<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended August 29, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________ to ____________
Commission File No. 0-19369
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LITTLE SWITZERLAND, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 66-0476514
(State of Incorporation) (I.R.S Employer
Identification No.)
161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS U.S.V.I. 00802
(Address of Principal Executive Offices) (Zip Code)
(340) 776-2010
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---
At October 2, 1998, 8,624,202 shares of $.01 par value common stock of the
registrant were outstanding.
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LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED August 29, 1998
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
Consolidated Balance Sheets as of August 29, 1998
(unaudited) and May 30, 1998 3
Consolidated Statements of Income (unaudited) for the
three months ended August 29, 1998 and August 30, 1997 4
Consolidated Statements of Cash Flows (unaudited) for
the three months ended August 29, 1998 and August 30, 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations 11-13
-------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
- ------- ----------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
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Item 5. Other Information 14
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Item 6. Exhibits and Reports on Form 8-K 14-15
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Signature Page 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
August 29, May 30,
ASSETS 1998 1998
---------- ---------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 1,494 $ 2,278
Accounts receivable.................................. 1,184 1,999
Inventory............................................ 46,145 49,178
Prepaid expenses and other current assets............ 1,770 1,944
-------- --------
Total current assets............................. 50,593 55,399
-------- --------
Property, plant and equipment, at cost................. 39,760 39,688
Less -- Accumulated depreciation..................... (19,041) (18,230)
-------- --------
20,719 21,458
-------- --------
Other assets........................................... 234 294
-------- --------
Total assets..................................... $ 71,546 $ 77,151
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of long term debt.................... $ 2,225 $ 2,225
Unsecured notes payable.............................. 11,125 7,825
Accounts payable..................................... 5,571 10,840
Accrued and currently deferred income taxes.......... 751 777
Other accrued expenses and deferred income........... 2,369 3,500
-------- --------
Total current liabilities........................ 22,041 25,167
Long term debt......................................... 3,338 3,894
Deferred income taxes.................................. 202 202
-------- --------
Total liabilities................................ 25,581 29,263
-------- --------
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 shares
at August 29, 1998 and May 30, 1998, respectively.. 87 87
Capital in excess of par............................... 15,601 15,601
Retained earnings...................................... 28,658 30,581
-------- --------
Total stockholders' equity....................... 44,346 46,269
-------- --------
Total liabilities, minority interest
and stockholders' equity........................ $ 71,546 $ 77,151
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Net sales..................................... $16,987 $20,370
Cost of sales................................. 9,304 11,713
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Gross profits................................. 7,683 8,657
Selling, general and administrative expenses.. 9,261 8,479
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Operating income (loss)..................... (1,578) 178
Interest expense, net......................... 345 370
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(Loss) before income taxes.................. (1,923) (192)
(Benefit) for income taxes.................... --- (35)
------- -------
Net (loss).................................... $(1,923) $ (157)
======= =======
Basic and diluted (loss)
Per share................................... $ (0.22) $ (0.02)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
August 29, August 30,
1998 1997
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)..................................................... $(1,923) $ (157)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities --
Depreciation.............................................. 811 641
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.............. 815 (798)
Decrease (increase) in inventory........................ 3,033 (4,334)
Decrease (increase) in prepaid expenses and
other current assets................................. 174 (1,554)
Decrease in other assets................................ 60 84
(Decrease) increase in accounts payable................. (5,269) 4,445
(Decrease) in other accrued expenses and
deferred income...................................... (1,131) (103)
(Decrease) in accrued and currently deferred
income taxes......................................... (26) (65)
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Net cash (used in) operating activities...................... (3,456) (1,841)
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Cash flows from investing activities:
Capital expenditures......................................... (72) (289)
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Net cash (used in) investing activities...................... (72) (289)
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Cash flows from financing activities:
Proceeds from unsecured notes payable........................ 6,400 3,825
Repayments of unsecured notes payable........................ (3,100) (1,900)
Repayments of long term borrowings........................... (556) (556)
Issuance of common stock..................................... --- 3
------- -------
Net cash provided by financing activities...................... 2,744 1,372
------- -------
Net (decrease) in cash and cash equivalents.................... (784) (758)
Cash and cash equivalents, beginning of period................. 2,278 1,710
------- -------
Cash and cash equivalents, end of period....................... $ 1,494 $ 952
======= =======
</TABLE>
During the three months ended August 29, 1998 and August 30, 1997 and the
Company paid income taxes of $26 and $29, respectively, and paid interest of
$311 and $415, respectively.
See accompanying notes to consolidated financial statements
5
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1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The accompanying consolidated financial statements include the operations of
Little Switzerland, Inc. (the "Company") and its wholly owned subsidiaries, L.S.
Holding, Inc. and L.S. Wholesale, Inc. All significant intercompany balances
have been eliminated in consolidation. The interim financial statements are
unaudited and, in the opinion of management, contain all adjustments necessary
to present fairly the Company's financial position as of August 29, 1998 and
August 30, 1997 and the results of its operations and cash flows for the interim
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's latest annual report on Form 10-K/A for the fiscal year ended
May 30, 1998.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of the Company's operations.
2. USE OF ESTIMATES
----------------
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.
3. TRANSACTIONS WITH AFFILIATES
----------------------------
The Company enters into a number of transactions with Town & Country
Corporation and its affiliates ("Town & Country"), of which during a portion of
fiscal 1998 and all of fiscal years 1997 and 1996 one of the Company's directors
and its acting president and chief executive officer was an executive officer of
Town & Country. The Company purchases a portion of its merchandise from Town &
Country at prices that management believes approximate arm's-length
transactions.
4. CREDIT ARRANGEMENTS
-------------------
The Company has available a total of $19.7 million in unsecured credit
facilities, of which $2.7 million is available for borrowing. Approximately
$4.1 million of the credit facilities is utilized to secure customs bonds and
other bank guarantees required in the normal course of business. Any unfunded
portion of the facilities can be withdrawn at the bank's discretion.
Outstanding borrowings against these credit facilities totaled approximately
$17.0 million as of August 29, 1998. These credit facilities with the Company's
two lead banks are up for renewal during the second and third quarters of fiscal
1999. One of the Company's lead banks has extended its credit facilities with
the Company until October 31, 1998. The Company is currently negotiating
renewals with each lender and it anticipates that these credit facilities will
be renewed in due course. It, however, has no assurance at this time that such
renewals will be granted. On August 11, 1998, the other lead bank approved a
$3.0 million line of credit (the "Credit Facility"), which the Company will use
to support its inventory requirements for the peak selling season. As of
October 16, 1998, the Company has drawn $2.0 million against the Credit
Facility. Additionally, in February 1996, the Company secured term debt of
approximately $8.9 million from its two lead banks to finance the acquisition of
the fixtures, leasehold rights and inventories of two stores in Barbados.
Interest on this debt accrues at an annual interest rate of approximately 7.25%,
and is payable monthly. The principal is payable in equal quarterly payments
over a four year period, commencing March 1997. As of August 29, 1998, the
Company had $5.6 million of term debt outstanding. As of May 30, 1998, the
Company was in compliance with, or had received waivers for, all restrictive
covenants related to its unsecured and term debt agreements. Additionally, the
Company has available separate facilities for foreign exchange contracts.
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5. EARNINGS PER SHARE
------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings per Share, effective December 15, 1997. 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 Method"). The weighted average number of shares
outstanding, the dilutive effects of outstanding stock options, and the shares
under option plans which were anti-dilutive for the periods included in this
report are as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Ended
-----------------
8/29/98 8/30/97
------- -------
<S> <C> <C>
Weighted average number of shares
used in basic earnings per share
calculation........................... 8,624 8,462
Dilutive effects of options............ --- ---
Weighted average number of shares
used in diluted earnings per share
calculation........................... 8,624 8,462
Shares under option plans excluded in
computation of diluted earnings per
share due to anti-dilutive effects.... 762 675
</TABLE>
6. ACCOUNTING FOR INCOME TAXES
---------------------------
The Company follows the liability method of accounting for income taxes as
set forth in 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 bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that is realizable, based
upon the realization criteria defined in SFAS No. 109.
7. OTHER ASSETS
------------
Other assets consist primarily of amounts related to rental deposits.
The Company accounts for long-lived and intangible assets in accordance with
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of. The Company continually reviews applicable
assets for events or changes in circumstances which might indicate the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of these assets by determining whether the amortization over
their remaining lives can be recovered through projected undiscounted future
results. The amount of impairment, if any, is measured based on projected
discounted future results using a discount rate commensurate with the risks
involved. No such impairment existed as of August 29, 1998.
7
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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 elected to adopt SOP 98-5 as of June 1, 1997.
8. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 - ACCOUNTING FOR STOCK-
---------------------------------------------------------------------------
BASED COMPENSATION
- ------------------
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which became effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 requires employee stock-
based compensation to be either recorded or disclosed at its fair value.
Management continues to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25 and did not adopt the new accounting
provision for employee stock-based compensation under SFAS No. 123. The
additional required disclosures will be included in the Company's fiscal year
end financial statements.
9. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
------------------------------------------------------------
In June 1998, the Financial Account Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement SFAS No. 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
10. ADVERTISING
-----------
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising expenses consist primarily of
advertisements with local, regional and national travel magazines, which are
produced on a periodic basis and distributed to visiting tourists, and fees paid
for promotional "port lecturer" programs directed primarily at cruise ship
passengers.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company's Relationship with Rolex
- -------------------------------------
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
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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. In order to
mitigate the impact on sales of the loss of Rolex products, the Company is
actively exploring opportunities for expanding existing, and adding new, world
class product lines in both watches and jewelry. In connection with these
efforts, the Company has added Movado, Baume & Mercier and Mont Blanc time
pieces to its watch lines and is adding Breitling products to its flagship store
in Aruba. The Company is in discussions with Breitling to add additional
locations. In addition, the Company is increasing the showcase space allocated
to jewelry in certain of its larger stores to accommodate a greater variety of
moderate to higher priced fashion merchandise, including diamond, tanzanite,
pearl and pearl accent classifications. There can be no assurance 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.
Employee Defalcation
- --------------------
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.
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
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 Lorraine Quetel, the former
employee of the Company, Lydia Magras and Bon Voyage Travel, Inc. 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 former employee and such other
parties. See Part II - Other Information, Item 1 "Legal Proceedings."
Aruba Audit
- -----------
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., a
wholly-owned subsidiary of the Company, 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
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tax returns. The outcome of this matter is uncertain, and as a result,
management is not able to quantify the related financial exposure at this time.
However, in the opinion of management of the Company, this assessment should not
result in a final judgment which could have a material adverse effect on the
Company's financial condition or results of operations.
Hurricane Damage
- ----------------
The Company has settled all outstanding claims related to the damages
suffered during Hurricanes Luis and Marilyn in September 1995 with its insurance
carrier. In connection with this final settlement, the Company received
approximately $13.4 million in property and business interruption insurance
proceeds. The Company recorded a net gain of approximately $4.7 million in
fiscal 1996, after write-offs related to damaged assets of approximately $8.1
million, including furniture and fixtures, inventory and other assets related to
stores affected by the hurricanes. In addition, approximately $560,000,
representing fiscal 1997 lost profits for a store in Marigot that was not
reopened until November 1996, was recorded as deferred income on the Company's
consolidated balance sheet as of June 1, 1996. In the nine month period ended
March 1, 1997, the Company recorded $560,000 as business interruption insurance
proceeds.
12. SUBSEQUENT EVENTS
-----------------
In September 1998, Hurricane Georges inflicted minor damage to several of
the Company's stores and caused significant damage to its St. Kitts store and to
various islands' infrastructures, including hotels and other tourist facilities.
As of October 16, 1998, all of the Company's stores have reopened with the
exception of the St. Kitts store, which sustained major damage. Based on
currently available information, the Company anticipates that the St. Kitts
store will be closed indefinitely. At this time, the financial impact of
Hurricane Georges on the Company's Caribbean operations is difficult to
quantify. The Company is currently in the process of preparing and filing
insurance claims with its insurance carrier in connection with the hurricane
damage to certain of the Company's properties.
10
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PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain statements that are
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 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 (vi) 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.
YEAR 2000
The Company utilizes software and related technologies throughout its
business that may be affected by the "Year 2000 problem," which is common to
most corporations, and which concerns the inability of information systems,
primarily computer software programs, to recognize and process date sensitive
information properly as of and subsequent to January 1, 2000. An internal study
has been completed resulting in an action plan which is designed to ensure that
the Company's systems continue to meet its internal needs and those of its
customers. The Company believes that this plan provides for modifications or
replacements that will be accomplished in time to minimize any detrimental
effects on operations. At this time, 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.
RESULTS OF OPERATIONS
NET SALES
- ---------
Net sales for the first quarter ended August 29, 1998 were $17.0 million, a
16.6% reduction from net sales of $20.4 million for the corresponding period
last year. Net sales for comparable stores decreased approximately 16.1% for
the quarter ended August 29, 1998 compared to the corresponding period last
year.
Management attributes this reduction in sales primarily as a result of the
absence of Rolex products in the Company's stores. See Part I, Item 1 "Notes to
Consolidated Financial Statements (unaudited)." The
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overall impact of operating without Rolex was similar throughout each of the
Company's market areas. Excluding the impact of Rolex sales, sales in comparable
stores fell .4% for the quarter.
GROSS PROFIT
- ------------
Gross profit as a percentage of net sales was 45.2% for the first quarter
ended August 29, 1998 as compared to 42.5% for the same period last year.
Management attributes this increase in gross profit as a percentage of net sales
to the impact of a significant reduction in the sales of Rolex products. Rolex
products have traditionally been sold at lower gross profit margins compared
with the aggregate of other products sold by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses ("SG&A") for the first quarter
ended August 29, 1998 were $9.3 million, or approximately 54.5% of net sales as
compared to $8.5 million, or approximately 41.6% of net sales for the
corresponding period last year. The increase in SG&A expenses as a percentage
of net sales is primarily attributable to the reduction in net sales for the
three month period end August 29, 1998. In addition, the Company has incurred
certain consulting and recruiting expenses as well as increased advertising
expenses as compared to the same period last year.
OTHER
- -----
Net interest expense for the first quarter ended August 29, 1998 was
$345,000 compared to $370,000 for the corresponding period last year. The
decrease in net interest expense reflects slightly lower average borrowings as
compared to the corresponding period last year.
The Company's effective tax rates for the three-month periods ended August
29, 1998 and August 30, 1997 were approximately 0.0% and 18.0%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three-month period ended August 29,
1998 was $3.5 million, compared to $1.8 million for the corresponding period
last year. The increase in net cash used in operations primarily reflects an
increase in the operating loss and a decrease in accounts payable balances
during the three-month period ended August 29, 1998.
The Company has available unsecured credit facilities of $19.7 million of
which approximately $17.0 million in borrowings were outstanding as of August
29, 1998. These credit facilities with the company's two lead banks are up for
renewal during the second and third quarters of fiscal 1999. One of the
Company's lead banks has extended its credit facilities with the Company until
October 31, 1998. The Company is currently negotiating renewals with each
lender and it anticipates that these credit facilities will be renewed in due
course. It, however, has no assurance at this time that such renewals will be
granted. If these credit facilities are not renewed or the terms of these
credit facilities are materially changed, it could have a material adverse
effect on the Company's results of operations. Additionally, on August 11,
1998, the other lead bank approved a $3.0 million line of credit (the "Credit
Facility"), which the Company will use to support its
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inventory requirements for the peak selling season. The Credit Facility expires
on March 2, 1999. As of October 16, 1998, the Company has drawn $2.0 million
against the Credit Facility. Further, in February 1996, the Company secured term
debt of approximately $8.9 million from its two lead banks to finance its
acquisition of the fixtures, leasehold rights and inventories of two stores in
Barbados. Interest on this debt is payable monthly and the principal is payable
in equal quarterly payments over a four year period commencing March 1997. As of
May 30, 1998, the Company was in compliance with, or had received 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 for the first quarter ended August 29, 1998 were
approximately $72,000 compared to $289,000 for the corresponding period last
year.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
None.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
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.
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
Jewelry Company Limited, a Cayman Islands corporation, Alliance International
Holdings Limited, a Bahamian corporation, and CEI Distributors Inc., a British
Virgin Islands corporation, each an affiliate of DRHC. The Company alleges
breach of the Merger Agreement among the Company, DRHC and certain affiliates of
DRHC and also alleges claims of misrepresentation and civil conspiracy, among
other causes of action. The Company is seeking monetary damages, including,
without limitation, consequential damages relating to harm to its business.
On July 15, 1998, the defendants moved to dismiss the Complaint on the
grounds that the court lacks subject matter jurisdiction over the claims. In
addition, Mr. Crane moved to dismiss the Complaint on the grounds that the court
lacks personal jurisdiction over him. Following preliminary discovery, the
Company filed an opposition to the defendants' motion to dismiss. This motion
remains pending before the court.
On October 7, 1998, Jewelcor Management, Inc., a record stockholder of the
Company, filed an action in the Court of Chancery for the State of Delaware
against the Company seeking certain equitable relief, including an order that a
meeting of stockholders of the Company be held immediately for the purposes of
electing directors and conducting such other business as is brought before the
meeting. A hearing on this matter has been scheduled for November 2, 1998.
In addition, 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 of the Company.
ITEM 5. Other Information
-----------------
In September 1998, Hurricane Georges inflicted water damage to several of
the Company's stores and caused significant damage to its St. Kitts store and to
various islands' infrastructures, including hotels and other tourist facilities.
As of October 16, 1998, all of the Company's stores have reopened with the
exception of the St. Kitts store, which sustained major damage. Based on
currently available information, the Company anticipates that the St. Kitts
store will be closed indefinitely. At this time, the financial impact of
Hurricane Georges on the Company's Caribbean operations is difficult to
quantify. The Company is currently in the process of preparing and filing
insurance claims with its insurance carrier in connection with the hurricane
damage to certain of the Company's properties.
ITEM 6. Exhibits and Reports of Form 8-K
--------------------------------
(a) Exhibits
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
14
<PAGE>
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 and the First Amendment to the Amended and Restated By-laws of the
Company is incorporated herein by reference to the Current Report on
Form S-K filed with the Securities and Exchange Commission on
November 12, 1997.
(b) Reports on Form 8-K during the quarter ended August 29, 1998
No Form 8-K was issued by the Company during the three month period
ended August 29, 1998.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE SWITZERLAND, INC.
Date: October 19, 1998 /s/ David J. Nace
-----------------
David J. Nace
Chief Financial Officer,
Executive Vice President and Treasurer
[Authorized Officer and Principal
Financial and Accounting Officer]
16
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