SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 1, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For transition period from to
COMMISSION FILE NUMBER 0-19369
LITTLE SWITZERLAND, INC.
STATE OF DELAWARE-I.R.S. EMPLOYER IDENTIFICATION NO.: 66-0476514
161-B Crown Bay Cruise Ship Port
St. Thomas U.S.V.I. 00802
(809) 776-2010
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
As of July 30, 1996, there were outstanding 8,456,721 shares of the
registrant's Common Stock, par value $.01 per share. The aggregate market value
of the voting stock held by non-affiliates of the registrant as of July 30, 1996
was approximately $35,602,697, based upon the closing price of $4.375 per share
for the registrant's Common Stock, as reported on the NASDAQ National Market
System as of such date.
<PAGE>
Part II, Item 8 of this report on Form 10-K is hereby amended and restated
in full by adding such item as follows:
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LITTLE SWITZERLAND, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants .............. 22
Consolidated Balance Sheets ........................... 23
Consolidated Statements of Income ..................... 24
Consolidated Statements of
Changes in Stockholders' Equity ................... 25
Consolidated Statements of Cash Flows ................. 26
Notes to Consolidated Financial Statements ............ 27 - 42
21
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Little Switzerland, Inc.:
We have audited the accompanying consolidated balance sheets of Little
Switzerland, Inc. (a Delaware corporation) and subsidiaries as of June 1, 1996
and May 31, 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the fiscal years ended June 1,
1996, May 31, 1995 and 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Little
Switzerland, Inc. and subsidiaries as of June 1, 1996 and May 31, 1995, and the
results of their operations and their cash flows for each of the fiscal years
ended June 1, 1996, May 31, 1995 and 1994, in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
Boston, Massachusetts
July 19, 1996
22
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated July 19, 1996, included in Little Switzerland,
Inc.'s Report on Form 10-K/A for the year ended June 1, 1996, into the Company's
previously filed Registration Statement on Form S-8 No. 33-46654 (filed on March
25, 1992), Registration Statement on Form S-8 No. 33-46656 (filed on March 25,
1992) and Registration Statement on Form S-8 No. 33-73056 (filed on December 17,
1993).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 25, 1996
22-A
<PAGE>
<TABLE>
<CAPTION>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands)
June 1, May 31,
ASSETS 1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2).............$ 5,393 $ 2,899
Accounts receivable............................ 1,892 1,820
Inventory (Note 2)............................. 43,678 33,554
Prepaid expenses and other current assets...... 1,607 1,785
------ ------
Total current assets......................... 52,570 40,058
------ ------
Property, plant and equipment,
at cost, (Note 2).............................. 34,247 32,947
Less--Accumulated depreciation.................. 12,522 16,667
------ ------
21,725 16,280
Other assets (Note 2)............................. 3,582 2,108
------ ------
Total assets............................... $77,877 $58,446
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt (Note 4)..... $ 832 $ ---
Unsecured notes payable (Note 4)............... 7,100 ---
Accounts payable............................... 6,839 6,484
Accrued and currently deferred
income taxes (Notes 2 and 5)................. 2,002 2,397
Other accrued expenses and deferred
income (Notes 2 and 12)..................... 3,225 2,160
------ ------
Total current liabilities.................... 19,998 11,041
Long term debt.................................... 8,068 ---
Deferred income taxes (Notes 2 and 5)............. 90 234
------ ------
Total liabilities......................... 28,156 11,275
------ ------
Commitments and contingencies (Note 6)............ --- ---
Minority interest (Note 11)....................... 1,619 ---
------ ------
Stockholders' equity (Notes 1, 3 and 10):
Preferred stock, $.01 par value--
Authorized--5,000 shares
Issued and outstanding--none................. --- ---
Common stock, $.01 par value--
Authorized--20,000 shares
Issued and outstanding--8,457 shares
in 1996 and 8,452 in 1995.............. 85 85
Capital in excess of par...................... 14,792 14,776
Retained earnings.............................. 33,225 32,310
------ ------
Total stockholders' equity................. 48,102 47,171
------ ------
Total liabilities, minority interest
and stockholders' equity................. $77,877 $58,446
======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
For the Years Ended
June 1, May 31, May 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net sales............................$62,895 $72,240 $64,312
Cost of sales........................ 36,164 41,307 35,968
------- ------- -------
Gross profit......................... 26,731 30,933 28,344
Selling, general and
administrative expenses
(Note 2)........................... 29,778 26,197 23,123
Gain on insurance
proceeds (Note 12)................ 4,713 --- ---
------- ------- -------
Operating income.................. 1,666 4,736 5,221
Interest expense, net................ 558 240 225
------- ------- -------
Income before provision
for income taxes................ 1,108 4,496 4,996
Provision for income taxes
(Notes 2 and 5).................... 193 802 898
------- ------- -------
Net income...........................$ 915 $ 3,694 $ 4,098
======= ======= =======
Net income per share
(Note 2)...........................$ 0.11 $ 0.44 $ 0.49
======= ======= =======
Weighted average shares
outstanding (Notes 1
and 2)............................ 8,456 8,451 8,446
======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Capital in
Common Stock Excess of Retained
Shares Amount Par Earnings Total
------ ------ --------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1993 8,442 $ 84 $14,715 $24,518 $39,317
Net income - - - 4,098 4,098
Exercise of stock options
(Note 10) - - - - -
Shares issued under stock
purchase plan (Note 10) 7 - 43 - 43
----- ---- ------ ------- ------
Balance, May 31, 1994 8,449 $ 84 14,758 28,616 $43,458
Net income - - - 3,694 3,694
Exercise of stock options
(Note 10) - - - - -
Shares issued under stock
purchase plan (Note 10) 3 1 18 - 19
----- ---- ------ ------- ------
Balance, May 31, 1995 8,452 $85 $14,776 $32,310 $47,171
Net income - - - 915 915
Exercise of Stock options
(Note 10) - - - - -
Shares issued under stock
purchase plan (Note 10) 5 - 16 - 16
----- ---- ------ ------- -------
Balance, June 1, 1996 8,457 $85 $14,792 $33,225 $48,102
===== ==== ======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Years Ended
June 1, May 31, May 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 915 $ 3,694 $ 4,098
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,489 2,157 1,833
Loss on Retirement of fixed assets 2,918 --- ---
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (72) (244) (132)
(Increase) decrease in inventory (3,499) (4,477) 6,812
(Increase) decrease in prepaid expenses
and other current assets 178 (489) 219
Increase (decrease) in accounts payable 355 1,350 (448)
Increase (decrease) in other accrued expenses
and deferred income 1,065 100 (318)
Increase (decrease) in accrued and
currently deferred income taxes (395) 536 647
(Decrease) in deferred income taxes (144) (122) (438)
------- ------- -------
Net cash provided by operating activities 3,810 2,505 12,273
------- ------- ------
Cash flows from investing activities:
Capital expenditures (6,806) (4,542) (3,738)
Decrease (Increase) in other assets (1,609) 286 269
Acquisition of inventory and fixed assets
(Notes 2 and 11) (8,917) - (1,247)
-------- -------- -------
Net cash used in investing activities (17,332) (4,256) (4,716)
-------- -------- -------
Cash flows from financing activities:
Borrowing under unsecured notes payable 32,400 36,297 7,100
Repayment of unsecured notes payable (25,300) (36,297) (11,975)
Proceeds from long term borrowing 8,900 - -
Issuance of common stock 16 18 43
-------- -------- -------
Net cash provided by (used in)
financing activities 16,016 18 (4,832)
Net (decrease) increase in cash
and cash equivalents: 2,494 (1,733) 2,725
Cash and cash equivalents, beginning of year 2,899 4,632 1,907
-------- -------- -------
Cash and cash equivalents, end of year $ 5,393 $ 2,899 $ 4,632
======= ======== =======
Cash paid during the year for:
Income Taxes $ 762 $ 316 $ 620
======= ======== =======
Interest $ 590 $ 240 $ 289
======= ======== =======
Non-cash activity:
Issuance of Preferred Stock by subsidiary
in acquisition of inventory and fixed assets 1,619 - -
======= ======== =======
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
26
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(1) Organization
Little Switzerland, Inc. (the "Company") was incorporated in May 1991. A
wholly owned subsidiary of Town & Country Corporation ("Town & Country")
contributed to the Company all of the outstanding shares of L.S. Holding, Inc.
and L.S. Wholesale, Inc. in exchange for 10,000,000 shares of the Company's
common stock. On June 3, 1991, the Company declared an 84 for 100 stock split
resulting in outstanding shares of common stock of 8,400,000, which has been
retroactively reflected in the accompanying consolidated financial statements.
L.S. Holding, Inc. was incorporated in July 1980 and has nine operating
subsidiaries: Montres et Bijoux, S.A.R.L.; World Gifts Imports N.V.; L.S.
Holding (Aruba) N.V.; L.S. Holding (Curacao) N.V.; Little Switzerland (St. Kitts
& Nevis) Limited; Little Switzerland (Antigua) Limited; Little Switzerland (St.
Lucia) Limited and L.S. Holding (USA), INC., World Gift Imports (Barbados)
Limited, (Note 2) which operate retail stores in the Virgin Islands, Aruba, St.
Kitts, Antigua, St. Lucia, the French and Netherlands Antilles, and Barbados.
Little Switzerland (BVI) Limited, incorporated in the British Virgin Island was
not yet in operation at June 1, 1996.
L.S. Wholesale, Inc. was incorporated in October 1987 and purchases
inventory for distribution to L.S. Holding, Inc.'s retail stores.
In July 1991, the Company completed an initial public offering (the
"Offering") whereby Switzerland Holding Inc., a wholly-owned subsidiary of Town
& Country, sold 5,700,000 shares of the Company's common stock at $12 per share.
Switzerland Holding, Inc. received all of the proceeds and paid substantially
all of the costs of the offering.
Subsequent to the offering, Switzerland Holding owned 2,700,000 shares of
the Company's Common Stock (approximately 32% of the issued and outstanding
Common Stock as of May 31, 1994) which were not registered in the Offering. In
connection with the consummation of the recapitalization of Town & Country
("T&C") in May 1993 (the "Recapitalization"), Switzerland Holding was dissolved
and 2,533,279 shares of such stock were transferred to a trust (the "Trust")
established for the benefit of T&C and the holders of T&C's Exchangeable
Preferred Stock (the "T&C Exchangeable Preferred Stock"). Each holder of a share
of T&C Exchangeable Preferred Stock may exchange such share for one share of the
Company's Common Stock held in the Trust.
27
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(1) ORGANIZATION--(CONTINUED)
On April 6, 1993, T&C exercised its rights under a Registration Rights
Agreement and requested that the Company file with the SEC a registration
statement covering the shares of the Company's Common Stock currently held in
The Trust. In accordance with the terms of the Registration Rights Agreement,
the Company caused such shares to be registered with the SEC.
In November 1994, holders of an aggregate of 2,381,038 shares of T&C
Exchangeable Preferred Stock exercised their right to exchange such shares for
Little Switzerland Common Stock on a share-for-share basis. Accordingly, the
Trust currently holds 152,241 shares of Little Switzerland Common Stock for the
benefit of T&C and the holders of T&C Exchangeable Preferred Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation
The accompanying consolidated financial statements include the operations
of the Company and its wholly owned subsidiaries L.S. Holding, Inc. and L.S.
Wholesale, Inc. Certain reclassification have been made to prior years'
consolidated financial statements to conform to the June 1, 1996 presentation.
All significant intercompany balances have been eliminated in consolidation.
Effective with the second quarter of fiscal 1996, the Company adopted a
"4-5-4" fiscal calendar wherein each fiscal quarter contains two four week
periods and one five week period, with each period beginning on a Sunday and
ending on a Saturday. Previously, the Company used calendar months for its
fiscal periods. The purpose of this change is to provide more consistent
comparability between fiscal periods. The change in fiscal calendar added one
day to fiscal 1996 as compared to a calendar year. Management estimates that the
one day gained from this calendar change had no material effect on the reported
net income for fiscal 1996.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
28
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Operations
Net sales and operating income from foreign operations (non-U.S.
possessions) amounted to 61%, 54% and 52%, and 78%, 20% and 34% of total net
sales and operating income, respectively, in fiscal 1996, 1995 and 1994,
respectively. Inter-segment sales were not material for all periods presented.
Identifiable assets of foreign operations amounted to 53%, 54% and 51% of total
assets as of June 1, 1996, May 31, 1995 and 1994, respectively.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market
value and consists almost entirely of finished merchandise purchased for resale.
Advertising
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising consists primarily of advertisements
with local and national travel magazines which are produced on a periodic basis
and distributed to visiting tourists and fees paid for promotional "port
lecturer" programs directed primarily at cruise passengers.
Advertising expense for fiscal 1996, 1995, 1994 was approximately
$3,008,000, $2,078,000 and $1,958,000, respectively. Prepaid advertising of
approximately $461,000 and $572,000 at June 1, 1996, and May 31, 1995,
respectively, is included in the consolidated balance sheets as prepaid expenses
and other current assets.
29
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property, Plant and Equipment
Fixed assets are depreciated over their estimated useful lives, principally
using the straight-line method. Property, plant and equipment consist of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Life June 1 May 31
Range 1996 1995
----- ---- ----
<S> <C> <C> <C>
Land and buildings 20-40 Years $ 7,191,000 $ 7,167,000
Furniture
and fixtures............. 3-10 Years 11,671,000 11,825,000
Equipment................. 3-20 Years 3,615,000 4,628,000
Construction in
progress................. --- 414,000 110,000
Leasehold Life of the lease
improvements............. or useful life,
whichever is shorter 11,356,000 9,217,000
----------- ----------
$34,247,000 $32,947,000
=========== ==========
</TABLE>
Income Taxes
The Company uses The liability method to account for income taxes in
accordance with SFAS No. 109. This standard determines deferred income taxes
based on the estimated future tax effects of any differences between the
financial statement and tax basis of assets and liabilities, given the
provisions of enacted tax laws.
Other Assets
Other assets consist primarily of amounts related to non-competition
agreements, rental premiums, rental deposits and the excess of cost over the
fair market value of the net assets of the business acquired (goodwill). Amounts
related to non-competition agreements are amortized over the lives of the
respective agreements and amounts related to rental premiums are amortized over
the lives of the related leases. Amounts related to goodwill are being amortized
over periods of up to 10 years. Accumulated amortization for all periods
presented was not material.
30
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company accounts for long-lived and intangible assets in accordance
with SFAS No. 121. Accounting for the Impairment of Long- lived Assets and for
Long-lived Assets to be Disposed of. The Company continually reviews its
intangible assets for events or changes in circumstances which might indicate
the carrying amount of the assets may not be recoverable. The Company assesses
the recoverability of the assets by determining whether the amortization of such
intangibles over their remaining lives can be recovered through projected
undiscounted future results. The amount of impairment, if any, is measured based
on projected discounted future results using a discount rate reflecting the
Company's average cost of funds.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts to hedge against foreign
currency fluctuations for purchase commitments and accounts payable denominated
in foreign currencies. Gains and losses on contracts to hedge purchase
commitments are included in the cost basis of the related purchases. Deferred
gains of approximately $213,000 and $29,000, respectively, are included in the
inventory balances at June 1, 1996 and May 31, 1995, respectively.
At June 1, 1996, the Company had various contracts maturing during the
period from June through September, 1996 at contractually predetermined rates
totaling approximately $7,600,000.
The Company's functional currency, under Statement of Financial Accounting
Standards No. 52, for all foreign locations is the U.S. dollar. Accordingly, all
transaction and translation gains and losses are included in the accompanying
consolidated income statements. Gains and losses for all periods presented were
not material.
Other Accrued Expenses and Deferred Income
Other accrued expenses and deferred income are comprised of the following:
<TABLE>
<CAPTION>
June 1, May 31,
1996 1995
<S> <C> <C>
Deferred income (Note 12)................... 560,000 --
Customer deposits...........................$ 512,000 $ 518,000
Payroll and related items................... 1,569,000 1,270,000
Other....................................... 584,000 372,000
---------- ----------
$3,225,000 $2,160,000
========== ==========
</TABLE>
31
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, the Company has determined the estimated fair
value amounts of its financial instruments using appropriate market information
and valuation methodologies. Considerable judgement is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash, accounts receivable, accounts payable and
bank debt. The carrying value of these assets and liabilities are a reasonable
estimate of their fair value at June 1, 1996.
Net Income per Share
Net Income per share is computed based on the weighted average number of
common and common equivalent shares outstanding, where dilutive, during each
period. Common equivalent shares result from the assumed exercise of stock
options (Note 10).
Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid instruments with a purchased maturity of three
months or less to be cash equivalents. The carrying amount of cash and cash
equivalents approximates fair value due to the short maturities.
(3) TRANSACTIONS WITH AFFILIATES
The Company enters into a number of transactions with Town & Country
Corporation of which two of the Company's Directors are Executive Officers. The
Company purchases a portion of its merchandise from Town & Country and its
affiliated companies at prices that approximate arm's-length transactions. Such
purchases totaled approximately $1,443,000, $2,502,000 and $1,388,000 in fiscal
1996, 1995 and 1994, respectively.
32
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(4) CREDIT ARRANGEMENTS
The Company has available a total of $19.6 million in unsecured credit
facilities, of which $12.5 million is available for borrowing with maturities
ranging from one to three years from June 1, 1996. Any unfunded portion of the
facilities can be withdrawn at the bank's discretion. Outstanding borrowing
against these credit facilities totaled $7.1 million and zero as of June 1,
1996, and May 31, 1995, respectively. Additionally, in February 1996, the
Company secured term debt of approximately $8.9 million from its two lead banks
to finance its acquisition of the fixtures, leasehold rights and inventories of
two stores in Barbados. Interest on this debt accrues at an annual interest rate
of approximately 7.25% and is payable monthly. The principal is payable in equal
quarterly payments over a four year period commencing March 1997. As of June 1,
1996, the Company was in compliance with all restrictive covenants related to
its unsecured and term debt agreements. Additionally, the Company has available
separate facilities for foreign exchange contracts. The weighted average
interest rates incurred during fiscal 1996, 1995 and 1994 were approximately
6.5%, $7.9% and 5.6%, respectively.
33
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(5) INCOME TAXES
The domestic (United States Virgin Islands "USVI", and Ketchikan, Alaska)
and foreign components of income before income taxes are as follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
June 1, May 31, May 31,
1996 1995 1994
<S> <C> <C> <C>
Domestic.....................$ 202,000 $3,583,000 $3,296,000
Foreign...................... 906,000 913,000 1,700,000
---------- ---------- ----------
$1,108,000 $4,496,00 $4,996,000
========== ========= ==========
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
June 1, May 31, May 31,
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Current:
Domestic................ .. $ 137,000 $ 522,000 $ 647,000
Foreign.................. . 200,000 402,000 689,000
---------- ---------- ----------
337,000 924,000 1,336,000
---------- ---------- ----------
Deferred:
Domestic..................... (144,000) (122,000) (438,000)
Foreign...................... -- -- --
---------- ---------- ----------
$ 193,000 $ 802,000 $ 898,000
========== ========== ==========
</TABLE>
The deferred tax benefit results primarily from the use of different
depreciation methods for financial reporting and tax purposes as well as the
difference in timing as to when insurance recoveries are taxable and when they
are recorded as income in the financial statements.
34
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(5) INCOME TAXES--(CONTINUED)
The Company's effective tax rate is less than the USVI statutory rate of 37.4%
due to the following:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
June 1, May 31, May 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed tax provision
at statutory rate 426,000 $1,682,000 $1,869,000
Increases (reductions)
resulting from--
Differences between
foreign provisions
recorded and provisions
at USVI rate (59,000) 62,000 53,000
Effect of earnings of
subsidiary in USVI subject
to lower tax rate (1,032,000) (942,000) (1,033,000)
Effect of subsidiary net
operating losses not
benefited 858,000 -- --
Other -- -- 9,000
---------- ----------- ------------
$ 193,000 $ 802,000 $ 898,000
=========== =========== ============
</TABLE>
The lower tax rate in effect on certain of the income of a subsidiary in the
USVI expires, subject to renewal, in 1998 and had the effect of increasing
earnings per share by $0.12, $0.11 and $0.12 in fiscal 1996, 1995 and 1994,
respectively.
The net effective tax rate was approximately 17.4% for fiscal year 1996 and
17.8% for fiscal years 1995 and 1994.
The deferred tax liability of $90,000 and $234,000 at June 1, 1996 and May
31, 1995, respectively, is the result of the use of accelerated depreciation
35
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(5) INCOME TAXES--(CONTINUED)
methods for tax purposes as well as the difference intiming as to when insurance
proceeds are taxable and when they are recorded as income in the financial
statements. The Company's only deferred tax assets consist of net operating loss
carryforwards totaling $858,000, for which a full valuation reserve has been
recorded.
(6) COMMITMENTS AND CONTINGENCIEs
Certain of the Company's facilities and retail stores are occupied under
operating leases expiring at various dates. The Company's rental commitments
under the noncancelable portion of these leases for each of the next five years
and, in total, thereafter at June 1, 1996 are as follows:
Total Lease
Year Commitment
---- ----------
1997................................. $3,937,000
1998................................. 3,640,000
1999................................. 2,854,000
2000................................. 2,340,000
2001................................. 1,742,000
Thereafter........................... 2,514,000
-----------
$17,027,000
===========
Rental expense included in the accompanying consolidated statements of
income amounted to approximately $3,345,000, $3,027,000 and $2,487,000 in fiscal
1996, 1995 and 1994, respectively.
The Company owns the building which houses its headquarters and warehouse
on St. Thomas and leases the underlying real property from the Virgin Islands
Port Authority under a 10-year ground lease. The ground lease is subject to two
five-year renewal terms and may be terminated by the lessor prior to the
expiration of its term subject to payment to the Company of the fair market
value of the Company's improvements.
Prior to the Company's initial public offering, Town & Country and several
of its wholly-owned subsidiaries had supplied the Company with jewelry. Pursuant
to written agreements entered into between Town & Country and each of its
subsidiaries and the Company, the subsidiaries have continued to supply jewelry
to the Company at the Company's option on the same terms and conditions as were
in effect prior to the initial public offering (Note 1). These agreements are
automatically renewed each year unless either party terminates upon 60 days
notice prior to the end of a year.
36
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(6) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company is not a party to any material pending legal proceedings, other
than ordinary litigation incidental to the business. The Company believes that
none of these proceedings, if adversely determined, would have a material
adverse effect on the Company's financial condition.
As a result of the high cost of wind insurance within the Caribbean,
management believes that currently available premiums are not justifiable in
light of the related risk. For fiscal 1997, the Company is only insured for
damage caused by wind for amounts in excess of $5,000,000, subject to certain
deductibles.
(7) FRANCHISE AGREEMENT
In fiscal 1988, the Company entered into a 10-year franchise agreement with
Solomon Brothers Limited ("Solomon"), a Bahamian company engaged in the
wholesale and retail distribution of jewelry, gift items and consumables in the
Bahamas. Solomon is responsible for developing each store, in accordance with
the Company's specifications, once a new location has been agreed upon. The
Company provides ongoing assistance in retail and merchandising methods. Solomon
is responsible for the operation of each store, but the general operating
methods are dictated by the Company. Currently, Solomon operates nine locations
in the Bahama Islands under the name of "Little Switzerland." Two of the
Company's Directors are Directors of Solomon.
In return for the use of the Little Switzerland name and the services
provided by Little Switzerland, the Company receives an annual franchise fee
which enables the Company to participate in the revenue of both Little
Switzerland stores operated by Solomon and other Solomon retail stores which are
not operated under the Little Switzerland name. Franchise fees are accrued by
the Company as earned based upon Solomon's revenues, as defined, and for fiscal
1996, 1995 and 1994 were approximately $100,000 , $37,000 and $76,000,
respectively.
(8) EMPLOYEE BENEFIT PLANS
The Company provided a tax-qualified discretionary contribution retirement
plan for eligible USVI employees to which the Company, at its discretion,
contributed. Each employee became a participant following completion of one
year's employment, or, if later, the attainment of age 21. All participants
became fully vested after seven years of service. The amount accrued and charged
to expense for fiscal 1995 in connection with this plan was approximately
$50,000. The Company did not contribute to this plan for fiscal 1994.
37
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(8) EMPLOYEE BENEFIT PLANS--(CONTINUED)
Effective June 1, 1996, the Company replaced its Discretionary Contribution
Plan with a 401(k) Plan under which the Company matches each employee's
contribution up to 3% of compensation. During fiscal 1996 the Company matching
totaled approximately $92,000. The Company's contributions vest based on the
employee's years of service, with full vesting after five years of service.
(9) QUARTERLY DATA (UNAUDITED)
The following presents the unaudited quarterly results of operations for
fiscal 1996 and 1995 (in thousands except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
August 31 December 2 March 30 June 1
--------- ---------- -------- ------
FISCAL 1996
<S> <C> <C> <C> <C>
Net sales $14,068 $ 9,752 $20,680 $18,395
Gross profit 6,091 4,171 11,794 7,582
Net income(loss) (250) (1,891) 397 2,658
Net income(loss) per share $(0.03) $(0.22) $0.05 $0.31
</TABLE>
<TABLE>
<CAPTION>
August 31 November 30 February 28 May 31
--------- ----------- ----------- ------
FISCAL 1995
<S> <C> <C> <C> <C>
Net sales $12,101 $14,959 $25,859 $19,321
Gross profit 5,293 6,686 11,116 7,838
Net income(loss) (119) 405 3,092 317
Net income (loss) per share $(0.01) $0.05 $0.37 $0.04
</TABLE>
(10) STOCKHOLDERS' EQUITY
Stock Options
During 1991, the Company established the 1991 Option Plan which reserves a
maximum of 500,000 shares of the Company's common stock to cover option awards
to key employees and directors who are also full time employees of the Company.
As of June 1, 1996, 498,300 option shares were outstanding under the 1991 Plan.
In fiscal 1996, upon his appointment as President & Chief Executive Officer,
John E. Toler, Jr. was awarded an option to purchase an aggrerate of 300,000
38
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(10) STOCKHOLDERS' EQUITY--(CONTINUED)
shares of the Company's common stock at an option price of $3.50 per share, the
market value on the date of grant, subject to stockholder approval of an
amendment to increase the number of authorized option shares available under the
1991 Plan. These option shares are not included in the summary table, below.
During 1992, the Company established the 1992 Option Plan which reserves a
maximum of 150,000 shares of the Company's common stock to cover option awards
to non-employee directors of the Company. As of June 1, 1996, 70,000 option
shares have been granted and were outstanding under the 1992 Plan.
Stock options under the 1991 and 1992 Plans outstanding, granted,
exercisable, exercised or canceled during fiscal years 1996, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ---------------- -----------------
Number of Price Number of Price Number of Price
Shares Range Shares Range Shares Range
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at $ 4.75 $10.00 $10.00-
Beginning of year 559,000 15.625 465,550 15.625 436,900 15.625
$ 4.75- $ 6.00-
Granted 12,000 $ 5.88 222,000 6.50 84,000 9.00
Exercised 0 - 0 - 0 -
$ 9.00- $10.00-
Canceled 3,500 $10.00 127,750 12.75 55,350 12.75
------- ------- ------- ------ ------- -------
Outstanding at $ 4.75- $ 4.75- $10.00-
end of year 568,300 15.625 559,800 15.625 465,550 15.625
======= ======= ======= ======= ======= =======
Options exercisable
at end of fiscal $ 4.75- $ 6.50- $10.00-
year 139,011 15.625 83,510 15.625 196,761 15.625
======= ======= ====== ======= ======= ======
</TABLE>
39
<PAGE>
LITTLE SWITZERLAND, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(10) STOCKHOLDERS' EQUITY--(CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 100,000 shares of common stock for issuance to
employees under the terms of the 1992 Employee Stock Purchase Plan. Under this
plan, 18,775 shares have been issued as of June 1, 1996.
SHAREHOLDER RIGHTS AGREEMENT
On July 24, 1991, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend distribution of one preferred stock purchase right for
each outstanding share of common stock to stockholders of record as of the close
of business on July 25, 1991. Such rights only become exercisable, and
transferable apart from the common stock upon the earliest to occur of (i) ten
business days after the first public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of 15% or
more of the outstanding shares of common stock (an "Acquiring Person")(the date
of the public announcement is hereinafter referred to as the "Stock Acquisition
Date"); (ii) ten business days following the commencement of tender or exchange
offer that would result in a person or group becoming an Acquiring Person, or
(iii) the declaration by the Board of Directors that any person is an Adverse
Person. A "Grandfathered Person" (as defined below) shall not become an
Acquiring Person unless such Person shall become the beneficial owner of more
than the Grandfathered Percentage (as defined below) of the outstanding shares
of common stock. In the event that a person becomes an Acquiring Person or the
Board of Directors determines that a person is an Adverse Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive upon exercise that number of Units of Series A Preferred Stock
having a market value of two times the exercise price of the Right. In the event
that, at any time following the Stock Acquisition Date, the Company is acquired
in a merger or other business combination transaction or 50% of the
Corporation's assets or earning power is sold, the rights entitle holders to
acquire common stock of the acquiring company having a value equal to two times
the exercise price of the rights (such right is referred to as the "Merger
Right"). The rights may be redeemed in whole by the Company at $.01 per right at
any time prior to (i) the date on which a person is declared an Adverse Person,
(ii) the tenth business day after the Stock Acquisition Date, or (iii) the
occurrence of an event giving right to a Merger Right. The rights will expire on
July 24, 2001.
A Grandfathered Person is generally defined as any person who or which,
together with its affiliates and associates, was, as of the close of business on
July 25, 1991, the beneficial owner of 15% or more of the shares of common stock
40
<PAGE>
LITTLE SWITZERLAND, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(10) STOCKHOLDERS' EQUITY--(CONTINUED)
then outstanding. The Grandfathered Percentage is generally defined as the
percentage of outstanding shares of common stock beneficially owned by a
Grandfathered Person as of the close of business on July 25, 1991 plus an
additional two percentage points.
The Shareholder Rights Agreement was amended in April 1993 in connection
with the recapitalization of Town & Country to permit, among other things, the
shares of common stock owned by Town & Country to be transferred to a trust
established for the benefit of Town & Country and the holders of shares of Town
& Country's Exchangeable Preferred Stock.
(11) ACQUISITIONS
On April 25, 1994, the Company purchased certain inventory, fixed assets
and leasehold interest of "La Parfumerie," a fragrance boutique located in
Antigua, for $1,247,000. The transaction was accounted for using the purchase
method of accounting. The proforma impact of the transaction is not material to
the results of the periods presented.
On February 16, 1996, World Gift Imports (Barbados), Inc., a subsidiary of
LS Holding, Inc. which is a subsidiary of Little Switzerland, Inc. (the
"Company"), purchased the leasehold rights, fixtures and inventories of two
retail stores located in Barbados, West Indies from Dacosta Mannings Inc., a
subsidiary of Barbados Shipping & Trading Company Limited. The two stores were
previously operated under the name of Louis Bayley and sold merchandise similar
to that carried in the Company's retail stores such as name brand watches,
jewelry, china, crystal and gift items at duty free prices. The Company began
operating the two stores as "Little Switzerland" stores on February 19, 1996.
The purchase price of approximately $10.6 million was financed by bank
borrowing provided by the Company's two primary banks, Chase Bank and Bank of
Nova Scotia, of approximately $9 million and the issuance of preferred stock of
approximately $1.6 million by World Gift Imports (Barbados), Inc. to the seller.
The purchase price is subject to adjustment three and four years after the
closing date, based on the sales performance of the two purchased stores and any
additional stores that may be opened by the Company in Barbados during that
period. As a part of the purchase agreement, the Company pays to the seller a
management fee of 2.5% of its Barbados stores annual sales up to $15 million and
1.25% of annual sales in excess of $15 million, so long as the preferred stock
is unredeemed. The preferred stock may be redeemed by the Company at face value
at any time after three years from the date of close through nine years from the
date of close. Following that period, the Company retains the right of first
refusal to match any bona fide offer from a third party to purchase the
preferred stock.
41
<PAGE>
LITTLE SWITZERLAND, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(11) ACQUISITION --- (CONTINUED)
The transaction has been accounted for as a purchase transaction whereby
the purchase price, including transactions costs, has been allocated to the
tangible and intangible assets acquired, based on their estimated fair value as
of February 16, 1996, which may be revised at a later date. However, the Company
does not expect material changes to the allocation of the purchase price.
Unaudited pro forma operating results of the Company for the years ended
June 1, 1996 and May 31, 1995 as adjusted for the debt financing and estimated
effects of the acquisition as if it had occurred on June 1, 1994, are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
June 1, May 31,
1996 1995
--------- ---------
<S> <C> <C>
Net sales.............................. $68,661,000 $77,932,000
Net income............................. 1,103,000 2,944,000
Net income per share................... .13 .35
Weighted average shares outstanding.... 8,456,000 8,451,000
</TABLE>
(12) GAIN ON INSURANCE PROCEEDS
In September, 1995, Hurricanes Luis and Marilyn inflicted damage on several
of the Company's stores and caused significant damage to various islands'
infrastructures, including hotels and other tourist facilities. As of July 17,
1996, all stores have reopened with the exception of one store in Marigot, St.
Martin, which is scheduled to reopen in the fall of 1996.
The Company has settled all outstanding claims related to the hurricanes
with its insurance carrier. In connection with this final settlement, the
company received approximately $13.4 million in property and business
interruption proceeds. The Company recorded a net gain of approximately $4.7
million in fiscal 1996, after write-offs related to damaged assets of
approximately $8.1 million, including furniture and fixtures, inventory and
other assets related to stores affected by the hurricanes. In addition,
approximately $560,000, representing fiscal 1997 lost profits for the as yet to
be reopened Marigot store, has been recorded as deferred income on the Company's
consolidated balance sheet as of June 1, 1996.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorize, this 22nd day of
October 25, 1996.
Little Switzerland, Inc.
By: /s/John E. Toler, Jr.
John E. Toler, Jr.
Chief Executive Officer,
President
<PAGE>
