LITTLE SWITZERLAND INC/DE, 10-K/A, 1998-09-28

LITTLE SWITZERLAND INC/DE
10-K/A, 1998-09-28
JEWELRY STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________

FORM 10-K/A

(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended May 30, 1998

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]

For the transition period from ___________ to ___________

COMMISSION FILE NUMBER 0-19369

LITTLE SWITZERLAND, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 66-0476514
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS U.S.V.I. 00802 00802
(Address of Principal Executive Offices) (Zip Code)

(Registrant's Telephone Number, Including Area Code) (340) 776-2010

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None N/A

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)

Preferred Stock Purchase Rights
-------------------------------
(Title of Class)

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 September 17, 1998, 8,624,202 shares of $0.01 par value Common Stock of
the registrant were outstanding. The aggregate market value of the voting stock
held by non-affiliates of the registrant based upon the closing price of $2.625
per share for the registrant's Common Stock, as reported on the NASDAQ National
Market System as of September 17, 1998, was $22,205,405.

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<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Little Switzerland, Inc. ("Little Switzerland" or the "Company") is a
specialty retailer of luxury items. The Company operates 26 distinctively-
designed retail stores on ten islands and Alaska and has eight franchise
locations in the Bahamas. For a description of the Company's properties see
Item 2 "Property." The Company markets a wide selection of high quality
products including watches, jewelry, crystal, china, fragrances, gifts and
accessories. The Company is the exclusive retailer of certain brand name
products on some islands. The Company's customers are primarily tourists from
the United States.

Little Switzerland was incorporated in the state of Delaware on May 23,
1991. On July 17, 1991, approximately 68% of the outstanding common stock, par
value $.01 per share (the "Common Stock"), of Little Switzerland was sold in a
public offering. L.S. Wholesale, Inc. ("L.S. Wholesale") and L.S. Holding, Inc.
("L.S. Holding") are wholly-owned subsidiaries of Little Switzerland. As of
September 17, 1998, there were ten subsidiaries of L.S. Holding incorporated in
various jurisdictions. L.S. Wholesale acts as purchasing agent for items sold
by the Company's stores. The subsidiaries of L.S. Holding are as follows:

Montres et Bijoux, S.A.R.L.
St. Martin/St. Barths
France, 1986

World Gift Imports N.V.
St. Maarten
Netherlands Antilles, 1984

LS Holding (Aruba) N.V.
Aruba, 1987

LS Holding (Curacao) N.V.
Netherlands Antilles, 1987

Little Switzerland (Antigua) Limited
Antigua, 1988

Little Switzerland (St. Kitts and Nevis) Limited
St. Kitts, 1992

Little Switzerland (St. Lucia) Limited
St. Lucia, 1992

Little Switzerland (BVI) Limited
British Virgin Islands, 1993

L.S. Holding (USA), Inc.
Ketchikan, Alaska, 1994

World Gift Imports (Barbados) Limited
Barbados, 1996

The Company's executive offices are located at 161-B Crown Bay Cruise Ship
Port, St. Thomas, U.S.V.I. 00802, and its telephone number is (340) 776-2010.
The terms "Little Switzerland" and the "Company" as used in this Annual Report
include, where the context so requires, its subsidiaries.
<PAGE>

As used throughout this report on Form 10-K/A, the terms fiscal 1998, 1997
and 1996 refer to the Company's twelve month periods ended May 30, 1998, May 31,
1997 and June 1, 1996, respectively.

MERCHANDISING

High-Quality Merchandise. Little Switzerland offers high-quality
------------------------
merchandise generally available in the world's finest stores and, on some
islands, is the exclusive retailer of certain brand name products. The Company
sells internationally renowned product lines such as Rado, Omega, Tag-Heuer,
Breitling and Cartier watches, Baccarat, Waterford, Lalique and Swarovski
crystal and Rosenthal, Lladro and Herend china gifts.

Presentation of Merchandise. The Company places particular emphasis on
---------------------------
effective marketing and merchandise presentation through well-designed stores
situated in prime retail locations. The layout, fixtures and upscale
presentation of merchandise create an inviting and relaxed atmosphere which is
conducive to shopping for luxury items. Superior customer service is a high
priority, and a knowledgeable and courteous sales staff is available to assist
customers.

Availability of Merchandise. Little Switzerland's customers are tourists
---------------------------
who may be staying in one location only a short time. Often they travel as
couples or families and while on vacation they find time to shop. To meet the
demands and interests of these tourists, the Company stocks a broad selection of
luxury products and carries a significant inventory so that most items offered
by a particular store are available for immediate delivery.

Name Recognition. Little Switzerland enjoys excellent name recognition in
----------------
the United States and locally in the Caribbean. It has an established reputation
for providing a wide variety of high-quality product lines, and its stores are
recognized as desirable places to purchase luxury products.

PRODUCT LINES

The principal product lines offered by the Company are watches, jewelry,
crystal, china, fragrances, gifts and accessories.

Watches. The most significant product line for Little Switzerland is
-------
watches. Sales of watches comprised approximately 47%, 44% and 43% of sales in
fiscal 1998, 1997 and 1996, respectively. The primary watch lines marketed by
Little Switzerland during the last three fiscal years included such quality
brand names as Rolex, Rado, Omega, Raymond Weil, Cartier, Tag-Heuer, Breitling,
Citizen and Tissot, prices for which generally range from $200 to $30,000.
Historically, the Company was the exclusive authorized retailer for Rolex
watches on the islands on which the Company operates. Following the execution
of the Agreement and Plan of Merger, dated as of February 4, 1998 (the "Merger
Agreement"), with Destination Retail Holdings Corporation ("DRHC") and certain
of its affiliates, Rolex suspended shipments of its products to the Company
because Rolex indicated that it did not believe it would be in its best interest
to begin a business relationship with DRHC. Following termination of the Merger
Agreement, on June 9, 1998, the Company made numerous attempts to rebuild its
business relationship with Rolex. However, on July 15, 1998, the Company
announced that it had learned that Rolex had decided not to resume shipments of
its watches to the Company for retail sale through Little Switzerland's stores.
Sales of Rolex watches accounted for 26%, 24% and 23% of the Company's sales in
fiscal 1998, 1997 and 1996, respectively. Rolex is the only manufacturer whose
products accounted for more than 10% of the Company's sales in any of the last
three fiscal years. In order to mitigate the impact on sales of the loss of
Rolex products, the Company is actively exploring opportunities for expanding
existing, and adding new, world class product lines in both watches and jewelry.
In connection with these efforts, the Company has added Movado, Baume & Mercier
and Mont Blanc time pieces to its watch lines and is adding Breitling products
to its flagship store in Aruba. The Company is in discussions with Breitling to
add additional locations. In addition, the Company is increasing the showcase
space allocated to jewelry in certain of its larger stores to accommodate a
greater variety of moderate to higher priced fashion merchandise, including
diamond, tanzanite, pearl and pearl accent classifications. See Item 7
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Recent Developments--Rolex."

2
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Jewelry. The second most significant product line for Little Switzerland is
-------
jewelry. Most of the jewelry is produced by international manufacturers and
sales of such items accounted for 27%, 27% and 24% of sales in fiscal 1998, 1997
and 1996, respectively. Jewelry items include rings, earrings, bracelets,
necklaces, pendants and charms, which generally range in price from $100 to
$5,000.

Crystal, China, Gifts and Flatware. The Company sells numerous lines of
----------------------------------
crystal, china, gifts and flatware, including Baccarat, Lalique, Swarovski,
Goebel, Waterford, Orrefors, Kosta Boda, Daum, Lladro, Herend, Portmeirion,
Christofle and Rosenthal, prices for which generally range from $20 to $3,000.
Sales of this product category accounted for 16%, 17% and 22% of sales in fiscal
1998, 1997 and 1996, respectively.

Fragrances and Accessories. Little Switzerland carries in excess of 90
--------------------------
fragrance lines, including Yves Saint-Laurent, Estee Lauder, Chanel, Calvin
Klein, Guerlain and Christian Dior, prices for which generally range from $15 to
$150. The Company also offers a variety of accessories which include
sunglasses, costume jewelry and writing instruments from Mont Blanc.

PRICING

Little Switzerland seeks to price its merchandise at levels which compare
favorably to prices generally available for the same products in the United
States. The cost of much of the inventory purchased by the Company is often
lower than the cost to retail stores in other markets because the Company is not
required to pay a duty or tariff on most incoming products in the Caribbean. In
addition, Little Switzerland can offer price advantages because inventory
purchases are generally directly from manufacturers and large quantities are
purchased at the same time for multiple store locations. Within the Caribbean,
there are no sales taxes in the jurisdictions in which the Company operates. In
addition, tourists from the United States may bring certain amounts of
merchandise home from the Caribbean duty-free. The Company regularly monitors
prices available for comparable merchandise in the United States and adjusts
pricing structures to maintain Little Switzerland's competitive advantage.

Little Switzerland makes manufacturers' warranties available to its
customers and generally accepts the return of merchandise within 30 days of its
purchase. Merchandise returns historically have been nominal.

PURCHASING AND DISTRIBUTION

Little Switzerland purchases its merchandise from suppliers worldwide. The
Company has developed long-term relationships with a number of its key
suppliers. The Company believes that these relationships are an important
factor in its success and have enabled it to become the exclusive authorized
retailer of certain important brands of merchandise on certain islands. Most of
these exclusive relationships are not based on binding agreements with
suppliers, but rather are based on factors such as the Company's effective
representation of product lines, its prompt payment for inventory and the
suppliers' long-standing relationships with the Company. The Company believes
that the loss of any major supplier could adversely affect the Company's results
of operations.

Many of the Company's suppliers manufacture merchandise only to specific
order, and the time required for manufacture may be considerable. As a result,
orders for many key items may be placed only two or three times a year. The
Company's inventory levels are typically high, particularly as the winter
tourist season approaches, to assure tourists immediate delivery of items. The
Company's buyers continually seek to identify new product lines with an emphasis
on non-branded items which usually carry more attractive margins. Little
Switzerland utilizes its information on buying patterns in each store and
management expertise to anticipate trends in customer demand.

Little Switzerland merchandise is shipped by vendors to four distribution
centers owned by the Company which supply the stores in their respective region.

Little Switzerland stores are designed to place the customer in an
environment which is conducive to the purchasing of luxury items. Most stores
are designed by the same architectural firm and decorated in similar

3
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fashion to present a consistent theme of luxury retailing throughout the network
of stores. Stores are located in areas which are easily accessible to tourists,
often in so-called "duty-free" ports which are visited by cruise ships. The
quantity and mix of products carried by Little Switzerland stores vary from
location to location based on store size and tourist buying patterns and
preferences.

MARKETING AND ADVERTISING

The Company's marketing plan includes targeted advertising in high-
circulation travel magazines and in a large selection of local publications
which are distributed to overnight guests wherever Little Switzerland stores are
located and elsewhere throughout the Caribbean. The Company's choices of print
media are shaped by customer and tourist demographics, local and historical
sales trends which provide information about the types of tourists who are
likely to purchase merchandise, and by retail buying patterns in the United
States.

Participation in promotional programs offered by many of the world's largest
cruise ship lines is another key element in the Company's strategy to gain
greater name recognition for Little Switzerland and increase store traffic.
Presentations by "Port Lecturers" aboard the major cruise ships provide cruise
ship passengers with highly targeted shopping information on retailers who
participate in the program before the passengers disembark at each port of call.
Similar hotel promotions which focus on overnight guests also contribute to the
Company's overall effort to increase its market share of the Caribbean retail
industry.

INVENTORY CONTROL AND SECURITY

Little Switzerland management utilizes modern inventory control and security
systems, careful personnel screening and well-articulated policies and
procedures to control losses and shrinkage. The Company has inventory control
and management information systems which integrate sales, inventory and
financial reporting and control. These systems provide vital management
information such as store-by-store data, which includes sales, profitability and
inventory levels by product category.

Given the high value of the merchandise offered by the Company, security is
a high priority. Sophisticated alarm systems as well as high security vaults are
in place in each location, and security guards are assigned at individual stores
as needs dictate. Most jewelry and watches are returned to these vaults each day
at closing under close scrutiny. The Company's cycle count inventory program
provides the Company with periodic verification of merchandise. The Company
carries insurance coverage on its inventory in amounts which it believes to be
customary and adequate.

COMPETITION

The Company's markets contain numerous retail stores and the competition for
tourist dollars is intense. Little Switzerland also competes with stores selling
similar products in the United States and in other markets where tourists
travel. The majority of the Company's local competitors are independently owned
stores and do not offer the variety of brand name luxury products which Little
Switzerland markets. The Company believes that its status as the exclusive
authorized retailer of certain brand name products in a number of markets
enhances its competitive position. The loss of one or more of these exclusive
relationships could adversely affect the Company's ability to compete in its
markets.

EMPLOYEES

As of May 30, 1998, Little Switzerland employed approximately 500 people.
The number of employees, including the number of sales personnel, varies from
season to season based on the Company's needs. Currently, the Company has no
collective bargaining agreements and has never experienced a work stoppage. In
February 1995, the employees of the Company's subsidiary in St. Maarten,
Netherlands Antilles voted to be represented by a local labor union. The Company
engaged in negotiations with the union but no collective bargaining agreement
was consummated. The Company considers relations with its employees to be good.

4
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Since August, 1998, the Company has experienced certain management changes.
See Item 7 "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Management Changes."

WORKING CAPITAL AND SEASONALITY

The Company's primary needs for working capital are to support its inventory
requirements, which fluctuate during the year due to the seasonal nature of the
Company's business, to maintain and remodel its existing stores and to finance
the opening or acquisition of new stores. In addition, a significant investment
in inventory is required at all times in order to meet the demands of its
customers who, as tourists, require immediate delivery of purchased goods.

As a general policy, the Company does not sell merchandise on account.
Virtually all sales are paid by cash, check or major credit card.

On the basis of its current operating plan, the Company anticipates that its
cash flow from operations together with funds available from bank financing will
be sufficient to fund its operations and expansion for the foreseeable future.
See Item 7 "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Liquidity and Capital Resources."

The Company's business is seasonal in nature, reflecting travel patterns to
the Caribbean. The peak selling season in the Caribbean runs from late fall
through spring. The peak selling season in Alaska runs from late spring through
the summer. Working capital requirements generally reflect this seasonality as
the Company increases its inventory in anticipation of the peak selling season.
Since the Company has less cash available from operations in the off-season, the
Company generally borrows to finance its build-up of inventory and any expansion
of Company operations. See Item 7 "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Seasonality."

INFLATION

Historically, the Company has generally been able to increase prices to
reflect cost increases resulting from inflation and expects to be able to do so
in the future. While the Company cannot precisely determine the effect of
inflation on its operations, the Company does not believe that its operations
have been materially affected by inflation during the three most recent fiscal
years.

OTHER MATTERS

Foreign and Domestic Operations. See Note 2 of Notes to Consolidated
-------------------------------
Financial Statements.

Environmental. In the opinion of Little Switzerland, compliance with
-------------
current laws and regulations pertaining to the environment, health and safety
has not materially affected its business or financial condition and will not do
so in the foreseeable future.

Customers. Little Switzerland is not dependent upon any single customer or
---------
upon any single group of customers, the loss of which would have a material
effect on Little Switzerland.

Patents and Trademark. Little Switzerland holds a number of licenses,
---------------------
trademarks and trade names. None of the foregoing is believed to be material to
Little Switzerland.

Other. Little Switzerland does not have significant research and
-----
development expenditures.

Little Switzerland does not have significant backlog of orders and
inventory. Little Switzerland must carry adequate inventory to enable tourists
to receive immediate delivery of items.

Little Switzerland does not have any business under government contract.

5
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ITEM 2. PROPERTY

Little Switzerland's 26 stores are all situated in prime retail locations.
The Company owns its facility in Philipsburg, St. Maarten and leases the 25
other stores it operates. Most of its stores are free-standing. In addition to
approximately 68,000 square feet of selling space, the Company has approximately
33,000 square feet of warehouse space, 11,000 square feet of which is at the
Company's main warehouse on St. Thomas. 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 ten-year ground
lease, which expires in April, 2000. 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. The Company anticipates that in most cases retail space
for new stores opened or acquired will be leased. This arrangement provides the
Company not only with greater flexibility in selecting prime retail locations
for its stores, but also allows the Company to utilize its capital to more
effectively design and decorate its stores with quality furnishings commensurate
with the prestigious image the Company maintains.

Little Switzerland also has eight franchise locations in the Bahamas. In
return for the use of the Little Switzerland name and the services provided by
Little Switzerland, the Company receives a minimum annual franchise fee of
$100,000. The franchise agreement pursuant to which these locations are
maintained has been terminated effective as of November 1, 1998.

ITEM 3. LEGAL PROCEEDINGS

On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware (Civil Action No. 98-315-SLR)
against DRHC, Stephen Crane, DRHC's controlling shareholder, Young Caribbean
Jewellery Company Limited, a Cayman Islands corporation, Alliance International
Holdings Limited, a Bahamian corporation, and CEI Distributors Inc., a British
Virgin Islands corporation, each an affiliate of DRHC. The Company alleges
breach of the Merger Agreement among the Company, DRHC and certain affiliates of
DRHC and also alleges claims of misrepresentation and civil conspiracy, among
other causes of action. The Company is seeking monetary damages, including,
without limitation, consequential damages relating to harm to its business.

On July 15, 1998, the defendants moved to dismiss the Complaint on the
grounds that the court lacks subject matter jurisdiction over the claims. In
addition, Mr. Crane moved to dismiss the Complaint on the grounds that the court
lacks personal jurisdiction over him. Following preliminary discovery, the
Company filed an opposition to the defendants' motion to dismiss. This motion
remains pending before the court. See Item 7 "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Recent Developments-
- -Litigation Against DRHC."

On March 11, 1998, the Company filed a civil action in the Territorial Court
of the Virgin Islands (Civil Action No. 98-229) against Lorraine Quetel, a
former employee of the Company, Lydia Magras and Bon Voyage Travel, Inc. The
Company alleges that such parties were involved in the employee defalcation that
management believes occurred during the Company's fiscal year ended May 31,
1997. The Company is seeking a preliminary injunction and damages against the
former employee and the other parties allegedly involved in the theft against
the Company. See Item 7 "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Recent Developments--Employee Defalcation
Loss."

The Company is involved in various other legal proceedings which, in the
opinion of management, will not result in a material adverse effect on the
financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended May 30, 1998.

6
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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "LSVI." The following table sets forth for the periods
indicated the high and low sale prices per share of the Common Stock on the
NASDAQ National Market System, as reported by NASDAQ. The Company's initial
public offering of its Common Stock at $12.00 per share occurred on July 18,
1991.
<TABLE>
<CAPTION>

High Low
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<S> <C> <C>

Fiscal Year ended May 30, 1998
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Quarter ended August 30, 1997 7-3/8 5-5/8
Quarter ended November 29, 1997 7 6
Quarter ended February 28, 1998 7-27/32 6
Quarter ended May 30, 1998 8 5-7/16

Fiscal Year ended May 31, 1997
------------------------------

Quarter ended August 30, 1996 5-3/4 4
Quarter ended November 29, 1996 5-1/2 4-1/4
Quarter ended February 28, 1997 5-1/8 4-7/16
Quarter ended May 31, 1997 6-3/8 4-1/4
</TABLE>

The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain earnings for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.

On September 17, 1998, there were 132 holders of record of the Company's
Common Stock.

RECENT SALES OF UNREGISTERED SECURITIES

Little Switzerland has not sold any securities within the past three years
that were not registered under the Securities Act of 1933, as amended.

7
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ITEM 6 SELECTED FINANCIAL DATA

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

Year Ended
-------------------------------------------------------------
May 30, May 31, June 1, May 31, May 31,
1998 1997 1996 1995 1994
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>

INCOME STATEMENT DATA:
Net sales $100,368 $88,314 $62,895 $72,240 $64,312
Operating income (loss) $ (1,165) $ 2,661 $ 1,666 $ 4,736 $ 5,221
Income (loss) before $ (3,568) $ 1,159 $ 915 $ 3,694 $ 4,098
cumulative effect of change
in accounting principle
Net income (loss) $ (3,803) $ 1,159 $ 915 $ 3,694 $ 4,098
======== ======= ======= ======= =======

Basic and diluted earnings $ (0.42) $ 0.14 $ 0.11 $ 0.44 $ 0.49
(loss) per share before
cumulative effect of
change in accounting principle (1)
Basic and diluted earnings
(loss) per share (1) $ (0.45) $ 0.14 $ 0.11 $ 0.44 $ 0.49
======== ======= ======= ======= =======

BALANCE SHEET DATA:
Total assets $ 77,151 $77,391 $77,877 $58,446 $52,869
Long-term debt $ 3,894 $ 6,119 $ 8,068 - -

OPERATING DATA:
Gross profit margin 42.5% 43.7% 42.5% 42.8% 44.1%
Operating income (loss) margin (1.2)% 3.0% 2.7% 6.6% 8.1%
Stores open at period end (2) 26(4) 27(5) 27(6) 24(7) 23(8)
Comparable store net sales
(decrease) increase (3) 8.7% (14.3%)(9) 17.3% 4.1% 0.6%
</TABLE>
______________________
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) In addition to the stores described, the Company's franchisee, Solomon
Brothers Ltd., currently has eight stores in the Bahamas which are operated
pursuant to a franchise agreement entered into in fiscal 1988. This
franchise agreement has been terminated effective as of November 1, 1998.
(3) Comparable store sales are calculated using sales of stores which were open
for the full period.
(4) In fiscal 1998, the Company closed one store in Aruba for renovation.
(5) In fiscal 1997, the Company opened a new Little Switzerland store on the
island of St. Lucia and in Skagway, Alaska. Also, it closed a Little
Treasures store in Curacao and its accessories store in Aruba.
(6) In fiscal 1996, the Company opened two new stores in Aruba and one in
Juneau, Alaska. In addition, it acquired two stores previously operating
under the name "Louis Bayley" on the island of Barbados. It also closed its
American Yacht Harbor and Little Treasures stores on St. Thomas.
(7) In fiscal 1995, the Company opened a new Little Switzerland store on the
island of St. Martin on the French side and in Ketchikan, Alaska. Also, it
closed one store in St. Thomas due to the expiration of its lease.
(8) In fiscal 1994, the Company opened two "Little Treasures" stores in Curacao
and St. Thomas, a Little Switzerland store in St. Thomas and reopened a
Little Switzerland store in Aruba which had been closed since November 1992
due to remodeling of the hotel in which it is located. In April 1994, the
Company acquired "La Parfumerie", a fragrance store in Antigua.
(9) This decrease was primarily the result of forced store closures due to
damage to several of the Company's stores caused by Hurricanes Luis and
Marilyn. See Item 7 "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Fiscal 1997 Compared to Fiscal 1996."

8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS

This Annual Report contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.

The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the frequency of tourist visits to the locations where the Company maintains
retail stores, (ii) the Company's ability to retain relationships with its major
suppliers of product for resale, (iii) the Company's ability to mitigate the
impact on sales of the loss of Rolex products by expanding existing, and adding
new, world class product lines in both watches and jewelry, (iv) weather in the
Company's markets, (v) actions of the Company's competitors and the Company's
ability to respond to such actions, (vi) economic conditions that affect the
buying patterns of the Company's customers and (vii) availability of new tourist
markets for expansion. In addition to the foregoing, the Company's actual
future results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth in the Company's
various filings with the Securities and Exchange Commission and of changes in
general economic conditions, changes in interest rates and/or exchange rates and
changes in the assumptions used in making such forward-looking statements.

The following represents the components of operating results for the three
years ended:
<TABLE>
<CAPTION>

Fiscal Year Ended
-------------------------------------
May 30, May 31, June 1,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>

Net sales 100.0% 100.0% 100.0%

Cost of sales 57.5 56.3 57.5
----- ----- -----

Gross profit 42.5 43.7 42.5

Selling, general and administrative 43.7 41.3 47.3
expenses

Gain on insurance proceeds -- (0.6) (7.5)
----- ----- -----

Operating Income (Loss) (1.2) 3.0 2.7
Interest expense, net 1.5 1.7 0.9
----- ----- -----

Income (Loss) before Provision (2.7) 1.3 1.8
for Income Taxes

Provision for Income Taxes 0.9 -- 0.3
----- ----- -----

Net Income (Loss) before Cumulative (3.6) -- --
Effect of Change in Accounting
Principle

Cumulative Effect of Change in (0.2) -- --
----- -----
Accounting Principle

Net (Loss) income (3.8)% 1.3% 1.5%
===== ===== =====
</TABLE>

9
<PAGE>

RECENT DEVELOPMENTS

Employee Defalcation Loss
- -------------------------

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 and
evaluation, which focused on unlocated differences in cash balances, management
believes that an employee defalcation occurred during fiscal 1997. The employee
was able to circumvent existing internal controls largely due to lapses in
appropriate segregation of duties regarding cash deposits and disbursements,
inter-bank transfers and bank account reconciliations. This lapse in the
segregation of such duties was further exacerbated by the resignation of the
Company's Assistant Treasurer on February 28, 1997, which office was not filled
until April 29, 1997. Two individuals, one of whom was an employee of the
Company, were arrested on February 10, 1998 in connection with this defalcation
and charged with embezzlement and appropriation of the property of the Company.
Lorraine Quetel, the former employee, has pled guilty to the embezzlement of
$1.85 million. The criminal action against Lydia Magras is still pending.

The estimated loss of approximately $2.4 million has been classified as a
general and administrative expense in the consolidated financial statements for
the fiscal year ended May 31, 1997. As a result of the charge, the Company
filed amended financial statements on Form 10-Q for each of the quarters within
fiscal 1997. Accordingly, the comparative consolidated statements of income for
the three month period ended November 30, 1996 reflect a net loss of $560,000 or
$0.07 per share, including a charge to administrative expense of $481,000 which,
after tax, negatively impacted net income and earnings per share by $394,000 and
$.05, respectively. For the six month period ended November 30, 1996, the
comparative consolidated statements of income reflect a net loss of $1.3 million
or $0.16 per share, including a charge to administrative expense of $758,000
which, after tax, negatively impacted net income and earnings per share by
$621,000 and $0.08, respectively.

The Company has insurance coverage which calls for a maximum claim
limitation of $1,000,000. A claim for the full amount of the loss has been
submitted and payment of the $1,000,000 has been received. The amount of
insurance recovery from its insurance carrier relating to these losses has been
reflected in the selling, general and administrative expenses in the
accompanying consolidated financial statements for the year ended May 30, 1998.
To date, the Company has received $65,000 in restitution from the employee. On
March 11, 1998, the Company filed a civil action against the employee and
certain other parties alleged to be involved in the defalcation seeking full
restitution from such parties, however, the Company does not know what, if any,
of the funds are still in the possession of the employee and such other parties.
See Item 3 "Legal Proceedings."

Although the Company continues to work to improve its accounting and
reconciliation methods, since the defalcation, certain of these methods have
been revised to improve monitoring of the Company's systems. For example, the
Company's accounting system has been revised to facilitate the closer monitoring
of detail transactions, so that each separate transaction is posted rather than
posting totals by category. In addition, the Company's Treasury and Accounting
staffs have been increased and their functions upgraded and reorganized in an
attempt to provide adequate segregation of duties and more timely bank account
reconciliations. Accordingly, unlike at the time of the defalcation, no one
person has control over cash deposits and disbursements, inter-bank transfers
and bank account reconciliations. As part of its sales audit, the Company also
has begun reconciling cash register deposits for each of its stores. As an
additional check on the system, a new cash flow report is prepared daily and
reviewed by management of the Company. This cash flow report sets forth, for
each day, the bank balance, the book balance, disbursements, transfers and float
(i.e., checks outstanding against the Company's credit line).

Merger Transaction
- ------------------

In the fall of 1997, the Board of Directors of the Company decided to
explore various strategic alternatives, including potential business
combinations with third parties. In this regard, the Company, through

10
<PAGE>

its financial advisor, Wasserstein Perella & Co., Inc., conducted a controlled
sales process to determine the interest of third parties in acquiring the
Company. As part of this process, the Company engaged in discussions with DRHC
as well as other third parties concerning a potential sale of the Company.
Following extensive negotiations, the Company entered into the Merger Agreement,
dated as of February 4, 1998, with DRHC and certain of its affiliates, pursuant
to which DRHC would acquire all of the issued and outstanding shares of the
Common Stock of the Company at the effective time of the proposed merger for
$8.10 per share in cash. As required under the Merger Agreement, the Board of
Directors scheduled a Special Meeting of Stockholders for May 8, 1998 to request
stockholder approval of the Merger Agreement. In connection with the Special
Meeting of Stockholders, the Company mailed proxy materials to the stockholders
of the Company on April 3, 1998.

On May 4, 1998, the Company announced that it had received correspondence
from DRHC's counsel indicating that DRHC's financing commitment letters from
Donaldson Lufkin & Jenrette, Inc. and DLJ Bridge Finance, Inc. (collectively,
"DLJ") had terminated on April 30, 1998 in accordance with their terms and that
DLJ, at that particular time, did not intend to extend or renew the commitment
letters. On May 8, 1998, following stockholder approval of the proposed merger,
the Company notified DRHC that the Company had satisfied all of the conditions
to the Merger Agreement and informed DRHC that it was prepared to close the
proposed merger at that time. In response, DRHC informed the Company that it
was not yet prepared to close the proposed merger, indicated that it did not
have the financing necessary to consummate the proposed merger and requested an
extension of between 90 and 120 days. On May 21, 1998, the Company announced
that it had received a second request by DRHC for a ninety day extension in
exchange for certain limited concessions. In response, the Company indicated
that it was prepared to grant a two week extension in exchange for DRHC's
acknowledgment that all conditions to the merger had been satisfied and the
concessions offered by DRHC. Although, the Company had the contractual right to
terminate the Merger Agreement, the Company continued to work diligently with
DRHC and its representatives to understand the structure, timing and likelihood
of Destination's financing. In connection with the extension negotiations, DRHC
repeatedly refused to provide the Company with financial or other form of
security or to reimburse the Company's merger-related expenses going forward in
exchange for the Company granting an extension. As a result of its diligence
and these negotiations, it became clear to the Board of Directors that it was
highly unlikely that DRHC would be able to raise the funds necessary to
consummate the proposed merger. On June 9, 1998, the Company terminated the
Merger Agreement because of DRHC's inability to raise the financing necessary to
consummate the proposed merger.

Litigation Against DRHC
- -----------------------

As a result of the Company's losses associated with the termination of the
Merger Agreement, on June 10, 1998, the Company filed a civil action in the
United States District Court for the District of Delaware (Civil Action No. 98-
315-SLR) against DRHC, Stephen Crane, DRHC's controlling stockholder, and
certain of DRHC's affiliates. The Company alleges breach of the Merger
Agreement and also alleges claims of misrepresentation and civil conspiracy,
among other causes of action. The Company is seeking monetary damages,
including, without limitation, consequential damages relating to harm to its
business.

Rolex
- -----

Prior to entering into the Merger Agreement with DRHC, the Company was the
exclusive authorized retailer for Rolex watches on the islands on which the
Company operates. Following the execution of the Merger Agreement with DRHC,
Rolex suspended shipments of its products to the Company because Rolex indicated
that it did not believe it would be in its best interest to begin a business
relationship with DRHC. The Company received its last shipment of Rolex
products in January, 1998. Following the termination of the Merger Agreement,
on June 9, 1998, the Company made numerous attempts to rebuild its business
relationship with Rolex. However, on July 15, 1998, the Company announced that
it had learned that Rolex had decided

11
<PAGE>

not to resume shipments of its watches to the Company for retail sale through
Little Switzerland's stores. Sales of Rolex watches accounted for 26%, 24% and
23% of the Company's sales in fiscal 1998, 1997 and 1996, respectively. The
Company believes that the loss of Rolex will have a material adverse effect on
the Company's results of operations for the fiscal year ending May 29, 1999 and
beyond. In order to mitigate the impact on sales of the loss of Rolex as a
supplier, the Company is actively exploring opportunities for expanding
existing, and adding new, world class product lines in both watches and jewelry.
See Item 1 "Business--Product Lines--Watches." There can be no assurances that
the Company's actions in replacing Rolex products with new or expanded watch and
jewelry products will be successful or that the sales of these new or expanded
products will reduce the effect of the loss of Rolex as a supplier on the
Company's sales.

Management Changes
- ------------------

On August 14, 1998, the Company announced the resignation of John E. Toler,
Jr., the President and Chief Executive Officer of the Company, effective August
31, 1998. At the request of the Company's Board of Directors, Mr. Toler will
remain a director of the Company until the next stockholders' meeting. Mr.
Toler's decision to resign was motivated by his as well as his wife's desire to
return to the continental United States. The Company has commenced the
selection process for a new President and Chief Executive Officer, and is in
final discussions with nationally recognized executive search firms to assist in
this process. The Board of Directors appointed C. William Carey as Acting Chief
Executive Officer until such time as a successor President and Chief Executive
Officer is identified. Mr. Carey has relocated to St. Thomas U.S.V.I. In
connection with accepting this interim position, Mr. Carey has resigned as the
Chairman of the Board of Directors, effective September 1, 1998.

On August 25, 1998, Michael M. Poole joined the Company as its Vice
President and General Merchandise Manager. Thomas S. Liston has resigned as
the Chief Financial Officer, Vice President and Treasurer of the Company
effective September 10, 1998. Mr. Liston's decision to resign was motivated by
his desire to spend more time with his family. The Company has hired David J.
Nace as the new Chief Financial Officer, Executive Vice President and Treasurer
of the Company effective September 10, 1998.

FISCAL 1998 COMPARED TO FISCAL 1997

Net sales for the fiscal year ended May 30, 1998 were $100.4 million, an
increase of $12.1 million or approximately 13.7% from $88.3 million in fiscal
1997. Sales for stores open in all of fiscal 1998 and 1997 increased $7.2
million or 8.7% from $82.7 million in fiscal 1997 to $89.9 million in fiscal
1998. The increase in total Company sales and comparable store sales is
attributed to an especially strong sales performance in the watch and jewelry
classifications resulting from more focused assortments and maintaining a much
better "in-stock" position in core suppliers as compared to fiscal year 1997.
All of the Company's market areas experienced sales growth during fiscal year
1998 with the Virgin Islands, St. Maarten/St. Martin, Antigua and Alaska
reporting strong double digit gains.

Gross profit margin decreased from 43.7% of net sales in fiscal 1997 to
42.5% of net sales in fiscal 1998. Management attributes the reduction in gross
margin of 1.2% to the significant growth of the watch category which generates
lower margins and the impact of lower margins realized in the Alaska market. In
addition, inventory reductions continued in the china, crystal, gift and
accessory categories for repositioning purposes.

Selling, general and administrative expenses ("SG&A") for the year ended May
30, 1998 increased 20% from $36.5 million in fiscal 1997 to $43.8 million in
fiscal 1998. The increase is due primarily to $2.7 million in charges incurred
as the result of the failed merger with DRHC (see "--Merger Transaction"), and a
$2.5 million non-cash charge resulting from the Company's recognition of
impaired asset values related to the goodwill at the World Gift Import
(Barbados) Limited subsidiary. Also contributing to the increased expenses were
charges associated with the employee defalcation of $0.6 million. See "--
Employee Defalcation Loss."

In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting
on the Costs of Start-up Activities. SOP 98-5 requires all costs associated
with the preopening, preoperating and organization activities to be expensed as
incurred. The Company has elected to adopt SOP 98-5 during fiscal 1998. As
required by

12
<PAGE>

SOP 98-5, the Company has recorded a one-time non-cash charge of approximately
$0.2 million (net of applicable tax) to expense previously capitalized start-up
costs. This charge has been classified in the accompanying consolidated
financial statements for fiscal year ended May 30, 1998 as a cumulative effect
of a change in accounting principle.

Net interest expense remained at $1.5 million in fiscal 1998 which was
consistent with the Company's average short term borrowing used to acquire
additional inventory to support the Company's sales growth. The weighted
average interest rate was 7.9% in fiscal 1997 compared to 8.1% in fiscal 1998.

The Company's income is subject to taxation in each of the jurisdictions in
which it operates at rates ranging from 3.7% to 42%, and, accordingly, the
effective tax rate for any given year is a function of the relative mix of
taxable income generated at each of the Company's locations. The Company's
wholly-owned subsidiary, L.S. Wholesale which acts as a purchasing agent for
items sold by the Company's stores and charges fees for acting as such an agent,
has elected to be treated as a "936 Company" under section 936 of the Internal
Revenue Code of 1986, as amended. Under an agreement which expires at the end
of August, 1998 (subject to renewal), L.S. Wholesale benefits from a lower tax
rate on its income earned outside the U.S. Virgin Islands, which is taxed at a
rate of 3.74%. The lower tax rate had the effect of increasing earnings per
share by $0.22 in fiscal year 1998 and $0.12 in fiscal year 1997. The Company
has submitted its application for renewal of benefits, and anticipates that it
will be notified with respect to the renewal sometime during the second quarter
of fiscal 1999. If the renewal is granted, then the lower tax rate will be
applied retroactively to the end of August, 1998. The Company anticipates that
the agreement will be renewed at the same or less favorable benefit. It,
however, has no assurance at this time that such a renewal will be granted. If
it is not renewed, all of the Company's U.S.V.I. based income will be taxed at
the statutory rate of 37.4%. The Company's effective tax rate was 31.9% and
0.0% in the fiscal years ended May 30, 1998 and May 31, 1997, respectively.

The Company utilizes software and related technologies throughout its
business that may be affected by the "Year 2000 problem," which is common to
most corporations, and which concerns the inability of information systems,
primarily computer software programs, to recognize and process date sensitive
information properly as of and subsequent to January 1, 2000. An internal study
has been completed resulting in an action plan which is designed to ensure that
the Company's systems continue to meet its internal needs and those of its
customers. The Company believes that this plan provides for modifications or
replacements that will be accomplished in time to minimize any detrimental
effects on operations. While it is not possible to give an accurate estimate of
the cost of this work, the Company expects that such costs will not be material
to its results of operations in one or more fiscal quarters or years, and these
costs will not have a material adverse impact on the long-term results of
operations, liquidity or consolidated financial position of the Company. System
maintenance or software modification costs will be expensed as incurred, while
the costs of new software will be capitalized and amortized over the software's
useful life.

FISCAL 1997 COMPARED TO FISCAL 1996

Net sales for the fiscal year ended May 31, 1997 increased approximately
$25.4 million or 40% from $62.9 million in fiscal 1996 to $88.3 million in
fiscal 1997. Sales for stores open in all of fiscal 1997 and 1996 decreased
approximately $3.5 million or 14.3% from $24.7 million in fiscal 1996 to $21.1
million in fiscal 1997. Both the large increase in overall sales and the
comparable store sales decline are attributable to the impact in fiscal 1996 of
hurricanes Luis and Marilyn which inflicted damage to several of the Company's
stores and caused significant damage to various islands' infrastructures. Those
stores that were not damaged and did remain open in fiscal 1996 benefited from
the closure of neighboring stores and thus reported higher than normal sales.
The store located on the harbor in Marigot, St. Martin, the last of the
hurricane damaged stores, reopened in November, 1996. While the reopening of
the Company's hurricane damaged stores and the opening of two new stores in
fiscal 1997 contributed to the overall increase in sales in fiscal 1997 compared
to fiscal 1996, management believes that the impact of the hurricanes continued
to have a negative impact on sales into fiscal 1997.

13
<PAGE>

Gross profit margin improved from 42.5% of net sales in fiscal 1996 to 43.7%
of net sales in fiscal 1997. Management attributes this improvement to the
stronger US dollar measured against European currencies partially offset by the
impact on margins of certain inventory liquidation efforts.

SG&A expenses for the year ended May 31, 1997 increased 23% from $29.8
million in fiscal 1996 to $36.5 million in fiscal 1997. The increase is largely
due to the estimated loss of approximately $2.4 million resulting from the
employee theft described above, which has been classified as a general and
administrative expense in the accompanying consolidated financial statements for
the fiscal year ended May 31, 1997. See "--Employee Defalcation Loss." In
addition, management further attributes the increase to the lower than normal
SG&A expenses in the prior year from the closed stores as well as additional
expense associated with its new store in Alaska. Management also noted higher
depreciation associated with stores remodeled after the hurricanes.

Net interest expense increased from $558,000 in fiscal 1996 to $1.5 million
in fiscal 1997 primarily due to higher average borrowings, caused by the
Company's acquisition of the inventory, leasehold rights, and fixed assets of
its two stores in Barbados. Additionally, the weighted average interest rate
increased from 6.5% in fiscal 1996 to 7.9% in fiscal 1997.

FISCAL 1996 COMPARED TO FISCAL 1995

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. The Company has
reopened all stores damaged by such hurricanes.

The Company has settled all outstanding claims related to the hurricanes
with its insurance carriers. In connection with the 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 lost profits for the then unopened Marigot
store related to fiscal 1997, was recorded as deferred income on the Company's
consolidated balance sheet as of June 1, 1996.

Net sales for the fiscal year ended June 1, 1996, decreased approximately
$9.3 million or 13% from $72.2 million in fiscal 1995 to $62.9 million in fiscal
1996. Sales for stores open in all of fiscal 1995 and 1996 increased
approximately $3.6 million or 17.3% from $20.6 million in fiscal 1995 to $24.2
million in fiscal 1996. The sales trends were dictated by the impact of
hurricanes Luis and Marilyn, which struck the Caribbean in September 1995,
forcing stores closures on the island of St. Thomas, St. Maarten, St. Barths,
St. Kitts and Antigua. As of June 1, 1996, all but two little Switzerland stores
reopened. One Marigot, St. Martin store reopened in mid-June 1996, with the
other Marigot store reopened in November, 1996. As a result of the store
closures and damaged island infrastructures management believes tourism was
redirected to other destinations, thereby benefitting Little Switzerland stores
on undamaged islands.

Gross profit margin decreased from 42.8% of sales in fiscal 1995 to 42.5% of
sales in fiscal 1996. The Company attributed this decline to the weak U.S.
Dollar as compared to European currencies during the early portion of fiscal
1996 as well as the impact of certain fixed components of cost-of-sales as
measured against a much lower sales base.

14
<PAGE>

SG&A expenses were $29.8 million or $3.6 million and 13.6% higher than a
year ago. Management attributed these increases mostly to new stores opened
during fiscal 1996.

Net interest expense increased from $240,000 in fiscal 1995 to $558,000 in
fiscal 1996. The increase reflects higher average borrowings, primarily due to
the Company's acquisition of the inventory, leasehold rights and fixed assets of
two stores in Barbados in February 1996. The weighted average interest rate
decreased from 7.9% in fiscal 1995 to 6.5% in fiscal 1996.

The Company's income is subject to taxation in each of the jurisdictions in
which it operates at rates currently ranging from 3.7% to 42.0%, and,
accordingly, the effective tax rate for any given year is a function of the
relative mix of taxable income generated at each of the Company's locations.
Under an agreement which expires in 1998 (subject to renewal), L.S. Wholesale
benefits from a lower tax rate on its income earned outside the U. S. Virgin
Islands, which is taxed at a rate of 3.74%. See "--Fiscal 1998 Compared to
Fiscal 1998." The lower tax rate had the effect of increasing earnings per share
by $0.12 and $0.11 in fiscal years 1996 and 1995, respectively. The Company's
effective tax rate was 17.8% in fiscal 1995 and 17.4% in fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary needs for liquidity are to support its inventory
requirements, which fluctuate during the year due to the seasonal nature of the
Company's business, and to maintain and remodel its existing stores and finance
the opening or acquisition of new stores. Inventory is maintained at levels to
adequately meet the demands of customers who, as tourists, require immediate
delivery of purchased goods.

Cash provided by operations during fiscal 1998, 1997 and 1996 was $3.4
million, $0.4 million and $3.8 million, respectively. The decrease in fiscal
1997 was primarily due to the loss of approximately $2.4 million in cash as a
result of the employee defalcation during fiscal 1997. See "--Employee
Defalcation Loss."

The Company has available unsecured credit facilities of $19.7 million of
which $7.8 million in borrowings were outstanding as of May 30, 1998. These
credit facilities with the Company's two lead banks are up for renewal during
the second and third quarters of fiscal 1999. Management anticipates that these
credit facilities will be renewed in due course. It, however, has no assurance
at this time that such renewals will be granted. If these credit facilities are
not renewed or the terms of these credit facilities are materially changed, it
could have a material adverse effect on the Company's results of operations.
Additionally, on August 11, 1998, the Chase Manhattan Bank approved a $3.0
million line of credit (the "Chase Credit Facility"), which the Company will use
to support its inventory requirements for the peak selling season. According to
the term sheet, the Chase Credit Facility expires 180 days from the date of the
initial drawdown, which must occur no later than October 30, 1998. As of
September 25, 1998, the Company has drawn $1.5 million against the Chase Credit
Facility. Further, 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 is payable monthly and the principal is payable in equal
quarterly payments over a four year period commencing March 1997. The Company
is in compliance with, or has obtained waivers for, all restrictive covenants
related to its unsecured and term debt agreements. Additionally, the Company has
available separate facilities for foreign exchange contracts. It remains
management's expectation that funds available from operations and existing
credit facilities will be sufficient to fund operations and expansion for the
foreseeable future.

Capital expenditures (excluding acquisitions) during fiscal 1998, 1997 and
1996 were approximately $1.1 million, $4.4 million and $6.8 million,
respectively. Capital expenditures during fiscal 1998 included approximately
$900,000 for store refurbishments and $200,000 for computer hardware and
software upgrades. Capital expenditures during fiscal 1997 included
approximately $3.6 million for the refurbishment of existing stores and
approximately $800,000 for computer and point-of-sale hardware and software
upgrades.

The Company currently leases 25 of its 26 stores and anticipates obtaining
retail space for new stores through leases. This arrangement allows the Company
to more effectively design and decorate its stores with quality furnishings
consistent with the prestigious image the Company maintains.

15
<PAGE>

SEASONALITY

The Company's business is seasonal in nature, reflecting travel patterns to
the Caribbean. The peak selling season in the Caribbean runs from late fall
through spring. Accordingly, approximately one-third of the Company's sales
have historically occurred during the third fiscal quarter, and the Company may
incur losses in the first and second fiscal quarters. Working capital
requirements generally reflect this seasonality as the Company increases its
inventory in anticipation of the peak selling season. Since the Company has
less cash available in the off season, it may be necessary to borrow to finance
its build-up of inventory and any expansion of the Company's operations.
Unaudited quarterly financial information for the Company for fiscal 1998 and
1997 is included in Note 9 of Notes to Consolidated Financial Statements.

INFLATION

EXCHANGE RATES

While the Company receives United States dollars for most of its sales, a
significant portion of the Company's inventory purchases are transacted in
foreign currencies. Because of the Company's need to maintain adequate levels
of inventory, the Company must place large orders for merchandise many months in
advance of when it will receive payment for the merchandise from customers. The
Company's ability to offer attractive pricing of luxury goods purchased in
foreign currency depends in part on the relative exchange rates between the
United States dollar and the various foreign currencies. The Company engages in
hedging transactions to minimize the effects of fluctuating foreign exchange
rates on the Company's results of operations. The Company enters into foreign
exchange contracts to hedge against foreign currency fluctuations for purchase
commitments and accounts payable denominated in foreign currencies. The Company
believes that foreign currency hedging has been effective in minimizing the
impact of foreign currency fluctuations on gross margin in prior years and
expects to continue this program. See Note 2 of Notes to Consolidated Financial
Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

16
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Index To Consolidated Financial Statements

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Financial Statements as of and for the Year Ended May 30, 1998:

Report of Independent Public Accountants............................... 18

Consolidated Balance Sheets as of May 30, 1998 and May 31, 1997........ 19

Consolidated Statements of Operations for the fiscal years ended
May 30, 1998, May 31, 1997 and June 1, 1996........................ 20

Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended May 30, 1998, May 31, 1997 and June 1, 1996..... 21

Consolidated Statements of Cash Flows for the fiscal years ended
May 30, 1998, May 31, 1997 and June 1, 1996........................ 22

Notes to Consolidated Financial Statements............................. 23-39
</TABLE>

17
<PAGE>

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 May 30, 1998
and May 31, 1997, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the fiscal years ended May
30, 1998, May 31, 1997 and June 1, 1996. 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 audits to obtain
reasonable assurance that 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 May 30, 1998 and May 31, 1997, and the
results of their operations and their cash flows for each of the fiscal years
ended May 30, 1998, May 31, 1997 and June 1, 1996, in conformity with generally
accepted accounting principles.

As explained in Note 2 to the consolidated financial statements, effective June
1, 1997, the Company changed its method of accounting for start-up activities.

/s/ Arthur Andersen LLP

Boston, Massachusetts
August 3, 1998

18
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>

ASSETS

MAY 30, 1998 MAY 31, 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,278 $ 1,710
Accounts receivable 1,999 2,083
Inventory 49,178 44,728
Prepaid expenses and other current assets 1,944 2,172
------- -------

Total current assets 55,399 50,693
------- -------

Property, Plant and Equipment, at cost 39,688 38,565
Less--Accumulated depreciation 18,230 15,201
------- -------
21,458 23,364
Other assets 294 3,334
------- -------

Total assets $77,151 $77,391
======= =======
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY

<S> <C> <C>
Current Liabilities:
Current portion of long term debt $ 2,225 $ 2,225
Unsecured notes payable 7,825 8,100
Accounts payable 10,840 7,002
Accrued and currently deferred income taxes 777 429
Other accrued expenses 3,500 2,431
------- -------

Total current liabilities 25,167 20,187
------- -------

Long-term debt 3,894 6,119

Deferred income taxes 202 186
------- -------

Total liabilities 29,263 26,492
------- -------

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--8,624 and 8,462 shares
at May 30, 1998 and May 31, 1997, respectively 87 85
Capital in excess of par 15,601 14,811
Retained earnings 30,581 34,384
------- -------

Total stockholders' equity 46,269 49,280
------- -------

Total liabilities, minority interest and stockholders' equity $77,151 $77,391
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

19
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>

FISCAL YEARS ENDED
------------------------------------------
MAY 30, 1998 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C>

Net Sales $100,368 $88,314 $62,895

Cost of Sales 57,728 49,721 36,164
-------- ------- -------

Gross profit 42,640 38,593 26,731

Selling, General and Administrative Expenses 43,805 36,492 29,778

Gain on Insurance Proceeds - 560 4,713
-------- ------- -------

Operating (loss) income (1,165) 2,661 1,666

Interest expense, net 1,540 1,502 558
-------- ------- -------

(Loss) income before income taxes and cumulative
effect of change in accounting principle (2,705) 1,159 1,108

Provision for Income Taxes 863 - 193

(Loss) income before cumulative effect of change
in accounting principle (3,568) 1,159 915

Cumulative Effect of Change in Accounting
Principle, net of applicable tax (235) - -
-------- ------- -------

Net (loss) income $ (3,803) $ 1,159 $ 915
======== ======= =======

Basic and Diluted Earnings (Loss) per common share:
(Loss) income before cumulative effect of change in
accounting principle $ (0.42) $0.14 $0.11
Cumulative effect of change in accounting principle,
net of applicable tax (0.03) - -
-------- ------- -------

Basic and diluted (loss) earnings per common share $ (0.45) $0.14 $0.11
======== ======= =======

Weighted Average Shares Outstanding:
Basic 8,505 8,459 8,456
-------- ------- -------
Diluted 8,505 8,543 8,520
-------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

20
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands)
<TABLE>
<CAPTION>

COMMON STOCK CAPITAL IN RETAINED
SHARES AMOUNT EXCESS OF PAR EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>

BALANCE, MAY 31, 1995 8,452 $85 $14,776 $32,310 $47,171

Net Income - - - 915 915
Shares issued under stock purchase plan 5 - 16 - 16
----- --- ------- ------- -------

BALANCE, JUNE 1, 1996 8,457 85 14,792 33,225 48,102

Net income - - - 1,159 1,159

Shares issued under stock purchase plan 5 - 19 - 19
----- --- ------- ------- -------

BALANCE, MAY 31, 1997 8,462 85 14,811 34,384 49,280

Net loss - - - (3,803) (3,803)
Shares issued under stock purchase plan 2 - 13 - 13

Exercise of stock options 160 2 777 - 779
----- --- ------- ------- -------

BALANCE, MAY 30, 1998 8,624 $87 $15,601 $30,581 $46,269
===== === ======= ======= =======

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

21
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)
<TABLE>
<CAPTION>

FISCAL YEARS ENDED
------------------------------------------
MAY 30, 1998 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (3,803) $ 1,159 $ 915
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 3,379 3,077 2,489
Cumulative effect of change in accounting principle 235 - -
Impairment of long-lived assets 2,508 - -
Deferred gain from insurance proceeds - (560) -
Loss on retirement of fixed assets - 22 2,918
Increase (decrease) in deferred income taxes 16 96 (144)
Changes in assets and liabilities-
Decrease (increase) in accounts receivable 84 (191) (72)
Increase in inventory (4,450) (1,050) (3,499)
Decrease (increase) in prepaid expenses and
other current assets 189 (522) 178
Increase in accounts payable 3,838 163 355
Increase (decrease) in other accrued expenses 1,069 (234) 1,065
Increase (decrease) in accrued and currently deferred
income taxes 348 (1,573) (395)
-------- -------- --------

Net cash provided by operating activities 3,413 387 3,810
-------- -------- --------

Cash Flows from Investing Activities:
Capital expenditures (1,123) (4,388) (6,806)
Increase in other assets (14) (145) (1,609)
Acquisition of inventory and fixed assets - - (8,917)
-------- -------- --------

Net cash used in investing activities (1,137) (4,533) (17,332)
-------- -------- --------

Cash Flows from Financing Activities:
Borrowing under unsecured notes payable 24,150 26,950 32,400
Repayment of unsecured notes payable (24,425) (25,950) (25,300)
(Repayments of) proceeds from long term borrowings (2,225) (556) 8,900
Issuance of common stock 792 19 16
-------- -------- --------

Net cash (used in) provided by financing activities (1,708) 463 16,016
-------- -------- --------

Net increase (decrease) in cash and cash equivalents 568 (3,683) 2,494

Cash and cash equivalents, beginning of year 1,710 5,393 2,899
-------- -------- --------

Cash and cash equivalents, end of year $ 2,278 $ 1,710 $ 5,393
======== ======== ========

Cash paid during the year for:
Income taxes $ 515 $ 1,543 $ 762
======== ======== ========
Interest $ 1,498 $ 1,450 $ 590
======== ======== ========

Noncash Activity:
Issuance of Preferred Stock by subsidiary in
acquisition of inventory and fixed assets - - 1,619
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

22
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998

(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
reverse stock split resulting in outstanding shares of Common Stock of
8,400,000.

L.S. Holding, Inc. was incorporated in July 1980 and, as of May 30, 1998,
had 10 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, Little Switzerland (BVI)
Limited, L.S. Holding (USA), Inc. and World Gift Imports (Barbados) Limited,
(Note 3) 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 May 30, 1998. 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 Inc. 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 in May 1993 (the Recapitalization), Switzerland Holding Inc.
was dissolved and 2,533,279 shares of the Company's Common Stock were
transferred to a trust (the Trust) established for the benefit of Town &
Country and the holders of Town & Country'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.

In November 1994, holders of an aggregate of 2,381,038 shares of Town &
Country Exchangeable Preferred Stock exercised their right to exchange such
shares for Little Switzerland Common Stock on a share-for-share basis.
Accordingly, as of May 30, 1998, the Trust held 127,217 shares of Little
Switzerland Common Stock for the benefit of Town & Country and the holders
of Town & Country Exchangeable Preferred Stock.

Merger Agreement

On February 4, 1998, the Company entered into an Agreement and Plan of
Merger (the Merger) with Destination Retail Holdings Corporation (DRHC) and
certain subsidiaries, pursuant to which each stockholder of the Company
would receive $8.10 in cash for each share of common stock held as of the
effective date of the merger. In addition, the holders of an option to
purchase common stock would receive, in cash, the difference between $8.10
and the option's exercise price. The consummation of the Merger was subject
to certain conditions, including, among other provisions, approval by the
Company's stockholders. The Company's stockholders approved the Merger at a
Special Meeting of Stockholders on May 8, 1998. On June 9, 1998, the
Company terminated its merger agreement with DRHC (see Note 14).

23
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

(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 reclassifications have been made to prior years'
consolidated financial statements to conform to the May 30, 1998
presentation. All significant intercompany balances have been eliminated in
consolidation. The Company's fiscal year ends on the Saturday closest to
May 31.

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.

Foreign Operations

Net sales and operating income (loss) from foreign operations (non-U.S.
possessions) amounted to 61%, 62% and 61%, and 162%, 22% and 174% of total
net sales and operating income (loss), respectively, in fiscal 1998, 1997
and 1996, respectively. Intersegment sales were not material for all
periods presented. Identifiable assets of foreign operations amounted to
56%, 63% and 53% of total assets as of May 30, 1998, May 31, 1997 and June
1, 1996, 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 are distributed to visiting tourists. Additionally,
fees are expensed as paid for promotional "port lecturer" programs directed
primarily at cruise passengers.

Advertising expense for fiscal 1998, 1997 and 1996 was approximately
$3,401,000, $3,138,000 and $3,008,000, respectively. Prepaid advertising of
approximately $585,000 and $663,000 at May 30, 1998 and May 31, 1997,
respectively, is included in the consolidated balance sheets as prepaid
expenses and other current assets.

24
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

Property, Plant and Equipment

Fixed assets are depreciated over their estimated useful lives, principally
using the straight-line method. Maintenance and repair costs are charged to
expense as incurred. Property, plant and equipment consist of the
following:
<TABLE>
<CAPTION>

ESTIMATED USEFUL MAY 30, MAY 31,
LIFE RANGE 1998 1997
<S> <C> <C> <C>

Land and buildings 20-40 years $ 7,295,000 $ 7,215,000
Furniture and fixtures 3-10 years 12,450,000 12,338,000
Equipment 3-20 years 5,102,000 4,735,000
Construction-in-progress - 37,000 162,000
Leasehold improvements Life of the lease or 14,804,000 14,115,000
useful life, which- ----------- -----------
ever is shorter $39,688,000 $38,565,000
=========== ===========
</TABLE>

Income Taxes

The Company follows the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
The amount of deferred tax asset or liability is based on the difference
between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.

Other Assets

Other assets have consisted primarily of amounts related to noncompetition
agreements, preopening and organization costs, rental deposits and the
excess of cost over the fair market value of the net assets of the business
acquired (goodwill). Amounts related to noncompetition agreements are
amortized over the lives of the respective agreements. Amounts related to
goodwill and preopening and organization costs are being amortized over
periods of up to 10 years (see below).

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. In accordance with the requirements of
SFAS No. 121, the Company periodically assesses whether events or
circumstances have occurred that may indicate the carrying value of its
long-lived assets may not be recoverable. When such events or circumstances
indicate the carrying value of an asset may be impaired, the Company uses an
estimate of the future undiscounted cash flows to be derived from the asset
over the remaining useful life of the asset to assess whether or not the
asset is recoverable. If the future undiscounted cash flows to be derived
over the life of the asset do not exceed the asset's net book value, the
Company recognizes an impairment loss for the amount by which the net book
value of the asset exceeds its estimated fair market value. Due to several
factors, including the event discussed further in Note 14, the Company
recognized an impairment loss relating to the goodwill at the Company's
World Gift Imports (Barbados) Limited subsidiary that totaled approximately
$2,508,000 during the year ended May 30, 1998. The impairment loss has been
classified as a component of

25
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

selling, general and administrative expense for the year ended May 30, 1998.
No other impairment losses were recognized during the year ended May 30,
1998.

Accumulated amortization (including the above write-off) totaled $3,137,193
and $340,821 at May 30, 1998 and May 31, 1997, respectively.

Cumulative Effect of Change in Accounting Principle

In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting
on the Costs of Start-up Activities. SOP 98-5 requires all costs associated
with preopening, preoperating and organization activities to be expensed as
incurred. The Company has elected to adopt SOP 98-5 as of June 1, 1997. As
required by SOP 98-5, the Company has recorded a charge of approximately
$235,000 (net of applicable tax) to expense previously capitalized start-up
costs. This charge has been classified in the accompanying consolidated
financial statements as a cumulative effect of a change in accounting
principle.

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. Gains (losses) of approximately $140,000 and $(296,000),
respectively, are included in the inventory balances at May 30, 1998 and May
31, 1997, respectively. The Company had no foreign exchange contracts
outstanding at May 30, 1998.

The Company's functional currency, under SFAS No. 52, Foreign Currency
Translations, 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.

The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, in June 1998. The new
statement is effective for fiscal years beginning after June 15, 1999;
however, earlier adoption is allowed. The statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The Company has
not yet determined the effect that adoption of SFAS No. 133 will have or
when the provisions of the statement will be adopted. However, the Company
currently expects that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 will not have a material effect on the
Company's results of operations or financial position.

26
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

Other Accrued Expenses

Other accrued expenses are comprised of the following:
<TABLE>
<CAPTION>

MAY 30, 1998 MAY 31, 1997
<S> <C> <C>

Customer deposits $ 400,000 $ 484,000
Payroll and related items 1,267,000 1,028,000
Legal 778,000 30,000
Management fees (Note 11) 447,000 245,000
Other 608,000 644,000
---------- ----------

$3,500,000 $2,431,000
========== ==========
</TABLE>
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 May 30, 1998 and May 31, 1997.

27
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

Net Income per Share

The Company adopted SFAS No. 128, Earnings per Share, effective February 28,
1998. In accordance with the requirements of SFAS No. 128, basic earnings
per share is computed by dividing net income by the weighted average number
of shares outstanding and diluted earnings per share reflects the dilutive
effect of stock options (as calculated utilizing the treasury stock method).
The weighted average number of shares outstanding, the dilutive effects of
outstanding stock options, and the shares under option plans which were
antidilutive for the periods included in this report are as follows (in
thousands):
<TABLE>
<CAPTION>

FISCAL YEARS ENDED
----------------------------------------
MAY 30, 1998 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C>

Weighted average number of shares used in
basic earnings per share calculation 8,505 8,459 8,456

Dilutive effects of options - 84 64

Weighted average number of shares used in
diluted earnings per share calculation 8,505 8,543 8,520

Shares under options plans excluded in computation
of diluted earnings per share due to antidilutive effects 812 372 539
</TABLE>

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.

New Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income, which is required to be adopted by the
Company no later than fiscal year 1999. This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is the total of net income and all other nonowner
changes in equity. The Company plans to adopt this statement in fiscal year
1999.

The FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, which is required to be adopted by the Company no
later than fiscal year 1999. This statement introduces a new model for
segment reporting, called the management approach. The management approach
is based on the way that the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. Reportable segments are defined in any manner in which
management disaggregates the company, e.g. based on products and services,
geography, legal structure, etc. The Company plans to adopt this statement
in fiscal year 1999.

28
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

(3) Transactions with Affiliates

The Company enters into a number of transactions with Town & Country.
During a portion of fiscal 1998 and all of fiscal years 1997 and 1996, one
or more of the Company's Directors was an Executive Officer of Town &
Country. The Company purchases a portion of its merchandise from Town &
Country and its affiliated companies at prices that management believes
approximate arm's-length transactions. Such purchases totaled approximately
$560,000, $640,000 and $1,443,000 in fiscal 1998, 1997 and 1996,
respectively.

(4) Credit Arrangements

The Company has available a total of $19.7 million in unsecured credit
facilities, of which $7.5 million is available for borrowing with maturities
ranging from one to three years from May 30, 1998. Any unfunded portion of
the facilities can be withdrawn at the bank's discretion. These credit
facilities with the Company's two lead banks are renewable at the Bank's
discretion during the second and third quarters of fiscal 1999. Management
anticipates that these credit facilities will be renewed, however, it has no
assurance that such renewals will be granted. Outstanding borrowings
against these credit facilities totaled $7.8 million and $8.1 million as of
May 30, 1998 and May 31, 1997, respectively. Outstanding letters of credit
against these credit facilities totaled $4.1 million and $3.6 million as of
May 30, 1998 and May 31, 1997, 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 May 30, 1998 and May 31, 1997, the principal
outstanding on the term debt was approximately $6.1 million and $8.3 million
respectively. As of May 30, 1998, the Company was in compliance with, or
had obtained waivers for, all restrictive covenants related to its unsecured
and term debt arrangements. Additionally, the Company has available
separate facilities for foreign exchange contracts. The weighted average
interest rates incurred during fiscal 1998, 1997 and 1996 were approximately
8.1%, 7.9% and 6.5%, respectively.

(5) Income Taxes

The domestic (United States Virgin Islands USVI, and Ketchikan, Juneau and
Skagway, Alaska) and foreign components of income (loss) before income taxes
and cumulative effect of change in accounting principle are as follows:
<TABLE>
<CAPTION>

FISCAL YEARS ENDED
---------------------------------------------
MAY 30, 1998 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C>

Domestic $ 4,292,000 $2,010,000 $ 202,000

Foreign (6,997,000) (851,000) 906,000
----------- ---------- ----------

$(2,705,000) $1,159,000 $1,108,000
=========== ========== ==========
</TABLE>

29
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
MAY 30, 1998 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C>
Current-
Domestic $ 339,000 $ (96,000) $ 137,000
Foreign 508,000 - 200,000
----------- ---------- ----------
847,000 (96,000) 337,000
----------- ---------- ----------
Deferred-
Domestic 16,000 96,000 (144,000)
Foreign - - -
----------- ---------- ----------
$ 863,000 $ - $ 193,000
=========== ========== ==========
</TABLE>

The deferred tax provision (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.

The Company's effective tax rate is less than the USVI statutory rate of
37.4% due to the following:
<TABLE>
<CAPTION>

FISCAL YEARS ENDED
------------------------------------------
MAY 30, 1998 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C>

Computed tax provision (benefit) at statutory rate $(1,012,000) $ 434,000 $ 426,000

Increases (reductions) resulting from-

Differences between foreign provisions 442,000 (441,000) (59,000)
recorded and provisions at USVI rate

Effect of earnings of subsidiary in USVI subject
to lower tax rate (1,836,000) (891,000) (1,032,000)

Effect of subsidiary net operating losses 3,269,000 898,000 858,000
not benefited
----------- --------- -----------

$ 863,000 $ - $ 193,000
=========== ========= ===========
</TABLE>

The lower tax rate in effect on certain of the income of a subsidiary in the
USVI expires, subject to renewal, in calendar 1998 and had the effect of
increasing earnings per share by $0.22, $0.12 and $0.12 in fiscal 1998, 1997
and 1996, respectively. The Company has applied for renewal of this lower
rate with a decision expected to be reached in the second fiscal quarter of
1999.

The deferred tax liability of $202,000 and $186,000 at May 30, 1998 and May
31, 1997, respectively, is the result of the use of accelerated depreciation
methods for tax purposes as well as the difference in timing as to when
insurance proceeds are taxable and when they are recorded as income in the
financial statements. The

30
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

Company's only deferred tax assets consist of net operating loss
carryforwards of certain subsidiaries totaling approximately $5,025,000 and
$1,756,000 as of May 30, 1998 and May 31, 1997, for which a full valuation
reserve has been recorded. The valuation allowance relates to uncertainty
surrounding the realizability of the deferred tax assets in excess of the
deferred tax liabilities, principally the net operating loss carryforwards.
For tax reporting purposes, the Company has net operating loss carryforwards
of approximately $8,188,000 and $2,402,000 as of May 30, 1998 and May 31,
1997, respectively. Utilization of the net operating loss carryforward is
contingent on the Company's ability to generate income in future years. The
net operating loss carryforwards will expire from 2011 to 2013 if not
utilized.

(6) Commitments and Contingencies

Lease Commitments

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 May 30, 1998 are as follows:
<TABLE>
<CAPTION>

TOTAL LEASE
YEAR COMMITMENT
<S> <C>

Fiscal 1999 $3,311,000

Fiscal 2000 1,977,000

Fiscal 2001 1,478,000

Fiscal 2002 1,278,000

Fiscal 2003 615,000

Thereafter 319,000
----------

$8,978,000
==========
</TABLE>

Rental expense included in the accompanying consolidated statements of
operations amounted to approximately $4,104,000, $4,167,000 and $3,345,000
in fiscal 1998, 1997 and 1996, 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 ten-year ground lease which expires in April 2000.
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.

31
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

Transactions with Affiliates

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.

Legal

During 1997, the Company received an assessment from the local government in
Aruba that relates to the Company's local income tax returns regarding
certain consulting fees paid and service fees assessed by L.S. Wholesale,
Inc. to Aruba. During 1998, the Company met with the tax authorities in
Aruba. The authorities have decided to focus on the Company's 1995-1996
local income tax returns. The outcome of this matter is uncertain, and as a
result, management is not able to quantify the related financial exposure,
if any, at this time. However, in the opinion of management of the Company,
this assessment should not result in a final judgment which would have a
material adverse effect on the Company's financial condition or results of
operations.

The Company is also party to various pending legal claims and proceedings
(see Notes 13 and 14). In the opinion of management of the Company, these
suits and claims should not result in final judgments or settlements which,
in the aggregate, would have a material adverse effect on the Company's
financial condition or results of operations.

Relationship with Rolex

The Company had historically ordered and received products from Montrex
Rolex, S.A. and its affiliates (collectively, Rolex) during most months of
the year. Following execution of the merger agreement with DRHC, Rolex
suspended shipments of its products to the Company and indicated that it did
not believe it would be in its best interest to begin a business
relationship with DRHC. The Company received its last shipment of Rolex
products in January 1998.

Sales of Rolex watches accounted for 26%, 24% and 23% of the Company's sales
for fiscal 1998, 1997, and 1996, respectively. In order to mitigate the
impact on sales during fiscal 1998 of the suspension of shipments of Rolex
products, the Company has redistributed Rolex products from lower traffic
stores to higher traffic stores. On July 15, 1998, the Company announced
that it had learned that Rolex had decided not to resume shipments to the
Company (see Note 14).

(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. The Company signed a new franchise agreement with Solomon,
effective November 1, 1996, with a two year term and option to renew for an
additional two years. Solomon is responsible for developing each store, in
accordance with the Company's specifications, once a new location

32
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

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 eight locations in the Bahama Islands under the
name of Little Switzerland.

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,
or a minimum annual fee of $100,000. These fees totaled approximately
$100,000 for fiscal 1998, 1997 and 1996 (see Note 14).

(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.

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 50% of the first 3% of the employee's contribution.
During fiscal 1998, 1997 and 1996 the Company's matching totaled
approximately $86,000, $82,000 and $92,000, respectively. The Company's
contributions vest based on the employee's years of service, with full
vesting after five years of service.

33
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

(9) Quarterly Data (Unaudited)

The following presents the unaudited quarterly results of operations for the
fiscal years ended May 30, 1998 and May 31, 1997 (in thousands except per
share data):
<TABLE>
<CAPTION>

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
------------ ------------ ----------- --------
AUGUST 30 NOVEMBER 29 FEBRUARY 28 MAY 30
<S> <C> <C> <C> <C>

FISCAL 1998

Net sales $20,370 $21,034 $34,925 $24,039
Gross profit 8,657 9,037 15,024 9,922
Net income (loss) (157) (168) 1,789 (5,267)
Net income (loss) per share (0.02) (0.02) 0.21 (0.62)

AUGUST 31 NOVEMBER 30 MARCH 1 MAY 31

FISCAL 1997

Net sales $15,868 $17,458 $32,624 $22,364
Gross profit 6,896 7,638 14,498 9,561
Net income (loss) (769) (560) 2,411 77
Net income (loss) per share (0.09) (0.07) 0.28 0.01
</TABLE>
(10) Stockholders' Equity

Stock Options

During 1991, the Company established the 1991 Option Plan to cover option
awards to key employees and directors who are also full time employees of
the Company. Under this plan, the Company may grant stock options for the
purchase of up to 500,000 shares of the Company's Common Stock at an
exercise price equal to the fair market value of the Common Stock on the
date of grant. During 1996, the Company amended the 1991 Option Plan to
increase the aggregate number of shares of the Common Stock of the Company
available for grant under the Plan from 500,000 to 900,000. As of May 30,
1998, 612,000 option shares were outstanding under the 1991 Plan. Options
granted under the Plan vest ratably over a three to five year period and
must be exercised within ten years of the date of grant. Each outstanding
unvested option automatically vested upon the execution of the merger
agreement with DRHC pursuant to the terms of the 1991 Option Plan.

During 1992, the Company established the 1992 Option Plan for nonemployee
directors of the Company. Under this plan, the Company may grant stock
options for the purchase of up to 150,000 shares of the Company's Common
Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. As of May 30, 1998, 100,000 option shares have
been granted and were outstanding under the 1992 Option Plan. Options
granted under the 1992 Option Plan vest immediately and must be exercised
within 10 years of the date of grant.

34
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

A summary of the status of the Company's stock option plans at May 30, 1998,
May 31, 1997 and June 1, 1996, together with changes during the periods then
ended, are presented in the following table:
<TABLE>
<CAPTION>

1998 1997 1996
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PER PRICE PER PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
<S> <C> <C> <C> <C> <C> <C>

Outstanding at beginning of period 903,500 $6.24 839,344 $ 6.36 531,844 $8.02
Grants during period 37,000 6.15 65,000 4.79 315,000 3.61
Exercised during period (160,000) 4.87 - - - -
Forfeitures/Cancellations
during period (68,500) 7.09 (844) 10.00 (7,500) 8.67
Outstanding at end of period 712,000 6.46 903,500 6.24 839,344 6.36
Options exercisable at end of period 712,000 6.46 402,800 7.28 279,999 8.59
</TABLE>

Statement of Financial Accounting Standards No. 123 (SFAS No. 123)

During 1995, the FASB issued SFAS No. 123, Accounting for Stock Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instruments and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans.

The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during fiscal 1998, 1997 and 1996,
using the Black-Scholes option pricing model as prescribed by SFAS No. 123
and the following weighted average assumptions used for grants:
<TABLE>
<CAPTION>

1998 1997 1996
<S> <C> <C> <C>

Risk-free interest rate 5.96% 6.41% 6.07%
Expected dividend yield 0% 0% 0%
Expected lives 10 years 10 years 10 years
Expected volatility 25.82% 32.21% 41.35%
</TABLE>

Adjustments are made for options forfeited prior to vesting. As a result of
the Merger Agreement, all options under the 1991 Option Plan became fully
vested and exercisable. The total value of options granted during fiscal
1996, 1997 and 1998, which were being amortized on a straight-line basis
over the vesting period of the options, was accelerated into fiscal year
1998. The weighted average fair value of options granted during fiscal
years 1998, 1997 and 1996 was $3.25, $2.78 and $2.30, respectively. If the
Company had accounted for these plans in accordance with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

35
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 30, MAY 31, JUNE 1,
1998 1997 1996
<S> <C> <C> <C>

Net Income-
As Reported $(3,803,473) $1,159,266 $914,921
Pro Forma (4,498,460) 967,129 776,527

Basic and Diluted EPS-
As Reported $ (0.45) $ 0.14 $ 0.11
Pro Forma (0.53) 0.11 0.09
</TABLE>

Employee Stock Purchase Plan

During 1992, the Company approved an Employee Stock Purchase Plan permitting
eligible employees to purchase Common Stock, semiannually on June 30 and
December 31, at the average trading price during the six-month period, but
not less than specified minimums. Under this plan, 26,259 shares have been
issued as of May 30, 1998.

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) 10 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) 10 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
Company'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 10th 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.

36
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

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 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.

(11) Acquisitions

On February 16, 1996, World Gift Imports (Barbados), Inc., a subsidiary of
LS Holding, Inc. which is a subsidiary of 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),
Limited to the seller. The preferred stock has been presented as a minority
interest in a consolidated subsidiary in the accompanying financial
statements. 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. No dividends or interest are paid or
accrued on the preferred stock. 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. These management fees totaled approximately $202,000 $190,000
and $55,000 for the fiscal 1998, 1997 and 1996, respectively, and are
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations. 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.

The transaction was accounted for as a purchase transaction whereby the
purchase price, including transactions costs, was allocated to the tangible
and intangible assets acquired, based on their estimated fair value as of
February 16, 1996.

Unaudited pro forma operating results of the Company for the year ended June
1, 1996 as adjusted for the debt financing and estimated effects of the
acquisition as if it had occurred on June 1, 1995, are as follows:
<TABLE>
<CAPTION>

<S> <C>
Net sales $68,661,000

Net income $ 1,103,000

Net income per basic share $ .13

Weighted average shares outstanding 8,456,000
</TABLE>

37
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

(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. All damaged
stores had reopened by November 30, 1996.

The Company settled all outstanding claims related to the hurricanes with
its insurance carrier. In connection with the 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. Approximately $560,000 of
deferred income as of June 1, 1996 representing fiscal 1997 lost profits for
the Marigot store, was recorded as income in the Company's consolidated
statement of income for fiscal 1997.

(13) Employee Defalcation Loss

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 and evaluation, which focused on unlocated differences in cash
balances, management believes that an employee defalcation occurred during
fiscal 1997.

The estimated loss of approximately $2.4 million is recorded in general and
administrative expense in the accompanying consolidated financial statements
for the fiscal year ended May 31, 1997. As a result of the charge, the
Company filed amended financial statements on Form 10-Q for each of the
quarters within fiscal 1997. The Company has insurance coverage with a
maximum claim limitation of $1 million. A claim for the full amount of the
loss was submitted and payment of $1 million was received by the Company.
The Company also intends to seek full restitution from the charged
individuals, however, the Company does not know what, if any, of the funds
are still in the possession of such individuals. The Company has, to date,
received $65,000 in restitution from the employee. In addition to pursuing
criminal charges, the Company commenced civil proceedings against the two
individuals on March 12, 1998 in an effort to reclaim any such funds. The
Company has classified the settlement from its insurance carrier as a credit
to selling, general and administrative expense for the year ended May 30,
1998. The legal and accounting costs associated with this matter amounted
to approximately $646,000 and have been recorded in selling, general and
administrative expense in the accompanying consolidated financial statements
for the fiscal year ended May 30, 1998.

(14) Subsequent Events

Termination of Merger Agreement

On June 9, 1998, the Company announced it had terminated its merger
agreement with DRHC because of DRHC's inability to raise the financing
necessary to complete the merger.

On June 10, 1998, the Company filed a civil action against DRHC, DRHC's
owner and some of DRHC's corporate affiliates in Delaware federal court,
alleging breach of the Agreement and Plan of Merger, dated February 4, 1998,
as well as claims of misrepresentation and civil conspiracy. The Company is
seeking

38
<PAGE>

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Notes To Consolidated Financial Statements
May 30, 1998
(Continued)

substantial monetary damages, including, without limitations, consequential
damages relating to the impairment of its business.

The costs associated with this matter, which consist primarily of legal and
investment banking fees, amounted to approximately $2.7 million and have
been recorded in selling, general and administrative expense in the
accompanying consolidated financial statements for the fiscal year ended May
30, 1998.

Relationship with Rolex

On July 15, 1998, the Company announced that it had learned that Rolex had
decided not to resume shipments of its watches to the Company. Sales of
Rolex products accounted for approximately 26%, 24% and 23% of Little
Switzerland's total retail sales during fiscal 1998, 1997 and 1996,
respectively. Little Switzerland has announced that it is actively
exploring opportunities for expanding existing and adding new, world class
product lines in both watches and jewelry. The Company believes that the
loss of Rolex will have a material adverse effect on the Company's results
of operations for the fiscal year ending May 29, 1999 and beyond.

Termination of Franchise Agreement

On July 21, 1998, the Company and Solomon mutually agreed to terminate the
franchise agreement as of November 1, 1998.

Governance

On August 14, 1998, the Company announced the resignation of its President
and Chief Executive Officer, John E. Toler, Jr., effective August 31, 1998.
At the request of the Company's Board of Directors, Mr. Toler will remain a
Director of the Company until the next annual stockholders' meeting. Mr. C.
William Carey, Chairman of the Board of Directors, will act as interim Chief
Executive Officer until such time as a successor is identified.

Mr. Toler's options, all of which are fully vested, to purchase 300,000
shares of the Company's common stock at $3.50 have been extended and can be
exercised through September 1, 2000.

39
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The firm of Arthur Andersen LLP has served as the Company's independent
public accountants since its incorporation and has served as the accountant for
certain of its subsidiaries since 1980. Accordingly, there have been no changes
in the Company's accountants during the two most recent fiscal years and no
material disagreements between the Company and its accountants.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

The Board of Directors of the Company currently consists of four members and
is divided into two classes, with two Directors in each of classes II and III.
Directors serve for three-year terms, with one class of Directors being elected
by the Company's stockholders at each annual meeting. Ms. Ilene B. Jacobs who
was a Class I Director, has resigned as a Director of the Company effective
September 14, 1998. Ms. Jacob's resignation was due to her acceptance of new
employment, which required her to terminate all outside directorships she held
as of the date of such acceptance.

Set forth below is certain information regarding the Directors of the
Company as of September 17, 1998, based on information furnished by them to the
Company.
<TABLE>
<CAPTION>

Name Age Director Since
- ---- --- --------------
<S> <C> <C>

CLASS I-TERM EXPIRES 1998

None

CLASS II-TERM EXPIRES 1999

Timothy B. Donaldson................ 64 1991
Kenneth W. Watson................... 55 1991

CLASS III-TERM EXPIRES 1997

C. William Carey.................... 61 1991
John E. Toler, Jr. ................. 55 1995
</TABLE>
The principal occupation and business experience during at least the last
five years for each Director of the Company is set forth below.

Mr. Carey resigned as the Chairman of the Board of Directors of the Company
effective September 1, 1998 and, on such date, became the Acting Chief Executive
Officer of the Company. Mr. Carey will continue to serve as a Director of the
Company. Since January 1997, Mr. Carey has been President of Carey Associates,
Inc., a company engaged in international marketing and finance, management
consulting and Russian business development. From 1965 through January 3, 1997,
he served as Chairman, Chief Executive Officer, President and Treasurer of Town
& Country Corporation ("Town & Country"), which was the sole stockholder of the
Company prior to the public offering of approximately 68% of the Company's
Common Stock in July 1991. Town & Country is a public company specializing in
the international design, manufacture and distribution of jewelry. On November
11, 1997, Town & Country filed a petition under chapter 11 of the federal
bankruptcy laws with the United States Bankruptcy Court for the District of
Massachusetts (Case No: 97-20872-WCH). Town & Country's Fourth Amended Plan of

40
<PAGE>

Reorganization, dated April 16, 1998, was confirmed on May 26, 1998. Mr. Carey
is also a Director of Prospect Street High Income Portfolio, Inc.

Mr. Donaldson has been Chairman and Chief Executive Officer of Dynamo M.
Ltd., an investment trading company, since 1995. Presently, Mr. Donaldson is
also Chairman of the Bahamas Securities and Exchange Commission. He has been
Ambassador to the United States, Government of the Bahamas (1993 to 1995);
Chairman, Bank of Montreal (Bahamas & Caribbean Ltd.) (1980 to 1983); Governor,
the Central Bank of The Bahamas (1968 to 1980); Governor, International Monetary
Fund (1974 to 1980); Governor, The World Bank (1974 to 1980); and Governor,
Caribbean Development Bank (1975 to 1980).

Mr. Toler served as President and Chief Executive Officer of the Company
until his resignation as such effective August 31, 1991. Mr. Toler has served
as a Director of the Company since November 1, 1995. Prior to joining the
Company, Mr. Toler was Director of Merchandising of Trimingham's, Bermuda, from
May 1995 through October 1995 and President and Chief Executive Officer of
Sage-Dey, Inc. from August 1991 to May 1993. From October 1990 through July
1991, Mr. Toler was President and Chief Executive Officer of Sage-Allen, Inc.
Mr. Toler was a 15-year employee of May Department Stores Company where he
served as President and Chief Executive Officer of several regional department
store divisions. Mr. Toler has been President and Chief Executive Officer of
prestigious retail companies for 14 years of his 30 years in the retail trade
and has been an active participant in numerous retail associations. In the
past, Mr. Toler has served on the Board of Directors of Norwest Bank Midland and
the Fund For the Arts and Convention Bureau. Also, Mr. Toler has been a past
sponsor/counselor to Explorer Groups and has volunteered to assist with Habitat
for Humanity Housing Projects.

Mr. Watson served as Chief Executive Officer and President of the Company
from January 1, 1994 to October 21, 1994, and has been a Director since 1991.
Since October 1996, Mr. Watson has served as Vice President-Consumer Marketing
of the New York Times Magazine Group, a subsidiary of the New York Times
Company. Mr. Watson served as Executive Vice President of K-Mart Corporation
from October 1994 through March 1996. Mr. Watson was President of Louis Vuitton
Stores, Inc. from July 1992 to March 1993. Previously, he was Chairman and
Chief Executive Officer of Gump's, a retailer of jewelry, art and gift items
from September 1989 to June 1992 and President and Chief Executive Officer of
Cartier, Inc. from 1985 to September 1989.

EXECUTIVE OFFICERS

The names and ages of all executive officers of the Company and the
principal occupation and business experience during at least the last five years
for each are set forth below as of September 17, 1998.
<TABLE>
<CAPTION>

Name Age Position
---- --- --------
<S> <C> <C>
C. William Carey........... 61 Acting Chief Executive Officer

David J. Nace.............. 52 Chief Financial Officer, Executive Vice
President and Treasurer

William Canfield........... 50 Vice President of Store Operations

Michael M. Poole........... 55 Vice President and General Merchandise
Manager
</TABLE>

Mr. Nace became the Chief Financial Officer, Executive Vice President and
Treasurer of the Company effective September 10, 1998. Mr. Nace was the
Executive Vice President, Chief Financial Officer and Treasurer for Gart Sports
Company, a publicly held, full-line sporting goods retailer, from October 1993
to January 1998. From June 1981 to June 1993, Mr. Nace was the Vice President,
Controller of Child World, Inc.

41
<PAGE>

Mr. Canfield has been Vice President of Store Operations since June 1994. In
that position, he has been responsible for store operations, new store
development and strengthening the Company's position in jewelry throughout its
stores. Mr. Canfield was Managing Director of Colombian Emeralds International
from December 1979 to June 1994. In the past, he served as the President of the
St. Thomas Retail Association for two years.

Mr. Poole became the Vice President and General Merchandise Manager of the
Company effective August 25, 1998. Mr. Poole was the Director of Licensing for
Combine International Inc., a jewelry manufacturing company, from August 1996 to
August 1998. From September 1991 to July 1996, Mr. Poole was the President of
NXP, d/b/a Jewels at A.H. Riise, a retail jewelry store in St. Thomas, U.S.V.I.

Each of the officers holds his respective office until the regular annual
meeting of the Board of Directors following the annual meeting of stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of the Company's outstanding shares of Common Stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and NASDAQ. Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on its review of the copies
of such forms received by it, or written representations from certain reporting
persons that no Section 16(a) reports were required for those persons, the
Company believes that during the fiscal year ended May 30, 1998, Mr. Carey
inadvertently failed to timely file a Form 4 with respect to the exchange of
25,000 shares of Town & Country Exchangeable Preferred Stock on a share-for-
share basis into 25,000 shares of the Company's Common Stock. Mr. Carey
subsequently filed the required form.

ITEM 11. EXECUTIVE COMPENSATION

The following sections of this Form 10-K/A set forth and discuss the
compensation paid or awarded during the last three years to (i) the Company's
Chief Executive Officer and the two most highly compensated executive officers
who earned in excess of $100,000 during fiscal 1998 and (ii) one other
individual for whom disclosure would have been provided but for the fact that he
was not serving as an executive officer at the end of fiscal 1998.

42
<PAGE>

SUMMARY COMPENSATION TABLE

The following table shows for the fiscal years ended June 1, 1996, May 31,
1997 and May 30, 1998 compensation paid by the Company to (i) the Chief
Executive Officer and the two most highly compensated executive officers who
earned in excess of $100,000 during fiscal 1998 and (ii) one other individual
for whom disclosure would have been provided but for the fact that he was not
serving as an executive officer at the end of fiscal year 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------------------- ------------------------------------
AWARDS PAYOUTS
--------------------------- --------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
SALARY BONUS COMPENSATION STOCK AWARDS UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS (#) ($) ($)
- --------------------------- ---- -------- ---------- ------------ ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John E. Toler, Jr.......... 1998 $300,000 $140,000 $4,000(7) - - - $6,688(12)(13)

President and Chief 1997 $300,000 - $3,000(7) - 300,000(10) - $ 3,894(12)
Executive Officer(1) 1996 $177,804 $ 50,000 $1,750(8) - -

Thomas S. Liston........... 1998 $ 81,845 - - 25,000(11) - -
Chief Financial Officer, 1997 - - - - - -
Vice President and 1996 - - - - - -
Treasurer(2)

William Canfield........... 1998 $173,000 $ 28,000 - - - - $ 8,659(14)
Vice President of 1997 $173,000 - - - - - -
Store Operations 1996 $156,327 $ 15,000 - - - - -

Ronald J. Lataille......... 1998 $ 74,077 $ 50,000(4) - - - - -
President and Chief 1997 $150,000 $ 44,202(5) - - - - -
Executive Officer, 1996 $110,000 $ 70,000(6) $1,250(9) - - - -
Chief Financial Officer
and Vice President(3)
</TABLE>
- -------------------

(1) Mr. Toler resigned as the Chief Executive Officer and President of the
Company effective August 31, 1998.

(2) Mr. Liston resigned as the Chief Financial Officer, Vice President and
Treasurer of the Company effective September 10, 1998.

(3) Mr. Lataille resigned as the acting Chief Executive Officer and President of
the Company on October 31, 1995, and resigned as Chief Financial Officer and
Vice President of the Company on October 31, 1997.

(4) Mr. Lataille was awarded a one time stay bonus of $50,000 during fiscal
1998.

(5) Mr. Lataille was awarded a bonus of $44,202 as compensation for certain
services to the Company performed in fiscal 1997. Specifically, Mr. Lataille
provided additional services to the Company in connection with (i) the
preparation and filing of an insurance claim on behalf of the Company in
connection with hurricane damage to certain of the Company's properties and
(ii) the initial analysis for the disposition and redevelopment of assets of
the Company, to be used later by Wasserstein Perella & Co., Inc., the
Company's financial advisor, in the development of a strategic plan for the
Company.

(6) Mr. Lataille was awarded a bonus of $50,000 as compensation for his services
to the Company as its acting President and Chief Executive Officer from
October 21, 1994 to October 31, 1995.

(7) This amount represents the cost to the Company for one year of certain
automobile allowances.

(8) This amount represents the cost to the Company for seven months of certain
automobile allowances.

(9) This amount represents the cost to the Company for five months of certain
automobile allowances.

(10) In connection with his appointment as President and Chief Executive Officer
of the Company, the Company granted Mr. Toler an option to purchase 300,000
shares of the Company's Common Stock pursuant to the Little Switzerland,
Inc. 1991 Stock Option Plan (the "1991 Option Plan").

43
<PAGE>

(11) In connection with his appointment as Chief Financial Officer, Vice
President and Treasurer of the Company, the Company granted Mr. Liston an
option to purchase 25,000 shares of the Company's Common Stock pursuant to
the 1991 Option Plan.

(12) Effective June 1, 1996, the Company replaced its tax-qualified
discretionary contribution retirement plan (the "Retirement Plan") with a
401(k) Plan under which the Company matches each employee's contribution up
to 3% of compensation. In fiscal 1998, the Company contributed $2,423 to
the individual account maintained on behalf of Mr. Toler pursuant to the
401(k) Plan. In fiscal 1997, the Company contributed $3,894 to an
individual account maintained on behalf of Mr. Toler pursuant to the 401(k)
Plan.

(13) This amount includes $4,265 in insurance premiums paid by the Company with
respect to term life insurance for the benefit of Mr. Toler.

(14) This amount represents $1,092 in insurance premiums paid by the Company
with respect to term life insurance for the benefit of Mr. Canfield and
$7,567 in remainder of premiums paid by the Company due to Mr. Canfield's
interest in the cash surrender value under one such insurance policy.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth the number of shares underlying stock options
granted during fiscal 1998 to the Chief Executive Officer and each other
executive officer named in the Summary Compensation Table and certain other
information regarding such stock options.
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS
--------------------------------------------------------
ALTERNATIVE
NUMBER OF PERCENT OF REALIZABLE VALUE TO (f) AND
SECURITIES TOTAL AT ASSUMED ANNUAL (g) : GRANT
UNDERLYING OPTIONS/ RATES OF STOCK DATE VALUE
OPTION SARS GRANTED EXERCISE PRICE APPRECIATION ------------
/SARS TO EMPLOYEES OR BASE FOR OPTION TERM GRANT DATE
GRANTED IN FISCAL PRICE ---------------------- PRESENT
NAME (#) YEAR ($/Sh)(1) EXPIRATION DATE 5% ($) 10% ($) VALUE $
- --------------------- ------- ------------ -------- --------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>

John E. Toler, Jr.... - - - - - - -

Thomas S. Liston(2).. 25,000 100% $6.4375 9/29/07 101,213 256,493 -

William Canfield..... - - - - - - -

Ronald J. Lataille... - - - - - - -
</TABLE>
- --------------
(1) The exercise price is equal to the fair market value of a share of Common
Stock on the grant date. The amounts shown as potential realizable value
illustrate what might be realized upon exercise immediately prior to
expiration of the option term using the 5% and 10% appreciation rates
established in regulations of the SEC, compounded annually. The potential
realizable value is not intended to predict future appreciation of the
price of the Company's Common Stock. The values shown do not consider
nontransferability, vesting or termination of the options upon termination
of employment.

(2) In connection with his appointment as Chief Financial Officer, Vice
President and Treasurer of the Company, the Company granted Mr. Liston an
option to purchase 25,000 shares of the Company's Common Stock pursuant to
the 1991 Option Plan. This option vested and became immediately
exercisable upon the execution of the Merger Agreement with DRHC pursuant
to the terms of the 1991 Option Plan.

44
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END VALUES

The following table sets forth the shares acquired and the value realized upon
exercise of stock options during fiscal 1998 by the Chief Executive Officer and
each other executive officer named in the Summary Compensation Table and certain
information concerning the number and value of unexercised options.
<TABLE>
<CAPTION>

VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FY-END ($)(2)
SHARES ACQUIRED ON VALUE OPTIONS AT FY-END(#) -------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ----------- ----------- -------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>

John E. Toler, Jr..... - - 300,000 - $618,750 $0

Thomas S. Liston...... - - 25,000 - $ 0 $0

William Canfield...... - - 60,000 - $ 8,125 $0

Ronald J. Lataille.... 70,000 196,750 - - - -
- ------------------
</TABLE>
(1) All of the unvested options on the date of the execution of the Merger
Agreement with DRHC automatically vested and became immediately exercisable
pursuant to the terms of the 1991 Option Plan.

(2) Equal to the market value of shares covered by in-the-money options on May
30, 1998 (based on the market value of $5.5625 per share as reported by the
NASDAQ National Market as of May 29, 1998) less the aggregate option
exercise price. Options are in-the-money if the market value of the shares
covered thereby is greater than the option exercise price.

COMPENSATION OF DIRECTORS

Directors who are officers or employees of the Company receive no
compensation for service as Directors. Directors who are not officers or
employees of the Company receive such compensation for their services as the
Board of Directors may from time to time determine. Non-employee Directors each
receive an annual retainer of $5,000, plus a fee of $2,500 for each Board of
Directors meeting attended ($500 if such meeting is held via telephone
conference) and $1,000 for each committee meeting attended ($500 if such meeting
is held via telephone conference) if such meeting does not take place in
conjunction with a regularly scheduled Board of Directors meeting. All
Directors are reimbursed for expenses incurred in connection with attendance at
meetings. In addition to the above compensation, in May, 1998, the Company
awarded each Director of the Company a gold watch for services provided during
fiscal 1998. The aggregate gross cost value of such watches was approximately
$51,000.

In order to align stockholder and Director interests, in 1992 the Board of
Directors established the 1992 Non-Employee Directors' Nonqualified Stock Option
Plan (the "1992 Option Plan"). Pursuant to the 1992 Option Plan, each eligible
non-employee Director automatically receives an option to purchase 3,000 shares
of Common Stock on the last day of the Company's fiscal year. All options
granted pursuant to the 1992 Option Plan vest and are immediately exercisable
upon grant. All options granted under the 1992 Option Plan have an exercise
price equal to 100% of the fair market value of a share of Common Stock on the
grant date. On May 30, 1998, the then eligible non-employee Directors of the
Company each received an option to purchase 3,000 shares of Common Stock at an
exercise price of $5.5625 per share, the fair market value of the Common Stock
on May 29, 1998.

For a description of the consulting arrangements with Mr. Carey during
fiscal 1998, see "--Compensation Committee Interlocks and Insider
Participation."

45
<PAGE>

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION

During fiscal 1998, the Compensation Committee of the Board of Directors of
the Company consisted of C. William Carey, Timothy B. Donaldson and Ilene B.
Jacobs, all of whom were outside directors during fiscal 1998. The Compensation
Committee approves Company compensation policies and procedures and establishes
compensation levels for executive officers. The Compensation Committee also
administers and grants awards under the 1991 Option Plan and the Company's
Employee Stock Purchase Plan.

Compensation Policies for Executive Officers

The Compensation Committee's executive compensation philosophy is to provide
competitive levels of compensation, integrate management's pay with Company
performance, reward above average individual performance, and assist the Company
in attracting and retaining qualified management. The Compensation Committee
has determined that base salaries of executive officers should be set at levels
that are competitive within the local retail industry. In addition, the
Compensation Committee believes that it is appropriate to reward outstanding
performance through a combination of cash bonuses and stock option grants and,
through stock option grants, to provide a competitive compensation package that
will enable the Company to attract and retain the executives needed to achieve
such performance. The Compensation Committee also has determined that any stock
option or other equity-based compensation should involve long-term vesting to
encourage long-term tenure and enhancement of shareholder value over the long-
term.

Base salaries for executive officers are targeted according to the salaries
of employees holding similar offices and having similar responsibilities within
the local retail industry. The Compensation Committee also considers the
relative cost of living within the United States Virgin Islands. Annual salary
adjustments for executive officers are determined by evaluating the competitive
marketplace, the performance of the Company, the performance of the executive
officer and any change in the responsibilities assumed by the executive officer.
Salary adjustments are normally determined and made on an annual basis.

The base salary and salary adjustments for John E. Toler, Jr., President and
Chief Executive Officer of the Company during fiscal 1998 were established
pursuant to his employment agreement, as described below under "--Employment
Agreements." See "--Compensation of John E. Toler, Jr., Former Chief Executive
Officer" below. The terms of employment of Thomas S. Liston, the Chief Financial
Officer, Vice President and Treasurer of the Company as of the end of fiscal
1998, were determined by the Compensation Committee and approved by the Board of
Directors.

Cash bonuses paid to executive officers generally are earned primarily
through the achievement of financial goals relative to each officer's
responsibilities. Such financial goals include targeted sales and profit
levels, earnings before interest and taxes ratios, selling, general and
administrative expense ratios, return on assets, inventory shrinkage and
inventory turns. Executive officers generally are eligible to earn up to 25% of
their base salaries in cash bonuses. Based on this criteria for fiscal 1998, Mr.
Toler and Mr. Canfield received $140,000 and $28,000, respectively, as a bonus.
Cash bonuses may also be paid to executive officers in accordance with the terms
of their employment agreements. Bonuses payable pursuant to such agreements
generally are earned through the achievement of the financial goals similar to
those discussed above and may also be awarded for executive retention purposes
in the sole discretion of the Compensation Committee. Pursuant to their
respective employment contracts, Messrs. Toler, Liston and Canfield were each
eligible to earn a bonus of up to 45.83%, 25% and 25%, respectively, of their
respective base salaries for fiscal 1998. See "--Compensation of John E. Toler,
Jr., Former Chief Executive Officer" and "--Employment Agreements" below.
Occasionally, cash bonuses are paid to executive officers for the performance of
services to the Company outside the scope of their offices, as determined by the
Compensation Committee of the Board of Directors of the Company.

Stock options are designed to attract and retain executives who can make
significant contributions to the Company's success; reward executives for such
significant contributions; and give executives a longer-term incentive to
increase shareholder value. In determining whether to grant stock options to
executive officers, the Compensation

46
<PAGE>

Committee evaluates each officer's performance by examining criteria similar to
that involved in fixing cash bonuses (but without any specific performance
measures) and awards reflect individual performance reviews. The Compensation
Committee also may grant stock options for executive retention purposes, taking
into account, among other things, general industry practice. Stock options
typically vest over three to five years in order to encourage outstanding
performance over the long-term. Historically, stock options generally have been
granted with a ten-year term and an exercise price equal to 100% of the fair
market value of the Common Stock on the grant date. Upon the execution of the
Merger Agreement with DRHC all unvested stock options on the date of the
execution of the Merger Agreement automatically vested pursuant to the terms of
the 1991 Option Plan.

Compensation of John E. Toler, Jr., Former Chief Executive Officer

The base salary and bonus for Mr. Toler, the Company's President and Chief
Executive Officer during fiscal 1998 were established by Mr. Toler's employment
agreement. See "--Employment Agreements" below. During fiscal 1998, there were
no adjustments made to Mr. Toler's base salary, and he received a cash bonus
equal to $140,000, in accordance with the terms of his employment agreement.
Additionally, pursuant to the terms of Mr. Toler's employment agreement, on
November 1, 1995, the Company granted Mr. Toler an option to purchase 300,000
shares of the Company's Common Stock at $3.50 per share pursuant to the 1991
Option Plan. This option automatically vested upon the execution of the Merger
Agreement with DRHC pursuant to the terms of the 1991 Option Plan. In
connection with his resignation, the Board of Directors has amended his option
agreement so that he may exercise the option after the termination of his
employment with the Company at any time prior to September 1, 2000, upon which
date the option shall expire.

Federal Tax Regulations

As a result of Section 162(m) of the Internal Revenue Code (the "Code"), the
Company's deduction of executive compensation may be limited to the extent that
a "covered employee" (i.e., the chief executive officer or one of the four
highest compensated officers who is employed on the last day of the Company's
taxable year and whose compensation is reported in the summary compensation
table in the Company's proxy statement) receives compensation in excess of
$1,000,000 in such taxable year of the Company (other than performance-based
compensation that otherwise meets the requirements of Section 162(m) of the
Code). The Company intends to take appropriate action to comply with such
regulations, if applicable, in the future.

C. William Carey Ilene B. Jacobs Timothy B. Donaldson

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Mr. Carey served as a member of the Compensation Committee of the Board of
Directors of the Company during fiscal 1998. Mr. Carey also served as the
Chairman of the Board of Directors of the Company until September 1, 1998 and,
on such date, became the Acting Chief Executive Officer of the Company. Mr.
Carey will continue to serve as Director of the Company.

Mr. Carey is the controlling stockholder of Town & Country and was
President, Chief Executive Officer and Chairman of the Board of Town & Country
until January 3, 1997. On November 11, 1997, Town & Country filed a petition
under chapter 11 of the federal bankruptcy laws with the United States
Bankruptcy Court for the District of Massachusetts (Case No. 97-20872-WCH).
Town & Country's Fourth Amended Plan of Reorganization, dated April 16, 1998,
was confirmed on May 26, 1998. Town & Country and certain of its subsidiaries
supply the Company with jewelry. The aggregate amount of purchases by the
Company from these entities totaled approximately $1.4 million, $640,000 and
$560,000, in fiscal 1996, 1997 and 1998, respectively. Pursuant to written
agreements among Town & Country, these subsidiaries and the Company, Town &
Country and the subsidiaries have agreed to supply jewelry to the Company at the
Company's option, on the terms and conditions in effect prior to the Company's
initial public offering. These agreements are automatically renewed each year
unless either party terminates upon 60 days' notice prior to the end of a year.
The Company believes that all jewelry purchased pursuant to these agreements
with Town & Country and its subsidiaries can be readily purchased from other,
unrelated third party suppliers on comparable terms, and that these agreements
do not restrict the Company from purchasing from other sources. See "Certain
Relationships and Related Transactions."

47
<PAGE>

On June 2, 1996, Mr. Carey entered into a consulting agreement with the
Company (the "Carey Consulting Agreement"). Pursuant to the Carey Consulting
Agreement, Mr. Carey provided consulting services to the Company, including,
without limitation, advice with respect to business and product planning,
marketing strategy, leasing and new store development and executive recruitment,
in exchange for a consulting fee at the annual rate of $150,000, payable in
monthly installments. In addition, Mr. Carey was entitled to receive
reimbursement for all reasonable expenses incurred by him on behalf of the
Company in connection with the performance of his obligations thereunder. In
connection with his position as Acting Chief Executive Officer of the Company,
the Company has terminated the Carey Consulting Agreement effective September 1,
1998. Mr. Carey will receive $37,500 in lieu of the three-month notification
necessary pursuant to the Carey Consulting Agreement to terminate such
agreement.

The Company currently is in negotiations with Mr. Carey with respect to an
employment agreement with the Company. For a description of certain terms of
such employment see "--Employment Agreements."

In connection with the establishment of the Investment Banking Committee, on
November 28, 1994, the Board of Directors voted to compensate the members of the
Investment Banking Committee for the significant additional time commitment that
would be required of such members in connection with fulfilling their duties and
responsibilities as members of the Investment Banking Committee. Pursuant to
such vote, the members of the Investment Banking Committee are entitled to an
aggregate success fee equal to two-thirds of one percent of the aggregate value
of any transaction, including any sale, purchase, merger, joint venture or
combination thereof, entered into and completed by the Company. The members of
the Investment Banking Committee at the time of its establishment by the Board
of Directors were Francis X. Correra and C. William Carey. These directors
continued to serve as the members of the Investment Banking Committee until Mr.
Correra's death on January 14, 1998, after which the Investment Banking
Committee consisted solely of Mr. Carey. On February 4, 1998, in anticipation
of the execution of the Merger Agreement with DRHC, Mr. Carey entered into a
success fee agreement with the Company (the "Success Fee Agreement"), pursuant
to which the Company is obligated to pay Mr. Carey an amount equal to 83.33% of
two-thirds of one percent of the aggregate value (as defined in the Success Fee
Agreement) of any such transaction entered into and completed by the Company;
provided, however, that the Company is not obligated to make such payment if Mr.
Carey resigns as a member of the Board of Directors on or before the effective
time of such transaction. The Board of Directors of the Company currently is in
discussions with Mr. Carey with respect to this arrangement.

The other members of the Compensation Committee of the Board of Directors of
the Company during fiscal 1998 were Timothy B. Donaldson and Ilene B. Jacobs.
Neither Mr. Donaldson nor Ms. Jacobs has ever been an officer or employee of the
Company or has ever had any other reportable relationship with the Company other
than through his/her position as a Director of the Company.

48
<PAGE>

SHAREHOLDER RETURN PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Company's Common Stock, based on
the market price of the Company's Common Stock and assuming reinvestment of
dividends, with the total return of companies within the NASDAQ stock market and
the companies within the NASDAQ Retail Trade Stocks Index prepared by the Center
for Research in Security Prices at The University of Chicago Graduate School of
Business. The calculation of total cumulative return assumes a $100 investment
in the Company's Common Stock, the NASDAQ stock market and the NASDAQ Retail
Stocks Index on July 18, 1991.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
PERFORMANCE REPORT FOR
LITTLE SWITZERLAND, INC.

Prepared by the Center for Research in Security Prices
Produced on 09/16/98 including data to 05/29/98

Company Index: CUSIP Ticker Class Sic Exchange

53752810 LSVI 5940 NASDAQ

Fiscal Year-end is 05/31/98

Market Index: Nasdaq Stock Market (US Companies)

Peer Index: Nasdaq Retail Trade Stocks
SIC 5200-5599, 5700-5799, 5900-5999 US & Foreign

<TABLE>
<CAPTION>
Date Company Index Market Index Peer Index
<S> <C> <C> <C>
05/28/93 100.000 100.000 100.000
06/30/93 76.250 100.460 99.850
07/30/93 73.750 100.578 101.712
08/31/93 72.500 105.776 107.484
09/30/93 63.750 108.927 110.748
10/29/93 77.500 111.375 115.183
11/30/93 90.000 108.056 110.780
12/31/93 92.500 111.069 112.763
01/31/94 72.500 114.440 112.479
02/28/94 85.000 113.371 110.180
03/31/94 67.500 106.401 103.723
04/29/94 70.000 105.019 103.942
05/31/94 65.000 105.277 101.525
06/30/94 62.500 101.426 99.489
07/29/94 62.500 103.508 99.652
08/31/94 65.000 110.108 107.137
09/30/94 65.000 109.826 108.765
10/31/94 53.750 111.984 110.091
11/30/94 53.750 108.269 105.911
12/30/94 52.500 108.572 102.819
01/31/95 41.250 109.191 99.209
02/28/95 52.500 114.966 101.256
03/31/95 50.000 118.376 101.697
04/28/95 45.000 122.105 101.141
05/31/95 47.500 125.254 103.544
06/30/95 43.750 135.405 112.020
07/31/95 42.500 145.359 118.104
08/31/95 60.000 148.306 117.772
09/29/95 40.000 151.715 119.914
10/31/95 37.500 150.839 117.790
11/30/95 38.750 154.381 117.164
12/29/95 38.750 153.559 113.248
01/31/96 41.250 154.314 112.097
02/29/96 41.250 160.187 119.506
03/29/96 40.000 160.715 127.353
04/30/96 58.125 174.046 138.863
05/31/96 58.750 182.037 142.144
06/28/96 52.500 173.831 136.121
07/31/96 45.625 158.329 127.785
08/30/96 43.750 167.200 136.843
09/30/96 43.125 179.989 143.708
10/31/96 48.750 178.000 137.774
11/29/96 45.625 189.004 141.161
12/31/96 45.625 188.834 135.006
01/31/97 49.375 202.254 137.882
02/28/97 47.500 191.067 133.137
03/31/97 45.000 178.591 128.435
04/30/97 49.375 184.174 124.153
05/30/97 57.500 205.046 137.186
06/30/97 60.000 211.326 145.096
07/31/97 70.625 233.631 151.658
08/29/97 71.250 233.275 154.260
09/30/97 66.250 247.062 164.490
10/31/97 65.000 234.265 155.586
11/28/97 66.875 235.439 159.102
12/31/97 70.625 231.678 158.621
01/30/98 74.375 238.944 160.884
02/27/98 77.188 261.379 175.516
03/31/98 76.875 271.017 190.366
04/30/98 80.000 275.609 190.763
05/29/98 55.625 260.483 183.764

</TABLE>
The index level for all series was set to 100.0 on 05/28/93

49
<PAGE>

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT

On November 1, 1995, Mr. Toler entered into an employment agreement with the
Company (the "Toler Employment Agreement"), pursuant to which Mr. Toler was to
serve as President and Chief Executive Officer of the Company for a five-year
term. Mr. Toler resigned as Chief Executive Officer and President of the
Company effective August 31, 1998. Under the Toler Employment Agreement,
Mr. Toler received a base salary of $300,000 over each twelve-month period
employed. The Toler Employment Agreement does not provide for any adjustment of
base salary over the term. Pursuant to the Toler Employment Agreement, Mr. Toler
was entitled to receive a bonus if certain performance criteria were satisfied,
ranging from 33.33% of base salary for fiscal 1996 to 50% of base salary for
fiscal 1999 and each fiscal year thereafter. In the event the Company terminated
Mr. Toler's employment without cause, Mr. Toler was entitled to receive the
salary plus the pro rata share of any cash bonus he would have received if he
had continued his employment for 18 months following the date of such
termination. Mr. Toler was subject to certain non-competition provisions during
the term of his employment and, in certain circumstances, for a period of 18
months subsequent to his leaving the Company. On August 14, 1998, Mr. Toler
entered into a letter agreement (the "Toler Letter Agreement") with the Company,
pursuant to which Mr. Toler received an aggregate amount equal to $19,883 as
payment for certain fees and expenses upon his resignation as President and
Chief Executive Officer of the Company. In addition, pursuant to the Toler
Letter Agreement, Mr. Toler received a one time stay bonus equal to $4,000 and
is entitled to purchase any and all of the Company's merchandise, at the
Company's cost, up to a maximum aggregate amount equal to $20,000 until August
31, 1999. For a description of the options granted to Mr. Toler see "--Report of
the Compensation Committee of the Board of Directors on Executive Compensation."

The Company currently is in negotiations with Mr. Carey with respect to an
employment agreement with the Company. Based on a term sheet, which is subject
to modification, the Company anticipates that the terms of Mr. Carey's
employment substantially will be as follows. Mr. Carey shall serve as Acting
Chief Executive Officer of the Company for a one-year term, or until such time
as a successor President and Chief Executive Officer of the Company commences
employment. Mr. Carey will receive a base salary of $350,000 over the twelve-
month period employed, but such amount will not be subject to adjustment over
the term. In addition, Mr. Carey will be entitled to receive a minimum of three
months' salary even if a successor is identified in less time and a minimum of
six months' salary if the Company employs him for more than three months of the
term of the employment. Mr. Carey will be entitled to receive up to a maximum
of $50,000 per quarter (and up to 100% of such amount for each quarter or part
thereof worked) as a quarterly bonus if certain performance and other criteria
are satisfied. Mr. Carey will also receive payment for certain expenses,
including living expenses, relocation expenses and travel related expenses. Mr.
Carey will be subject to certain non-competition provisions during the term of
this employment. Additionally, on September 1, 1998, the Company granted Mr.
Carey an option to purchase 150,000 shares of the Company's Common Stock at
$2.25 per share. The Company granted this option outside of the 1991 Option
Plan.

On November 12, 1997, Mr. Liston entered into an employment agreement with
the Company, which was subsequently amended on June 14, 1998 (the "Liston
Employment Agreement"), pursuant to which Mr. Liston was to serve as the Chief
Financial Officer, Vice President and Treasurer of the Company for a two-year
term. Mr. Liston resigned as the Chief Financial Officer, Vice President and
Treasurer of the Company effective September 10, 1998. Under the Liston
Employment Agreement, Mr. Liston received a base salary ranging from $65,000 to
$160,000 (depending on whether or not Mr. Liston rendered services under the
Liston Employment Agreement at the main offices of the Company). Mr. Liston
also was entitled to receive, upon the achievement of certain financial
performance criteria, a bonus in an amount of up to 25% of his base salary in
each year. Mr. Liston was subject to certain non-competition provisions during
the term of his employment.

The Company currently is in negotiations with Mr. Nace with respect to an
employment agreement with the Company. Based on a term sheet, which is subject
to modification, the Company anticipates that the terms of Mr. Nace's employment
substantially will be as follows. Mr. Nace will serve as the Chief Financial
Officer, Executive Vice President and Treasurer of the Company for a two-year
term. Mr. Nace will receive a base salary of $200,000 over each twelve-month
period employed, but such amount will not be subject to adjustment over the
term. Upon achievement of certain performance criteria, Mr. Nace will be
entitled to receive a bonus in an amount of up to 25% of his base salary in each
year. Mr. Nace's employment may be terminated immediately by the Company with
"cause"

50
<PAGE>

(as defined in the term sheet). If Mr. Nace's employment is terminated by the
Company either without cause or in the event of a change of control of the
Company and Mr. Nace is not retained by the new company, then he will be
entitled to receive on the date of such termination a lump sum payment equal to
twelve months of base salary. Mr. Nace will be subject to certain non-
competition provisions during the term of his employment. Additionally, on
September 10, 1998, the Company granted Mr. Nace an option to purchase 75,000
shares of the Company's Common Stock at $2.50 per share pursuant to the 1991
Option Plan.

The Company currently is in negotiations with Mr. Poole with respect to an
employment agreement with the Company. Based on a term sheet, which is subject
to modification, the Company anticipates that the terms of Mr. Poole's
employment substantially will be as follows. Mr. Poole will serve as Vice
President and General Merchandise Manager of the Company in exchange for a base
salary of $135,000 over each twelve-month period employed. Upon achievement of
certain performance criteria, Mr. Poole is entitled to receive a bonus in an
amount of up to 25% of his base salary in each year. Additionally, on August
25, 1998, the Company granted Mr. Poole an option to purchase 50,000 shares of
the Company's Common Stock at $2.0625 per share. The Company granted this
option outside of the 1991 Option Plan.

On June 16, 1994, Mr. Canfield entered into an employment agreement with the
Company (the "Canfield Employment Agreement"), pursuant to which Mr. Canfield
serves as the Vice President of Store Operations of the Company for a five-year
term. Under the Canfield Employment Agreement, Mr. Canfield receives a base
salary ranging from $157,000 over the twelve-month period ended on June 15, 1996
to $182,000 over the twelve-month period ending on June 15, 1999, and upon the
achievement of certain performance criteria, a bonus in an amount of up to 25%
of his base salary in each year. Pursuant to the Canfield Employment Agreement,
Mr. Canfield received a signing bonus equal to $50,000 on the date he became
Vice President of Store Operations of the Company. In the event Mr. Canfield's
employment is terminated due to his disability, for non-performance or without
cause, Mr. Canfield is entitled to receive the salary he would have received had
he continued his employment for 60 days, 90 days or 12 months, respectively,
following the date of such termination. Mr. Canfield is subject to certain non-
competition provisions during the term of his employment and, in certain
circumstances, for a period of up to one year subsequent to his leaving the
Company.

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<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table sets forth on the following page, to the best knowledge and belief
of the Company, certain information regarding the beneficial ownership of the
Company's Common Stock as of September 17, 1998 by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each of the Company's Directors, (iii) each of the named executive
officers in the Summary Compensation Table and (iv) all of the Company's
executive officers and Directors as a group.

<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS SHARES BENEFICIALLY PERCENT OF
AND 5% STOCKHOLDERS OWNED(1) CLASS(2)
------------------- -------- --------
<S> <C> <C>
Franklin Advisory Services, Inc........... 843,000(3) 9.0%
One Parker Plaza, Sixteenth Floor,
Ft. Lee, NJ 07024

Franklin Resources, Inc.
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Boulevard,
San Mateo, CA 94404

Jewelcor Management, Inc.................. 842,000(4) 9.0%
Seymour Holtzman
Steven Holtzman
Trust F/B/O A. Holtzman Garcia
Custodial Account F/B/O Chelsea Holtzman
100 N. Wilkes-Barre Boulevard
Wilkes-Barre, PA 18702

ValueVest Partners L.P.................... 837,400(5) 9.0%
1 Sansome Street, 39 Floor,
San Francisco, CA 94104
Donald L. Sturm
3033 East First Avenue, Suite 200,
Denver, CO 80206

The TCW Group, Inc........................ 637,300(6) 6.8%
Robert Day
865 South Figueroa Street,
Los Angeles, CA 90017

1838 Investment Advisors, LP.............. 439,795(7) 4.7%
5 Radnor Corp. Ctr., Suite 320
Radnor, PA 19087

Heartland Advisors, Inc................... 423,000(8) 4.5%
790 North Milwaukee Street,
Milwaukee , WI 53202

William Canfield.......................... 60,000(9) *
C. William Carey.......................... 228,000(10) *
Timothy B. Donaldson...................... 24,000(11) *
Ilene B. Jacobs........................... 33,000(12) *
Ronald J. Lataille........................ 1,158 *
Thomas S. Liston.......................... 25,000(13) *
John E. Toler, Jr......................... 300,000(14) *
Kenneth W. Watson......................... 30,000(15) *
All directors and executive officers
as a group (8 persons).................. 700,000(16) 7.5%
- --------------------------
</TABLE>
* Less than 1%.

52
<PAGE>

(1) Beneficial share ownership is determined pursuant to Rule 13d-3 under the
Exchange Act. Accordingly, a beneficial owner of a security includes any
person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares the power to vote
such security or the power to dispose of such security. The amounts set
forth as beneficially owned include shares owned, if any, by spouses and
relatives living in the same home as to which beneficial ownership may be
disclaimed. The amounts set forth as beneficially owned include shares of
Common Stock which such Directors or officers had the right to acquire
within 60 days of September 17, 1998 under options previously granted
pursuant to the 1991 Option Plan and the 1992 Option Plan. Upon the
execution of the Merger Agreement with DRHC, all unvested stock options on
the date of the execution of the Merger Agreement automatically vested
pursuant to the terms of the 1991 Option Plan.

(2) Percentages are calculated on the basis of 9,391,202 shares of stock
outstanding as of September 17, 1998, which includes 100,000 shares subject
to options exercisable within 60 days of September 17, 1998 granted pursuant
to the 1992 Option Plan, 627,000 shares subject to options exercisable
within 60 days of September 17, 1998 granted pursuant to the 1991 Option
Plan, and 40,000 shares subject to options exercisable within 60 days of
September 17, 1998 granted to Messrs. Carey and Poole outside of the 1991
Option Plan.

(3) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 5, 1998, which indicates that the Franklin
Advisory Services, Inc. has sole voting power with respect to 543,000 shares
and sole dispositive power with respect to all 843,000 shares. These
securities are owned by one or more open or closed-end investment companies
or other managed accounts, which are advised by direct and indirect
investment advisory subsidiaries of Franklin Resources, Inc. For purposes
of the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), each of Franklin Advisory Services, Inc.,
Franklin Resources, Inc., Charles B. Johnson and Rupert B. Johnson may be
deemed to be a beneficial owner of such securities; however, each such
person expressly disclaims any economic interest or beneficial ownership in
any of such securities.

(4) The above information is based on copies of a statement on Schedule 13D
filed with the SEC on September 4, 1998, which indicates that Jewelcor
Management, Inc. has sole voting and sole dispositive power with respect to
821,000 shares, Seymour Holtzman and Steven Holtzman have shared voting and
shared dispositive power with respect to 8,000 shares, the Custodial Account
F/B/O Chelsea Holtzman, has sole voting and sole dispositive power with
respect to 3,000 shares, and the Trust F/B/O Allison Holtzman Garcia, has
sole voting and sole dispositive power with respect to 10,000 shares. For
purposes of the reporting requirements of the Exchange Act, each of Jewelcor
Management, Inc., Jewelcor Inc., S.H. Holdings, Inc., Seymour Holtzman,
Steven Holtzman, Evelyn Holtzman, the Custodial Account F/B/O Chelsea
Holtzman and the Trust F/B/O Allison Holtzman Garcia may be deemed to be a
beneficial owner of such securities; however, each such person expressly
disclaims beneficial ownership of any Common Stock of the Company
beneficially owned by any other such person, except that Seymour Holtzman
acknowledges beneficial ownership of the Common Stock owned by Jewelcor
Management, Inc.

(5) The above information is based on copies of a statement on Schedule 13D
filed with the SEC on May 5, 1997, as amended by Amendment No. 1 to Schedule
13D filed with the SEC on August 4, 1997, which indicates that ValueVest
Partners L.P. has sole voting and dispositive power with respect to 395,300
shares and Donald L. Sturm has sole voting and dispositive power with
respect to 442,100 shares.

(6) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 12, 1998, which indicates that The TCW Group,
Inc. and Robert Day each has sole voting and dispositive power with respect
to all 637,300 shares. The filing of this Schedule 13D was also made on
behalf of Robert Day, 200 Park Avenue, Suite 2200, New York, New York 10166.

(7) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 12, 1998, which indicates that 1838
Investment Advisors, LP has sole voting power with respect to 374,995 shares
and sole dispositive power with respect to all 439,795 shares.

(8) The above information is based on copies of a statement on Schedule 13G
filed with the SEC on February 3, 1998, which indicates that the Heartland
Advisors, Inc. has sole voting and dispositive power with respect to all
423,000 shares.

(9) Represents shares of Common Stock deemed to be beneficially owned by Mr.
Canfield which are subject to options previously granted pursuant to the
1991 Option Plan.

53
<PAGE>

(10) Includes 10,000 shares and 23,000 shares of Common Stock deemed to be
beneficially owned by Mr. Carey which are subject to options previously
granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively. Includes 30,000 shares of Common Stock deemed to be
beneficially owned by Mr. Carey which are subject to options previously
granted outside of the 1991 Option Plan. Includes 25,000 shares of Common
Stock which were acquired pursuant to the one-for-one exchange on October
22, 1997 of 25,000 shares of Town & Country Exchangeable Preferred Stock,
which Mr. Carey purchased on June 9, 1994 for $7.1875 per share. Includes
140,000 shares of Common Stock acquired by Mr. Carey in September, 1998.
Does not include 127,241 shares of Common Stock held in the trust by
Linchmen Company, c/o State Street Bank & Trust Company, as trustee for the
trust established in connection with the recapitalization of Town &
Country, of which Mr. Carey is the controlling stockholder.

(11) Represents 10,000 shares and 14,000 shares of Common Stock deemed to be
beneficially owned by Mr. Donaldson which are subject to options
previously granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively.

(12) Represents 10,000 shares and 23,000 shares of Common Stock deemed to be
beneficially owned by Ms. Jacobs which are subject to options previously
granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively.

(13) Represents shares of Common Stock deemed to be beneficially owned by Mr.
Liston which are subject to options previously granted pursuant to the 1991
Option Plan.

(14) Represents shares of Common Stock deemed to be beneficially owned by Mr.
Toler which are subject to options previously granted pursuant to the 1991
Option Plan.

(15) Represents 10,000 shares and 20,000 shares of Common Stock deemed to be
beneficially owned by Mr. Watson which are subject to options previously
granted pursuant to the 1991 Option Plan and 1992 Option Plan,
respectively.

(16) Amount does not include beneficial ownership of the Company's Common Stock
by Messrs. Liston and Lataille of 25,000 and 1,158 shares of Common Stock,
respectively. Amount does include beneficial ownership of the Company's
Common Stock by Messrs. Nace and Poole of 15,000 and 10,000 shares of
Common Stock, respectively, which are subject to options previously granted
pursuant to the 1991 Option Plan and outside of the 1991 Option Plan,
respectively.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Carey, a Director and the former Chairman of the Board of Directors of
the Company, is the controlling stockholder of Town & Country and was Chairman,
President and Chief Executive Officer of Town & Country until January 3, 1997.
Effective September 1, 1998, Mr. Carey resigned as Chairman of the Board of
Directors of the Company and, on such date, became the Acting Chief Executive
Officer of the Company. On October 22, 1997, Mr. Carey exchanged 25,000 shares
of Town & Country Exchangeable Preferred Stock, which he acquired on June 9,
1994 at $7.1875 pre share, on a share-for-share basis into 25,000 shares of the
Company's Common Stock.

Town & Country and certain of its subsidiaries supply the Company with
jewelry. The aggregate amount of purchases by the Company from these entities
totaled approximately $1.4 million, $640,000 and $560,000 in fiscal 1996, 1997
and 1998, respectively. Pursuant to written agreements among Town & Country,
these subsidiaries and the Company, Town & Country and the subsidiaries have
agreed to supply jewelry to the Company at the Company's option, on the terms
and conditions in effect prior to the Company's initial public offering. These
agreements are automatically renewed each year unless either party terminates
upon 60 days' notice prior to the end of a year. The Company believes that all
jewelry purchased pursuant to these agreements with Town & Country and its
subsidiaries can be readily purchased from other, unrelated third party
suppliers on comparable terms, and that these agreements do not restrict the
Company from purchasing from other sources.

Mr. Carey, a Director of the Company, was, as of the end of fiscal 1998,
also a Director of Solomon Brothers, Limited, the Company's franchisee which
operates eight stores in the Bahamas under a franchise agreement with the
Company. This franchise agreement was terminated effective November 1, 1998.
In addition, Mr. Carey entered into the Carey Consulting Agreement with the
Company on June 2, 1996, which provided, among other things, that Mr. Carey
would receive in exchange for certain services a consulting fee at the annual
rate of $150,000 over a three-year term, as well as reimbursement for all
reasonable expenses incurred by him on behalf of the Company in connection with
the performance of his obligations thereunder. In connection with his position
as Acting Chief Executive Officer of the Company, the Company has terminated the
Carey Consulting Agreement effective

54
<PAGE>

September 1, 1998. Mr. Carey will receive $37,500 in lieu of the three-month
notification necessary pursuant to the Carey Consulting Agreement to terminate
such agreement. See Item 11 "Executive Compensation--Compensation Committee
Interlocks and Insider Participation."

Mr. Carey currently is in negotiations with respect to an employment
agreement with the Company. For a description of certain terms of such
employment see Item 11 "Executive Compensation--Employment Agreements."

In connection with the establishment of the Investment Banking Committee, on
November 28, 1994, the Board of Directors voted to compensate the members of the
Investment Banking Committee for the significant additional time commitment that
would be required of such members in connection with fulfilling their duties and
responsibilities as members of the Investment Banking Committee. Pursuant to
such vote, the members of the Investment Banking Committee are entitled to an
aggregate success fee equal to two-thirds of one percent of the aggregate value
of any transaction, including any sale, purchase, merger, joint venture or
combination thereof, entered into and completed by the Company. On February 4,
1998, in anticipation of the execution of the Merger Agreement with DRHC, Mr.
Carey entered into the Success Fee Agreement, pursuant to which the Company is
obligated to pay Mr. Carey an amount equal to 83.33% of two-thirds of one
percent of the aggregate value (as defined in the Success Fee Agreement) of any
such transaction entered into and completed by the Company; provided, however,
that the Company is not obligated to make such payment if Mr. Carey resigns as a
member of the Board of Directors on or before the effective time of such
transaction. The Board of Directors of the Company currently is in discussions
with Mr. Carey with respect to this arrangement. See Item 11 "Executive
Compensation--Compensation Committee Interlocks and Insider Participation."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(1) Financial Statements

The financial statements filed as part of the report are listed on the Index
to Consolidated Statements on page 17.

(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulations of the Security and Exchange Commission are not required under
the related instructions or are not material, and therefore have been
omitted.

(3) Articles of Incorporation and By-Laws:

3.1 The Amended and Restated Certificate of Incorporation of the Company is
incorporated herein by reference to Exhibit 3.3 to Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration No.
33-40907, filed with the Securities and Exchange Commission on July 10,
1992 ("Amendment No. 1 to the Form S-1");

3.2 The Amended and Restated By-Laws of the Company are incorporated herein
by reference to Exhibit 3.4 to Amendment No. 1 to the Form S-1.

(10) Material Contracts

10.1 The Little Switzerland, Inc. 1991 Stock Option Plan is incorporated
herein by reference to Exhibit 10.1 to Amendment No. 1 to the Form S-1;

55
<PAGE>

10.2 Franchise Agreement dated November 1, 1987, among L.S. Wholesale,
Inc., L.S. Holding, Inc. and Solomon Brothers Limited is
incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1, Registration No. 33-40907, filed
with the Securities and Exchange Commission on June 4, 1991
("Form S-11");

10.3 L.S. Holding, Inc. Retirement Plan and Trust Agreement is
incorporated herein by reference to Exhibit 10.4 to Form S-1;

10.4 Registration Rights Agreement between Switzerland Holding, Inc. and
the Company is incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on May 29, 1992;

10.5 Manufacturing, Service and Pricing Agreement, dated as of March 1,
1991, between Anju Jewelry Limited and L.S. Wholesale, Inc. is
incorporated herein by reference to Exhibit 10.7 to Amendment No. 1
to Form S-1;

10.6 Manufacturing, Service and Pricing Agreement dated as of March 1,
1991, between Essex International Company Limited and L.S.
Wholesale, Inc. is incorporated herein by reference to Exhibit 10.8
to Amendment No. 1 to Form S-1;

10.7 Manufacturing, Service and Pricing Agreement dated as of March 1,
1991, between Feature Enterprises, Inc. and L.S. Wholesale, Inc. is
incorporated herein by reference to Exhibit 10.9 to Amendment No. 1
to Form S-1;

10.8 Director and Officer Liability Insurance Policy is incorporated
herein by reference to Exhibit 10.11 to Amendment No. 2 to Form S-1;

10.9 Shareholder Rights Agreement, dated as of July 25, 1991, between the
Company and State Street Bank and Trust Company, as Rights Agent, is
incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A, filed with the Securities and
Exchange Commission on July 26, 1991;

10.10 First Amendment to Shareholder Rights Agreement, dated as of
November 8, 1991, between the Company and State Street Bank and
Trust Company, as Rights Agent, is incorporated herein by reference
to Exhibit 28 to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on November 15, 1991;

10.11 The Little Switzerland, Inc. 1992 Employee Stock Purchase Plan is
incorporated herein by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on May 29, 1992;

10.12 Purchase Agreement, dated January 23, 1992, between L.S. Holding,
Inc. and A.H. Riise Gift Shop, Inc. is incorporated herein by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on May
29, 1992;

10.13 Purchase Agreement, dated June 4, 1992, between Maria Tohme, Meli,
and Little Switzerland (St. Lucia) Limited is incorporated herein by
reference to Exhibit 10.15 to the Company's Transition Report on
Form 10-K filed with the Securities and Exchange Commission on
August 27, 1992;

10.14 Second Amendment to Shareholder Rights Agreement, dated as of April
6, 1993, between the Company and State Street Bank and Trust
Company, as Rights Agent, as incorporated by reference to Exhibit 28
to the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on April 22, 1993;

56
<PAGE>

10.15 The Little Switzerland, Inc. 1992 Non-Employee Directors'
Nonqualified Stock Option Plan is incorporated herein by reference
to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on May 26, 1993;

10.16 Employment Agreement between William Canfield and the Company is
incorporated herein by reference to Exhibit 10.16 of the 10-K Report
for the year ended May 31, 1995;

10.17 Form of Income Continuance Agreement between Ronald J. Lataille and
the Company and Denis X. Comment and the Company is incorporated
herein by reference to Exhibit 10.17 of the 10-K Report for the year
ended May 31, 1994;

10.18 Asset Purchase Agreement by and among World Gift Imports (Barbados)
Ltd. as Buyer, Dacosta Mannings Inc., as Seller and Barbados
Shipping & Trading Company Limited dated as of December 28, 1995 is
incorporated herein by reference to Item 7(c) of the 8-K report
filed February 16, 1996;

10.19 Employment agreement between John E. Toler, Jr. and the Company is
incorporated herein by reference to Exhibit 10.19 of the 10-K Report
for the year ended June 1, 1996.

10.20 Consulting Agreement between C. William Carey and the Company is
incorporated herein by reference to Exhibit 10.20 of the 10-K/A
Report for the year ended May 31, 1997.

10.21 Employment Agreement, dated as of November 12, 1997, between Thomas
S. Liston and the Company is incorporated herein by reference to
Exhibit 10.21 of the 10-K Report for the year ended May 30, 1998.

10.22 First Amendment to Employment Agreement, dated as of June 14, 1998,
between Thomas S. Liston and the Company is incorporated herein by
reference to Exhibit 10.22 of the 10-K Report for the year ended
May 30, 1998.

10.23 Letter Agreement, dated as of August 14, 1998, between the Company
and John E. Toler, Jr. is incorporated herein by reference to
Exhibit 10.23 of the 10-K Report for the year ended May 30, 1998.

10.24 Franchise Agreement, dated as of November 1, 1996, among the
Company, L.S. Wholesale, Inc. and Solomon Brothers, Limited is
incorporated herein by reference to Exhibit 10.24 of the 10-K Report
for the year ended May 30, 1998.

10.25 Success Fee Agreement, dated as of February 4, 1998, between the
Company and C. William Carey is incorporated herein by reference to
Exhibit 10.25 of the 10-K Report for the year ended May 30, 1998.

(21) Subsidiaries of Registrant: A list of Subsidiaries of the Company is
incorporated herein by reference to Exhibit 21 of the 10-K/A Report for the
year ended May 31, 1997.

(23) Consent of Experts and Counsel: Consent of Arthur Andersen LLP is filed
herewith as Exhibit 23.

(b) Report on Form 8-K. The registrant filed the following Current Reports on
Form 8-K during the three month period ended May 30, 1998:

1. On May 5, 1998, the Company filed a Current Report on Form 8-K
announcing that the Company had received correspondence from DRHC's
counsel indicating that DRHC's financing commitment letters from DLJ
Bridge Finance, Inc. and Donaldson, Lufkin & Jenrette, Inc. had
terminated on April 30, 1998.

2. On May 11, 1998, the Company filed a Current Report on Form 8-K
announcing that the Agreement and Plan of Merger, dated as of
February 4, 1998, with DRHC and certain of DRHC's subsidiaries and the
transactions contemplated thereby had been adopted by the requisite
affirmative vote of the Company's stockholders at the Special Meeting of
the Stockholders held on May 8, 1998.

57
<PAGE>

3. On May 15, 1998, the Company filed a Current Report on Form 8-K
announcing that DRHC had requested an extension of the deadline by which
the proposed merger pursuant to the Agreement and Plan of Merger with
DRHC would be consummated.

4. On May 22, 1998, the Company filed a Current Report on Form 8-K
announcing that it had received a second request by DRHC for a 90 day
extension and that it had apprised DRHC that the Company was prepared to
grant a two week extension in return for certain concessions by DRHC.

58
<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, this 28 day of
September, 1998.

Little Switzerland, Inc.

By: /s/ C. William Carey
--------------------
C. William Carey
Acting Chief Executive Officer
and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.

Signatures Title Date Signed
- ---------- ----- -----------

/s/ John E. Toler, Jr. Director September 28, 1998
- ------------------------
John E. Toler, Jr.

/s/ C. William Carey Acting Chief Executive Officer September 28, 1998
- ------------------------ and Director (Principal
C. William Carey Executive Officer)

/s/ Timothy B. Donaldson Director September 28, 1998
- ------------------------
Timothy B. Donaldson

/s/ Kenneth W. Watson Director September 28, 1998
- ------------------------
Kenneth W. Watson

/s/ David J. Nace Chief Financial Officer, September 28, 1998
- ------------------------ Executive Vice President and
David J. Nace Treasurer (Principal Financial
and Accounting Officer)

<PAGE>

EXHIBIT 23

ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated August 3, 1998, included in Little Switzerland,
Inc.'s Report on Form 10-K/A for the year ended May 30, 1998, 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).

/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP

Boston, Massachusetts
September 25, 1998