SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO.1
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended August 31, 1996
Commission File No. 0-19369
LITTLE SWITZERLAND, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0476514
(State of Incorporation) (I.R.S Employer
Identification No.)
161-B Crown Bay Cruise Ship Port
St. Thomas U.S.V.I. 00802
(Address of Principal Executive Offices) (Zip Code)
(809) 776-2010
(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 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
At October 7, 1996, 8,458,294 shares of $.01 par value common stock of the
registrant were outstanding.
<PAGE>
LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q/A
FOR THE QUARTER ENDED AUGUST 31, 1996
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
August 31, 1996 (unaudited) and
June 1, 1996 3
Consolidated Statements of Income
for the three months ended August 31,
1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows
for the three months ended August 31,
1996 and 1995 (unaudited) 5
Notes to Consolidated Financial
Statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
- ------- --------------------------------
Signature Page 16
<PAGE>
PART I. FINANCIAL INFORMATION FORM 10-Q/A
Item 1. Financial Statements Page 3
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (in thousands)
August 31, June 1,
ASSETS 1996 1996
--------- ------
Current assets: (unaudited)
Cash and cash equivalents..........................$ 3,711 $ 5,393
Accounts receivable................................ 1,616 1,892
Inventory.......................................... 49,508 43,678
Prepaid expenses and other current assets.......... 2,824 1,607
--------- --------
Total current assets............................ 57,659 52,570
--------- --------
Property, plant and equipment, at cost................ 35,103 34,247
Less -- Accumulated depreciation................... (13,350) (12,522)
--------- ---------
21,753 21,725
Other assets.......................................... 3,534 3,582
--------- --------
Total assets.................................$ 82,946 $ 77,877
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of long term debt..................$ 1,113 $ 832
Unsecured notes payable............................ 9,200 7,100
Accounts payable................................... 11,935 6,839
Accrued and currently deferred income taxes........ 966 2,002
Other accrued expenses and deferred income......... 2,893 3,225
--------- --------
Total current liabilities 26,107 19,998
Long term debt........................................ 7,788 8,068
Deferred income taxes................................. 90 90
--------- --------
Total liabilities..................................... 33,985 28,156
--------- --------
Commitments and contingencies......................... --- ---
Minority interest..................................... 1,619 1,619
--------- --------
Stockholders' equity:
Preferred stock, $.01 par value--
Authorized--5,000 shares
Issued and outstanding--none...................... --- ---
Common stock, $.01 par value--
Authorized--20,000 shares
Issued and outstanding--8,458 shares at
August 31, 1996 and 8,457 at June 1, 1996....... 85 85
Capital in excess of par.............................. 14,801 14,792
Retained earnings..................................... 32,456 33,225
--------- --------
Total stockholders' equity...................... 47,342 48,102
--------- --------
Total liabilities, minority interest
and stockholders' equity.....................$ 82,946 $ 77,877
========= =========
See accompanying notes to consolidated financial statements
<PAGE>
PART I. FINANCIAL INFORMATION FORM 10-Q/A
Item 1. Financial statements Page 4
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share data)
(unaudited)
For the three months
ended August 31,
1996 1995
-------- --------
Net sales................................$15,868 $14,068
Cost of sales............................ 8,972 7,977
-------- -------
Gross profit............................. 6,896 6,091
Selling, general and
administrative expenses.................. 7,929 6,333
Business interruption insurance
proceeds.............................. (428) ---
-------- -------
Operating (loss).................... (605) (242)
Interest expense, net.................... 332 74
-------- -------
(Loss) before benefit
for income taxes................. (937) (316)
(Benefit) for income taxes............... (168) (66)
-------- --------
Net (loss)...............................$ (769) $ (250)
======== ========
Net (loss) per share.....................$ (0.09) $ (0.03)
======== ========
Weighted average shares
outstanding.......................... 8,458 8,454
======== ========
See accompany notes to consolidated financial statements
<PAGE>
PART I. FINANCIAL INFORMATION FORM 10-Q/A
Item 1. Financial statements Page 5
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the three months
ended August 31,
Cash flows from operating activities: 1996 1995
--------- --------
Net (loss).........................................$ (769) $ (250)
Adjustments to reconcile net loss to
net cash provided by operating activities--
Depreciation and amortization.................. 828 581
Changes in assets and liabilities:
Decrease in accounts receivable.............. 276 406
(Increase) in inventory....................... (5,830) (3,291)
(Increase) in prepaid expenses
and other current assets................... (1,217) (782)
Decrease in other assets..................... 48 11
Increase (decrease) in accounts payable...... 5,097 (1,789)
(Decrease) in other accrued expenses and
deferred income............................ (332) (161)
(Decrease) in accrued and currently
deferred income taxes...................... (1,036) (168)
------- -------
Net cash (used in) operating activities............ (2,935) (5,443)
------- -------
Cash flows from investing activities:
Capital expenditures............................. (856) (1,312)
------- -------
Net cash (used in) investing activities............ (856) (1,312)
------- -------
Cash flows from financing activities:
Increase in unsecured notes payable.............. 2,100 5,500
Issuance of common stock......................... 9 9
------- -------
Net cash provided by financing activities............. 2,109 5,509
------- -------
Net (decrease) in cash and cash equivalents........... (1,682) (1,246)
Cash and cash equivalents, beginning of period........ 5,393 (2,899)
------- -------
Cash and cash equivalents, end of period..............$ 3,711 $ 1,653
======= =======
During the three months ended August 31, 1996 and 1995, the Company paid income
taxes of $837 and $102, respectively, and paid interest of $259 and $62,
respectively.
See accompanying notes to consolidated financial statements
<PAGE>
FINANCIAL INFORMATION FORM 10-Q/A
Item 1. Financial statements Page 6
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
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. All significant intercompany balances have been
eliminated in consolidation. The interim financial statements are unaudited and,
in the opinion of management, contain all adjustments necessary to present
fairly the Company's financial position as of August 31, 1996 and 1995 and the
results of its operations and cash flows for the interim periods presented. It
is suggested that these interim financial statements be read in conjunction with
the financial statements and the notes thereto included in the Company's latest
report on Form 10-K.
Effective with the second quarter of fiscal year 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 resulted in
one less day in the first quarter of the current year, as compared to the prior
year. Management estimates that the one day lost from this fiscal calendar
change had no material effect on the reported net loss for the current fiscal
quarter.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year due
to the seasonal nature of the Company's operations.
2. RESTATEMENT
In July, 1997 management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company. As a
result, the Company engaged Arthur Andersen, LLP to evaluate the matter and
determine the impact, if any, on the Company's previously and currently reported
consolidated financial statements. After extensive review, analysis
<PAGE>
FORM 10-Q/A
Page 7
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
and evaluation, which focused on unlocated differences in cash balances,
management believes that an employee defalcation has occurred during the current
fiscal year. The estimated loss of approximately $200,000 has been classified as
a general and administrative expense in the accompanying restated consolidated
statement of income for the three month period ended August 31, 1996.
3. 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
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. 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 which approximate arm's-length transactions.
5. CREDIT ARRANGEMENTS
The Company has available a total of $19.6 million in unsecured credit
facilities, of which $10.4 million is available for borrowing with maturities
ranging from one to three years from August 31, 1996. Any unfunded portion of
the facilities can be withdrawn at the bank's discretion. Outstanding borrowings
against these credit facilities totaled $9.2 million as of August 31, 1996.
Additionally, in February 1996, the Company secured term debt of approximately
$8.9 million from its two lead banks to finance its
<PAGE>
FORM 10-Q/A
Page 8
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 August
31, 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.
6. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding during each period. Primary and fully diluted earnings per share
have not been presented as they are within three percent of simple earnings per
share.
7. ACCOUNTING FOR INCOME TAXES
The Company uses the Liability method in accounting 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 the tax basis of assets and liabilities, given the
provisions of the enacted tax laws.
8. INTANGIBLE ASSETS
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.
<PAGE>
FORM 10-Q/A
Page 9
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
9. ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, requires pro forma disclosure but only encourages companies
to change their accounting for stock-based compensation. Adoption of this
standard is required for fiscal 1997. The Company is currently in the process of
determining how it will implement this standard.
10. 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 ship
passengers.
11. COMMITMENTS AND CONTINGENCIES
In September 1995, Hurricanes Luis and Marilyn inflicted damage to
several of the Company's stores and caused significant damage to various
islands' infrastructures, including hotels and other tourist facilities. As of
August 31, 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, was recorded as deferred income on the Company's
consolidated balance sheet as of June 1,
<PAGE>
FORM 10-Q/A
Page 10
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1996. In the current fiscal quarter, the Company recorded $428,000 of that
amount as Business interruption insurance proceeds which represented lost
profits for the closed Marigot store.
The Company is insured for property losses and related business
interruption losses in excess of 5% of the insured value of the property subject
to a claim. For fiscal years 1995 and 1996, the Company was only insured for
wind related losses in excess of $5 million, subject to certain deductibles.
12. ACQUISITION
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 $8.9 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.
<PAGE>
FORM 10-Q/A
Page 11
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The Acquisition has been accounted for as a purchase transaction
effective as of February 16, 1996, in accordance with Accounting Principles
Board Opinion No. 16, "Business Combinations", and accordingly, the consolidated
financial statements for the period subsequent to February 16, 1996 reflect the
purchase price allocated to tangible and intangible assets acquired, based on
their estimated fair values 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 three months
ended August 31, 1995 as adjusted for the debt financing and estimated effects
of the acquisition as if it had occurred on June 1, 1995, are as follows:
Net sales............................................ $15,245,000
Net (loss)........................................... (445,000)
Net (loss) per share................................. (.05)
Weighted average shares outstanding.................. 8,454,000
<PAGE>
FORM 10-Q/A
Page 12
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
NET SALES
Net sales for the first quarter ended August 31, 1996 were $15.9
million or 12.8% higher than net sales of $14.1 million for the same period last
year. The increase in net sales is primarily the result of sales generated by
four new stores, the Royal Plaza store in Aruba, the Juneau store in Alaska and
two stores in Barbados.
Net sales of $11.7 million for stores which were open for the full
three month period this year and last year decreased 12.0% from net sales of
$13.3 million for the same period last year. This was primarily due to decreased
sales in the U.S. Virgin Islands, St. Maarten/St. Martin and Antigua stores.
Lower tourist and cruise ship visits to these islands occurred due to damaged
infrastructure and tourist facilities on these islands from Hurricanes Luis and
Marilyn in September 1995 and the active hurricane season experienced in the
Caribbean this year, including Hurricane Bertha in July, which caused the
diversion of cruise ships from the region.
GROSS PROFIT
Gross profit as a percentage of net sales during the three month
periods ended August 31, 1996 and 1995 were 43.5% and 43.3%, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
First quarter selling, general and administrative expenses ("SG&A")
increased 25.2% to $7.9 million for the three month period ended August 31, 1996
from $6.3 million for the same period last year. As a percent to net sales, SG&A
expenses increased to 50.0% for the quarter ended August 31, 1996 from 45.0% for
the same quarter last year. In July, 1997 management disclosed to its
independent auditors that certain transactions may have been
<PAGE>
FORM 10-Q/A
Page 13
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
recorded in error on the books of the Company. As a result, the Company engaged
Arthur Andersen, LLP to evaluate the matter and determine the impact, if any, on
the Company's previously and currently reported consolidated financial
statements. After extensive review, analysis and evaluation, which focused on
unlocated differences in cash balances, management believes that an employee
defalcation has occurred during the current fiscal year. The estimated loss of
approximately $200,000 has been classified as a general and administrative
expense for the three month period ended August 31, 1996. Additional increases
in SG&A expenses are attributable to new stores opened since the first three
months of last fiscal year.
BUSINESS INTERRUPTION INSURANCE PROCEEDS
For the three month period ended August 31, 1996 the Company recorded
$428,000 as Business interruption insurance proceeds which represents the
insurance recovery for lost profits from its closed Marigot store during the
period.
OTHER
Net interest expense for the three month period ended August 31, 1996
and 1995 totaled $332,000 and $74,000, respectively. The increase is due to
higher average borrowings this year to support increased inventories for new
stores and the interest on long term debt utilized in the acquisition of the
fixtures, leasehold rights and inventories of two stores in Barbados in February
1996.
The Company's effective income tax rates for the three month period
ended August 31, 1996 and 1995 consisted of a benefit of approximately 18% and
21%, respectively.
<PAGE>
FORM 10-Q/A
Page 14
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three month period ended August
31, 1996 was $2.9 million compared to $5.5 million used in operations for the
same three month period last year. The decrease in net cash used in operations
primarily reflects an increase in accounts payable of $5.1 million offset by an
increase in inventories of $2.5 million this year, a $436,000 increase in
prepaid expenses and other current assets and a $986,000 decrease in accrued and
currently deferred income taxes, as compared to the same period in the prior
year.
The Company's working capital position as of August 31, 1996 decreased
to $31.6 million from $32.6 million at June 1, 1996. Current ratios were 2.21
and 2.63 as of the same periods, respectively. Capital expenditures were
approximately $856,000 during the three month period ended August 31, 1996,
compared to approximately $1.3 million during the same period last year. Major
capital expenditures this year include new in-store merchandise systems and
related hardware, upgrade of the Company's central computer system, a new store
in Juneau, Alaska and the refurbishment of stores in St. Thomas, Marigot and
Antigua.
The Company has total unsecured credit facilities of $19.6 million
provided by its two lead banks. As of August 31, 1996, short-term borrowings of
$9.2 million were outstanding against these facilities. Additionally, the
Company has secured facilities through its two lead banks for the acquisition of
the leasehold rights, fixed assets and inventory of two stores in Barbados. The
total borrowing provided for the acquisition was $8.9 million at an approximate
7 1/4% interest rate, with terms of interest only, for the first year and equal
principal payments due quarterly over the following three years. It remains
management's expectation that funds available from operations and bank financing
will be sufficient to fund operations and expansion for at least the next three
years.
<PAGE>
FORM 10-Q/A
Page 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits--Not Applicable
(b) Reports on Form 8-K
No Form 8-K was issued by the registrant during the three month period
ended August 31, 1996.
<PAGE>
FORM 10-Q/A
Page 16
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
LITTLE SWITZERLAND, INC.
Date: October 3, 1997 /s/ Ronald J. Lataille
--------------- ----------------------
Ronald J. Lataille
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-1-1997
<PERIOD-START> JUN-2-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,711
<SECURITIES> 0
<RECEIVABLES> 1,616
<ALLOWANCES> 0
<INVENTORY> 49,508
<CURRENT-ASSETS> 57,659
<PP&E> 35,103
<DEPRECIATION> 13,350
<TOTAL-ASSETS> 82,946
<CURRENT-LIABILITIES> 26,107
<BONDS> 7,788
0
0
<COMMON> 85
<OTHER-SE> 47,257
<TOTAL-LIABILITY-AND-EQUITY> 82,946
<SALES> 15,868
<TOTAL-REVENUES> 15,868
<CGS> 8,972
<TOTAL-COSTS> 8,972
<OTHER-EXPENSES> 7,501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 332
<INCOME-PRETAX> (937)
<INCOME-TAX> (168)
<INCOME-CONTINUING> (769)
<DISCONTINUED> 0
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