<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 August 28, 1999
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 August 28, 1999
- ---------------------------------- ----------------------------------------
Common Stock ($.01 par value) 10,228,967
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<PAGE>
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at August 28, 1999 and February 27, 1999...... 4
Consolidated Statements of Operations for the three and six month
periods ended August 28, 1999 and August 29, 1998......................... 5
Consolidated Statements of Cash Flows for the six month periods ended
August 28, 1999 and August 29,1998........................................ 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....... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 21
Item 2. Changes in Securities and Use of Proceeds........................ 21
Item 3. Defaults Upon Senior Securities.................................. 21
Item 4. Submission of Matters to a Vote of Security Holders.............. 21
Item 5. Other Information................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................. 21
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
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PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
August 28, February 27,
1999 1999
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,837 $ 149
Receivables 4,746 2,683
Inventories 47,563 56,474
Prepaid expenses 2,212 1,234
Prepaid catalog costs 4,265 4,274
-------------- --------------
Total current assets 61,623 64,814
Deferred catalog costs 5,188 3,195
Property and equipment, net of accumulated depreciation 34,081 31,236
Executive loans 1,376 1,376
-------------- --------------
Total assets $ 102,268 $ 100,621
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ - $ 9,938
Accounts payable 28,136 17,086
Accrued liabilities 10,168 7,668
Income taxes payable - 4,445
Deferred income taxes - 1,080
-------------- --------------
Total current liabilities 38,304 40,217
Deferred income taxes 238 298
-------------- --------------
Total liabilities 38,542 40,515
-------------- --------------
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,
10,228,967 and 10,183,117 issued and outstanding, respectively 102 102
Additional paid-in capital 39,892 39,287
Retained earnings 23,732 20,717
-------------- --------------
Total stockholders' equity 63,726 60,106
-------------- --------------
Total liabilities and stockholders' equity $ 102,268 $ 100,621
============== ==============
</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 for per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -----------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 59,812 $ 60,952 $ 124,925 $ 140,889
Cost of sales 29,883 30,968 60,795 69,093
-------------- -------------- -------------- -------------
Gross profit 29,929 29,984 64,130 71,796
Selling, general and administrative expenses 28,522 28,776 60,150 69,166
-------------- -------------- -------------- -------------
Income from operations 1,407 1,208 3,980 2,630
Interest, net, and other 161 (278) 201 (525)
Gain on sale of Milepost Four assets 826 - 826 -
-------------- -------------- -------------- -------------
Income before provision for income taxes 2,394 930 5,007 2,105
Provision for income taxes 948 374 1,992 846
-------------- -------------- -------------- -------------
Net income $ 1,446 $ 556 $ 3,015 $ 1,259
============== ============== ============== =============
Net income per share - Basic $ 0.14 $ 0.05 $ 0.30 $ 0.12
============== ============== ============== =============
Net income per share - Diluted $ 0.14 $ 0.05 $ 0.29 $ 0.12
============== ============== ============== =============
</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 28, August 29,
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,015 $ 1,259
-------------- -------------
Noncash items:
Depreciation and amortization 3,272 2,549
Deferred income tax benefit (60) (589)
Gain on sale of Milepost Four assets (826) -
Net change in current assets and liabilities:
Receivables (1,467) (1,255)
Inventories 8,315 (3,410)
Prepaid expenses (978) 1,962
Prepaid catalog costs 9 (1,185)
Accounts payable 10,330 (5,768)
Accrued liabilities 2,500 349
Current and deferred income tax liabilities (5,525) -
(Increase) Decrease in Deferred catalog costs (1,993) 661
----------------- -------------
Net cash provided by (used in) operating activities $ 16,592 $ (5,427)
----------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment $ (6,117) $ (6,257)
Proceeds from sale of Milepost Four assets 1,546 -
----------------- -------------
Net cash used in investing activities $ (4,571) $ (6,257)
----------------- -------------
FINANCING ACTIVITIES:
Net (repayments of) advances under revolving line of credit $ (9,938) $ 10,892
Net proceeds from exercise of stock options 605 540
----------------- -------------
Net cash (used in ) provided by financing activities $ (9,333) $ 11,432
----------------- -------------
Net increase (decrease) in cash and cash equivalents 2,688 (252)
Cash and cash equivalents, beginning 149 331
----------------- -------------
Cash and cash equivalents, ending $ 2,837 $ 79
================= =============
SUPPLEMENTAL CASH FLOW DATA:
Cash paid for interest $ 45 $ 394
Cash paid for income taxes 8,519 522
</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 27, 1999.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at the date of the condensed consolidated
financial statements. Actual results could differ from those estimates.
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 condensed consolidated financial statements
have been reclassified to be consistent with the current period presentation.
3. RECENTLY ADOPTED ACCOUNTING STANDARDS
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 was effective for the Company's fiscal
1999 financial statements. The adoption of SOP 98-1 did not have a material
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
was effective for the Company's fiscal 1999 financial statements. The adoption
of SOP 98-5 did not have a material impact on the Company's consolidated
financial statements.
7
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, the FASB issued Statement
of Financial Accounting Standard No. 137 delaying the effective date of SFAS No.
133. SFAS No. 133, as amended, is effective for the Company's fiscal 2001
financial statements. As the Company currently is not a party to any derivative
financial instruments and does not anticipate becoming a party to any derivative
instruments, management does not currently expect the adoption of SFAS No. 133
to have a material impact on the Company's consolidated financial statements.
5. EXECUTIVE LOAN PROGRAM
Effective June 30, 1997, the Company established an Executive Loan Program under
which the Company may make, at its sole discretion and with prior approvals from
the Chief Executive Officer and the Board of Directors' Compensation Committee,
secured long-term loans to key executives. Each loan is secured by the
executive's personal net assets, inclusive of all vested stock options in the
Company, bears interest at three percent per annum, and becomes due and payable
on the earlier of (i) the date ten days before the date on which the vested
stock options serving as partial security expire or (ii) ninety days from the
date on which the executive's employment with the Company terminates for any
reason.
6. EARNINGS PER SHARE
The following is a reconciliation of the number of common shares used in the
computations of net income per basic and diluted share. Net income per basic
common share is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Net income per diluted common
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. (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,446 $ 556 $ 3,015 $ 1,259
======= ======= ======= =======
Average shares outstanding used to
determine net income per basic common
share 10,209 10,169 10,196 10,150
Net effect of dilutive stock options based
on the treasury stock method using average
market price (1) 376 386 289 427
------- ------- ------- -------
Average shares used to determine net
income per diluted common share 10,585 10,555 10,485 10,577
======= ======= ======= =======
</TABLE>
(1) Anti-dilutive stock options excluded from the above computations for the
three months ended August 28, 1999 and August 29, 1998 were 276,527 and
390,008, respectively. Anti-dilutive stock options excluded from the above
computations for the six months ended August 28, 1999 and August 29, 1998
were 299,827 and 387,008, respectively.
8
<PAGE>
COLDWATER CREEK INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. CONTINGENCIES
The Company is involved in litigation and administrative proceedings primarily
arising in the normal course of its business. In the opinion of management, the
Company's recovery, if any, or the Company's liability, if any, under any
pending litigation or administrative proceedings would not materially affect its
financial position, results of operations or cash flows.
The Company's retailing business is currently based solely in the states of
Idaho, West Virginia and Wyoming, and accordingly, the Company only collects
sales taxes from customers residing in those states. The Company's wholly-owned
subsidiary, Coldwater Creek Outlet Stores Inc., owns and operates outlet stores
throughout the United States and pays sales tax and applicable corporate income,
franchise and other taxes to the states in which outlets are located. Various
states have attempted to collect back sales and use tax from direct marketers.
The U.S. Supreme Court has held that the various states, absent congressional
legislation, may not impose tax collection obligations on an out-of-state mail
order company whose only contacts with the taxing state are the distribution of
catalogs and other advertisement materials through the mail, and whose
subsequent delivery of purchased goods is by mail or interstate common carriers.
The Company has not received an assessment from any state. The Company
anticipates that any legislative changes, if adopted, would be applied only on a
prospective basis.
8. SALE OF MILEPOST FOUR CATALOG
In late June of 1999, the Company completed the sale of the assets underlying
its Milepost Four men's apparel catalog. The purchase price of $2.25 million
resulting in a net pre-tax, non-operating gain of $826,000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion may contain forward-looking statements, including
statements regarding the Company's strategy, sales trends and operations, within
the meaning of the federal securities laws which involve risks and
uncertainties. When used in this discussion, the words "anticipate," "believe,"
"estimate," "expect," and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. These
statements are based on management's current expectations and the Company's
actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Factors
that could cause or contribute to such differences include, among others, the
following: those associated with offering apparel merchandise such as long lead
times, increased inventory requirements, merchandise returns, and high shipping
costs; general economic and business conditions and other factors outside the
Company's control such as customer response rates, consumer preferences, and
fluctuations in paper and postage costs; competition; success of operating
initiatives; development and operating costs; advertising and promotional
efforts; brand awareness; the existence or absence of adverse publicity;
availability, locations and terms of sites for store development; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs; and
construction costs; as well as those factors discussed below and elsewhere in
this Form 10-Q Quarterly Report. References to a fiscal year refer to the
calendar year in which such fiscal year commences. The Company's fiscal year
ends on the Saturday closest to February 28. References to three and six month
periods refer to the thirteen and twenty-six weeks ended on the date indicated.
Overview
- ---------
Coldwater Creek Inc. (the "Company") is a national, multi-channel retailer of
apparel, gifts, jewelry and home furnishings. The Company currently markets its
merchandise primarily through three distinct direct mail catalogs, an
interactive Internet web site (www.coldwatercreek.com) and two full-line retail
stores in Sandpoint, Idaho and Jackson Hole, Wyoming. Northcountry, which was
introduced in 1985, is the Company's core catalog and features casual,
comfortable apparel, hard-to-find jewelry, distinctive artwork, gifts and items
for the home. The Company's premium catalog for women, Spirit of the West, was
introduced in 1993 and features fashionable, upscale apparel and hard-to-find
jewelry and accessories. Responding to customer demand for the selected,
upscale bed and bath products periodically featured in Northcountry and Spirit
of the West, the Company introduced its Bed & Bath catalog in August of 1997.
With the objective of further cultivating the success Bed & Bath has achieved,
the Company recently retitled this catalog as "Home" and expanded its
merchandise offerings to include furnishings for every room of the house.
In recognition of the rapidly increasing level of customer activity experienced
on its web site during early fiscal 1999, the Company recently accelerated a
number of related initiatives. In June of 1999, the Company significantly
increased the number of clearance items available for viewing and purchase on
its web site from approximately 70 items to more than 600 items. In July of
1999, the Company made its entire spectrum of catalog merchandise, consisting of
over 15,000 items, available for viewing and purchase on its web site. The
Company also has recently enhanced the usability and informational content of
its web site by adding a number of search and inquiry capabilities, including
detailed product specifications. So as to further increase the web site's appeal
to holiday shoppers, the Company plans to shortly add technology that will
enable a customer at the click of a button to instantaneously communicate with a
customer service representative via a live, text-based chat session.
Through its wholly-owned subsidiary, Coldwater Creek Outlet Stores Inc., the
Company currently operates twelve outlet stores throughout the United States.
These outlet stores, as well as periodic clearance catalogs and the web site,
serve as the Company's primary promotional vehicles for the disposition of
excess merchandise inventory. As a result of the potential efficiency of the
Company's web site as a cost effective disposition vehicle, the Company
currently plans to close three outlets by the end of fiscal 1999.
The Company targets middle-to-upper income households and seeks to differentiate
itself from other catalog, retail and e-commerce operations by offering
exceptional value through superior customer service and a merchandise assortment
that reflects a casual, uniquely American spirit. The Company believes that the
successful execution of its marketing and merchandising strategies coupled with
its high customer service standards and efficient order entry and fulfillment
operations have allowed it to develop a unique brand identity and strong
relationships with its loyal customer base. The Company plans to continue to
stimulate future long-term growth through a variety of strategic initiatives
designed to promote customer
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Overview (continued)
- --------------------
use of the Company's web site, expand merchandise offerings, yield higher
customer response rates and increase catalog circulation.
A key element of the Company's overall marketing strategy has been to pursue an
aggressive catalog circulation strategy when market conditions permit. As a
result of this ongoing marketing investment in current and future customer
growth, the costs of which constitute the substantial majority of each fiscal
period's selling, general and administrative expenses, the Company's proprietary
mailing list increased to 8.1 million names at August 28, 1999 as compared to
7.4 million names and 6.3 million names at February 27, 1999 and August 29,
1998, respectively. The Company's active customer file, defined as customers who
have made a purchase during the preceding twelve months, consisted of 2.0
million customers at August 28, 1999 and February 27, 1999 as compared to 1.9
million customers at August 29, 1998.
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 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 and
home furnishings 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 and building its web site capacity to handle expected
Holiday and Christmas season peak volume. In addition, due to the larger
percentage of gifts and accessories traditionally offered in the second half of
the fiscal year related to holiday gift giving, the Company generally 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. The Company
does not believe its historical results of operations will necessarily be
indicative of future results.
11
<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 28, August 29, August 28, August 29,
(as a percentage of net sales) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.0 50.8 48.7 49.0
----- ----- ----- -----
Gross profit 50.0 49.2 51.3 51.0
Selling, general and
administrative expenses 47.7 47.2 48.2 49.1
----- ----- ----- -----
Income from operations 2.3 2.0 3.2 1.9
Interest, net, and other 0.3 (0.5) 0.2 (0.4)
Gain on sale of Milepost Four assets 1.4 0.0 0.7 0.0
----- ----- ----- -----
Income before provision for
income taxes 4.0 1.5 4.0 1.5
Provision for income taxes 1.6 0.6 1.6 0.6
----- ----- ----- -----
Net income 2.4% 0.9% 2.4% 0. %
===== ===== ===== =====
</TABLE>
Note: Certain of the above sub-totals and totals may vary arithmetically due to
the effects of rounding.
The Company realized net sales of $59.8 million from the mailing of 24.6 million
catalogs during the three months ended August 28, 1999 ("the fiscal 1999
quarter") versus net sales of $61.0 million from the mailing of 26.9 million
catalogs during the three months ended August 29, 1998 ("the fiscal 1998
quarter"). For the six months ended August 28, 1999 ("the first half of fiscal
1999"), the Company realized net sales of $124.9 million from the mailing of
61.1 million catalogs as compared to net sales of $140.9 million from the
mailing of 77.1 million catalogs during the six months ended August 29, 1998
("the first half of fiscal 1998"). The Company's previously discontinued
Milepost Four men's apparel catalog, which was sold during the fiscal 1999
quarter, contributed $2.6 million of net sales from the mailing of 2.1 million
catalogs and $6.3 million of net sales from the mailing of 6.8 million catalogs
during the fiscal 1998 quarter and first half, respectively.
Consistent with the planned mailing strategy disclosed in the Company's most
recent Form 10-K Annual Report, the Company maintained a conservative posture
towards prospective catalog mailings during the first half of fiscal 1999.
Instead, the Company's focus remained on cultivating its proprietary house file,
strengthening its balance sheet position, improving operating cash flow and
streamlining costs while opening its new 600,000 square foot East Coast
Operations Center near Parkersburg, West Virginia. This significantly contrasts
with the first half of fiscal 1998 during which the Company aggressively
prospected for additional sales by mailing more catalogs but realized a
significantly lower return on its marketing investment.
Excluding the effects of Milepost Four and reflecting the improved return
realized on its marketing investment, the Company's net sales for the fiscal
1999 quarter increased $1.4 million, or 2.4%, despite the mailing of 0.2
million, or 0.8%, fewer catalogs. More dramatically reflecting the increased
effectiveness of its current year catalog mailings, net sales for the first half
of fiscal 1999 decreased by 7.2%, or $9.7 million, from the mailing of 13.1%, or
9.2 million, fewer catalogs. With the objectives outlined in the preceding
paragraph now substantially met, the Company has directed its focus for the
balance of fiscal 1999 on aggressively pursuing increased sales with its new
fall, winter and holiday merchandise offerings.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------------------
The Company's e-commerce sales continue to grow at a rapid rate, realizing
milestones of one million dollars and two million dollars in online net sales
during the months of August and September 1999, respectively. Another favorable
development has been that approximately one-quarter of the customers patronizing
the web site have had no previous history with the Company. With continued
promotion of the Company's web site and the planned addition of real-time, text-
based customer service assistance beginning in November, management believes
that e-commerce sales will continue to increase at a rapid rate during the
upcoming holiday season and thereafter. The Company's Internet Commerce Division
is personally led by Dennis Pence, the Company's Co-Founder and Chief Executive
Officer.
While gross profit for the comparative fiscal 1999 and 1998 quarters remained
relatively unchanged at $29.9 million and $30.0 million, respectively, gross
profit for the first half of fiscal 1999 decreased $7.7 million, or 10.7%, to
$64.1 million from $71.8 million for the first half of fiscal 1998. However, in
contrast, the Company's gross profit percentages increased to 50.0% and 51.3%
for the three and six months ended August 28, 1999, respectively, from 49.2% and
51.0% for the corresponding fiscal 1998 periods. The lower gross profit
realized during the first half of fiscal 1999 primarily is attributable to the
planned reduction in net sales from contributing, yet less profitable,
prospective catalog mailings. The improved gross margins realized during the
fiscal 1999 periods primarily are the result of increased profit realization on
excess merchandise inventories sold through more cost effective disposition
channels, primarily the Company's outlet stores and web site, and improved
pricing obtained from vendors.
Selling, general and administrative expenses ("SG&A") modestly decreased to
$28.5 million during the fiscal 1999 quarter from $28.8 million in the
comparable fiscal 1998 quarter. However, during the first half of fiscal 1999,
SG&A expenses significantly decreased by $9.0 million, or 13.0%, to $60.2
million compared to $69.2 million during the first half of fiscal 1998. SG&A
expenses increased as a percentage of net sales to 47.7% during the fiscal 1999
quarter from 47.2% during the fiscal 1998 quarter primarily as a result of the
lower sales leverage, and to a lesser extent, approximately $0.4 million in non-
recurring, start-up costs associated with the July 1999 opening of the permanent
East Coast Operations Center. In contrast, SG&A expenses decreased to 48.2% of
net sales for the first half of fiscal 1999 from 49.1% for the first half of
fiscal 1998 primarily as a result of the decreased catalog circulation costs
incurred in connection with the aforementioned planned contraction in
prospective catalog mailings.
As a result of the foregoing, operating income increased by $0.2 million, or
16.5%, to $1.4 million for the fiscal 1999 quarter from $1.2 million for the
fiscal 1998 quarter. Operating income for the first half of fiscal 1999
increased by $1.4 million, or 51.3%, to $4.0 million from $2.6 million during
the first half of fiscal 1998. Expressed as a percentage of net sales,
operating income was 2.3% and 3.2% for the fiscal 1999 quarter and first half,
respectively, versus 2.0% and 1.9% for the comparative fiscal 1998 periods.
During the fiscal 1999 quarter, the Company realized $0.2 million in net
interest income as compared to $0.3 million in net interest expense during the
comparable fiscal 1998 quarter. Similarly, for the first half of fiscal 1999,
the Company realized $0.2 million in net interest income as compared to $0.5
million in net interest expense during the first half of fiscal 1998. These
favorable reversals are substantially attributable to the Company's
significantly improved operating cash flows which in turn enabled it to fully
repay its preceding year-end line of credit balance and to accumulate a modest
cash balance. The Company also realized a non-recurring, pre-tax gain of $0.8
million from the aforementioned sale of its Milepost Four catalog during the
fiscal 1999 quarter.
The Company reported net income for the fiscal 1999 quarter of $1.4 million, an
increase of 160.1% from $0.6 million for the fiscal 1998 quarter. Basic and
diluted net income per share was $0.14 for the fiscal 1999 quarter versus basic
and diluted net income per share of $0.05 for the fiscal 1998 quarter. Net
income for the first half of fiscal 1999 was $3.0 million as compared to net
income of $1.3 million for the first half of fiscal 1998. Basic and diluted net
income per share was $0.30 and $0.29 for the first half of fiscal 1999,
respectively, versus basic and diluted net income per share of $0.12 for the
first half of fiscal 1998.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
- -------------------------------
Coldwater Creek has historically funded its growth through a combination of
funds generated from operations, trade credit arrangements and short-term bank
credit facilities. Working capital requirements generally precede the
realization of sales. The Company typically draws on its working capital lines
to produce catalogs and increase inventory levels in anticipation of future
sales realization. Standard trade credit arrangements typically require the net
amount due to be paid within sixty days of receipt of the inventory or services.
The Company has an agreement with First Security Bank, N.A., a major Northwest
commercial bank, providing for $50.0 million in credit facilities, consisting of
an unsecured revolving line of credit of $47.4 million (with a sub-limit of $7.0
million for letters of credit) and a term standby letter of credit of $2.6
million. At the option of the Company, the interest rate is the bank's Prime
Rate or Adjusted LIBOR [i.e., rate per annum equal to the quotient of the London
Interbank Offered Rate divided by one (1) minus the Eurocurrency Reserve
Requirement for the applicable Interest Period, rounded upward, if necessary, to
the nearest one-sixteenth of one percent], increased or decreased by a margin
based upon the Company's then EBITDA Coverage Ratio, as defined. The agreement
provides that the Company must satisfy certain specified EBITDA, leverage and
current ratio requirements and places restrictions on the Company's ability to,
among other things, sell assets, participate in mergers, incur debt, pay
dividends, and make investments or guarantees. The credit facility has a
maturity date of June 30, 2001.
Operating activities generated $16.6 million of positive cash flow during the
first half of fiscal 1999 compared to $5.4 million of negative cash flow during
the first half of fiscal 1998. On a comparative basis, the first half
of fiscal 1999 primarily reflects the Company's higher net income complimented
by the positive cash flow effects of reduced merchandise inventories and
increased accounts payable and accrued liabilities. These positive cash flows
were partially offset primarily by the reversal of the non-operating gain on the
sale of Milepost Four and the negative cash flow effects of increased prepaid
expenses and deferred catalog costs and decreased income tax liabilities. The
net positive operating cash flow, as well as $1.5 million in net investing
proceeds from the sale of Milepost Four assets, were primarily utilized to fund
$6.1 million of capital equipment expenditures, to fully pay-off the Company's
$9.9 million revolving line of credit balance and to increase the Company's cash
and cash equivalents balance by $2.7 million.
Investing activities consumed $4.6 million and $6.3 million of cash during the
fiscal 1999 and 1998 periods, respectively, with cash outlays consisting solely
of capital equipment purchases. The fiscal 1999 capital expenditures primarily
reflect the cost of material handling, telecommunication and information systems
for the permanent East Coast Operations Center discussed below, and to a lesser
degree, hardware and software additions and upgrades to corporate systems,
including the e-commerce web site. Capital expenditures directly attributable
to the Company's Year 2000 compliance program discussed below have been, and are
expected to remain, immaterial.
Financing activities during the first half of fiscal 1999 primarily consisted of
the repayment of the Company's previous $9.9 million revolving line of credit
balance whereas the fiscal 1998 quarter primarily consisted of $10.9 million in
line of credit advances. The Company also realized $0.6 million and $0.5
million from the exercising of employee stock options during the fiscal 1999 and
1998 periods, respectively. At August 28, 1999, the Company had no short or
long-term debt as compared to outstanding revolving line of credit balances of
$9.9 million and $21.2 million at February 27, 1999 and August 29, 1998,
respectively.
As a result of the foregoing, the Company had $23.3 million in working capital
at August 28, 1999 as compared to $24.6 million and $12.8 million at February
27, 1999 and August 29, 1998, respectively. The Company's current ratio was 1.6
at August 28, 1999 as compared to 1.6 at February 27, 1999 and 1.2 at August 29,
1998. Reflecting management's continuing efforts at increasing inventory
turnover and productivity, the Company's inventories of $47.6 million at August
28, 1999 are 15.8% lower than the
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
levels which existed at February 27, 1999 and August 29, 1998.
On June 12, 1998, the Company executed a definitive operating lease agreement
with the Wood County Development Authority to establish an East Coast Operations
Center near Parkersburg, West Virginia. This agreement primarily was entered
into in order to alleviate certain capacity constraints which were being
experienced at the Company's distribution center in Sandpoint, Idaho and to
reduce the costs incurred in shipping certain merchandise orders to the majority
of the Company's customers which are located in the eastern United States. The
new East Coast Operations Center, which opened in July 1999, approximates
600,000 square feet and is situated on approximately 60 acres, allowing for
future expansion.
In exchange for the Company's willingness to establish a long-term presence near
Parkersburg, the State of West Virginia made available to the Company, at a
nominal annual lease cost, a temporary 120,000 square foot facility from which
the Company conducted certain order fulfillment operations while the permanent
facility was under construction. The establishment of the interim East Coast
operations allowed the Company's management to implement new technologies and
train new employees on a reduced but increasing scale pending completion of the
permanent operations center.
The addition of the permanent East Coast Operations Center, supported by a new
information technology platform, provides the Company with a consolidated base
of operations capable of processing 120,000 customer orders a day thereby
enabling the Company to continue its historical commitment to providing the
highest possible standard of customer service. In addition, the new facility
enables the Company to rapidly expand its Internet sales channel, immediately
build upon the success of its Bed & Bath line by increasing the current offering
of home furnishings in the Company's recently debuted "Home" catalog and
potentially expand other merchandise category offerings. The Company also
recently transitioned the operations of its Parkersburg customer service call
center, which previously resided in other leased premises, into the new
operations center.
The Company will incur annual lease expense for the permanent East Coast
Operations Center of approximately $2.2 million over the twenty year lease term.
The lease allows the Company, at its option, to (i) purchase the underlying land
and facility at a then determined fair market value or (ii) exercise up to four
successive five-year extensions.
Management's long-term brand building strategy includes the selective opening of
highly visible retail stores in high traffic areas, including major urban areas
and "destination" locations near major national parks or other resort areas. The
Company currently operates two full-line retail stores in Sandpoint, Idaho and
Jackson Hole, Wyoming and is scheduled to open two additional full-line retail
stores in Seattle, Washington and Kansas City, Missouri during November 1999.
Management will continue to consider the opening of retail stores in the future
as prime locations become available. The Company does not currently plan to open
any additional stores during the balance of fiscal 1999 but is evaluating the
possibility of establishing four additional full-line retail stores during
fiscal 2000. It is contemplated that each such retail store would be leased with
an average initial cash investment per store being limited to leasehold
improvements and inventory in the approximate range of $2 million to $4 million.
During the balance of fiscal 1999, the Company plans to make between $3 million
and $6 million in additional capital expenditures to support its anticipated
continued growth. The majority of these capital expenditures will constitute
leasehold improvements for new retail store locations, technological upgrades
for the interactive commerce web site and additional equipment and technology
for the permanent East Coast Operations Center. These expenditures are expected
to be funded from available cash balances, and to the extent necessary, the
Company's existing bank credit facility.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Company believes that cash flow from operations and borrowing capacity under
its bank credit facility will be sufficient to support operations and future
growth for the foreseeable future. Thereafter, the Company may be required to
seek additional sources of funds for continued or accelerated growth and there
can be no assurance that such funds will be available on satisfactory terms.
Failure to obtain such financing could delay or prevent the Company's planned
growth, which could adversely affect the Company's business, financial position,
results of operations and cash flows.
Other Matters
- -------------
Future Outlook
- --------------
Beginning in the fourth quarter of fiscal 1997, the Company began to experience,
as did other direct retailers, a significant softening of consumer demand
particularly for upscale womens' fashions such as those featured by the Company
in its Spirit of the West catalog. In light of the then uncertain state of this
niche of the marketplace, the Company modified its growth expectations and
proceeded cautiously in its mailings of Spirit of the West. Particularly, the
Company curtailed its previously aggressive prospect mailings of Spirit of the
West until a reasonably sustained improvement in consumer demand for upscale
womens' fashions was noted. While awaiting such upturn, the Company and its new
chief merchant embarked on a program to significantly revamp the Spirit of the
West fashions which began being featured in the Company's Fall 1999 offerings.
Although the Company has recently noted significant improvement in consumer
demand for upscale womens' apparel, should this positive trend not be sustained
the growth and financial performance of the Company's Northcountry and Home
catalogs could be diminished by the financial performance of Spirit of the West.
Year 2000 Compliance
- --------------------
Coldwater Creek has substantially completed its enterprise-wide Year 2000
project. A project leader coordinated a team that included representatives from
every department. A comprehensive project plan that defined each objective and
task in detail guided 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 has evaluated 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
have been received and 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. Year
2000 compliance provisions have also been added to all significant contracts and
purchase orders.
The project team's review of the Company's major systems identified two
application systems and two system software components which were not Year 2000
compliant. The two application systems, which were an interface to the
Company's accounting system and a payroll system, have been upgraded to be Year
2000 compliant at no material cost to the Company.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Other Matters (continued)
- -------------------------
Year 2000 Compliance (continued)
- --------------------------------
The internal testing of all other applications systems for Year 2000 compliance
is complete. The Year 2000 compliance shortcomings detected in these systems
were 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
was immaterial.
The Company's Year 2000 compliance program also included the testing of all
major systems containing embedded technologies. The Year 2000 compliance
shortcomings detected in these systems generally involved telecommunications
components and were minor in nature. The correcting upgrades were completed
during the first calendar quarter of 1999 at an immaterial cost to the Company.
The Company has completed its Year 2000 compliance evaluation program.
Contingency plans to manage all identified areas of perceived risk will be
completed by November 1999. At this time, the Company continues to believe that
the balance of the costs to be incurred in connection with its Year 2000
compliance program will be immaterial to the Company's financial position,
results of operations and cash flows.
Recently Issued Accounting Standards Not Yet Adopted
- ----------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, the FASB issued Statement
of Financial Accounting Standard No. 137 delaying the effective date of SFAS No.
133. SFAS No. 133, as amended, is effective for the Company's fiscal 2001
financial statements. As the Company currently is not a party to any derivative
financial instruments and does not anticipate becoming a party to any derivative
instruments, management does not currently expect the adoption of SFAS No. 133
to have a material impact on the Company's consolidated financial statements.
Risk Factors
- -------------
Competition
- ------------
The markets for the Company's merchandise are highly competitive, and the recent
growth in these markets has encouraged the entry of many new competitors as well
as increased competition from established companies. Although the Company
believes that it does not compete directly with any single company with respect
to its entire range of merchandise, within each merchandise category the Company
has significant competitors and may face new competition from new entrants or
existing competitors who focus on market segments currently served by the
Company. These competitors include large retail operations, including some with
catalog operations, other catalog and direct marketing companies and
international competitors. The recent addition of Internet commerce operations
by a number of these retailers, as well as the emergence of a number of stand-
alone e-commerce companies, has introduced a further element of competition into
the Company's markets. The Company is in direct competition with more
established catalog operations, some with substantially greater experience in
selling similar merchandise and which may focus on prospective customers sharing
some of the demographic characteristics of the Company's customers. Any failure
on the part of the Company to successfully market its merchandise or to compete
effectively against such competitors could have a material adverse affect on the
Company's growth and could adversely affect the Company's business, financial
position, results of operations and cash flows.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors (continued)
- -------------------------
Competition (continued)
- -----------------------
Many of these competitors are larger and have significantly greater financial,
marketing and other resources than the Company. Increased catalog mailings and
Internet solicitations by the Company's competitors may adversely affect
response rates to the Company's catalog mailings and Internet offerings. In
addition, because the Company sources the majority of its merchandise from
vendors located in the United States, where labor and production costs may be
higher than in foreign countries, there can be no assurance that the Company's
merchandise will or can be competitively priced when compared to merchandise
offered by other retailers. While the Company believes that it has been able to
compete successfully because of its brand recognition, the exclusivity and broad
range and quality of its merchandise, including its private label merchandise
offerings, and its customer service policies, there can be no assurance that the
Company will be able to maintain or increase its market share in the future.
The failure of the Company to compete successfully could materially and
adversely affect the Company's business, financial position, results of
operations and cash flows.
Reliance on Catalog Operations
- ------------------------------
The Company's success for the foreseeable future depends predominately on the
success of its catalog operations, which the Company believes is achieved
through the efficient targeting of its mailings, a high volume of prospect
mailing when market conditions permit, appropriate shifts in the Company's
merchandise mix and the Company's ability to achieve adequate response rates to
its mailings. Catalog mailings entail substantial paper, postage, merchandise
acquisition and human resource costs, including costs associated with catalog
development and increased inventories, virtually all of which are incurred prior
to the mailing of each catalog. As a result, the Company is not able to adjust
the costs being incurred in connection with a particular mailing to reflect the
actual performance of the catalog. If, for any reason, the Company were to
experience a significant shortfall in anticipated revenue from a particular
mailing, and thereby not recover the costs associated with that mailing, the
Company's financial condition, results of operations and cash flows could be
adversely affected. In addition, response rates to the Company's mailings and,
as a result, revenues generated by each mailing, can be affected by factors such
as consumer preferences, economic conditions, the timing and mix of catalog
mailings and changes in the merchandise mix, several of which may be outside the
Company's control. Furthermore, the Company historically has experienced
fluctuations in the response rates to its catalog mailings. Any inability of the
Company to accurately target the appropriate segment of the consumer catalog
market or to achieve adequate response rates could result in lower sales,
significant markdowns or write-offs of inventory, increased merchandise returns,
lower results of operations and decreased cash flows.
Risks Associated with Growth Strategy
- -------------------------------------
The Company's growth strategy primarily includes the following components:
introducing expanded catalog and merchandise offerings, publishing new catalog
titles, increasing catalog circulation, expanding the Company's customer base
through aggressive prospect mailings when market conditions permit, and
increasing the use of other marketing channels, such as retail stores and the
Internet. The Company's growth strategy involves various risks, including a
reliance on a high degree of prospect mailings when market conditions permit,
which may lead to less predictable response rates. The failure of the Company
to successfully implement any or all of its growth strategies could have a
material adverse effect on the Company's business, financial position, results
of operations and cash flows.
The Company believes its growth is attributable in large part to the Company's
success in meeting the merchandise, timing and service demands of an expanding
customer base with certain demographic characteristics. There can be no
assurance that the Company will be able to continually identify and offer new
merchandise that appeals to its customer base or that the introduction of new
merchandise categories or new marketing or distribution strategies, such as the
sale of the Company's merchandise through new
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors (continued)
- -------------------------
Risks Associated with Growth Strategy (continued)
- -------------------------------------------------
catalog titles, retail stores or the Internet, will be successful or profitable,
or that any such efforts will achieve sustainable acceptance in the market. Any
inability on the part of the Company to sustain the growth of its catalog
operations and sales, to maintain its current average order size and response
rates or to leverage the success of existing catalog titles to new merchandise
lines, catalogs, retail stores and the Internet could have a material adverse
effect on the Company's business, financial position, results of operations and
cash flows.
Management's long-term brand building strategy includes the selective opening of
highly visible retail stores in high traffic areas, including major urban areas
and "destination locations" such as locations near major national parks or other
resort areas. The Company currently operates two full-line retail store
complexes in Sandpoint, Idaho and Jackson Hole, Wyoming and plans to open two
additional stores in Seattle, Washington and Kansas City, Missouri during
November 1999. Management will continue to consider the opening of additional
retail stores in the future as prime locations become available. To date, the
Company has had limited experience operating retail stores, particularly stores
outside the vicinity of its headquarters. The cost of opening a retail store
varies dramatically depending on several factors such as whether the Company
purchases or leases the facilities in which the store will be placed, the size
of the store, the location of the store as well as the attendant differences in
the cost of real estate and the type and range of merchandise to be offered at
the store. In addition, retail store operations entail substantial fixed costs,
including costs associated with real estate, inventory maintenance and staffing.
Failure to successfully implement this store-based strategy could result in
significant write-offs of inventory and fixtures and could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows.
Management's long-term brand building strategy also includes increased promotion
of the Company's interactive Internet commerce web site. While Internet-related
sales remained immaterial to the Company's overall financial results for the
fiscal year ended February 27, 1999 and the first half of fiscal 1999, the
increases realized from this new sales channel have been substantial on a
percentage basis. As a result, the Company recently formed a dedicated Internet
Commerce Division which is personally led by Dennis Pence, the Company's Co-
Founder and Chief Executive Officer. In June of 1999, the Company expanded the
number of clearance items available for viewing and sale on its web site from
approximately 70 items to over 600 items. In July of 1999, the Company began
offering its entire spectrum of catalog merchandise, consisting of over 15,000
items, for viewing and sale on its web site. The Company also has recently
improved the site's structure and capacity to handle additional customer demand
and enhanced its usability and informational content by adding a number of
search and inquiry capabilities, including detailed product specifications and
real-time inventory availability. The development and expansion of the
Company's e-commerce capabilities will continue to entail substantial costs,
including costs associated with computer hardware and software, technical
staffing and continuing web site maintenance and development. Additionally,
substantial costs will be incurred in the marketing of the Company's web site.
Failure to successfully implement and maintain this Internet-based strategy
could result in significant write-offs of inventory and computer hardware and
software and could have a material adverse effect on the Company's business,
financial position, results of operations and cash flows.
In addition, the continued expansion of the Company's Internet operations entail
significant risks including the uncertainty of widespread consumer acceptance
and use of the Internet as a way to buy products. This consumer practice is at
an early state of development, and demand and continued market acceptance is
uncertain. The Company cannot predict the number of consumers that will be
willing to shift their purchasing habits to online retailers. The Internet may
not become a viable commercial marketplace due to inadequate development of
network infrastructure and enabling technologies that address consumer concerns
about network performance, security, reliability, speed of access, and ease of
use. In addition, the Internet's viability as a commercial marketplace could be
adversely affected by increased government regulation. Changes in or
insufficient availability of telecommunications or other services to support the
Internet also could result in slower response times and adversely affect general
usage of the Internet. Also, negative publicity and consumer concern about the
security of transactions conducted on the Internet and the privacy of users may
also inhibit the growth of commerce on the Internet. There can be no assurances
that e-commerce sales will continue to increase at current rates if at all.
The Company may need to raise additional funds in order to support greater
expansion, develop enhanced services, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated or seasonal requirements.
In addition, various elements of the Company's growth strategies may require
additional capital, including its plans to broaden existing merchandise lines,
including its private label offerings, its plans to introduce new merchandise
and catalog titles and its aggressive mailing program when market conditions
permit. There can be no assurance that funds will be available to the Company
on terms satisfactory to the Company when needed.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Risk Factors (continued)
- -------------------------
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. Recently, the
Company significantly expanded its warehousing and distribution capabilities.
There can be no assurance that the upgrades, improvements and expansions in the
Company's information or telephone systems or its current expansion of its
warehousing and 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 effect on the Company's business, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Coldwater Creek is not exposed to financial market risks from changes in foreign
currency exchange rates and is only minimally impacted by changes in interest
rates. Borrowings under the Company's bank credit facility are at a variable
rate of interest and, based on the current level of borrowings, the Company
experiences only modest changes in interest expense when market interest rates
change. However, in the future, the Company may enter into transactions
denominated in non-U.S. currencies or increase the level of its borrowings,
which could increase the Company's exposure to these market risks. The Company
has not used, and currently does not contemplate using, any derivative financial
instruments.
20
<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 10, 1999. At such meeting, the following proposals were voted upon
and approved:
1. Proposal No. 1: To elect to the Board two directors.
<TABLE>
<CAPTION>
For Withhold
--- --------
<S> <C> <C>
Ann Pence 9,486,667 142,876
Curt Hecker 9,485,983 143,560
</TABLE>
2. Proposal No. 2: Ratify the selection of Arthur Andersen LLP as
independent public accountants for the Company for the fiscal year ending
March 4, 2000.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
9,621,345 4,484 3,714
</TABLE>
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 August 28,
1999.
21
<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 October 1999.
COLDWATER CREEK INC.
By: /s/ Donald A. Robson
----------------------------
Donald A. Robson
Senior Vice President, Chief
Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
22
<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-26-2000 FEB-27-1999
<PERIOD-START> FEB-28-1999 MAR-01-1998
<PERIOD-END> AUG-28-1999 AUG-29-1998
<CASH> 2,837 0
<SECURITIES> 0 0
<RECEIVABLES> 4,746 0
<ALLOWANCES> 0 0
<INVENTORY> 47,563 0
<CURRENT-ASSETS> 61,623 0
<PP&E> 51,117 0
<DEPRECIATION> 17,036 0
<TOTAL-ASSETS> 102,268 0
<CURRENT-LIABILITIES> 38,304 0
<BONDS> 0 0
0 0
0 0
<COMMON> 102 0
<OTHER-SE> 63,624 0
<TOTAL-LIABILITY-AND-EQUITY> 102,268 0
<SALES> 124,925 140,889
<TOTAL-REVENUES> 124,925 140,889
<CGS> 60,795 69,093
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<INCOME-TAX> 1,992 846
<INCOME-CONTINUING> 3,015 1,259
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<NET-INCOME> 3,015 1,259
<EPS-BASIC> 0.30 0.12
<EPS-DILUTED> 0.29 0.12
</TABLE>
