<PAGE>
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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 NOVEMBER 28, 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
incorporation or organization) Identification No.)
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 November 28, 1998
- ------------------------------ ----------------------------------------------
Common Stock ($.01 par value) 10,183,117
- --------------------------------------------------------------------------------
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<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at November 28, 1998 and February 28, 1998.................................. 4
Consolidated Statements of Operations for the three and nine month periods ended
November 28, 1998 and November 29, 1997................................................................. 5
Consolidated Statements of Cash Flows for the nine month periods ended
November 28, 1998 and November 29, 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>
November 28, February 28,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 543 $ 331
Receivables 5,892 4,019
Inventories 62,062 53,051
Prepaid expenses 978 2,729
Prepaid catalog costs 921 2,794
-------- --------
Total current assets 70,396 62,924
Deferred catalog costs 13,681 7,020
Property and equipment, net of accumulated depreciation 32,491 26,661
Executive loans 1,620 1,620
-------- --------
Total assets $118,188 $ 98,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 15,086 $ 10,264
Accounts payable 33,082 27,275
Accrued liabilities 11,169 10,517
Income taxes payable, current and deferred 3,213 919
-------- --------
Total current liabilities 62,550 48,975
Deferred income taxes 451 375
-------- --------
Total liabilities 63,001 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 15,798 10,026
-------- --------
Total stockholders' equity 55,187 48,875
-------- --------
Total liabilities and stockholders' equity $118,188 $ 98,225
======== ========
</TABLE>
The accompanying notes are an integral 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 Nine Months Ended
------------------------------- -------------------------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $94,730 $77,242 $235,618 $164,633
Cost of sales 45,747 37,698 114,839 80,187
------- ------- -------- --------
Gross profit 48,983 39,544 120,779 84,446
Selling, general and administrative expenses 41,094 32,397 110,260 73,266
------- ------- -------- --------
Income from operations 7,889 7,147 10,519 11,180
Interest, net, and other 343 31 868 (162)
------- ------- -------- --------
Income before provision for income taxes 7,546 7,116 9,651 11,342
Provision for income taxes 3,033 2,776 3,879 4,514
------- ------- -------- --------
Net income $ 4,513 $ 4,340 $ 5,772 $ 6,828
======= ======= ======== ========
Net income per share - Basic $ 0.44 $ 0.43 $ 0.57 $ 0.67
======= ======= ======== ========
Net income per share - Diluted $ 0.43 $ 0.41 $ 0.55 $ 0.65
======= ======= ======== ========
</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>
Nine Months Ended
------------------------------------
November 28, November 29,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,772 $ 6,828
-------- --------
Noncash items:
Depreciation 4,054 2,817
Deferred income tax provision 76 (10)
Net change in current assets and liabilities:
Receivables (1,873) (5,011)
Inventories (9,011) (15,670)
Prepaid expenses 1,751 (1,633)
Prepaid catalog costs 1,873 662
Accounts payable 5,807 10,495
Accrued liabilities 652 4,064
Income taxes payable 2,294 (451)
Increase in deferred catalog costs (6,661) (7,531)
------- --------
Net cash provided by (used in) operating activities $ 4,734 $ (5,440)
------- --------
INVESTING ACTIVITIES:
Purchase of short-term investments $ - $ (5,106)
Sale of short-term investments - 5,106
Purchase of property and equipment (9,884) (7,310)
Loans to executives - (1,286)
------- --------
Net cash used in investing activities $(9,884) $ (8,596)
------- --------
FINANCING ACTIVITIES:
Net advances under revolving line of credit $ 4,822 $ 4,975
Proceeds from exercises of stock options 540 -
------- --------
Net cash provided by financing activities $ 5,362 $ 4,975
------- --------
Net increase (decrease) in cash and cash equivalents 212 (9,061)
Cash and cash equivalents, beginning 331 9,095
------- --------
Cash and cash equivalents, ending $ 543 $ 34
======= ========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid for interest $ 742 $ 74
Cash paid for income taxes 595 5,008
</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 nine month periods refer to the respective
thirteen and thirty-nine 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
7
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED (CONTINUED)
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.
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 NINE MONTHS ENDED
------------------------------------ -----------------------------------
NOVEMBER 28, NOVEMBER 29, NOVEMBER 28, NOVEMBER 29,
1998 1997 1998 1997
------------------------------------ -----------------------------------
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Net income $ 4,513 $ 4,340 $ 5,772 $ 6,828
==================================== ===================================
Average shares outstanding used to
determine net income per basic common share 10,183 10,120 10,161 10,120
Net effect of dilutive stock options based on the
treasury stock method using average market price (1) 199 556 379 466
------------------------------------ -----------------------------------
Average shares used to determine net income
per diluted common share 10,382 10,676 10,540 10,586
==================================== ===================================
</TABLE>
(1) Anti-dilutive stock options excluded from the above computations for the
three months ended November 28, 1998 and November 29, 1997 were 757,861 and
82,276 respectively. Anti-dilutive stock options excluded from the above
computations for the nine months ended November 28, 1998 and November 29, 1997
were 327,833 and 161,792, 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.
The Company recently announced that it is offering its Milepost Four men's
catalog for sale so that the underlying resources can be redirected at more
fully meeting the apparel and home furnishing needs of the Company's core female
customer. Milepost Four represented approximately five percent of the Company's
net sales for the nine months ended November 28, 1998 and approximately seven
percent of the Company's net sales for the most recently completed fiscal year
ended February 28, 1998.
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 NINE MONTHS ENDED
---------------------------------------------------------
November 28, November 29, November 28, November 29,
(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 48.3 48.8 48.7 48.7
----- ----- ----- -----
GROSS PROFIT 51.7 51.2 51.3 51.3
Selling, general and
administrative expenses 43.4 41.9 46.8 44.5
----- ----- ----- -----
INCOME FROM OPERATIONS 8.3 9.3 4.5 6.8
Interest, net, and other 0.3 0.1 0.4 (0.1)
----- ----- ----- -----
INCOME BEFORE PROVISION FOR
INCOME TAXES 8.0 9.2 4.1 6.9
Provision for income taxes 3.2 3.6 1.6 2.7
----- ----- ----- -----
NET INCOME 4.8% 5.6% 2.5% 4.2%
===== ===== ===== =====
</TABLE>
Net sales increased by $17.5 million, or 22.6%, to $94.7 million for the
fiscal quarter ended November 28, 1998 ("the fiscal 1998 quarter") from $77.2
million during the fiscal quarter ended November 29, 1997 ("the fiscal 1997
quarter"). Net sales for the nine months ended November 28, 1998 ("the first
nine months of fiscal 1998") increased by $71.0 million, or 43.1%, to $235.6
million compared to net sales of $164.6 million for the nine months ended
November 29, 1997 ("the first nine months of fiscal 1997"). These increases are
primarily attributable to continuing increases in the circulation of and order
volume resulting from the Company's core Northcountry catalog, and to a lesser
extent, the Company's Bed & Bath catalog.
Gross profit increased $9.4 million, or 23.9%, to $49.0 million during the
fiscal 1998 quarter from $39.5 million during the fiscal 1997 quarter. For the
first nine months of fiscal 1998, gross profit increased $36.3 million, or
43.0%, to $120.8 million from $84.4 million during the first nine months of
fiscal 1997. Expressed as a percentage of net sales, the Company's gross profit
was 51.7% and 51.3%, respectively, for the three and nine months ended November
28, 1998 versus 51.2% and 51.3%, respectively, for the corresponding fiscal 1997
periods. The increase in the fiscal 1998 quarter gross margin as well as the
resulting recovery in the Company's fiscal 1998 year-to-date gross margin are
primarily attributable to the traditionally higher margins realized on the
Company's fall merchandise mix offerings. To a lesser extent, the Company's
gross margin benefited from higher than expected realized margins on the sale of
discounted catalog items.
Selling, general and administrative expenses increased by $8.7 million, or
26.8%, to $41.1 million during the fiscal 1998 quarter from $32.4 million in the
fiscal 1997 quarter. Selling, general and administrative expenses increased by
$37.0 million, or 50.5%, to $110.3 million during the first nine months of
fiscal 1998 from $73.3 million during the first nine months of fiscal 1997.
Expressed as a percentage of net sales, the Company's selling, general and
administrative expenses were 43.4% and 46.8%, respectively, for the three and
nine months ended November 28, 1998 versus 41.9% and 44.5%, respectively, for
the corresponding fiscal 1997 periods. These dollar and percentage increases in
selling, general and administrative expenses are primarily attributable to the
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.
As a result of the foregoing, operating income increased by $0.7 million, or
10.4%, to $7.9 million for the fiscal 1998 quarter from $7.1 million for the
fiscal 1997 quarter. For the nine months ended November 28, 1998, operating
income decreased by $0.7 million, or 5.9%, to $10.5 million versus $11.2
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (CONTINUED)
million for the nine months ended November 29, 1997. Expressed as a percentage
of net sales, operating income was 8.3% and 4.5%, respectively, for the three
and nine months ended November 28, 1998 versus 9.3% and 6.8%, respectively, for
the corresponding fiscal 1997 periods.
The Company realized net income of $4.5 million for the fiscal 1998 quarter
versus $4.3 million for the fiscal 1997 quarter. 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 $0.44 and $0.43, respectively, for the fiscal 1998 quarter, versus net
income per basic and diluted share of $0.43 and $0.41, respectively, for the
fiscal 1997 quarter. For the first nine months of fiscal 1998, the Company
realized net income of $5.8 million versus net income of $6.8 million for the
first nine months of fiscal 1997. This equates to net income per basic and
diluted share of $0.57 and $0.55, respectively, for the first nine months of
fiscal 1998, versus net income per basic and diluted share of $0.67 and $0.65,
respectively, for the first nine months of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Coldwater Creek Inc. historically has 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 nine months ended November 28, 1998, operating activities provided
$4.7 million while financing activities provided $5.4 million. This compares to
the nine months ended November 29, 1997 when operating activities consumed $5.4
million and financing activities provided $5.0 million. On a comparative basis,
the fiscal 1998 year-to-date period primarily reflects the Company's lower net
income being more than offset by the positive cash flow effects of decreased
inventory purchases and receivables funding. Conversely, the fiscal 1998 year-
to-date period additionally reflects the positive cash flow effect of increased
deferred income taxes payable offset by decreased cash contributions from lower
levels of accounts payable and accrued expenses. The $10.2 million of positive
cash flow generated by operations during the fiscal 1998 quarter enabled the
Company to reduce the level of borrowings under its revolving line of credit to
$15.1 million at November 28, 1998 from $21.2 million at Auguts 29, 1998. The
current borrowing level reflects the Company's continued growth when contrasted
to the $10.3 million and $5.0 million outstanding at February 28, 1998 and
November 29, 1997, respectively.
The Company's overall merchandise inventory level was $62.1 million at
November 28, 1998, as compared to $53.1 million and $40.9 at February 28, 1998
and November 29, 1997, respectively. The current overall inventory level
reflects management's decision to accelerate receiving levels of selected
merchandise offered in the Christmas and Snowbreak catalog mailing series.
Management anticipates these items will sell down during the fourth fiscal
quarter and bring the overall inventory level more in-line with sales growth.
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
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 $9.9 million during the nine months ended November
28, 1998 versus $8.6 million during the nine months ended November 29, 1997. The
fiscal 1998 year-to-date period is comprised entirely of capital expenditures
for property and equipment purchases whereas the comparative period included
$7.3 million of such capital expenditures. The current period's capital
expenditures primarily reflect 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 $1.0 million and
$2.0 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.
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 have not been and 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
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 eleven additional outlet stores in the United States. The
subsidiary's management currently plans to open approximately two 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.
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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
OTHER MATTERS (CONTINUED)
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.
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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
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,
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RISK FACTORS (continued)
Management of Expanding Operations (continued)
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.
Competition
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new competitors
as well as increased competition from established companies. Although the
Company believes that it does not compete directly with any single company with
respect to its entire range of merchandise, within each merchandise category the
Company has significant competitors and may face new competition from new
entrants or existing competitors who focus on market segments currently served
by the Company. These competitors include large retail operations, including
some with catalog operations, other catalog and direct marketing companies and
international competitors. In addition, the Company has begun to experience
increased competition from various companies engaged in electronic commerce.
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.
17
<PAGE>
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
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NUMBER DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule
There were no reports filed on Form 8-K during the three months ended
November 28, 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 12th day of January 1999.
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
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
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FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> MAR-01-1998 MAR-02-1997
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