeds..........................................................19
Item 3. Defaults Upon Senior Securities....................................................................19
Item 4. Submission of Matters to a Vote of Security Holders................................................19
Item 5. Other Information..................................................................................19
Item 6. Exhibits and Reports on Form 8-K...................................................................19
</TABLE>
This report may contain forward-looking statements that involve risks and
uncertainties. When used in this discussion, the words "anticipate," "believe,"
"estimate," "expect," and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. The
Company's actual results could differ materially from the results anticipated in
these forward-looking statements as a result of certain factors set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors" and elsewhere in this report.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
August 29, February 28,
1998 1998
---------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 79 $ 331
Receivables 5,274 4,019
Inventories 56,461 53,051
Prepaid expenses 767 2,729
Prepaid catalog costs 3,979 2,794
-------- -------
Total current assets 66,560 62,924
Deferred catalog costs 6,359 7,020
Property and equipment, net of accumulated depreciation 30,369 26,661
Executive loans 1,620 1,620
-------- -------
Total assets $104,908 $98,225
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 21,156 $10,264
Accounts payable 21,507 27,275
Accrued liabilities 10,866 10,517
Deferred income taxes 254 919
-------- -------
Total current liabilities 53,783 48,975
Deferred income taxes 451 375
-------- -------
Total liabilities 54,234 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 11,285 10,026
-------- -------
Total stockholders' equity 50,674 48,875
-------- -------
Total liabilities and stockholders' equity $104,908 $98,225
======== =======
</TABLE>
The accompanying notes are an integal part of these financial statements.
4
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- -------------------------------
August 29, August 30, August 29, August 30,
1998 1997 1998 1997
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Net sales $60,952 $36,389 $140,889 $87,391
Cost of sales 30,968 18,152 69,093 42,489
------------ ------------ ----------- -------------
Gross profit 29,984 18,237 71,796 44,902
Selling, general and administrative expenses 28,776 17,495 69,166 40,869
------------ ------------ ----------- -------------
Income from operations 1,208 742 2,630 4,033
Interest, net, and other 278 (57) 525 (193)
------------ ------------ ----------- -------------
Income before provision for income taxes 930 799 2,105 4,226
Provision for income taxes 374 384 846 1,738
------------ ------------ ----------- -------------
Net income $ 556 $ 415 $ 1,259 $ 2,488
============ ============ =========== =============
Net income per share - Basic $ 0.05 $ 0.04 $ 0.12 $ 0.25
============ ============ =========== =============
Net income per share - Diluted $ 0.05 $ 0.04 $ 0.12 $ 0.24
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,259 $ 2,488
------- -------
Noncash items:
Depreciation 2,549 1,758
Deferred income tax provision (589) 269
Net change in current assets and liabilities:
Receivables (1,255) (1,948)
Inventories (3,410) (9,993)
Prepaid expenses 1,962 (1,127)
Prepaid catalog costs (1,185) 575
Accounts payable (5,768) 3,087
Accrued liabilities 349 1,874
Income taxes payable - 41
Decrease (increase) in deferred catalog costs 661 (3,380)
------- -------
Net cash used in operating activities $(5,427) $(6,356)
------- -------
INVESTING ACTIVITIES:
Purchase of short-term investments $ - $(5,105)
Sale of short-term investments - 5,105
Purchase of property and equipment (6,257) (4,728)
Loans to executives - (1,286)
------- -------
Net cash used in investing activities $(6,257) $(6,014)
------- -------
FINANCING ACTIVITIES:
Net advances under revolving line of credit $10,892 $ 3,275
Proceeds from exercises of stock options 540 -
------- -------
Net cash provided by financing activities $11,432 $ 3,275
------- -------
Net decrease in cash and cash equivalents (252) (9,095)
Cash and cash equivalents, beginning 331 9,095
------- -------
Cash and cash equivalents, ending $ 79 $ -
======= =======
SUPPLEMENTAL CASH FLOW DATA:
- ---------------------------
Cash paid for interest $ 394 $ 43
Cash paid for income taxes 522 1,354
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Coldwater Creek Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the United States Securities and Exchange Commission,
and in the opinion of management, contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
financial position, results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The results of operations for
the interim periods disclosed within this report are not necessarily indicative
of future financial results. These consolidated financial statements are
condensed and should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-K, which includes consolidated financial statements for the fiscal
year ended February 28, 1998.
References to a fiscal year refer to the calendar year in which such fiscal
year commenced. The Company's fiscal year ends on the Saturday closest to
February 28. References to three and six month periods refer to the respective
thirteen and twenty-six weeks ended on the date indicated.
2. RECLASSIFICATIONS
Certain amounts in the prior period consolidated financial statements have
been reclassified to be consistent with the current period presentation.
3. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). 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 financial statements. Management does not expect this standard to have a
significant impact on the Company's consolidated financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). 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 financial statements. Management
does not expect this standard to have a significant impact on the Company's
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). 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. The Statement 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 expect this standard
to have a significant impact on the Company's consolidated financial statements.
7
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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. If material, compensation expense is recognized by the Company
for the difference between the stated interest rate and the prevailing prime
rate.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share". The statement
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share," and
revises the computation and presentation of earnings per share. Basic earnings
per share, 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. Diluted earnings per share, 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 by the new standard, all
previously reported amounts have been restated.
The following is a reconciliation of net income and the number of common
shares used in the computations of net income per basic and diluted share (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------------------
August 29, AUGUST 30, August 29, August 30,
1998 1997 1998 1997
-------------------------------------------------------
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 556 $ 415 $ 1,259 $ 2,488
=======================================================
Average shares outstanding used to
determine net income per basic common share 10,169 10,120 10,150 10,120
Net effect of dilutive stock options based on the
treasury stock method using average market price(1) 386 479 427 400
-------------------------------------------------------
Average shares used to determine net income
per diluted common share 10,555 10,599 10,577 10,520
=======================================================
</TABLE>
(1) Anti-dilutive stock options excluded from the above computations for the
three months ended August 29, 1998 and August 30, 1997 were 390,008 and
46,816, respectively. Anti-dilutive stock options excluded from the above
computations for the six months ended August 29, 1998 and August 30, 1997
were 387,008 and 44,316, respectively.
8
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. PARKERSBURG EXPANSION AND NEW BANK CREDIT FACILITY
In order to alleviate certain capacity constraints which were being
experienced at the Company's distribution center in Sandpoint, Idaho and to
reduce certain costs incurred in shipping merchandise orders to the majority of
the Company's customers which are located in the eastern United States, the
Company executed a definitive operating lease agreement with the Wood County
Development Authority on June 12, 1998 to establish a distribution center in
Parkersburg, West Virginia. The Company will recognize annual lease expense of
approximately $2.3 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.
On June 29, 1998, the Company executed a credit agreement with First
Security Bank, N.A., a major Northwest commercial bank. The agreement provides
for an unsecured revolving line of credit under which the Company may borrow up
to $47.4 million, less letter of credit amounts outstanding or unreimbursed
under a $7.0 million sub-facility, at an interest rate, at the option of the
Company, which 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 July 31, 2001.
In connection with the execution of the above operating lease, First
Security Bank, N.A. issued a $2.6 million irrevocable standby letter of credit
on the Company's behalf to the Wood County Development Authority. This letter of
credit, which is over and beyond the letter of credit sub-facility described
above, reduces by $500,000 per annum and automatically terminates on June 29,
2003.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this discussion and analysis, including statements
regarding the Company's strategy, financial performance and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. The Company's actual
results could differ materially from the results anticipated in these forward-
looking statements as a result of certain factors set forth under "Risk Factors"
and elsewhere in this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the SEC that attempt to advise interested
parties of certain risks and factors that may affect the Company's business.
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto.
GENERAL
- -------
Coldwater Creek Inc. is a specialty direct mail retailer of apparel, gifts,
jewelry and home furnishings. The Company markets its merchandise primarily
through four 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 the Fall of
1993 and features fashionable, upscale apparel and hard-to-find jewelry and
accessories. Created in the Spring of 1996, Milepost Four features upscale, yet
relaxed, natural-fiber men's clothing. In response to customer demand for
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.
Also, as part of the Company's brand building strategy, the Company operates
a unique complex of catalog-themed retail stores in Sandpoint, Idaho. As a
continuation of this strategy, the Company opened a similar complex in Jackson
Hole, Wyoming during June of 1997.
In analyzing the Company's financial position, results of operations and
cash flows, it should be noted that the Company has experienced, and will
continue to experience, seasonal fluctuations in its sales and operating results
as is typical for 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. Management believes that this seasonality will continue in the
future although to a lesser degree as a result of the increased representation
of apparel within the Company's overall merchandise mix.
In anticipation of the increased sales activity expected during November and
December, the Company incurs certain significant additional expenses, including
the hiring of a substantial number of temporary employees to supplement its
permanent, full time staff. In addition, due to the larger percentage of gifts
and accessories offered in the second half of the fiscal year related to holiday
gift giving, the Company expects higher gross margins in the second half of the
fiscal year than in the first half. If, for any reason, the Company's net sales
were to fall below its expectations during November and December, the Company's
financial condition, results of operations and cash flows would be adversely
affected.
It should further be noted that the Company's revenues and results of
operations have fluctuated, and are likely to continue to fluctuate, on a
quarterly basis as a result of a number of other 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 does not believe its historical results
of operations will necessarily be indicative of future results.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain information regarding the Company's
costs and expenses expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -----------------------------
AUGUST 29, AUGUST 30, AUGUST 29, AUGUST 30,
(AS A PERCENTAGE OF NET SALES) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
COST OF SALES 50.8 49.9 49.0 48.6
---------- ---------- ---------- ----------
GROSS PROFIT 49.2 50.1 51.0 51.4
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 47.2 48.1 49.1 46.8
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 2.0 2.0 1.9 4.6
INTEREST, NET, AND OTHER 0.5 (0.2) 0.4 (0.2)
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1.5 2.2 1.5 4.8
PROVISION FOR INCOME TAXES 0.6 1.1 0.6 2.0
---------- ---------- ---------- ----------
NET INCOME 0.9% 1.1% 0.9% 2.8%
========== ========== ========== ==========
</TABLE>
Net sales increased by $24.6 million, or 67.5%, to $61.0 million for the
fiscal quarter ended August 29, 1998 ("the fiscal 1998 quarter") from $36.4
million during the fiscal quarter ended August 30, 1997 ("the fiscal 1997
quarter"). Net sales for the six months ended August 29, 1998 ("the first half
of fiscal 1998") increased by $53.5 million, or 61.2%, to $140.9 million
compared to net sales of $87.4 million for the six months ended August 30, 1997
("the first half of fiscal 1997"). The Company believes these increases
primarily are attributable to continuing increases in the circulation of and
resulting order volume from the Company's Northcountry and Spirit of the West
catalogs, and to a lesser extent, the Company's Bed & Bath and Milepost Four
catalogs. Total catalog mailings were 26.9 million during the fiscal 1998
quarter reflecting an increase of approximately 56.4% from the 17.2 million
catalogs mailed during the fiscal 1997 quarter. Total catalog mailings were
77.1 million during the first half of fiscal 1998, an increase of 83.1% over
the 42.1 million catalogs mailed during the first half of fiscal 1997.
The investment made by the Company in increased catalog mailings resulted in
the active customer file, comprised of customers who have made a purchase in the
preceding twelve months, increasing to 1.9 million customers at August 29, 1998
compared to 1.6 million customers at February 28, 1998 and 1.4 million customers
at August 30, 1997. The Company's proprietary mailing list increased to 6.3
million names at August 29, 1998 compared to 5.4 million names at February 28,
1998 and 4.3 million names at August 30, 1997.
Gross profit increased $11.7 million, or 64.4%, to $30.0 million during the
fiscal 1998 quarter from $18.2 million during the fiscal 1997 quarter. For the
first half of fiscal 1998, gross profit increased $26.9 million, or 59.9%, to
$71.8 million from $44.9 million during the first half of fiscal 1997.
Expressed as a percentage of net sales, the Company's gross profit was 49.2% and
51.0%, respectively, for the three and six months ended August 29, 1998 compared
to 50.1% and 51.4% for the respective fiscal 1997 periods. The Company believes
these decreases in gross profit percentages primarily are the consequence of the
reduced margins realized on clearance sales of the excess inventory which arose
from the previously communicated first quarter softness in customer response
rates to Spirit of the West offerings.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
The Company's overall merchandise inventory level was $56.5 million at
August 29, 1998 compared to $55.7 million at May 30, 1998 and $53.1 million at
February 28, 1998. The current inventory level reflects management's planned
moderation of overall inventory growth during the second fiscal quarter
following planned increases in the overall inventory level during preceding
fiscal quarters aimed at improving initial fill rates. Management believes the
resulting improvement realized in initial fill rates contributed significantly
to improved customer service and the continued high rate of sales growth
outlined above.
Selling, general and administrative expenses primarily consist of marketing,
distribution and general and administrative expenses. Marketing expenses
primarily consist of catalog production and postage costs. Production costs
primarily consist of paper, printing, computer services and list rental costs
(net of list rental revenue). Selling, general and administrative expenses
increased by $11.3 million, or 64.5%, to $28.8 million during the fiscal 1998
quarter from $17.5 million in the fiscal 1997 quarter. Selling, general and
administrative expenses increased by $28.3 million, or 69.2%, to $69.2 million
during the first half of fiscal 1998 from $40.9 million during the first half of
fiscal 1997. The Company believes these increases in selling, general and
administrative expenses primarily are attributable to circulation costs incurred
in connection with increased catalog mailings, and to a lesser extent,
continuing infrastructure investments made to support the Company's anticipated
growth. Returning to the historical trend experienced by the Company prior to
the first quarter of fiscal 1998, selling, general and administrative expenses
decreased as a percentage of net sales to 47.2% for the second quarter of fiscal
1998 compared to 48.1% for the second quarter of fiscal 1997. The Company
believes that this percentage decrease is primarily attributable to its
continued leveraging of the non-marketing cost components within selling,
general and administrative expenses. Selling, general and administrative
expenses for the first half of 1998 were 49.1% compared to 46.8% for the first
half of fiscal 1997, primarily as a result of the incremental circulation costs
incurred in the first quarter of fiscal 1998 to clear excess Spirit of the West
inventory.
As a result of the foregoing, operating income increased by $0.5 million, or
62.8%, to $1.2 million for the fiscal 1998 quarter from $0.7 million for the
fiscal 1997 quarter. For the six months ended August 29, 1998, operating income
decreased by $1.4 million, or 34.8%, to $2.6 million compared to $4.0 million
for the six months ended August 30, 1997. Expressed as a percentage of net
sales, operating income was 2.0% and 1.9%, respectively, for the three and six
months ended August 29, 1998 versus 2.0% and 4.6% for the corresponding fiscal
1997 periods.
The Company realized net income of $0.6 million for the fiscal 1998 quarter
versus net income of $0.4 million for the fiscal 1997 quarter, representing an
increase of 50% . After restating the fiscal 1997 quarter for the required
implementation of Financial Accounting Standard No. 128 "Earnings Per Share,"
this equates to net income per basic and diluted share of $0.05 for the fiscal
1998 quarter versus net income per basic and diluted share of $0.04 for the
fiscal 1997 quarter. For the first half of fiscal 1998, the Company realized
net income of $1.3 million compared to net income of $2.5 million for the first
half of fiscal 1997. This equates to net income per basic and diluted share of
$0.12 for the first half of fiscal 1998 versus net income per basic and diluted
share of $0.25 and $0.24, respectively, for the first half of fiscal 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Coldwater Creek Inc. has historically funded its growth through a
combination of funds generated from operations and short-term bank credit
facilities. Working capital requirements generally precede the realization of
sales. The Company draws on its working capital lines to produce catalogs and
increase inventory levels in anticipation of future sales realization. In
addition, the Company regularly relies on standard trade credit arrangements in
purchasing inventory and services. These arrangements typically require the net
amount due to be paid within sixty days of receipt.
During the six months ended August 29, 1998, operating activities consumed
$5.4 million while financing activities provided $11.4 million. This compares
to the six months ended August 30, 1997 when operating activities consumed $6.4
million and financing activities provided $3.3 million. The current period
primarily reflects the Company's lower net income and increased servicing of
accounts payable partially offset by decreased inventory purchases. To a lesser
extent, decreases in various prepaid expenses provided operating cash compared
to their utilization of cash in the comparative period. The Company's then
existing revolving line of credit financed the Company's operating cash needs
during both periods. As a consequence, the Company had $21.2 million
outstanding under its revolving lines of credit at August 29, 1998 compared to
$10.3 million and $3.3 million outstanding at February 28, 1998 and August 30,
1997, respectively.
On June 29, 1998, the Company executed a credit agreement with First
Security Bank, N.A., a major Northwest commercial bank. The agreement provides
for an unsecured revolving line of credit allowing the Company to borrow up to
$47.4 million, less letter of credit amounts outstanding or unreimbursed under a
$7.0 million sub-facility, at an interest rate, at the option of the Company,
which 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 July 31, 2001.
In connection with the execution of the Parkersburg Distribution Center
operating lease discussed below, First Security Bank, N.A. issued a $2.6 million
irrevocable standby letter of credit on the Company's behalf to the Wood County
Development Authority. This letter of credit, which is in addition to the
letter of credit sub-facility described above, reduces by $500,000 per annum and
automatically terminates on June 29, 2003.
Investing activities used $6.3 million during the six months ended August
29, 1998 versus $6.0 million during the six months ended August 30, 1997. These
amounts include purchases of property and equipment totaling $6.3 million and
$4.7 million during the respective fiscal 1998 and 1997 periods. The current
period primarily reflects the cost of material handling and information systems
for the temporary and permanent distribution centers discussed below, and to a
lesser degree, hardware and software upgrades to the Company's corporate systems
and leasehold improvements to outlet stores. During the balance of fiscal 1998,
the Company plans to make between $6.0 million and $8.0 million in additional
capital expenditures to support its anticipated continued growth. These capital
expenditures primarily will be for distribution center equipment and technology
and are expected to be funded from the Company's existing bank credit facility.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
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
Company executed a definitive operating lease agreement with the Wood County
Development Authority on June 12, 1998 to establish a planned second
distribution facility in Parkersburg, West Virginia. The new distribution
center will approximate 590,000 square feet and be situated on approximately 60
acres. The Company will recognize annual lease expense of approximately $2.3
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.
In exchange for the Company's willingness to explore the possibility of
establishing a long-term presence, 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 conducts, and will continue to conduct, certain order fulfillment
operations until the permanent facility is constructed and available.
Construction of the temporary facility was completed in May 1998 and the Company
commenced certain order fulfillment operations in July 1998. Construction by
the Wood County Development Authority of the permanent distribution center is
proceeding on schedule with order fulfillment operations targeted to commence
during the Summer of 1999.
The Company recently leased 20,000 square feet of existing office space for
two years in Parkersburg, West Virginia and established a planned third customer
service call center. The cost of the required telecommunications equipment and
furnishings are not expected to be material. The Company will consider building
a permanent facility for its Parkersburg call center on the same site as the
permanent distribution center. The completion and availability of any permanent
facility would be planned to coincide with the expiration of the above office
space lease.
Management's long-term brand building strategy includes the selective
opening of highly visible retail stores in high traffic areas, including
"destination locations" such as locations near major national parks or other
resort areas. Consistent with such strategy, the Company opened a retail store
complex in Jackson Hole, Wyoming in June of 1997. Management will continue to
consider the opening of similarly situated retail stores in the future as prime
locations become available. It is contemplated that each such retail store would
be leased with the 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 merchandise overstocks, 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 has
subsequently opened seven additional outlet stores in the United States. The
subsidiary's management currently plans to open approximately five additional
outlet stores in the United States during the remainder of fiscal 1998. It is
contemplated that each such store would be leased with the initial cash
investment per store being limited to approximately $50,000 to $100,000 in
leasehold improvements.
The Company believes that cash flow from operations and borrowing capacity
under its credit facilities 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.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS
- -------------
Year 2000 Compliance
- --------------------
Coldwater Creek Inc. 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 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 and 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 are not Year 2000
compliant. The first application system which is an interface to the Company's
accounting system will be upgraded by the vendor to be Year 2000 compliant no
later than March 1999 at no 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 been minor in nature. The correcting upgrades
are scheduled for implementation 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER MATTERS (CONTINUED)
- -------------------------
Recently Issued Accounting Standards Not Yet Adopted
- ----------------------------------------------------
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). 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 financial statements. Management does not expect this standard to have a
significant impact on the Company's consolidated financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). 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 financial statements. Management
does not expect this standard to have a significant impact on the Company's
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). 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. The Statement 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 expect this standard to
have a significant impact on the Company's consolidated financial statements.
RISK FACTORS
- ------------
Reliance on Catalog Operations
- ------------------------------
The Company's success depends on the success of its catalog operations, the
success of which depends significantly on the efficient targeting of mailings
and a high volume of prospect 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 position, results of
operations and cash flows would be adversely affected. Further, the Company has
historically experienced fluctuations in the response rates to its catalog
mailings. For example, in the first fiscal quarter of 1998, the Company
experienced softness in customer response rates to Spirit of the West. 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 financial position, results of operations and cash
flows.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Risk Factors (continued)
- ------------------------
Risks Associated With Growth Strategy
- -------------------------------------
The Company's growth strategy primarily includes increasing catalog
circulation, expanding the Company's customer base through aggressive prospect
mailings, introducing expanded catalog and merchandise offerings, publishing new
catalog titles and increasing the use of other marketing channels, such as
retail stores and the Internet. The Company's growth strategy involves various
risks, including a reliance on a high degree of prospect mailings, which may
lead to less predictable response rates. The failure of the Company to
successfully implement any or all of its growth strategies would have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
Quarterly and Seasonal Fluctuations
- -----------------------------------
The Company's revenue and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of a number
of factors including, among other things, the timing of new merchandise and
catalog offerings, recognition of costs or net sales contributed by new
merchandise and catalog offerings, fluctuations in response rates, fluctuations
in paper, production and postage costs and expenses, merchandise returns,
adverse weather conditions that affect distribution or shipping, shifts in the
timing of holidays and changes in the Company's merchandise mix. If revenues
are below expectations in any given period, the adverse impact of such a
shortfall may be magnified by the Company's inability to adjust spending to
compensate for the shortfall.
Management of Expanding Operations
- ----------------------------------
The Company's growth has resulted in an increased demand on the Company's
managerial, operational and administrative resources. The Company recently has
invested significant resources in its distribution facilities, management
information systems and telephone infrastructure. However, in order to manage
currently anticipated levels of future demand, the Company will be required to
continue, among other things, to improve and integrate its management
information systems and controls, including inventory management, and attract
and retain qualified personnel, including middle management. In particular, the
Company is in the process of expanding its distribution capabilities. There can
be no assurance that any upgrades, improvements and expansions in the Company's
information or telephone systems or its current expansion of its distribution
facilities and operations will increase the productivity or efficiency of the
Company's operations or that the same will be adequate to meet the present or
future needs of the Company. Continued growth could result in a strain on the
Company's management, financial, merchandising, marketing, distribution and
other resources and the Company may experience operating difficulties, including
difficulties in training and managing an increasing number of employees,
difficulties in obtaining sufficient quantities of certain merchandise from its
vendors, problems in upgrading its management information systems and delays in
merchandise shipments. The inability of the Company to respond to and manage
these changing business conditions could have a material adverse impact on the
Company.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Risk Factors (continued)
- ------------------------
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. There can be no assurance that the Company will be
able to maintain or increase its market share in the future. The failure of the
Company to compete successfully would materially and adversely affect the
Company's financial position, results of operations and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings presently pending to which Coldwater
Creek Inc. or its subsidiary is a party or of which any of their properties are
the subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Coldwater Creek Inc. (the Company)
was held on July 11, 1998. At such meeting, the following proposals were voted
upon and approved:
1. Proposal No.1: To elect to the Board one director.
For Withhold
--------- --------
Michelle Collins 7,602,668 0
2. Proposal No.2: Approve a series of amendments to the Company's 1996
Stock Option/Stock Issuance Plan ("1996 Plan"), including a 350,000-share
increase in the number of Common Stock authorized for issuance under the
1996 Plan.
For Against Abstain
--------- ------- -------
7,345,847 256,621 200
3. Proposal No.3: Ratify the selection of Arthur Andersen LLP as
independent public accountants for the Company for the fiscal year ending
February 27, 1999.
For Against Abstain
--------- ------- -------
7,602,688 0 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NUMBER DESCRIPTION OF DOCUMENT
- ------------------------------
27.1 Financial Data Schedule for 6 months.
There were no reports filed on Form 8-K during the three months ended August 29,
1998.
19
<PAGE>
SIGNATURE
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 13th day of October 1998.
COLDWATER CREEK INC.
By: /s/Donald A. Robson
--------------------------------
Donald A. Robson
Chief Financial Officer,
Vice-President of Finance
and Administration, Treasurer
and Secretary
(Principal Financial and
Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> FEB-27-1999 FEB-28-1998
<PERIOD-START> MAR-01-1998 MAR-02-1997
<PERIOD-END> AUG-29-1998 AUG-30-1997
<CASH> 79 0
<SECURITIES> 0 0
<RECEIVABLES> 5,274 0
<ALLOWANCES> 0 0
<INVENTORY> 56,461 0
<CURRENT-ASSETS> 66,560 0
<PP&E> 40,992 0
<DEPRECIATION> (10,623) 0
<TOTAL-ASSETS> 104,908 0
<CURRENT-LIABILITIES> 53,783 0
<BONDS> 0 0
0 0
0 0
<COMMON> 102 0
<OTHER-SE> 50,572 0
<TOTAL-LIABILITY-AND-EQUITY> 104,908 0
<SALES> 140,889 87,391
<TOTAL-REVENUES> 140,889 87,391
<CGS> 69,093 42,489
<TOTAL-COSTS> 69,093 42,489
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 525 (193)
<INCOME-PRETAX> 2,105 4,226
<INCOME-TAX> 846 1,738
<INCOME-CONTINUING> 1,259 2,488
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,259 2,488
<EPS-PRIMARY> 0.12 0.25
<EPS-DILUTED> 0.12 0.24
</TABLE>
