<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
(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 [ ] No [X]
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 August 14, 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 $3.25 per
share for the registrant's Common Stock, as reported on the NASDAQ National
Market System as of August 14, 1998, was $27,947,407.
<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
August 14, 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, 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
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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 expanding the number of
stores carrying Breitling products. 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, pearls 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
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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
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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 leather lines including Paloma Picasso, Versace
and Bally, 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 experience and 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 national,
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 are in place in each location, and
security guards are assigned at individual stores as needs dictate. Most
jewelry and watches are returned to 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.
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." In addition to these changes, on
August 25, 1998, Michael M. Poole joined the Company as its Vice President,
General Merchandise Manager. Mr. Poole brings more than 30 years of jewelry and
watch retailing experience to this position.
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, it
may be required to borrow 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
<PAGE>
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. The court has now ruled that the Company
may pursue certain discovery before responding to these motions and the parties
are currently engaging in such discovery. 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
- -------------------------------------------
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 August 14, 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
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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
Accounting Principle (0.2) -- --
----- ----- -----
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
reconcilation 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 requesting 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.
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. The court has now ruled that the Company
may pursue certain discovery before responding to these motions and the parties
are currently engaging in such discovery.
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
11
<PAGE>
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. 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 will hire
a nationally recognized executive search firm 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. In connection with accepting this interim position, Mr. Carey has
resigned as the Chairman of the Board of Directors, effective September 1, 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 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.
12
<PAGE>
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 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.
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
13
<PAGE>
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.
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. 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%. The lower tax rate had the effect of increasing earnings per
share by $0.12 in both fiscal years 1997 and 1996. See "--Fiscal 1998 Compared
to Fiscal 1998." The Company's effective tax rate was 0.0% and 17.4% in the
fiscal years ended May 31, 1997 and June 1, 1996, respectively.
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.
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
14
<PAGE>
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 the 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. The Company
has not entered into definitive loan documents with Chase Manhattan Bank, and
there is no assurances that such loan documents will be entered into. 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.
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
15
<PAGE>
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
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 years.
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 20
May 30, 1998, May 31, 1997 and June 1, 1996
Consolidated Statements of Changes in Stockholders' Equity for the 21
fiscal years ended May 30, 1998, May 31, 1997 and June 1, 1996
Consolidated Statements of Cash Flows for the fiscal years ended 22
May 30, 1998, May 31, 1997 and June 1, 1996
Notes to Consolidated Financial Statements 23-43
</TABLE>
17
<PAGE>
Arthur Andersen LLP
Report of Independent Public Accountants
To Little Switzerland, Inc.:
We have audited the accompanying consolidated balance sheets of Little
Switzerland, Inc. (a Delaware corporation) and subsidiaries as of 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
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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.
23
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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).
(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.
24
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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.
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 useful
life, whichever
is shorter 14,804,000 14,115,000
----------- -----------
$39,688,000 $38,565,000
=========== ===========
</TABLE>
25
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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 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.
26
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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.
27
<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.
28
<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.
29
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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.
(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.
30
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
(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, MAY 31, JUNE 1,
1998 1997 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>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
------------FISCAL YEARS ENDED--------------
MAY 30, MAY 31, JUNE 1,
1998 1997 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.
31
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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, MAY 31, JUNE 1,
1998 1997 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
recorded and provisions at USVI rate 442,000 (441,000) (59,000)
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
not benefited 3,269,000 898,000 858,000
----------- --------- -----------
$ 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 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.
32
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
(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.
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.
33
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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).
34
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
(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 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.
35
<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 QUARTER SECOND QUARTER THIRD QUARTER FOURTH 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)
<CAPTION>
FISCAL 1997 AUGUST 31 NOVEMBER 30 MARCH 1 MAY 31
<S> <C> <C> <C> <C>
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.
36
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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.
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.
37
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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:
<TABLE>
<CAPTION>
YEAR ENDED MAY YEAR ENDED YEAR ENDED
30, 1998 MAY 31, 1997 JUNE 1, 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.
38
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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.
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.
39
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
(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.
40
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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>
<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>
(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.
41
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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 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.
42
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 30, 1998
(Continued)
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.
43
<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.
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information called for by Item 10 is incorporated herein by reference to
the Company's Definitive Proxy Statement for the 1998 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein be reference to
the Company's Definitive Proxy Statement for the 1998 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference to
the Company's Definitive Proxy Statement for the 1998 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference to
the Company's Definitive Proxy Statement for the 1998 Annual Meeting.
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.
(c) Exhibits:
(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;
45
<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 filed herewith as Exhibit 10.21.
10.22 First Amendment to Employment Agreement, dated as of June 14, 1998,
between Thomas S. Liston and the Company is filed herewith as
Exhibit 10.22.
10.23 Letter Agreement, dated as of August 14, 1998, between the Company
and John E. Toler, Jr. is filed herewith as Exhibit 10.23.
10.24 Franchise Agreement, dated as of November 1, 1996, among the
Company, L.S. Wholesale, Inc. and Solomon Brothers, Limited is filed
herewith as Exhibit 10.24.
10.25 Success Fee Agreement, dated as of February 4, 1998, between the
Company and C. William Carey is filed herewith as Exhibit 10.25.
(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.
46
<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
August, 1998.
Little Switzerland, Inc.
By: /s/ John E. Toler, Jr.
-----------------------
John E. Toler, Jr.
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/ Thomas S. Liston Chief Financial Officer, August 28, 1998
- -------------------- Vice President and
Thomas S. Liston Treasurer (Principal Financial
and Accounting Officer)
/s/ C. William Carey Chairman of the Board and August 28, 1998
- -------------------- Director
C. William Carey
/s/ Timothy B. Donaldson Director August 28, 1998
- ------------------------
Timothy B. Donaldson
/s/ Ilene B. Jacobs Director August 28, 1998
- -------------------
Ilene B. Jacobs
/s/ Kenneth W. Watson Director August 28, 1998
- ---------------------
Kenneth W. Watson
/s/ John E. Toler, Jr. Chief Executive Officer August 28, 1998
- ---------------------- and Director (Principal
John E. Toler, Jr. Executive Officer)
47
<PAGE>
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the 12th day of November, 1997, by and between L.S.
Wholesale, Inc., a Massachusetts corporation with its main office in St. Thomas,
U.S.V.I. (the "Employer"), Little Switzerland, Inc., a Delaware corporation with
its main office in St. Thomas, U.S.V.I. ("Little Switzerland") and Thomas Liston
(the "Executive").
WITNESSETH
WHEREAS, the Executive possesses certain unique skills, talents and
judgment as well as the experience to provide the direction and leadership
required by the Employer; and
WHEREAS, the Employer and Executive desire to provide for the Executive's
employment by the Employer.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained herein, the Employer and the Executive mutually agree as
follows:
1. Employment. The Employer agrees to employ the Executive and the
----------
Executive agrees to be employed by the Employer on the terms and conditions
hereinafter set forth.
2. Effective Date and Term. The commencement date (the "Commencement
-----------------------
Date") of this Agreement shall be November 12, 1997. Subject to the provisions
of Section 5, the term of the Executive's employment hereunder shall be for two
(2) years from the Commencement Date (the "Term").
3. Compensation and Benefits. The compensation and benefits payable to
-------------------------
the Executive under this Agreement shall be as follows:
a. Salary. For all services rendered by the Executive under this
------
Agreement, the Employer shall pay the Executive a total salary as follows:
(1) Base Salary. For each twelve (12) month period of the Term,
-----------
the Employer shall pay the Executive a base salary at an annual rate
(the "Base Salary") equal to One Hundred Sixty Thousand Dollars
($160,000.00).
(2) Bonus. During the Term and as further set forth below, for
-----
each fiscal year during which the Executive is employed by the
Employer pursuant to this Agreement, in the event that Little
Switzerland shall achieve certain performance criteria (the
"Performance Criteria"), the Employer shall pay to the Executive a
bonus (the "Annual Bonus") in an amount of up to one-quarter (25%) of
the Base Salary earned for that fiscal year which shall be prorated
for periods shorter than a full fiscal year.
The applicable Performance Criteria for any fiscal year shall be
established annually by the Compensation Committee of Little
Switzerland prior to the beginning of the applicable fiscal year. For
any fiscal year, the determination of whether Performance Criteria
have been met and whether any Annual Bonus shall be paid shall be made
by the Compensation Committee of Little Switzerland.
<PAGE>
The Executive's Base Salary shall be payable in periodic installments in
accordance with the Employer's usual practice for payment of compensation
to its senior executives and the Annual Bonus, if any, shall be payable
within ten (10) days after the date on which Little Switzerland determines
from its financial reports and other relevant information the extent to
which, if any, the Performance Criteria have been achieved and in any event
not more than ninety (90) days after the end of the Employer's fiscal year.
Notwithstanding the foregoing, the Annual Bonus shall be prorated for any
period of employment shorter than a full fiscal year.
b. Stock Option. On the Commencement Date, the Executive will be
------------
awarded an option (the "Option") to purchase 25,000 shares of Common Stock,
par value $.01 per share, of Little Switzerland (the "Common Stock"),
having an exercise price equal to one hundred percent (100%) of the fair
market value of a share of Common Stock on the Commencement Date. The
25,000 shares of Common Stock subject to purchase pursuant to the Option
shall vest and become exercisable as follows:
<TABLE>
<CAPTION>
Number of Cumulative Number
Vesting Date Shares Vested of Shares Vested
------------ ------------- -----------------
<S> <C> <C>
November 12, 1998 5,000 5,000
November 12, 1999 5,000 10,000
November 12, 2000 5,000 15,000
November 12, 2001 5,000 20,000
November 12, 2002 5,000 25,000
</TABLE>
c. Moving and Housing Expenses. The Employer shall reimburse the
---------------------------
Executive for moving expenses incurred by the Executive in moving his
household goods to St. Thomas, U.S.V.I., when appropriate, up to a maximum
amount of $5,000.00. Furthermore, while the Executive is searching for
permanent housing in St. Thomas, the Employer shall reimburse the Executive
for his living expenses for up to thirty (30) days.
d. Life Insurance. During the Term, the Employer shall maintain a
--------------
term life insurance policy on the life of the Executive in the amount of
One Hundred Thousand Dollars ($100,000.00) payable as directed by the
Executive; provided, however, that in the event the Executive does not pass
a physical examination, the Employer shall only be obligated to maintain a
policy on the life of the Executive in the amount of Fifty Thousand Dollars
($50,000.00).
e. Regular Benefits. After one (1) year of employment hereunder with
----------------
the Company, the Executive shall be entitled to three (3) weeks vacation
time annually, which shall be prorated thereafter for any period of
employment less than a full year. The Executive shall be entitled to
participate in any and all employee benefit plans, medical insurance plans,
life insurance plans, disability income plans, retirement plans and other
benefit plans from time to time in effect for senior executives of the
Employer. The Executive shall be entitled to participate in the Employer's
401k plan only after one (1) year of employment hereunder with the Company.
Except as otherwise specifically agreed to by the Employer and the
Executive, the Executive also shall be entitled to reimbursement for all
ordinary and necessary business expenses incurred by the Executive in
connection with the advancement of the Employer's interests and the
discharge of his duties and responsibilities hereunder, including without
limitation, all travel and lodging expenses; provided, however, that the
-------- -------
Executive accounts promptly for such expenses to the Employer in the manner
reasonably prescribed from time to time by the Employer and in compliance
with the Employer's policy. The Employer may alter, modify, add to or
terminate its employee benefit
<PAGE>
plans as they apply to the Employer's management at such times and in such
manner as the Employer determines to be appropriate, without recourse by
the Executive.
4. Capacity and Extent of Service. The capacity and the extent of the
------------------------------
Executive's service shall be as follows:
a. During the Term, the Executive shall serve as the Vice President,
Chief Financial Officer and Treasurer of Little Switzerland and the
Employer beginning on November 12, 1997, and shall serve in such other or
additional offices or consulting positions in which he may be reasonably
requested to serve.
b. The parties agree that it is their intent that the Executive
devote his full business time, best efforts and business judgment, skill
and knowledge to the advancement of Little Switzerland's and the Employer's
interests and to the discharge of his duties and responsibilities
hereunder. In accordance with the foregoing, the Executive shall not
engage in any other business activity, except as may be approved by the
Board of Directors of Little Switzerland; provided, however, that nothing
-------- -------
herein shall be construed as preventing the Executive from:
(1) investing his assets in a manner not otherwise prohibited by
this Agreement, and in such form or manner as shall not require any
material services on his part in the operations or affairs of the
companies or other entities in which such investments are made;
(2) serving on the board of directors of any company, provided
that he shall not be required to render any material services with
respect to the operations or affairs of any such company; or
(3) engaging in religious, charitable or other community or non-
profit activities which do not impair his ability to fulfill his
duties and responsibilities under this Agreement.
5. Termination. Notwithstanding the provisions of Section 2, the
-----------
Executive's employment hereunder shall terminate under the following
circumstances and shall be subject to the following provisions:
a. Death. In the event of the Executive's death during the
-----
Executive's employment hereunder, the Executive's employment shall
terminate on the date of his death.
b. Termination by the Employer for Cause. The Executive's employment
-------------------------------------
hereunder may be terminated for cause (as defined below) without further
liability on the part of the Employer for any compensation or benefits
pursuant to Section 3 hereof or otherwise by written notice to the
Executive setting forth in reasonable detail the nature of such cause,
effective upon delivery of such notice. Only the following shall
constitute "cause" for termination pursuant to this Section 5b:
(1) Deliberate dishonesty of the Executive with respect to the
Employer or any subsidiary or affiliate thereof;
(2) Conviction of the Executive of a crime involving moral
turpitude;
(3) Material failure to perform a substantial portion of his
duties and responsibilities hereunder, which failure continues for
more than thirty (30) days after
<PAGE>
written notice given to the Executive pursuant to a two-thirds vote of
all of the members of the Board of Directors of Little Switzerland,
each such vote to set forth in reasonable detail the nature of such
failure;
(4) Gross or willful misconduct of the Executive with respect to
the Employer or any subsidiary or affiliate thereof; or
(5) Failure to report to work at the Employer's principal office
during normal business hours on each business day that the office is
open, except for vacation leave, sick leave or time out of the office
for Employer business purposes; provided, however, that nothing in
-------- -------
this clause shall be construed to indicate that the Executive's
working hours are limited to the Employer's normal business hours.
c. Termination by the Executive for Cause. The Executive's
--------------------------------------
employment hereunder may be terminated by the Executive by written notice
to the Board of Directors of Little Switzerland effective thirty (30) days
after the giving of such notice in the event of a material breach by the
Employer of any provision of this Agreement, which breach shall continue
for more than thirty (30) days after the date on which the Board of
Directors of Little Switzerland receives such notice.
d. Termination by the Employer Without Cause. The Executive's
-----------------------------------------
employment with the Employer may be terminated without cause by a two-
thirds vote of all of the members of the Board of Directors of Little
Switzerland on written notice to the Executive effective upon thirty (30)
days after the giving of such notice.
e. Termination by the Executive Without Cause. The Executive may
------------------------------------------
terminate his employment with the Employer without cause on written notice
to the Employer effective upon thirty (30) days after the giving of such
notice.
f. Disability. If, due to physical or mental illness, the Executive
----------
shall be disabled so as to be unable to perform substantially all of his
duties and responsibilities hereunder (a "Substantial Disability"), the
Employer may designate another executive to act in his place during the
period of such disability. For a period of up to two (2) months subsequent
to the commencement of a Substantial Disability, the Employer shall
continue to pay to the Executive his salary and benefits in accordance with
Section 3 hereof. If, at the end of such two (2) month period the
Executive shall continue to have a Substantial Disability, the Executive's
employment may be terminated by a two-thirds vote of all of the members of
the Board of Directors of Little Switzerland without further liability to
the Employer or Little Switzerland. If any question shall arise as to
whether during any period the Executive suffered a Substantial Disability,
the Executive may, and at the request of the Employer will, submit to the
Employer a certification in reasonable detail by a physician selected by
the Executive or his guardian to whom the Employer has no reasonable
objection as to whether the Executive was so disabled and such
certification shall for the purposes of this Agreement be conclusive of the
issue. If such question shall arise and the Executive shall fail to submit
such certification, the Employer's determination of such issue shall be
binding on the Executive.
g. Participation in a Change of Control. Notwithstanding anything to
------------------------------------
the contrary contained herein, in the event that the Executive participates
in a Change of Control (as defined below) of Little Switzerland which is
not approved by the Board of Directors of Little Switzerland as constituted
prior to such Change of Control, the Executive's employment shall terminate
immediately upon delivery of notice of termination without further
liability to the Employer or
<PAGE>
Little Switzerland, and any and all outstanding options, benefits and
severance obligations shall be canceled and terminated immediately upon
such termination of employment.
6. Termination Subsequent to Change in Control.
-------------------------------------------
a. Except as set forth in Section 5 above to the contrary, in the
event of a Terminating Event (as defined below) within one year from the
date of a Change in Control (as defined below) of Little Switzerland, as of
the date of such Terminating Event, (i) the Executive shall be entitled to
receive an amount of termination pay (the "Termination Pay") equal to (A)
six (6) months of Base Salary in the event of a Change of Control pursuant
to Section 6c(i), (ii), (iii), (iv) or (v) hereof is consummated on or
prior to May 31, 1998 or nine (9) months of Base Salary in the event such a
Change of Control is consummated after May 31, 1998, whichever is
applicable, plus (B) any accrued and unpaid Annual Bonus which the
Executive has earned pursuant to Section 3a of this Agreement; (ii) the
Executive shall be reimbursed for any and all expenses incurred in
relocating the Executive's household goods to the State of Arizona in
connection with such Termination Event; and (iii) that portion of the
Executive's outstanding Option (and any other stock grants) scheduled to
vest during the calendar year in which such Change of Control occurs shall
vest and become exercisable immediately upon such date notwithstanding
anything to the contrary contained herein or in any agreement relating to
the Option (or any such other stock grant), and any remaining portion of
the Executive's outstanding Option (and any other stock grants) shall be
canceled and terminated immediately upon such date.
b. For purposes of this Agreement, a "Terminating Event" shall mean
(a) termination by the Employer or its successor entity of the Executive
for any reason other than death, cause or disability pursuant to Section
5a, Section 5b or Section 5f above or (b) resignation of the Executive upon
the occurrence of (i) a significant change in the nature or scope of the
Executive's responsibilities, authorities, powers, functions or duties from
the responsibilities, authorities, powers, functions or duties exercised by
the Executive immediately prior to the Change in Control or (ii) a material
reduction in the compensation paid to the Executive as compared to the
compensation level in effect immediately prior to the Change in Control.
c. For purposes of this Agreement, a "Change in Control" shall be
deemed to have occurred in the following instances: (i) if there has
occurred a change in control which Little Switzerland would be required to
report in response to Item 1 of Form 8-K promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation
is no longer in effect, any regulations promulgated by the Securities and
Exchange Commission pursuant to the 1934 Act which are intended to serve
similar purposes; (ii) if there has occurred a change in control which
Little Switzerland would be required to report in response to Item 6(e) of
Schedule 14A promulgated under the 1934 Act, or, if such regulation is no
longer in effect, any regulations promulgated by the Securities and
Exchange Commission pursuant to the 1934 Act which are intended to serve
similar purposes; (iii) when any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of Little Switzerland representing fifteen
percent (15%) or more of the total number of votes that may be cast for the
election of Directors of Little Switzerland; (iv) the sale, transfer or
other disposition of all or substantially all of the assets of Little
Switzerland to another person or entity; (v) the election of Directors of
Little Switzerland equal to one-third or more of the total number of
Directors then in office who have not been nominated by Little
Switzerland's Board of Directors or a committee thereof as constituted on
the date hereof; or (vi) the signing of an agreement, contract or other
arrangement providing for any of the transactions described above in this
definition of Change in Control; provided, however, that a "Change in
-------- -------
Control" shall not be deemed to have occurred as a
<PAGE>
result of the beneficial ownership of Little Switzerland's Common Stock by
any person who is a "Grandfathered Person" under Little Switzerland's
Shareholder Rights Agreement dated July 17, 1991, as amended (the "Rights
Agreement"), so long as such Grandfathered Person's beneficial ownership of
Little Switzerland's Common Stock does not exceed such Grandfathered
Person's "Grandfathered Percentage" (as defined in the Rights Agreement).
7. Noncompetition and Confidential Information.
-------------------------------------------
a. Noncompetition. During the period of the Executive's employment
--------------
by the Employer pursuant to this Agreement or otherwise, the Executive will
not, directly or indirectly, whether as owner, partner, shareholder,
consultant, agent, employee, co-venturer or otherwise, or through any
Person (as defined in Section 9), compete in Little Switzerland's or the
Employer's market area (defined as any country or other jurisdiction in
which Little Switzerland or the Employer conducts business as of the
effective date of termination) with the business conducted by Little
Switzerland or the Employer during the period of his employment hereunder,
nor will he attempt to hire any employee of Little Switzerland or the
Employer, assist in such hiring by any other Person, encourage any such
employee to terminate his or her relationship with Little Switzerland or
the Employer, or solicit or encourage any customer of Little Switzerland or
the Employer to terminate its relationship with Little Switzerland or the
Employer or to conduct with any other Person any business or activity which
such customer conducts or could conduct with Little Switzerland or the
Employer.
b. Confidential Information. The Executive will not disclose to any
------------------------
other Person (except as required by applicable law or in connection with
the performance of his duties and responsibilities hereunder), or use for
his own benefit or gain, any confidential information of Little Switzerland
or the Employer obtained by him incident to his employment with the
Employer. The term "confidential information" includes, without limitation,
financial information, business plans, prospects and opportunities (such as
lending relationships, financial product developments, or possible
acquisitions or dispositions of businesses or facilities) of Little
Switzerland or the Employer but does not include any information which has
become part of the public domain by means other than the Executive's non-
observance of his obligations hereunder.
c. Relief; Interpretation. The Executive agrees that the Employer
----------------------
shall be entitled to injunctive relief for any breach by him of the
covenants contained in Sections 7a or 7b. In the event that any provision
of this Section 7 shall be determined by any court of competent
jurisdiction to be unenforceable by reason of its being extended over too
great a period of time, too large a geographic area, or too great a range
of activities, it shall be interpreted to extend only over the maximum
period of time, geographic area, or range of activities as to which it may
be enforceable. For purposes of this Section 7, the term "Employer" shall
mean L.S. Wholesale, Inc. and any of its subsidiaries, affiliates,
predecessors and successors.
8. Conflicting Agreements. The Executive hereby represents and warrants
----------------------
that the execution of this Agreement and the performance of his obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants against
competition or similar covenants which would affect the performance of his
obligations hereunder.
9. Definition of "Person". For purposes of this Agreement the term
----------------------
"Person" shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.
10. Withholding. All payments made by the Employer under this Agreement
-----------
shall be net of
<PAGE>
any tax or other amounts required to be withheld by the Employer under
applicable law.
11. Assignment; Successors and Assigns, etc. Neither the Employer nor the
---------------------------------------
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided, however, that the Employer may assign its rights under this
Agreement without the consent of the Executive in the event that the Employer
shall hereafter effect a reorganization, consolidate with or merge into any
other Person, or transfer all or substantially all of its properties or assets
to any other Person. This Agreement shall inure to the benefit of and be
binding upon the Employer and the Executive, their respective successors,
executors, administrators, heirs and permitted assigns.
12. Enforceability. If any portion or provision of this Agreement shall
--------------
to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
13. Waiver. No waiver of any provision hereof shall be effective unless
------
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer, at its main offices, attention of the
Board of Directors. Any such notice shall be deemed to be effective and
therefore given upon the following dates: (i) if such notice is delivered in
person the date on which such delivery is done; or (ii) if such notice is sent
by registered or certified mail, postage prepaid, the date which is three days
subsequent to the date on which such notice is mailed.
15. Amendment. This Agreement may be amended or modified only by a
---------
written instrument signed by the Executive and by a duly authorized
representative of the Employer.
16. Governing Law. It is the parties' intention that the terms of
-------------
employment under this contract shall be construed under and be governed in all
respects by the laws of The Commonwealth of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Employer, by its duly authorized officer, and by the Executive, as of the
date first above written.
L.S. WHOLESALE, INC.
By: /s/ John E. Toler, Jr.
-----------------------------------
Name: John E. Toler, Jr.
Title: President
LITTLE SWITZERLAND, INC.
By: /s/ C. William Carey
-----------------------------------
Name: C. William Carey
Title: Chairman of the Board, Director
/s/ Thomas Liston
--------------------------------------
Thomas Liston
<PAGE>
EXHIBIT 10.22
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment"), effective as of
June 14, 1998, by and between L.S. Wholesale, Inc., a Massachusetts corporation
with its main office in St. Thomas, U.S.V.I. (the "Employer"), and Thomas Liston
(the "Executive"), is hereby made and entered into to amend the Employment
Agreement, made as of the 12th day of November, 1997, by and among the Employer,
Little Switzerland, Inc., a Delaware corporation with its main office in St.
Thomas, U.S.V.I. ("Little Switzerland"), and the Executive (the "Original
Employment Agreement"). Except as otherwise defined herein, all capitalized
terms shall have the meanings ascribed to them in the Original Employment
Agreement.
WHEREAS, the parties hereto desire to amend the Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The Original Employment Agreement is hereby amended by deleting clause
(1) of Section 3(a) in its entirety and replacing it with a new clause (1) of
Section 3(a) to read as follows:
"(1) Base Salary. For each week of the Term, Employer shall pay the
-----------
Executive a base salary at a daily rate equal to Two Hundred Fifty Dollars
($250.00); provided, however, that for any day during the Term on which the
-------- -------
Executive renders services hereunder out of the main office of the Employer
located in St. Thomas, the Employer shall pay the Executive a base salary
at a daily rate equal to Six Hundred Fifteen Dollars and Thirty Eight Cents
($615.38). The aggregate amount of such base salary paid or payable to the
Executive during any fiscal year of the Employer is hereinafter referred to
as the 'Base Salary.'"
2. The Original Employment Agreement is hereby amended by adding the
following sentence at the beginning of clause (2) of Section 3(a) to read as
follows:
"Within ten (10) days after the date on which Little Switzerland's Annual
Report on Form 10-K for the fiscal year ended May 30, 1998 is filed with
the Securities and Exchange Commission, the Employer shall pay to the
Executive a bonus equal to Two Thousand Dollars ($2,000.00)."
3. The Original Employment Agreement is hereby amended by deleting clause
(5) of Section 5(b) in its entirety and by deleting "; or" from clause (4) of
such Section 5(b) and replacing it with "." so that such clause (4) ends with
the word "thereof."
4. The Original Employment Agreement is hereby amended by deleting clause
(A) of Section 6(a)(i) in its entirety and replacing it with a new clause (A) to
read as follows:
"(A) the aggregate amount of Base Salary received by the Executive during
the nine (9) months prior to consummation of a Change of Control pursuant
to Section 6(c)(i), (ii), (iii), (iv) and (v) hereof"
5. In all other respects, except as modified by this Amendment, the
Original Employment Agreement shall remain in full force and effect.
6. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which shall be considered one and
the same agreement.
7. It is the parties' intention that the terms of this Amendment shall be
construed under and be governed in all respects by the laws of The Commonwealth
of Massachusetts.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument
by a duly authorized officer of the Employer and by the Executive, as of the
date first above written.
L.S. WHOLESALE, INC.
By: /s/ John E. Toler, Jr.
-----------------------------------
Name: John E. Toler, Jr.
Title: President
/s/ Thomas Liston
--------------------------------------
Thomas Liston
<PAGE>
EXHIBIT 10.23
[Little Switzerland, Inc. Letterhead]
August 14, 1998
John E. Toler, Jr.
Little Switzerland, Inc.
161-B Crown Bay Cruise Ship Port
P.O. Box 930
St. Thomas, U.S.V.I. 00804
Re: Employment Agreement
--------------------
Dear John:
Reference is hereby made to your Employment Agreement (the "Employment
Agreement"), dated November 1, 1995, with L.S. Wholesale, Inc. (the "Employer")
and Little Switzerland, Inc. (the "Company"). Capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Employment
Agreement.
You have informed us that you now desire to resign from the Company
effective August 31, 1998 (the effective date of your resignation being
hereinafter referred to as the "Resignation Date"). We appreciate your efforts
on the Company's behalf and will be willing to promptly provide you with a
favorable letter of recommendation upon request and each of the directors of the
Company will respond promptly to telephone reference inquiries by prospective
employers. In consideration of your services rendered to the Company to date
and your continued employment as President and Chief Executive Officer of the
Company through the end of business on the Resignation Date, and for other good
and valuable consideration, the receipt and sufficiency of which you, the
Employer and the Company hereby acknowledge, you, the Employer and the Company
hereby covenant and agree as follows:
1. You shall continue your service to the Company as President and Chief
Executive Officer pursuant to the terms and conditions set forth in your
Employment Agreement through the end of business on the Resignation Date, at
which time, your resignation shall become effective. Your resignation is a
termination of employment by you without cause pursuant to Section 5(e) of the
Employment Agreement.
2. The Compensation Committee of the Board of Directors will grant you a
bonus in the aggregate amount of $140,000.00 for the fiscal year ended May 30,
1998 and payable to you on July 17, 1998, in accordance with Section 3.a.(2) of
the Employment Agreement. In addition, the Compensation Committee of the Board
of Directors will grant you a special one-time lump sum "stay bonus" of
$4,000.00 for your agreement to remain as President and Chief Executive Officer
of the Company through the end of business on the Resignation Date.
3. The Compensation Committee of the Board of Directors is hereby
directed by the Company to amend your Incentive Stock Option Agreement, dated as
of August 11, 1997, pursuant to which your outstanding Option was granted in
accordance with Section 3.b. of the Employment Agreement to provide that such
Option may be exercised after termination of your employment with the Company at
any time prior to September 1, 2000, upon which date such Option shall expire.
<PAGE>
4. The Company will pay to you or on your behalf the following fees and
expenses, up the applicable maximum payment set forth below:
(a) all rent and utilities expenses incurred by you from August 1,
1998 through the Resignation Date, up to a maximum aggregate amount of
$2,000.00;
(b) all personal attorney's fees and expenses incurred by you in
connection with the negotiation of this letter agreement and the matters
contemplated hereby, up to a maximum aggregate amount of $4,000.00;
(c) all moving expenses incurred by you in moving from St. Thomas,
U.S.V.I. to Wilmington, North Carolina, up to a maximum aggregate amount of
$10,000.00; and
(d) $3,883.14 to cover certain other expenses.
5. The Company hereby grants you the right to purchase any and all of the
Company's merchandise, at Company's cost, up to a maximum aggregate amount of
$20,000.00, for a period of one (1) year ending on the first anniversary of the
Resignation Date.
6. You shall continue to serve as a director of the Company after the
Resignation Date until the expiration of your term (i.e., until you are replaced
at the Company's next meeting of stockholders, it being understood that you do
not want to be re-nominated by the Board of Directors for election as a director
for another term). It is understood that, after the Resignation Date, you shall
serve as a non-employee director, entitled to a pro rata share of the fees and
expense reimbursement to which other non-employee directors of the Company are
entitled.
7. You and your attorneys shall have the right to review and approve the
content of a press release regarding the termination of your employment.
8. The Company agrees to indemnify and hold you harmless against
litigation costs and expenses in accordance with the terms of the Company's
existing Directors and Officers insurance policy and its Amended and Restated
Certificate of Incorporation.
9. This letter agreement amends the Employment Agreement only to the
extent set forth herein. In all other respects, except as modified by this
letter agreement, the Employment Agreement shall remain in full force and
effect.
By executing below, you, the Employer and the Company hereby agree to the
terms outlined above.
L.S. WHOLESALE, INC.
By: /s/ C. William Carey
-----------------------------------
Name: C. William Carey
Title: Chairman of the Board
LITTLE SWITZERLAND, INC.
By: /s/ C. William Carey
-----------------------------------
Name: C. William Carey
Title: Chairman of the Board
<PAGE>
ACKNOWLEDGED AND AGREED:
/s/ John E. Toler, Jr.
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John E. Toler, Jr.
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EXHIBIT 10.24
LITTLE SWITZERLAND, INC.
FRANCHISE AGREEMENT
1. PARTIES AND RECITALS
(a) This Franchise Agreement is made as of the 1st day of November,
1996, (the "effective date') by and between Little Switzerland, Inc., a Delaware
corporation, having its primary place of business in St. Thomas, U.S. Virgin
Islands, L. S. Wholesale, Inc., a Massachusetts corporation, having its
principal place of business in St. Thomas, U.S. Virgin Islands and L.S. Holding,
Inc. a Virgin Island Corporation, having its principal place of business in St.
Thomas, U.S. Virgin Islands. (hereinafter together referred to as the
"Franchisor") AND Solomon Brothers, Limited and its wholly owned subsidiaries,
all Bahamas corporations, having their principal place of business in Nassau,
the Bahamas (collectively referred to as the "Franchisee").
(b) Franchisor has acquired unique experience, skills and knowledge
with respect to the development and operation of retail stores featuring
primarily jewelry, watches, fine china, crystal, perfumes and accessories, under
the "Little Switzerland" name and mark ("Little Switzerland Stores").
(c) Franchisor is the sole and exclusive owner of the entire right,
title and interest, together with all the goodwill connected therewith, in and
to the trade name, trademark and service mark "Little Switzerland" in numerous
jurisdictions including the Bahamas, and Franchisor has registered "Little
Switzerland" as a service mark or trademark for retail store services, watches
and certain other products and services.
(d) Franchisor has devised a standard, unique and uniform method for
the operation and development of Little Switzerland stores together with
distinctive products, presentation (including material subject to copyrights),
and services for such stores (currently called "the System"), and, by
maintaining uniformity and high standards of quality and service, has
established a reputation, demand and goodwill for such stores.
(e) Franchisor is willing, upon the terms and conditions set forth
herein, to license Franchisee to operate Little Switzerland stores at certain
specified locations in the Bahamas (the "Territory").
2. GRANT OF FRANCHISE
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(a) Franchisor grants to Franchisee the sole and exclusive right,
license and privilege to develop and operate certain Little Switzerland stores
in the Territory in accordance with the system at the specific locations
designated in Exhibit A attached hereto (such stores to be hereinafter referred
to as the "Licensed Stores") and to use the "Little Switzerland" name and mark
solely in connection with the development and operation of the Licensed Stores.
The Franchisee acknowledges and agrees that the Franchise relates solely to the
Premises and Unit thereon, and affords the Franchisee no right to construct or
operate any additional, expanded or modified facilities on the Premises, nor any
right to construct or operate the Franchised Business at any location other than
the Licensed Stores. Any future L. S. Bahamas Store is limited to the
jurisdiction of the Territory, and is subject to the approval of Franchisor in
it's sole discretion, and Franchisor agrees to assist Franchisee in determining
whether particular locations are suitable. When locations for L. S. Bahamas
Stores have been selected, designated and approved by Franchisee and Franchisor,
said locations shall be added to Exhibit A, and shall become a part of Exhibit A
as if originally incorporated therein.
(b) Any future L. S. Bahamas Stores or any remodels of existing
stores shall be designed and completed by an architect and contractor selected
by Franchisee, and approved in advance, in writing, by the Franchisor.
Franchisee shall be responsible for, and bear cost of, preparation of plans and
construction or renovations of the L. S. Bahamas Stores and such construction,
including the design, materials, and interior fixtures shall be of a quality and
appearance consistent with Franchisor's specifications as determined by
Franchisor in it's sole discretion.
3. TERM AND RENEWAL
(a) This Agreement shall be effective and binding from the date first
set forth above and shall remain in full force and effect for a term of two (2)
years (the "Initial Term"), subject to renewal or termination as provided below.
(b) This Agreement may be renewed for additional two (2) year terms
by mutual written agreement of the parties.
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4. LICENSED MARKS
(a) Franchisee hereby acknowledges and agrees that only Franchisor
has the exclusive right to use the "Little Switzerland" trade name, service
marks and copyrights as may presently exist or be acquired by Franchisor and
licensed for use by the Franchisor, along with all ancillary signs, symbols or
other indicia used in connection or conjunction with said marks (such trade
name, service marks, trademarks, and all ancillary symbols and copyrights to be
collectively referred to as the "Licensed Marks") in the Territory. The Licensed
Marks shall include, without limitation, the distinctive style and appearance of
the red-and-white striped shopping bags used in Little Switzerland Stores.
Franchisee further agrees that the system, including without limitation
Franchisor's retail merchandising methods, its relationship with product
manufacturers and its knowledge of product services, prices, terms and other
arrangements, constitutes trade secrets solely owned by Franchisor and that only
Franchisor and Franchisee have the right to use such trade secrets. Franchisee
acknowledges that valuable goodwill is attached to the Licensed Marks and trade
secrets and agrees to use them solely for the purpose of operating the L.S.
Bahamas Store to the extent specifically licensed by this Agreement, and will
not take any action that would impair the goodwill associated with such Licensed
Marks or trade secrets.
(b) Franchisee agrees to adopt and use the Licensed Marks solely in
the manner prescribed by Franchisor/1/.
(c) Franchisee understands and agrees that any use of the Licensed
Marks other than as expressly authorized by this Agreement, without Franchisor's
prior written consent, may constitute an infringement of Franchisor's rights
therein, and that the right to use the Licensed Marks granted herein does not
extend beyond the Licensed Stores or beyond the termination or expiration of
this Agreement. Franchisee expressly covenants that, during the term of this
Agreement and thereafter, Franchisee shall not, directly or
_____________________
/1/ Franchisor further agrees that the license to use the Licensed Marks
is exclusive in the Territory, but is granted without prejudice to the
Franchisors right to conduct business under the Licensed Marks and to grant
other licenses in, to and under the Licensed Marks on any terms and conditions
Franchisor deems fit outside the Territory.
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indirectly, commit any act of infringement or contest or aid others in
contesting the validity of Franchisor's right to use the Licensed Marks or take
any other action in derogation thereof.
(d) Franchisee shall promptly notify Franchisor of any unauthorized
attempt by any person or legal entity to use the Licensed Marks, any colorable
variation thereof or any names or mark confusingly similar thereto, or any other
mark, name or indicia in which Franchisor has or claims a proprietary interest.
Franchisee shall assist Franchisor, upon request and at Franchisor's expense, in
taking such action, if any, as Franchisor may deem appropriate to halt such
activities, but shall take no action nor incur any expenses on Franchisor's
behalf without Franchisor's prior written approval. If Franchisor undertakes the
defense of prosecution of any litigation relating to the Licensed Marks,
Franchisee agrees to execute any and all documents and to do such acts and
things as may, in the opinion of Franchisor's legal counsel, be reasonably
necessary to carry out such defense or prosecution.
(e) Franchisee further agrees and covenants to operate the Licensed
stores and advertise such stores only under the names or marks from time to time
designated by Franchisor and to adopt and use the Licensed Marks solely in
connection with the operation of the Licensed Stores in accordance with the
System and solely in the manner prescribed by Franchisor; to refrain from using
the Licensed Marks to perform any activity or to incur any obligation or
indebtedness in such a manner as may, in any way, subject Franchisor to
liability therefore; to observe all laws with respect to the registration of
trade names and assumed or fictitious names, to include in any application
therefore a statement that Franchisee's use of the Licensed Marks is limited by
the terms of this Agreement, and to provide Franchisor with a copy of any such
application and other registration document(s), to observe such requirements
with respect to trademark, service mark and copyright notices as Franchisor may,
from time to time, require, including, without limitation, affixing R adjacent
to all such Licensed Marks which are registered under the law of the Territory
and affixing TM adjacent to all such Licensed Marks which are so registered, in
any and all uses thereof, and, to utilize such other appropriate notice of
ownership, registration and copyright as Franchisor may require.
(f) Franchisor reserves the right, in its sole discretion, to
designate one or more new, modified or replacement Licensed Marks for use by
Franchisee and to require use by Franchisee of any such
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new, modified or replacement Licensed Marks in addition to or in lieu of any
previously designated Licensed Marks. Any expenses or costs associated with the
use by Franchisee of any such new, modified or replacement Licensed Marks and
the cessation of it's use of any Licensed Marks which are replaced shall be the
sole responsibility of Franchisee.
(g) Franchisee hereby acknowledges that the Licensed Marks are valid
and enforceable and are the property of Franchisor. Franchisee shall not in any
manner challenge the validity of the Licensed Marks or question Franchisor's
ownership thereof, either during or after the term of this Agreement. Franchisee
acknowledges that all use by Franchisee of the Licensed Marks shall inure to the
benefit of Franchisor, and Franchisee shall not acquire any rights therein by
virtue of any such use. If and to the extent that Franchisee may acquire any
rights in the Licensed Marks, Franchisee shall and does hereby assign to
Franchisor any and all such rights acquired by it, and all goodwill pertaining
thereto.
5. DUTIES OF FRANCHISOR
(a) Franchisor shall provide reasonable training, in accordance with
Franchisor's standards, to store managers and other employees which, at the
discretion of the Franchisor, are pertinent to the overall success of the
business, for the Licensed Stores. The training shall cover such matters as
introduction to product lines, marketing techniques, standard retail operations
and familiarization with Little Switzerland merchandising. Franchisee shall bear
the cost of the reasonable travel, lodging and related out-of-pocket expenses
incurred by Franchisor in providing such training services. Franchisor and
Franchisee agree that all training both initial and on-going shall be carried
out upon such reasonable schedule and in such places as may be established by
the mutual agreement of Franchisor and Franchisee.
(b) Franchisor shall, upon Franchisee's reasonable request, be
available to provide on-going consultation and support to Franchisee, to an
extent deemed with respect to establishing the design, layout and procedures
essential to the operation of Licensed Stores. Franchisor shall provide a
continuing advisory service which shall include, but not be limited to,
consultation with respect to promotional, business or operational problems with
analysis of Franchisee's sales, marketing and financial data. Franchisee shall
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reimburse Franchisor for reasonable travel, lodging and related out-of-pocket
expenses incurred for any support services in addition to those provided for
above as may be requested by Franchisee.
(c) Franchisee may request that Franchisor furnish accounting,
bookkeeping or related data processing services to be used by Franchisee in
connection with the operation of the L. S. Bahamas Stores. Franchisee shall bear
the cost of such services at Franchisor's then current rates for any such
services requested by Franchisee.
(d) Franchisor agrees that it will advertise the Little Switzerland
name, and the L.S. Bahamas Stores internationally.
6. STANDARD OF OPERATION
(a) Franchisor reserves the right to ensure that the retail
operations, product lines, signage and overall appearance of the L. S. Bahamas
Stores conform to the high and exacting standards of Franchisor's Little
Switzerland stores both as such standards now exist and in the event such
standards are changed at any time in the future. Franchisor may establish,
confirm and revise appropriate standards, guidelines and policies by written
notice to Franchisee from time to time, all of which shall be deemed to
constitute parts of the System and of this Agreement and shall be binding on
Franchisee. Franchisee agrees to operate and maintain the Licensed Stores in
accordance with such standards, guidelines and policies and with the System
generally, and to comply with any and all specific instructions communicated to
it by Franchisor for purposes of establishing and implementing such compliance.
(b) Franchisee shall carry only those product lines and brands
offered by Little Switzerland stores as communicated by Franchisor to Franchisee
in writing, or such other product lines and brands as may be designated or
approved by Franchisor. The product lines which Franchisee is authorized to
carry shall be subject to change by written notice from Franchisor. Franchisee
shall purchase its inventory for the L.S. Bahamas Stores directly from
manufacturers and their representatives. Franchisee shall pay for its inventory
within the terms agreed upon with the manufacturers and their representatives
and shall, at all times, attempt to maintain good relationships with
manufacturers and their representatives. To the extent
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relationships between Franchisee and my manufacturer or its representatives as
determined by Franchisor in its sole discretion, become impaired, Franchisor
reserves the right to intervene and mediate the relevant issues.
(c) Franchisee shall price its inventory in accordance with the usual
and customary prices for such inventory and its discounting policies shall be
subject to the review and approval of Franchisor. The continuation or
discontinuation of any particular product line in the Licensed Stores shall be
subject to the review and approval of Franchisor.
(d) Franchisee agrees to keep and preserve during the term of the
franchise granted hereunder complete and accurate books and accounts prepared in
accordance with generally accepted accounting principles consistently applied.
All records relating to Franchisees activities under this Agreement shall be
retained for at least six years. Franchisee shall furnish Franchisor with
monthly reports showing the financial conditions of its retail operations which
reports shall include Franchisee's gross sales, discounts, net sales, cost-of-
sales, gross margins, operating expenses and profit. On a quarterly basis,
Franchisee shall furnish Franchisor with an operating profit and loss statement
for each Licensed Store and for the retail division as a whole. These profit and
loss statements should identify the amount of advertising spent for the Licensed
Stores. On an annual basis, Franchisee shall furnish comfort in a form
reasonably satisfactory to Franchisee from Franchisee's independent auditors as
to total retail, net sales and advertising expenses for the Licensed Stores, and
a reasonable projected revenue and expense budget for each Licensed Store for
the following year. Franchisor's representatives shall further have the right at
any time at Franchisor's expense to inspect Franchisee's books, records and cash
and accounting control devices or systems.
(e) Franchisee recognizes that it is essential to the proper
marketing of Little Switzerland merchandise and to the preservation of
Franchisor's reputation to the public at large that uniform standards of quality
and appearance be maintained in the L.S. Bahamas Stores. Franchisee therefore
agrees, as part of the consideration for this Agreement, that Franchisee will at
all times dispense, sell or offer for sale to the public, only such merchandise
as shall be approved by Franchisor; and Franchisee shall display such
merchandise according to specifications and standards provided by Franchisor.
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(f) Franchisee agrees to comply with the requirements of its
suppliers and Franchisor's suppliers with respect to the servicing and repair of
any products sold or offered for sale in the L. S. Bahamas Stores.
(g) Franchisee and Franchisor will cooperate in the selection of
mutually acceptable and economically beneficial locations for the establishment
of new L. S. Bahamas Stores in the Franchise Area and the establishment of such
new L. S. Bahamas Stores will be subject to the mutual agreement of the parties.
L. S. Bahamas Stores which are not economically viable may be closed by
Franchisee upon approval of Franchisor.
(h) Franchisor reserves the right, from time to time, to add, amend,
modify, delete or enhance any portion of the Little Switzerland System
(including any of the Licensed Marks) as may be necessary in Franchisor's sole
judgement, to change, maintain or enhance the Little Switzerland System trade
names or the reputation, efficiency, competitiveness and/or quality of the
Little Switzerland System, or to adapt it to new conditions, materials or
technology, or to better serve the public. Franchise Owner, at its expense, will
fully comply with all such additions or modifications. All of the foregoing have
a distinctive and valuable significance to the public. Franchisee has concluded
that it would be mutually beneficial for Franchisee to make use of the trade
name and trademark "Little Switzerland" and to enjoy the commercial benefits of
that name and the benefits of the retail merchandising methods and operating
services related thereto.
(i) Franchisee shall submit to Franchisor for its approval, samples
or designs of all advertising, displays, signs or other materials to be
circulated or otherwise made public by Franchisee which bear the Licensed Marks
or otherwise relate to the Licensed Stores, and shall not distribute, display or
otherwise use any such materials prior to the receipt of Franchisor's written
approval. Franchisee shall comply with Franchisor's instructions and guidelines
with respect to the use and display of the Licensed Marks.
(j) Franchisee and Franchisor agree that merchandise returned by
customers in compliance with the return policy of the selling party will be
accepted by either the Franchisee or Franchisor. Should Franchisor accept
returned merchandise sold by Franchisee, then Franchisor has the option to (1)
return the merchandise to the Franchisee for full credit (amount equal to the
sales price to the customer or (2) keep
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the merchandise and receive credit for the difference between the sales price to
the customer and the current cost of the merchandise. The same privilege extends
to the Franchisee.
7. FEES
(a) Subject to obtaining exchange control approval, Franchisee shall
pay to Franchisor an annual fee equal to the greater of (i) US$100,000 for
Franchisee's use of the name "Little Switzerland" and such other Licensing Marks
associated therewith, or (ii) the sum of a) 0. 3 3 % of net sales (as defined
below) up to net sales of $33,000,000 and b) 3.0% of net sales in excess of
$33,000,000. Net sales is defined as Annual Gross Revenues for all product sold
in the Licensed Stores and any retail stores operating within the Territory
under the name "Greenfire", less any point-of-sate discounts awarded to
customers. In the event that any of the Licensed Stores or Greenfire stores are
closed as a result of fire, storm or any other casualty, net sales with respect
to such Licensed Stores or Greenfire stores shall be deemed to be equal to the
budgeted annual sales of such Store as presented in the budget presented to
Licensor for the applicable period.
(b) Subject to obtaining exchange control approval, Franchisee shall
pay the Franchisor based upon the following schedule:
Date Amount
---- ------
January 31, 1997 $25,000
April 30, 1997 $25,000
July 31, 1997 $25,000
October 31, 1997 $25,000
January 31, 1998 $25,000
April 30, 1998 $25,000
July 31, 1998 $25,000
October 31, 1998 $25,000
Should the results of applying the formula indicated within the previous
paragraph on each of the annual net sales for the twelve month periods ended
October 31, 1997 and 1998 result in an annual franchise fee greater than
$100,000, then the amount in excess of $ 100,000 shall be due and payable on
December 31, 1997 and 1998, respectively.
8. ADVERTISING AND MARKETING
Recognizing the value of standardized advertising and marketing
programs to the furtherance of the goodwill and public image of the Little
Switzerland system, the Parties agree as follows:
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(a) Franchisor shall advertise the Little Switzerland trade name and
logo internationally, and shall promote the sale of Little Switzerland products
and Little Switzerland stores to the extent, and in the manner, which it, at its
sole discretion, deems desirable. Franchisor agrees to include the L. S. Bahamas
Store locations in any international advertising or promotional material in
which the locations of Little Switzerland stores generally are mentioned unless
there is reason not to include such locations. Franchisee shall bear the cost of
any advertising or promotional material which is originated by Franchisee, and
the pro rata cost of Little Switzerland catalogues or any other advertising or
promotional material requested by Franchisee. In addition to the foregoing
materials, Franchisee agrees that its direct local advertising expenditures,
determined in accordance with standards and procedures established by
Franchisee, after reducing the vendor invoice values by amounts received from
vendors in co-op ads, in support of the "Little Switzerland" trade name and the
L.S. Bahamas Stores shall equal a minimum of $100,000 per year or 1.2% of net
sales, whichever is higher.
(b) In addition, Franchisee agrees to participate in Port Lecturer
programs on all_________________________. Franchisee agrees that all sales
promotion materials and advertising to be used by Franchisee shall conforn to
the general practice of Franchisor. Franchisor agrees to furnish art work, work
co-op advertising with Vendors, and supply shopping bags, wrapping paper and
stationery, all at cost to Franchisee.
(c) Franchisee shall not advertise or use in its advertising or any
other form of promotion, the trademarks and other proprietary materials of
Franchisor or Franchisor's suppliers intended for distribution outside the
Territory without appropriate C or R copyright and registration marks.
9. COVENANTS
(a) During the term of this Agreement, Franchisee covenants:
(i) to devote all the time, energy and effort reasonably
required for the sound management and operation of the L. S. Bahamas Stores
licensed hereunder and shall actively participate in the operation of the
business licensed hereunder;
(ii) to comply with Franchisor's requirements and standards
relative to the uniform and standard operation of L. S. Bahamas stores, and take
all reasonable actions
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necessary to promote the continued goodwill of the Little Switzerland name and
product lines in the Franchise Area and maintain competent, conscientious and
qualified staff trained in Little Switzerland retail merchandising methods;
(iii) to bear all of the costs of developing and operating
the L. S. Bahamas Stores (except such costs as may be specifically reserved to
Franchisor under this Agreement) and to maintain reasonable financial stability
and credit standing;
(iv) to operate the L. S. Bahamas Stores in conformity with
the standards and requirements set forth in this Agreement and not to divert any
business of, or any customers of, the L. S. Bahamas Stores licensed hereunder to
any other competitive establishment not owned by or affiliated with Franchisee
by direct or indirect inducement or otherwise;
(v) to not operate, manage, own or have an interest (other
than through acquisition of a controlling interest therein), direct or indirect,
in any retail business (other than Franchisee's current business, income from
which is included in the computation of net sales in Section 7 which details any
of the product lines or brand names of Little Switzerland. In addition to other
available remedies, Franchisor shall be entitled to injunctive relief for any
failure of Franchisee to comply with this Section 8;
(vi) To cause it's employees, prior to commencement of
operation of any new Licensed Store and at such other times as may be reasonably
requested by Franchisee or determined by Franchisor, to undergo a training and
familiarization course offered by Franchisor or management of the Franchisee;
(vii) to employ in the operation of the Licensed Stores only
managers and other personnel who have received adequate training in accordance
with Franchisor's standards and guidelines;
(viii) to maintain a competent, conscientious, trained staff
in numbers sufficient to promptly service customers, including at least one
manager on duty at all time, and to take such steps as are necessary to ensure
that its employees preserve good customer relations and comply with such dress
code as Franchisor may prescribe;
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(ix) to use the Licensed Stores premises (including the
grounds surrounding each Licensed Store) solely for the operation of the
business franchised hereunder, to keep the Licensed Stores open and in normal
operation for such hours and days as Franchisor may from time to time specify in
writing, and to refrain from using or permitting the use of the Licensed Store
premises for any other purpose or activity at any time without first obtaining
the written consent of Franchisor;
(x) to at all times maintain the Store in a high degree of
sanitation, repair, and condition, and in connection therewith to make such
additions, alterations, repairs and replacements thereto (but no others without
Franchisor's prior written consent) as may be required for that purpose,
including, without limitation, such periodic repainting or replacement of
obsolete signs, furnishings, equipment, and decor as Franchisor may reasonably
direct;
(xi) at Franchisor's request, which shall not be more often
than once every five years, to refurbish any Licensed Store at Franchisee's
expense to conform to the building design, trade dress, color schemes, and
presentation of the Licensed Marks in a manner consistent with the image then in
effect for new stores under the System, provided that such remodeling
requirement shall not impose costs that exceed 15% of the original capital cost
incurred by Franchisee to establish such Licensed Store;
(xii) to engage in the licenced stores only in retail sales
and not sell at wholesale any products without the specific prior written
consent of Franchisor;
(xiii) to permit Franchisor and its agents to enter upon the
Licensed Store premises at any time for the purpose of conducting inspections,
and to cooperate with Franchisor's representatives in such inspections by
rendering such assistance as they may reasonably request, and upon notice from
Franchisor or its agents and without limiting franchisor's other rights under
this Agreement to take such steps as may be necessary to correct immediately any
deficiencies detected during any such inspection; and
(xiv) to maintain in force policies of casualty, liability
and business interruption insurance in amounts and with carriers reasonably
satisfactory to Franchisor, and to cause Franchisor to be named as a loss payee
on any such policies of insurance in accordance with its requests.
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All covenants of Franchisee herein shall apply to the shareholders of
Franchisee, and any breach thereof by any such shareholder shall be deemed to be
a breach by Franchisee.
(b) During the term of this agreement the Franchisors jointly and
severally covenant:
(i) to seek to maintain the uniform and standard operation of
the said Little Switzerland Stores and take reasonable actions to promote the
continued goodwill of the Little Switzerland name and product lines;
(ii) to maintain reasonable financial stability and credit
standing;
(iii) to use its best efforts to advise Franchisee of new
developments; and improvements with respect to the standardization of methods of
operations, store layouts and engineering, operating problems and procedures and
advertising for Little Switzerland stores; and
(iv) to make available to Franchisee its operating procedures,
quality control directives and recommendations for standardizing signs,
letterheads and sales promotion, office and other similar materials.
10. CONFIDENTIALITY
(a) Franchisee shall not, during the term of this Agreement or after
its termination, communicate or divulge to any other person or entity any trade
secrets or other confidential information regarding Little Switzerland (except
as may be appropriate and necessary to Franchisee's accountants, attorneys and
banking sources) or use any such trade secrets or other confidential information
in any manner or for any purpose other than the operation of the Licensed Stores
under this Agreement, and shall take all steps necessary (and at its own
expense) to protect such confidential information from being divulged by its
officers, employees or Directors.
11. INSURANCE
(a) Franchisee shall maintain comprehensive general liability
insurance (broad form) on a worldwide basis. The limit of such insurance shall
be not less than $1,000,000 combined single limit per occurrence for bodily
injury and property damage arising out of each occurrence.
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(b) Franchisee shall carry workers compensation as required by
Bahamian law and employers' liability insurance at a limit of not less than
$500,000.
(c) All such insurance policies shall name the Franchisor as an
additional insured as its interest may appear.
(d) All such insurance policies shall each be in a form satisfactory
to Franchisor and written by companies satisfactory to Franchisor.
(e) The Franchisee shall deposit with the Franchisor certificates of
insurance at or prior to the commencement date and thereafter within thirty (30)
days prior to the expiration of any and all such policies. Certificates of
insurance shall provide that such policies shall not be canceled or materially
changed in form without at least thirty (30) days written notice to Franchisor.
12. DEFAULTS AND TERMINATION
(a) Franchisor, at its option, and without prejudice to any and all
remedies which it may otherwise have, may terminate this Agreement upon the
happening of any of the following defaults:
(i) Franchisee, or any of its officers or Directors, is
convicted of or pleads guilty or no contest to a charge of violating any law
which may materially affect Franchisee's ability to operate the Little
Switzerland stores under the terms of this Agreement;
(ii) Franchisee makes an assignment for the benefit of
creditors or similar disposition of the assets of the franchised business; a
petition is filed by or against Franchisee to declare it bankrupt and a winding-
up order is made and a receiver or trustee is appointed for Franchisee's
property or business; or a substantial part of the real or personal property of
Franchisee is attached or levied upon any sheriff, marshal, or constable and is
not seasonably cured;
(iii) Franchisee commits any act or engages in any conduct which
materially impairs the goodwill associated with any of Franchisor's Licensed
Marks, including without limitation, disclosure of confidential information
regarding Franchisor to any third party;
(iv) Franchisee's retail operations (income from which is
included in the computation of gross sales in Section 7) becomes substantially
less profitable as a result of the failure on the
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part of the Franchisee to abide by any of its covenants or obligations herein
contained or Franchisee sells or liquidates a substantial portion of its retail
operations; or
(v) Franchisee fails to comply with any material provision of
this Agreement, including without limitation, any provision relating to payment
of Franchisor (whether or not such failure to pay is caused by restrictions
imposed by The Bahamian government), confidentiality, advertising and reports;
PROVIDED ALWAYS that Franchisor must notify Franchisee in writing of such
default or failure and give Franchisee thirty (30) days to correct such default
or failure. If Franchisee does not so correct the failure, Franchisor may at its
option forthwith, terminate this Agreement in writing and declare the Franchise
rights granted herein void.
(vi) Franchisee makes, or has made, any materially false
statement or report to Franchisor in connection with this Agreement or
application therefore;
(vii) Franchisee receives from Franchisor three (3) or more
notices to cure the same on similar defaults or violations of this Agreement
during any twelve (12) month period;
(viii) If Franchisee or its designated manager fails to complete
to Franchisor's reasonable satisfaction any of the training required pursuant to
Paragraph 5 of this Agreement.
(b) Franchisee may terminate this Agreement if (i) Franchisor has
materially defaulted in the performance of its obligations under this agreement,
(ii) Franchisor, or any of its officers or Directors, is convicted of or pleads
guilty or no contest to a charge of violating any law which may materially
affect Franchisor's ability to perform its obligations under this Agreement or
(iii) Franchisor makes an assignment for the benefit of creditors or similar
disposition of its assets; a petition is filed by or against Franchisor to
declare it bankrupt and a winding-up order is made and a receiver or trustee is
appointed for Franchisor's property or business; or a substantial part of the
real or personal property of Franchisor is attached or levied upon by any
sheriff, Marshall, or constable and is not seasonably cured; provided that:
(i) Franchisee has provided Franchisor with a written notice
of default; and
(ii) Franchisor has failed to cure such default within thirty
(30) days after receipt of such notice.
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<PAGE>
13. POST TERM OBLIGATIONS
(a) Within 6 months of the expiration (or sooner termination) of this
Agreement, the Franchisee shall immediately:
(i) Discontinue any use whatsoever of Little Switzerland's
trade name and other Licensed Marks, shall take such action necessary to cancel
or change any assumed name or equivalent registration and/or to transfer any
rights therein or thereto back to Franchisor, and shall, at its own expense,
make or cause to be made such changes in signs and supplies in order to
distinguish Franchisee effectively from its former association with other Little
Switzerland stores to the intent that the Franchisee shall cease to carry on
business under the name and style of "Little Switzerland" or any name
confusingly similar thereto;
(ii) Cease operation or do business under any name or in any
manner that might tend to give the general public the reasonable impression that
this Agreement is still in force, or that Franchisee is connected in any way
with Franchisor, or any longer has any right to the use of the Licensed Marks;
(iii) Pay to the Franchisor all sums owing under the terms of
this Agreement. Said sums shall include all damages, costs and expenses incurred
by Franchisor by reason of any default on the part of the Franchisee, whether or
not incurred before or after the termination or expiration of this Agreement;
(iv) Cause to represent or advertise that Franchisee was
formerly a party to this Franchise Agreement, or that Franchisee did business
under the trademarks or name of Franchisor.
(v) promptly return to Franchisor or, with Franchisor's prior
written permission, destroy any and all documents or other materials containing
trade secret or other confidential information of Franchisor; and
(vi) extend to Franchisor or any person designated by
Franchisor the right to purchase any signs and similar materials bearing the
Licensed Marks at a price no greater than Franchisee's original cost thereof as
depreciated on a straight-line basis over a period of five years.
14. TRANSFER AND ASSIGNMENT
(a) This Agreement and all rights and duties hereunder may be freely
assigned or transferred by Franchisor in its sole discretion to any person or
legal entity which agrees to assume
16
<PAGE>
Franchisor's obligations hereunder, including a competitor of Franchisor, and
shall be binding upon and inure to the benefit of Franchisor's successors and
assigns including, without limitation, any entity which acquires all or a
portion of the capital stock of Franchisor or any entity resulting from or
participating in a merger, consolidation or reorganization in which Franchisor
is involved, and to which Franchisor's rights and duties hereunder are assigned
or transferred.
(b) Franchisee understands and acknowledges that the rights and
duties created by this Agreement are personal to Franchisee and that Franchisor
has granted this Franchise in reliance on many factors, including, without
limitation, the individual or collective character, skill, aptitude and business
and financial capacity of Franchisee, and any persons owning an interest in
Franchisee. Franchisee hereby represents that shares in Franchisee are held by
the persons ("the existing shareholders") and in the proportions set forth on
Exhibit B attached hereto.
Franchisee agrees that it will give written notice to the Franchisor ("the
transfer notice") of any transfer of shares (or series of transfers of shares)
the effect of which is to transfer a majority of the voting rights in the
Franchisee from the existing shareholders to a third party or third parties
(such notice to be sent by the Franchisee to the Franchisor within 10 day of the
transfer of series of transfers aforesaid) whereupon the Franchisor shall have
the option in its sole discretion to terminate this Agreement by return written
notice sent to the Franchisee with 28 days of the receipt by the Franchisor of
the transfer notice.
(c) Franchisor will not require approval of the assignment of all or
any part of the assets of the Franchised Business or the stock in a corporate
Franchisee, excluding this Agreement or the Franchise, to a bank or other
lending institution as collateral security for loans made directly to or for the
benefit of the Franchised Business. However, such approval will be required for
any proposed assignment or hypothecation of this Agreement or the Franchise
which approval will not permit further transfers or assignments of this
Agreement or the Franchise, without compliance by the transferee or assignee
with the provisions of Paragraph 14 hereof.
17
<PAGE>
15. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
(a) Franchisee agrees to protect, defend, indemnify, and hold
Franchisor, and its respective directors, officers, agents, attorneys and
shareholders, jointly and severally, harmless from and against all claims,
actions, proceedings, damages, costs, expenses and other losses and liabilities,
consequently, directly or indirectly incurred (including without limitation
attorneys' and accountants' fees) as a result of, arising out of, or connected
with the operation of the Franchised Business.
(b) In all dealings with third parties including, without limitation,
employees, suppliers and customers, Franchisee shall disclose in an appropriate
manner acceptable to Franchisor that it is an independent entity licensed by
Franchisor. Nothing in this Agreement is intended by the parties hereto to
create a fiduciary relationship between them nor to constitute Franchisee an
agent, legal representative, subsidiary, joint venturer, partner, employee or
servant of Franchisor for any purpose whatsoever. It is understood and agreed
that Franchisee is an independent contractor and is in no way authorized to make
any contract, warrant or represent or to create any obligation on behalf of
Franchisor.
16. TAXES, PERMITS AND INDEBTEDNESS
(a) Franchisee shall promptly pay when due any and all taxes levied
or assessed with respect to any services or products furnished, used or licensed
pursuant to any Agreement and all accounts or other indebtedness of every kind
incurred by Franchisee in the operation of the Franchised Business.
(b) Franchisee shall comply with all Bahamian laws, rules and
regulations and timely obtain any and all permits, certificates and licenses for
the full and proper conduct of the business of Franchisee.
(c) Franchisee hereby expressly covenants and agrees to accept full
and sole responsibility for any and all debts and obligations incurred in the
operation of the Franchised Business.
17. APPROVALS AND WAIVERS
(a) Whenever this Agreement requires Franchisor's prior approval,
Franchisee shall make a timely written request. Unless a different time period
is specified in this Agreement, Franchisor shall respond with its approval or
disapproval within fifteen (15) days of receipt of such request. If Franchisor
has
18
<PAGE>
not specifically approved a request within such fifteen (15) day period, such
failure to respond shall be deemed disapproval of any such request.
(b) No failure of Franchisor to exercise any power reserved to it by
this Agreement and no custom or practice of the parties at variance with the
terms hereof shall constitute a waiver of Franchisor's right to demand exact
compliance with any of the terms herein. No waiver or approval by Franchisor of
any particular breach or default by Franchisee, nor any delay, forbearance or
omission by Franchisor to act or give notice of default or to exercise any power
or right arising by reason of such default hereunder, nor acceptance by
Franchisor of any payments due hereunder shall be considered a waiver or
approval by Franchisor of any preceding or subsequent breach or default by
Franchisee of any term, covenant or condition of this Agreement.
18. GOVERNING LAW
This Agreement and the performance hereof shall be governed, interpreted
and construed under the laws of the Commonwealth of the Bahamas.
19. NOTICES
Whenever, by the terms of this Agreement, notice shall or may be given
either to Franchisor or Franchisee, such notice shall be in writing and shall be
sent by registered or certified mail, return receipt requested, postage prepaid:
If intended for Franchisor, addressed to:
L. S. Wholesale, Inc. With a copy to:
Post Office Box 930
Charlotte Amalie Goodwin, Procter & Hoar
St. Thomas, Exchange Place
U.S. Virgin Islands Boston, MA 02109
ATTN: Richard E. Floor, P.C.
If intended for Franchisee, addressed to:
With a copy to:
Solomon Brothers, Limited
Post Office Box 3218 Messrs. Higgs & Kelly
Nassau, Bahamas Post Office Box N. 1113
Nassau, Bahamas
19
<PAGE>
20. SEVERABILITY AND CONSTRUCTION
(a) Should any provision of this Agreement be for any reason held
invalid, illegal or unenforceable by a court of competent jurisdiction, such
provision shall be deemed restricted in application to the extent required to
render it valid; and the remainder of this Agreement shall in no way be affected
and shall remain valid and enforceable for all purposes, both parties hereto
declaring that they would have executed this Agreement without inclusion of such
provision. In the event such total or partial invalidity or unenforceability of
any provision of this Agreement exists only with respect to the laws of a
particular jurisdiction, this paragraph shall operate upon such provision only
to the extent that the laws of such jurisdiction are applicable to such
provision. Each party agrees to execute and deliver to the other any further
documents which may be reasonably required to effectuate fully the provisions
hereof.
(b) This Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original, but
such counterparts together shall constitute one and the same instrument.
(c) The table of contents, headings and captions contained herein are
for the purposes of convenience and reference only and are not to be construed
as a part of this Agreement. All terms and words used herein shall be construed
to include the number and gender as the context of this Agreement may require.
The parties agree that each section of this Agreement shall be construed
independently of any other section or provision of this Agreement.
21. ACKNOWLEDGMENTS
Franchisee hereby acknowledges the following:
(a) FRANCHISEE HAS CONDUCTED AN INDEPENDENT INVESTIGATION OF THE
BUSINESS CONTEMPLATED BY THIS AGREEMENT AND UNDERSTANDS AND ACKNOWLEDGES THAT
THE BUSINESS CONTEMPLATED BY THIS AGREEMENT INVOLVES BUSINESS RISKS MAKING THE
SUCCESS OF THE VENTURE LARGELY DEPENDENT UPON THE BUSINESS ABILITIES AND
PARTICIPATION OF FRANCHISEE AND ITS EFFORTS AS AN INDEPENDENT BUSINESS OPERATOR.
FRANCHISEE AGREES THAT NO CLAIMS OF SUCCESS OR
20
<PAGE>
FAILURE HAVE BEEN MADE TO IT PRIOR TO SIGNING THIS AGREEMENT; AND THAT IT
UNDERTAKES ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT. THIS AGREEMENT
CONTAINS ALL ORAL AND WRITTEN AGREEMENTS, REPRESENTATIONS AND ARRANGEMENTS
BETWEEN THE PARTIES HERETO, AND ANY RIGHTS WHICH THE RESPECTIVE PARTIES HERETO
MAY HAVE HAD UNDER ANY OTHER PREVIOUS CONTRACTS ARE HEREBY CANCELED AND
TERMINATED, AND NO REPRESENTATIONS OR WARRANTEES ARE MADE OR IMPLIED, EXCEPT AS
SPECIFICALLY SET FORTH HEREIN. THIS AGREEMENT, INCLUDING WITHOUT LIMITATION THE
PROVISIONS OF THIS PARAGRAPH 22, CANNOT BE CHANGED OR TERMINATED ORALLY WITHOUT
LIMITING THE FOREGOING. FRANCHISOR EXPRESSLY DISCLAIMS THE MAKING OF, AND
FRANCHISEE ACKNOWLEDGES THAT IT HAS NOT RECEIVED OR RELIED UPON, ANY WARRANTY OR
GUARANTEE, EXPRESS OR IMPLIED, AS TO THE POTENTIAL VOLUME, PROFITS OR SUCCESS OF
THIS BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT, OR AS TO THE SUITABILITY
OF THE SITE FOR THE UNIT AS A SUCCESSFUL LOCATION FOR THE UNIT.
(b) FRANCHISEE HAS NO KNOWLEDGE OF ANY REPRESENTATIONS BY FRANCHISOR
OR ITS OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS OR SERVANTS, ABOUT
THE BUSINESS CONTEMPLATED BY THIS AGREEMENT THAT ARE CONTRARY TO THE TERMS OF
THIS AGREEMENT OR THE DOCUMENTS INCORPORATED HEREIN. FRANCHISOR REPRESENTS, AS
AN INDUCEMENT TO FRANCHISOR'S ENTRY INTO THIS AGREEMENT, THAT IT HAS MADE NO
MISREPRESENTATIONS IN OBTAINING THIS AGREEMENT.
(c) FRANCHISEE ACKNOWLEDGES THAT FRANCHISOR'S APPROVAL OF
FRANCHISEE'S PREMISES DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
LOCATION OF THE UNIT, NOR ANY ASSURANCE BY FRANCHISOR THAT THE OPERATION OF A
UNIT AT THE PREMISES WILL BE SUCCESSFUL OR PROFITABLE.
21
<PAGE>
(d) FRANCHISEE ACKNOWLEDGES THAT IT HAS HAD AMPLE OPPORTUNITY TO
CONSULT WITH ITS OWN ATTORNEYS, ACCOUNTANTS AND OTHER ADVISORS AND THAT THE
ATTORNEYS FOR FRANCHISORS HAVE NOT ADVISED OR REPRESENTED FRANCHISEE WITH
RESPECT TO THIS AGREEMENT OR THE RELATIONSHIP THEREBY CREATED.
(e) FRANCHISEE, TOGETHER WITH ITS ADVISORS, HAS SUFFICIENT KNOWLEDGE
AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS TO MAKE AN INFORMED INVESTMENT
DECISION WITH RESPECT TO THE FRANCHISE.
(f) FRANCHISEE ACKNOWLEDGES THAT THIS INSTRUMENT CONSTITUTES THE
ENTIRE AGREEMENT OF THE PARTIES. THIS AGREEMENT TERMINATES AND SUPERSEDES ANY
PRIOR AGREEMENT BETWEEN THE PARTIES CONCERNING THE SAME SUBJECT MATTER.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
under seal on the date first written above.
IN WITNESS WHEREOF, L.S. Wholesale, Inc. has caused its Common Seal to be
hereunto affixed. The Common Seal of L.S. Wholesale, Inc. was hereto affixed in
the presence of:
Witness: /s/ RONALD J. LATAILLE /s/ DENIS COMMENT
-------------------------- ------------------------
Ronald J. Lataille Denis Comment
Director Director
IN WITNESS WHEREOF, L.S. Holdings, Inc. has caused its Common Seal to be
hereunto affixed.
The Common Seal of L. S. Wholesale, Inc. was hereto affixed in the presence of:
Witness: /s/ RONALD J. LATAILLE /s/ DENIS COMMENT
-------------------------- ------------------------
Ronald J. Lataille Denis Comment
Director Director
IN WITNESS WHEREOF, Little Switzerland, Inc. has caused its Common Seal to
be hereunto affixed. The Common Seal of Little Switzerland, Inc.) was hereto
affixed in the presence of:
Witness: /s/ RONALD J. LATAILLE /s/ DENIS COMMENT
-------------------------- ------------------------
Ronald J. Lataille Denis Comment
Chief Financial Officer Senior Vice President
22
<PAGE>
IN WITNESS WHEREOF, Solomon Brothers Limited has caused its Common Seal to
be hereunto affixed.
The Common Seal of Solomon Brothers Limited was hereto affixed in the
presence of:
Witness: /s/__________________ /s/ GODFREY K. KELLY
------------------------
[_______________] Godfrey K. Kelly
Chairman Secretary
23
<PAGE>
EXHIBIT A
---------
Franchisee's Little Switzerland Store Locations
-----------------------------------------------
1. Little Switzerland, Bay Street - formerly the Carib Shop
2. Little Switzerland, Bay Street - formerly the English Sports and Sweater
Shop
3 Little Switzerland, Bay Street - formerly Solomon's Mines & Columbian
Emeralds
4. Little Switzerland, Atlantis Hotel, Paradise Island
5. Little Switzerland, Treasure Cay - formerly Solomon's Mines
6. Little Switzerland, Hurricane Hole Marina, Paradise Island
7. Little Switzerland, Marsh Harbour, Abaco
8. Little Switzerland, Bay Street, Sunley Building
9. Greenfire Emeralds, Bay Street
10. Greenfire Emeralds, Atlantis Hotel, Paradise Island
11. Leather Boutique, Atlantis Hotel, Paradise Island
24
<PAGE>
EXHIBIT 10.25
SUCCESS FEE AGREEMENT
---------------------
AGREEMENT made as of the 4th day of February, 1998, by and between Little
Switzerland, Inc., a Delaware corporation with its main office in St. Thomas,
U.S.V.I. (the "Company"), and C. William Carey (the "Director").
WITNESSETH
WHEREAS, the Director is a member of the Investment Banking Committee of
the Board of Directors of the Company (the "Committee");
WHEREAS, on November 28, 1994, the Board of Directors voted to compensate
the members of the Committee on the basis of a success fee equal to two-thirds
of one percent (1%) of the aggregate value of any transaction, including any
sale, purchase, merger, joint venture or combination thereof (a "Transaction"),
entered into and completed (the "Success Fee");
WHEREAS, on the date of such vote, the Committee consisted of two members,
the Director and Francis X. Correra, who is since deceased; and
WHEREAS, the Company recognizes and acknowledges the Director's significant
contributions to the Committee and his efforts in designing and promoting a
strategy with the objective of successfully consummating a Transaction;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained herein, the Company and the Director mutually agree as
follows:
1. Payment of Success Fee. For compensation for all of the services
----------------------
rendered by the Director as a member of the Committee, the Company shall pay the
Director an amount equal to eighty three and one-third percent (83 1/3%) of two-
thirds of one percent (1%) of the Aggregate Value (as defined in Section 2
hereof) of a Transaction (the "Success Fee") by wire transfer of immediately
available funds to an account designated by the Director on the closing date of
such a Transaction (the "Effective Time"). The Company shall be obligated to
pay such Success Fee regardless of whether or not the Director is a member of
the Board of Directors of the Company at the Effective Time, including, without
limitation, by reason of his death, disability or the failure of stockholders of
the Company to reelect the Director to the Board of Directors at a Meeting of
the Stockholders; provided, however, that the Company shall not be obligated to
-------- -------
make such payment to the Director if the Director resigns as a member of the
Board of Directors on or before the Effective Time.
2. Aggregate Value. For purposes of this Agreement, the term "Aggregate
---------------
Value" shall mean the total amount of cash and the fair market value (on the
date of payment) of all other property paid or payable, directly or indirectly,
by the acquiring party (the "Acquiror") to the acquired party or the seller of
the acquired business (the "Acquired"), or to the Acquired's security holders or
its employees, or by the Acquired to the Acquired's security holders, in
connection with a Transaction (including, without limitation, amounts paid by
the Acquiror to holders of any warrants, stock purchase rights, convertible
securities or similar rights of the Company and to holders of any options or
stock appreciation rights issued by the Company, whether or not vested).
Aggregate Value shall also include the value of any long-term liabilities
(including the short-term portion thereof) of the Company (including the
principal amount of any indebtedness for borrowed money) indirectly or directly
assumed or acquired by the Acquiror, or otherwise repaid or retired, in
connection with or in anticipation of a Transaction. In the event the
Transaction takes the form of a recapitalization or restructuring of the Company
(including, without limitation, through
<PAGE>
negotiated repurchases of its securities, an issuer tender offer, an
extraordinary dividend, a spin-off, split-off or similar transaction), Aggregate
Value shall also include the fair market value of (i) the equity securities of
the Company retained by the Company's security holders following such
Transaction and (ii) any cash, securities (including securities of subsidiaries)
or other consideration received by the Company's security holders in exchange
for or in respect of securities of the Company in connection with such
Transaction (all such cash, securities or other consideration received by such
security holders being deemed to have been paid to such security holders in such
Transaction). If a Transaction takes the form of a sale of assets, Aggregate
Value shall also include (i) the value of any current assets not sold, minus
(ii) the value of any current liabilities not assumed by the Acquiror. In the
event that any part of the consideration in connection with a transaction will
be payable (whether in one payment or a series of two or more payments) at any
time following the consummation thereof, the term Aggregate Value shall include
the present value of such future payment of payments. As used in this Agreement,
the terms "payment," "paid" or "payable" shall be deemed to include, as
applicable, the issuance or deliver of securities or other property other than
cash.
3. Satisfaction of the Company's Obligations; Interest. The Company and
---------------------------------------------------
the Director agree that the payment provided for in Section 1 hereof shall
satisfy in full the Company's obligation to pay the Success Fee to the Director
with respect to the services rendered by the Director as a member of the
Committee. Notwithstanding the foregoing, in the event that the Company shall
fail to pay the Success Fee when due, the term "Success Fee" shall be deemed to
include interest on such unpaid Success Fee, commencing on the Effective Time,
at a rate per annum equal to the rate of interest publicly announced by
Citibank, N.A., from time to time, in the City of New York, as such bank's Prime
Rate. Further, the Company and the Director agree that the payments provided
for in this Agreement are not in lieu of or offset by the fees and benefits
provided for under the Consulting Agreement, dated June 2, 1996 between the
Company and the Director, which Consulting Agreement remains in full force and
effect.
4. Legal Fees. If legal action is commenced by the Director to enforce
----------
his rights under this Agreement, the Director shall be entitled to recover any
and all costs incurred in connection with the enforcement of his rights
hereunder or the collection of the Success Fee, including, without limitation,
reasonably attorney's fees, in addition to any other relief granted.
5. Binding Effect. This Agreement shall inure to the benefit of and be
--------------
binding upon the Company and the Director, their respective successors,
executors, administrators, heirs and permitted assigns.
6. Amendment. This Agreement may be amended or modified only by a
---------
written instrument signed by the Director or a duly authorized representative of
the Director and the Company.
7. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which documents shall be considered one and the same
document.
8. Governing Law; Consent to Jurisdiction. It is the parties' intention
--------------------------------------
that this Agreement shall be construed under and be governed in all respects by
the laws of the State of Delaware. Each of the Company and the Director hereby
irrevocably and unconditionally consent to the jurisdiction of the courts of the
State of Delaware and the United States District Court for the District of
Delaware for any action, suit or proceeding arising out of or relating to this
Agreement, and agrees not to commence any action, suit or proceeding related
thereto except in such courts. Each of the Company and the Director further
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any lawsuit, claim or other proceeding arising out of or relating to
this Agreement in the courts of the State of Delaware or the United States
District Court for the District of Delaware, and hereby further irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such lawsuit, claim or other proceeding brought in any such court has been
brought in an inconvenient forum. Each of the Company and the Director further
agree that service of any process, summons, notice or document by U.S.
registered mail to its address set forth above shall be effective service of
process for any action, suit or proceeding brought against it in any such court.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the Company, by its
duly authorized officer, and by the Director, as of the date first above
written.
LITTLE SWITZERLAND, INC.
By: /s/ John E. Toler, Jr.
---------------------------------------------
Name: John E. Toler, Jr.
Title: President and Chief Executive Officer
/s/ C. William Carey
------------------------------------------------
C. William Carey
<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 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
August 28, 1998
