LITTLE SWITZERLAND INC/DE, 10-K, 1999-09-17

LITTLE SWITZERLAND INC/DE
10-K, 1999-09-17
JEWELRY STORES

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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 29, 1999

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

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)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of August 23, 1999, 8,627,209 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 $.4375 per
share for the registrant's Common Stock, as reported on the NASDAQ National
Market System as of August 23, 1999, was $2,645,916.

================================================================================
<PAGE>

PART I

ITEM 1. BUSINESS

General

Little Switzerland, Inc. ("Little Switzerland" or the "Company") is a
specialty retailer of luxury items. The Company currently operates 21
distinctively-designed retail stores on seven Caribbean islands and Alaska. 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 23, 1999, 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 1999, 1998 and
1997 refer to the Company's twelve month periods ended May 29, 1999, May 30,
1998 and May 31, 1997, 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,
Movado, 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 jewelry, watches,
crystal, china, fragrances and gifts.

Jewelry. Currently, the most significant product line for Little
-------
Switzerland is jewelry (gold and gemstones). Most of the jewelry is produced by
international manufacturers and sales of such items accounted for 37%, 27% and
27% of sales in fiscal 1999, 1998 and 1997, respectively. Jewelry items include
rings, earrings, bracelets, necklaces, pendants and charms, which generally
range in price from $100 to $5,000. Many new branded jewelry lines were added to
the 1999 fall selection such as Lagos, Alfieri St. John, Carrera Y Carrera, and
Antonini.

Watches. The second most significant product line for Little Switzerland is
-------
watches. Sales of watches comprised approximately 34%, 47% and 44% of sales in
fiscal 1999, 1998 and 1997, respectively. Excluding the impact of Rolex on
fiscal 1999 and 1998, watch sales grew approximately 14% in fiscal 1999. The
primary watch lines marketed by Little Switzerland during the last three fiscal
years included such quality brand names as Rado, Omega, Raymond Weil, Cartier,
Tag-Heuer, Movado, Breitling, Citizen, Tissot and Rolex, the latter having
minimal impact on sales in fiscal 1999 due to the change in distributorship from
the Company to other retail outlets. Retail prices for these watch lines
generally range from $200 to $30,000.

In order to mitigate the impact on sales of the loss of Rolex products (as
further explained below), the Company is 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 has added Breitling products
to its flagship store in Aruba. 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.

2
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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 3%, 26% and 24% of the Company's sales
in fiscal 1999, 1998 and 1997, respectively. The 3% achieved in fiscal 1999 was
recorded primarily in the first quarter of fiscal 1999 and represented clearance
of residual products received prior to January 1998, which was the last time
that Rolex shipped its watches to the Company. Rolex is the only manufacturer
whose products accounted for more than 10% of the Company's sales in fiscal 1998
and 1997. As a result of losing Rolex, the Swatch Group, which includes Omega,
Rado, Longiness, Tissot and Swatch, comprised 10.4% of the Company's sales in
fiscal 1999.

Crystal, China, Gifts and Flatware. The Company sells numerous lines of
----------------------------------
crystal, china, gifts and flatware, including Baccarat, Lalique, Swarovski,
Goebel, Waterford, Orrefors, Kosta Boda, Daum, Lladro, Herend, Portmeirion,
Christofle and Rosenthal, prices for which generally range from $20 to $3,000.
Sales of this product category accounted for 20%, 16% and 17% of sales in fiscal
1999, 1998 and 1997, respectively.

Fragrances. Little Switzerland carries over 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 has
decided to exit the fragrance category and is in the process of liquidating its
remaining inventory.

Accessories. The Company decided during fiscal 1999 to liquidate inventory
-----------
in its accessory category. Accessories included sunglasses, costume jewelry and
leather products.

Pricing

Little Switzerland seeks to price its branded 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

3
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representation of product lines, its prompt payment for inventory and the
suppliers' long-standing relationships with the Company. The Company believes
that the loss of any major supplier could adversely affect the Company's results
of operations.

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

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

Little Switzerland stores are designed to place the customer in an
environment which is conducive to the purchasing of luxury items. Most stores
are designed by the same architectural firm and decorated in similar fashion to
present a consistent theme of luxury retailing throughout the network of stores.
Stores are located in areas which are easily accessible to tourists, often in
so-called "duty-free" ports which are visited by cruise ships. The quantity and
mix of products carried by Little Switzerland stores vary from location to
location based on store size and tourist buying patterns and preferences.

Marketing and Advertising

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

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

Inventory Control and Security

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

Given the high value of the merchandise offered by the Company, security is
a high priority. Sophisticated alarm systems 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.

4
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Competition

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

Employees

As of May 29, 1999, Little Switzerland employed approximately 451 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. The
Company considers relations with its employees to be good.

Since May 29, 1999, the Company has experienced certain management changes.
See Part II Item 7 "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Recent Developments--Management Changes."

Working Capital and Seasonality

Currently, 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 and to maintain and remodel its existing
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 and due to the nature of its
current banking relationships, the Company must pay off its existing lenders
with alternative financing from third parties. The Company is currently in
active negotiations with new financial sources to provide it with funds to pay
off the existing lenders and fund working capital. However, there is no
assurance that the Company will be able to obtain such alternative financing or
that such financing will be on terms favorable to the Company. If the Company is
unable to obtain such alternative financing, it will have a material adverse
effect on the Company. See Part II 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.
Because the Company has less cash available from operations in the off-season,
borrowing levels do not reduce proportionally with the reduction in inventory
levels. Historically, the Company has borrowed to fund its normal build-up of
inventory for the peak selling season. During the latter part of fiscal 1999,
the Company established payment plans to pay its vendors past due amounts and
employed its cash from operations to pay down existing vendor payables. As a
result of the Company's existing lenders not making additional borrowings
available to the Company during the term of the Forbearance Agreement, the
Company has been required to reduce the amount of merchandise orders placed for
the upcoming selling season. If the Company is not able to obtain alternative
financing, which it would use, in part, to place additional merchandise orders
for the upcoming season, it will have a material adverse effect on the Company.
See Item 7 "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Seasonality."

5
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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.

ITEM 2. PROPERTY

Little Switzerland's 21 stores are all situated in prime retail locations.
The Company owns its facility in Philipsburg, St. Maarten and leases the 20
other stores it operates. Most of its stores are free-standing. In addition to
approximately 59,090 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.

ITEM 3. 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 January 19, 1999, the defendant, Lydia Magras, filed a petition for
Bankruptcy (Chapter 7) in the United States Bankruptcy Court, District of St.
Thomas. A Notice of Appearance was filed on February 2, 1999 on behalf of the
Company. A trustee was appointed, but due to a conflict of interest, he has
withdrawn from the case. Anna Paieonsky was appointed as trustee in this matter
at the meeting of the creditors held on May 20, 1999.

On June 10, 1998, the Company filed a civil action (the "Complaint") in the
United States District Court for the District of Delaware (Civil Action No. 98-
315-SLR) against DRHC, Stephen G.E. Crane, DRHC's controlling shareholder, Young
Caribbean Jewelry Company Limited, a Cayman Islands

6
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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 jurisdictional grounds. On March
31, 1999, the court issued an order denying the defendants' motions to
dismiss. On May 21, 1999, the defendants filed their Answer, Affirmative
Defenses, Counterclaims and Third Party Complaint. The defendants allege
counterclaims against the Company and others for fraud, negligent
misrepresentations, breach of the covenant of good faith and fair dealing and
breach of the Merger Agreement, unfair competition and business libel, among
others, primarily stemming from their allegations that the Company was
responsible for their failure to consummate the Merger Agreement.

On March 22, 1999, a class action complaint was filed in the United States
District Court for the District of Delaware (Civil Action No.99-176) against the
Company, certain of its former officers and directors, DRHC and Stephen G.E.
Crane. The complaint alleges that the defendants violated federal securities
laws by failing to disclose that DRHC's financing commitment to purchase the
Company's shares expired on April 30, 1998, before the Company's stockholders
were scheduled to vote to approve the merger between the Company and DRHC at the
May 8, 1998 special meeting of stockholders. On August 5, 1999, the Company
moved to dismiss the complaint. This motion remains pending.

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

On April 7, 1999, the Company held its annual meeting of stockholders. At
this meeting the stockholders of the Company elected Adriane J. Dudley as the
Class I Director of the Company, to serve for a term expiring at the 2001 annual
meeting of stockholders and until her successor is duly elected and qualified,
and Melanie L. Sturm and Richard C. Hunter as Class III Directors of the
Company, each to serve for a term expiring at the 2000 annual meeting of
stockholders and until each Director's successor is duly elected and qualified.
The following is a list of the votes cast in connection with these elections:

For Withheld
--------- --------
Adriane J. Dudley 7,474,074 426,922
Melanie L. Sturm 7,474,424 426,572
Richard C. Hunter 7,473,924 427,072

Kenneth W. Watson continued to serve as the Class II Director of the
Company. In connection with the Settlement Agreement, dated February 23, 1999,
the Company entered into with Donald L. Sturm, ValueVest Partners, L.P., Seymour
Holtzman and Jewelcor Management Inc., among others, immediately following the
annual meeting, Peter McMullin was appointed as a Class II Director, to serve
until the 1999 annual meeting of stockholders and until his successor is duly
elected and qualified. For a detailed description of the terms of this
Settlement Agreement, see the Company's proxy statement for the annual meeting
of stockholders held on April 7, 1999, which was filed with the Securities and
Exchange Commission on March 16, 1999.

On June 4, 1999, the Company announced that Adriane J. Dudley had resigned
as the Class I Director of the Company. Subsequently, on July 20, 1999, Alex J.
Nobile was appointed as the Class I Director of the Company.

7
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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 currently is traded on the NASDAQ National Market
System ("NMS") under the symbol "LSVI." On June 7, 1999, NASDAQ notified the
Company that the Company will not remain eligible for continued listing on NMS
unless its Common Stock demonstrates compliance with NASDAQ's $1.00 minimum bid
price requirement during the period ending September 6, 1999. On July 9, 1999,
NASDAQ notified the Company that the Company also was not in compliance with
NASDAQ's $5 million minimum public float value requirement. Should the Company
be unable to demonstrate compliance with these requirements, the Company will
consider actions to preserve its listing. The Company has requested a hearing as
permitted by applicable NASDAQ procedure and has been notified that such hearing
will be held on October 14, 1999. NASDAQ has informed the Company that the
delisting procedures have been stayed pending such hearing. In the event that
NASDAQ denies continued listing following such hearing, the Company's current
intent would be to seek listing on other markets or exchanges. However, there
is no assurance that any such actions will be effective or that listing will not
cease after October 14, 1999.

The following table sets forth for the periods indicated the high and low
sale prices per share of the Common Stock on NMS, as reported by NASDAQ. The
Company's initial public offering of its Common Stock at $12.00 per share
occurred on July 18, 1991.

High Low
------------- -----------

Fiscal Year ended May 29, 1999
------------------------------

Quarter ended August 29, 1998 5 3/4 1 15/16
Quarter ended November 28, 1998 3 9/16 2 1/4
Quarter ended February 27, 1999 2 9/16 2
Quarter ended May 29, 1999 2 1/8 13/16

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

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 23, 1999, there were 128 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.

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ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>

Year Ended
---------------------------------------------------------------
May 29 May 30, May 31, June 1, May 31,
1999 1998 1997 1996 1995
------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 76,435 $100,368 $88,314 $62,895 $72,240
Operating (loss) income $ (8,527) $ (1,165) $ 2,661 $ 1,666 $ 4,736
(Loss) income before
cumulative effect of change
in accounting principle $ (9,822) $ (3,568) $ 1,159 $ 915 $ 3,694
Net (loss) income $(11,082) $ (3,803) $ 1,159 $ 915 $ 3,694
======== ======== ======= ======= =======

Basic and diluted (loss) earnings
per share before
cumulative effect of
change in accounting principle (1) $ (1.29) $ (0.42) $ 0.14 $ 0.11 $ 0.44
Basic and diluted (loss) earnings
per share (1) $ (1.29) $ (0.45) $ 0.14 $ 0.11 $ 0.44
======== ======== ======= ======= =======

Balance Sheet Data:
Total assets $ 60,844 $ 77,151 $77,391 $77,877 $58,446
Long-term debt - $ 3,894 $ 6,119 $ 8,068 -

Operating Data:
Gross profit margin 40.4% 42.5% 43.7% 42.5% 42.8%
Operating (loss) income margin (11.2)% (1.2)% 3.0% 2.7% 6.6%
Stores open at period end (2) 22(9) 26(4) 27(5) 27(6) 24(7)
Comparable store net sales
(decrease) increase (3) (21.7)%(10) 8.7% (14.3)%(8) 17.3% 4.1%
</TABLE>
______________________
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) In addition to the stores described, the Company's former franchisee,
Solomon Brothers Ltd., had eight stores in the Bahamas which were operated
pursuant to a franchise agreement entered into in fiscal 1988. This
franchise agreement was 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) 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.
(9) In fiscal 1999, the Company closed stores in Ketchikan, Alaska, St. Kitts,
Antigua and St. Croix.
(10) This decrease was primarily due to the absence of Rolex products during
fiscal 1999.

9
<PAGE>

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" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
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 Company's ability to obtain alternative financing to provide it with
funds to pay off its existing lenders and to fund its working capital needs,
(ii) the Company's ability to maintain its relationship with its existing
lenders, (iii) the frequency of tourist visits to the locations where the
Company maintains retail stores, (iv) the Company's ability to retain
relationships with its major suppliers of product for resale, (v) 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, (vi) weather in the Company's markets, (vii) actions of the
Company's competitors and the Company's ability to respond to such actions and
(viii) economic conditions that affect the buying patterns of the Company's
customers. 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:

Fiscal Year Ended
-------------------------------
May 29, May 30, May 31,
1999 1998 1997
-------- ------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.6 57.5 56.3
------ ----- -----
Gross profit 40.4 42.5 43.7
Selling, general and administrative
expenses 52.0 43.7 41.3
(Gain) loss on insurance proceeds (0.4) -- (0.6)
------ ----- -----
Operating (loss) income (11.2) (1.2) 3.0
Interest expense, net 1.8 1.5 1.7
------ ----- -----
(Loss) income before provision
for income taxes (13.0) (2.7) 1.3

Provision for income taxes 1.5 0.9 --
------ ----- -----
Net (loss) income before cumulative
effect of change in accounting (14.5) (3.6) --
principle
Cumulative effect of change in
accounting principle -- (0.2) --
------ ----- -----
Net (loss) income (14.5)% (3.8)% 1.3%
====== ===== =====

10
<PAGE>

Recent Developments

Shareholder Rights Agreement
- ----------------------------

The Board of Directors of the Company determined that the Company's
Shareholder Rights Agreement (as defined below) was no longer in the best
interests of the holders of the Company's Common Stock and, therefore, voted
unanimously to terminate, effective as of May 20,1999, the Shareholder Rights
Agreement, dated as of July 25, 1991, between the Company and State Street Bank
and Trust Company, a Massachusetts trust company (the "Rights Agent"), as
amended by the First Amendment to Shareholder Rights Agreement, dated as of
November 8, 1991, between the Company and the Rights Agent, the Second Amendment
to Shareholder Rights Agreement, dated as of April 6, 1993, between the Company
and the Rights Agent, the Third Amendment to Shareholder Rights Agreement, dated
as of February 4, 1998, between the Company and the Rights Agent and the Fourth
Amendment to Shareholder Rights Agreement, dated as of February 23, 1999,
between the Company and the Rights Agent (the "Shareholder Rights Agreement").

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

On August 24, 1999, the Company announced the appointment of Robert L.
Baumgardner as the President and Chief Executive Officer of the Company. Mr.
Baumgardner was also appointed as a Class I Director of the Company, increasing
the Board of Directors to six members. Mr. Watson, the former Acting Chief
Executive Officer of the Company, will continue to serve as a Class II Director
of the Company.

On June 4, 1999, the Company announced the resignation of Adriane J. Dudley
as the Class I Director of the Company. Subsequently, Alex J. Nobile was
appointed as the Class I Director of the Company effective as of July 20, 1999.

On April 19, 1999, the Company announced the resignation of David J. Nace,
the Chief Financial Officer of the Company, effective upon hiring a successor
Chief Financial Officer. On June 6, 1999, Patrick J. Hopper joined the Company
as its Vice President - Finance and, on July 3, 1999 became the Company's new
Chief Financial Officer.

NASDAQ Listing
- --------------

On June 7, 1999, NASDAQ notified the Company that the Company will not
remain eligible for continued listing on NMS unless its Common Stock
demonstrates compliance with NASDAQ's $1.00 minimum bid price requirement during
the period ending September 6, 1999. On July 9, 1999, NASDAQ notified the
Company that the Company also was not in compliance with NASDAQ's $5 million
minimum public float value requirement. Should the Company be unable to
demonstrate compliance with these requirements, the Company will consider
actions to preserve its listing. The Company has requested a hearing as
permitted by applicable NASDAQ procedure and has been notified that such hearing
will be held on October 14, 1999. NASDAQ has informed the Company that the
delisting procedures have been stayed pending such hearing. In the event that
NASDAQ denies continued listing following such hearing, the Company's current
intent would be to seek listing on other markets or exchanges. However, there
is no assurance that any such actions will be effective or that listing will not
cease after October 14, 1999.

St. Barthelmey Store
- --------------------

On August 31, 1999, the Company consummated the sale of the goodwill and
inventory of its store located on the island of St. Barthelmey pursuant to a
purchase and sale agreement with a third party for an aggregate amount equal to
$1.3 million. The Company expects to record a gain on this transaction in the
first quarter of fiscal year 2000.

11
<PAGE>

Fiscal 1999 Compared to Fiscal 1998

General
- --------

The Company operated 22 luxury gift and jewelry stores as of May 29, 1999.
However, subsequent to May 29, 1999, the Company consummated the sale of its
store located on St. Barthelmey for an aggregate amount of $1.3 million, thus
reducing the current number of stores to 21. See "--Recent Developments-- St.
Barthelmey Store." In comparison at May 30, 1998, the Company operated 26
stores. The Company closed one store in Ketchikan, Alaska and one store each in
Antigua, St. Kitts and St. Croix during fiscal 1999. The store in St. Kitts was
closed due to damage inflicted by Hurricane Georges.

Included in Note 1 to the Company's consolidated financial statements is a
discussion of management's planned actions to improve its current financial
condition. The planned actions include a thorough review of each location and
operation to determine what further actions are required to return the Company
to sustained profitability. Although the Company believes no further impairment
losses are required at May 29, 1999, future strategic actions could result in
additional store closings and material restructuring charges and impairment
losses.

Net Sales
- ---------

Net sales for the fiscal year ended May 29, 1999 were $76.4 million, a
reduction of $24.0 million or approximately 23.8% from $100.4 million in the
corresponding fiscal year ended May 30, 1998. Net sales in comparable stores
decreased 21.7% in fiscal 1999 compared to fiscal 1998.

The decrease in both total Company net sales and comparable store net sales
was primarily due to the absence of Rolex products in the Company's stores. The
Company has not received any Rolex products since January 1998. Historically,
the Company was the exclusive authorized retailer for Rolex products on the
islands on which the Company operates. On July 15, 1998, the Company announced
that it had learned that Rolex had decided not to resume shipments of its
watches and related products to the Company for retail sale through the
Company's Stores. The overall impact to the Company's net sales without Rolex
products was similar throughout most of the Company's market areas but was most
profound in the U.S. Virgin Islands. Excluding the impact of Rolex sales, sales
in comparable stores increased 4.4% in fiscal 1999 compared to fiscal 1998.

Total net sales were also reduced due to the closure of four stores in
fiscal 1999. These store closings and the resulting lost revenue contributed to
the sales reduction by approximately $2.0 million.

Gross Profit
- ------------

Gross profit, as a percentage of net sales, was 40.4% in fiscal 1999
compared to 42.5% for fiscal 1998. Management attributes the decrease in gross
profit as a percentage of net sales in fiscal 1999 to the impact of markdowns
taken for competitive reasons, to stimulate sales in slow-moving categories and
to complete inventory liquidation in the accessories category.

Selling, General and Administrative Expenses
- --------------------------------------------

Selling, general and administrative expenses ("SG&A") for the year ended May
29, 1999 decreased 9.3% from $43.8 million, or 43.7% of net sales in fiscal 1998
to $39.7 million, or 52.0% of net sales in fiscal 1999. The decrease is due
primarily to the absence in fiscal 1999 of certain expenses incurred during
fiscal 1998, specifically $2.7 million in charges as a result of the failed
merger with DRHC (see Part I, Item 3 "Legal Proceedings") 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 Imports (Barbados) Limited
subsidiary.

SG&A includes a charge of $1.8 million recorded by the Company related to
the closing of four stores during fiscal 1999. The charge was for impairment of
fixed assets and leasehold improvements at the closed stores of approximately
$1.1 million and the remaining portion related to a rental obligation at an
abandoned

12
<PAGE>

store and severance and related costs. The increase in SG&A as a percentage of
net sales, exclusive of store closing costs, is primarily attributable to the
reduction in net sales for fiscal 1999 compared to fiscal 1998.

Net Interest Expense
- --------------------

Net interest expense was $1.4 million in fiscal 1999, a 12% reduction
compared to $1.5 million in fiscal 1998. The decrease in net interest expense
reflects lower average borrowings in fiscal 1999 compared to fiscal 1998.

Income Taxes
- ------------

The Company's income is subject to taxation in each of the jurisdictions in
which it operates at rates ranging from 3.7% to 42.0%, 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. 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 expired at the end
of August 1998 (subject to renewal), L.S. Wholesale benefited from a lower tax
rate on its income earned outside the United States Virgin Islands, which had
been taxed at a rate of 3.7% up through the end of fiscal 1998. The lower tax
rate had the effect of increasing earnings per share by $.02 in fiscal 1999 and
$0.22 in fiscal 1998.

The Company has submitted its application for renewal of benefits and has
been verbally notified that the Industrial Development Commission (the "IDC")
has recommended to the Governor of the U.S.V.I. that the Company be awarded up
to 75% of the benefits which the Company enjoyed in the past. If such benefits
were granted at the 75% benefit rate, the effective tax rate for L.S. Wholesale
would be approximately 9.3%.

The Company anticipates that it will be notified with respect to such
renewal within the 60-day period in which the Governor is permitted under
applicable law to determine the extent of the benefits, which the Company will
receive. Until it receives notification with respect to the renewal, the
Company must pay and is recording taxes on all of the Company's U.S.V.I. income
at the statutory rate of 37.4%. However, if the renewal is granted, management
believes that the lower tax rate will be applied retroactively to the end of
August 1998 and the Company will be reimbursed for any excess payments; however,
there is no assurance that this will occur. If the IDC benefit is not granted,
then all of the Company's U.S.V.I. based income will be taxed at the statutory
rate of 37.4% and the Company will be subject to a higher gross receipt tax.
Such non-renewal may have a material and adverse effect on the Company's results
of operations.

As the Company operates in multiple tax jurisdictions, it is subject to
various tax exposure. At this time, in the opinion of management any resulting
liability would not have a material impact on the Company's financial position.

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 Company has entered into a settlement
with the tax authorities regarding its 1988-1996 local tax returns and recorded
a tax expense of $600,000 in fiscal 1999 for the incremental cost of this
settlement. Pursuant to this settlement, the Company has been assessed a profit
tax in the amount of $650,000, which is payable in ten equal installments of
$65,000 per month commencing on March 1, 1999. Interest of 6% per annum will be
charged on the outstanding amount starting on March 1, 1999. The Company also
has been assessed a wage tax in the amount of $550,000, which is payable in six
installments commencing in June 1999. Interest of 6% per annum will be charged
on the outstanding amount starting on June 1, 1999.

On July 29, 1999, the Company entered into a settlement agreement with the
Aruba tax authorities regarding its 1997-1998 local tax returns. The Company
agreed to accelerate the payment of the remaining balance of the profit tax
settlement discussed above ($455,000 of $650,000) and settle its 1997-1998 local
tax returns. The cost to the Company after this settlement was approximately
$580,000, which has been paid to the Aruba taxing authorities.

13
<PAGE>

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 United States 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.

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,
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 Imports
(Barbados) Limited subsidiary. Also contributing to the increased expenses were
charges associated with the employee defalcation of $0.6 million. See Part I,
Item 3 "Legal Proceedings."

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.

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 expired at the end
of August, 1998 (subject to renewal), L.S. Wholesale benefited 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 2000. If the renewal is granted, management believes that 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.

<PAGE>

Liquidity and Capital Resources

Currently, 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. 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 1999, 1998 and 1997 was $1.9
million, $3.4 million and $0.4 million respectively.

As a result of negotiations with its two lead banks regarding the Company's
noncompliance with certain financial covenants contained in the original loan
agreements with the banks and the nonpayment of amounts totaling approximately
$1.5 million due under the revolving term loan with one of the Company's banks,
the Company and its subsidiaries entered into a Forbearance Agreement, effective
as of April 1, 1999 that effectively froze the Company's line of credit at its
then and current level of $17.5 million. This amount consists of approximately
$13.3 million in outstanding cash borrowings and approximately $4.2 million in
contingent stand-by letters of credit. Pursuant to the Forbearance Agreement,
the banks agreed, through August 31, 1999, not to exercise their rights and
remedies under the existing loan documents with respect to existing defaults and
certain expected future defaults. In exchange, the Company and its subsidiaries
granted a security interest to the banks against their personal property. The
Forbearance Agreement also sets forth certain criteria that the Company must
meet regarding the Company's inventory levels. The banks indicated that they
would not make any additional borrowings to the Company during the term of the
Forbearance Agreement. The Company is currently in negotiations with its banks
regarding an extension of the term of the Forbearance Agreement to enable the
Company to find alternative financing. To date, the Company has been verbally
informed that the banks are willing to grant an extension until the end of
November 1999, subject to certain conditions and documentation. There is no
assurance that such extension will be on favorable terms to the Company or that
alternative financing will be obtained during the extension period. If the
Company is unable to fulfill these conditions, the banks may exercise their
rights and remedies under the existing loan documents, including declaring all
amounts immediately due under the loan agreements. If the banks declare amounts
outstanding under such loan agreements immediately due, the Company does not
believe that it will have sufficient funds available to make such payments and
such action by the banks will have a material adverse effect on the Company.

The Company currently is actively exploring other financing alternatives and
has made progress toward finding such alternative financing. At this time,
however, the Company does not have any firm commitments from other lenders or
third parties to provide it with funds that would be used to pay off its
existing lenders or to finance its working capital. There is no assurance that
the Company will be successful in obtaining any other financing.

During the latter part of fiscal 1999, the Company established payment plans
to pay its vendors past due amounts and employed its cash from operations to pay
down existing vendor payables. As a result of the Company's existing lenders
not making additional borrowings available to the Company during the term of the
Forbearance Agreement, the Company has been required to reduce the amount of
merchandise orders placed for the upcoming selling season. If the Company is
not able to obtain alternative financing, which it would use, in part, to place
additional merchandise orders for the upcoming season, it will have a material
adverse effect on the Company.

In addition, the Company has taken margin reductions to move older
merchandise and discontinued categories in order to improve liquidity. Measures
to improve liquidity could adversely affect short term earnings, but management
believes such measures are necessary to improve the Company's long term
viability. However, there is no assurance that such measures will improve the
Company's long term viability.

Capital expenditures (excluding acquisitions) during fiscal 1999, 1998 and
1997 were approximately $.8 million, $1.1 million and $4.4 million respectively.
Capital expenditures during fiscal 1999 included store fixtures, lease
improvements and computer hardware and software upgrades.

15
<PAGE>

The Company currently leases 20 of its 21 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 Company's sales
have historically occurred during the third fiscal quarter. Working capital
requirements generally reflect this seasonality as the Company increases its
inventory in anticipation of the peak selling season. Because the Company has
less cash available in the off season, it may be necessary to borrow to finance
its build-up of inventory. Unaudited quarterly financial information for the
Company for fiscal 1999 and 1998 is included in Note 9 of Notes to Consolidated
Financial Statements.

Inflation

Exchange Rates

While the Company receives United States dollars for most of its sales, a
significant portion of the Company's inventory purchases are transacted in
foreign currencies. Because of the Company's need to maintain adequate levels
of inventory, the Company must place large orders for merchandise many months in
advance of when it will receive payment for the merchandise from customers. The
Company's ability to offer attractive pricing of luxury goods purchased in
foreign currency depends in part on the relative exchange rates between the
United States dollar and the various foreign currencies. The Company previously
engaged in hedging transactions to minimize the effects of fluctuating foreign
exchange rates on the Company's results of operations; however, due to the
absence of Rolex products, the need for hedging on a large-scale basis is
minimal. As a result, the Company has ceased its practice of hedging in the
foreign exchange market.

Year 2000 Readiness Disclosure

The statements in the following section include "Year 2000 readiness
disclosure" within the meaning the Year 2000 Information and Readiness
Disclosure Act.

Year 2000. "Y2K Compliance" refers to the ability for information systems,
---------
software programs, computer hardware and other computer enhanced equipment to
properly handle the processing of dated material properly for the year 2000 and
beyond. Many existing computer programs and databases use two digits to
identify a year in the date field (i.e., 98 would represent 1998). These
programs and databases were designed and developed without considering the
impact of the upcoming millennium. If not corrected, many computer systems
could fail or create erroneous results relating to the year 2000. If the
Company or its significant suppliers fail to make necessary modifications and
conversions on a timely basis, the year 2000 issue could have a material adverse
effect on Company operations. However, the impact cannot be quantified at this
time. The Company believes that its competitors face a similar risk.
Information contained in this annual report pertains to the initiatives
undertaken by the Company to insure full compliance with Y2K processing prior to
the year 2000

Company's State of Readiness. The Company has developed plans to address
----------------------------
the possible exposures related to the impact on its computer systems of the year
2000 issue. Key financial, information and operational systems, including
equipment with embedded microprocessors, have been, or are currently being,
inventoried and assessed, and detailed plans have been, or are currently being,
developed for the required systems modifications or replacements. Progress
against these plans is monitored and reported to management on a regular basis.
Implementation of required changes to critical systems is expected to be

16
<PAGE>

completed prior to the end of the calendar year. The Company is also focusing
on major suppliers to assess their compliance. The Company has received
assurances from certain suppliers that such suppliers expect to be year 2000
compliant and is seeking such assurances from its other material suppliers.
Nevertheless, there can be no assurance that there will not be a material
adverse effect on the Company if third party governmental or business entities
do not convert or replace their systems in a timely manner and in a way that is
compatible with the Company's systems. In the event a material supplier is not
year 2000 compliant, the Company's business, financial condition and results of
operations could be materially and adversely affected.

Compliance readiness analysis was conducted to determine the impact and
requirements associated with all operational aspects of the Company, both
internally and externally. Plans have been developed to modify, upgrade or
replace equipment and software where necessary. Procedures were instituted to
require all new and future contracts with outside vendors to include a Y2K
compliance in all products provided to the Company. Additionally, vendors
providing services to the Company, such as security systems or banking services,
have been required to submit a statement of Y2K compliance.

Outside servicers were contracted to upgrade all merchandising, warehouse
and most financial systems. The majority of these systems were upgraded in May
1999 to full Y2K compliance. Upgrading and testing of all point of sale
("POS") and store systems is currently underway and management believes that
this process will be complete and Y2K compliant by the end of the second quarter
of fiscal 2000. The Company currently is rolling out the upgrade to non-
U.S.V.I. stores and management anticipates such roll out will be completed
during the second quarter of fiscal 2000. A parallel test of the upgraded
payroll system is in process and management anticipates that the implementation
of the upgraded system will occur by the end of September 1999. The Company has
determined that its existing general ledger system, which has been upgraded to
be compliant with Y2K requirements, should be replaced with a more efficient
system. As a result, a project plan has been developed and initiated with
completion anticipated prior to December 31, 1999.

Costs to Address Year 2000 Compliance. Costs associated with year 2000
--------------------------------------
compliance have been primarily associated with acquiring outside contract
personnel that have been required to modify and implement the various software
systems. Some equipment has been necessary as well as travel expense related to
the POS roll out. Estimated total expenses related to the Y2K compliance will
be approximately $600,000. It is management's belief that with the actions
taken and proposed by the Company, the Company will be Y2K compliant before the
beginning of year 2000. Continued testing and re-evaluation will occur to
insure full compliance. With efforts to this point and plans for finalizing
compliance, management believes that it has significantly reduced any material
adverse effect on the Company's business due to potential Y2K issues. However,
there can be no assurance that the Company will be able to identify and address
all year 2000 issues before problems arise.

Contingency Plan. As the Company is already operating in its fiscal year
-----------------
2000, in July 1999, the Company upgraded its existing general ledger package to
a version that has been certified as being Y2K compliant.

The Company has developed a contingency plan to restore its store
operations, merchandising and logistics, financial systems and computer
operations in the event of a year 2000 failure. The Company has operating plans
to guide key managers in the case of any material systems failure throughout the
Company. As mentioned previously and as contingent strategy, the Company has
upgraded and tested to Y2K standards its current financial system and currently
expects to have a more efficient replacement financial system that is Y2K
compliant in place before the end of the calendar year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

17
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES

Index to Consolidated Financial Statements

Page
----
Financial Statements as of the Year Ended May 29, 1999

Report of Independent Public Accountants 19

Consolidated Balance Sheets 20

Consolidated Statements of Operations 21

Consolidated Statements of Changes in Stockholders' Equity 22

Consolidated Statements of Cash Flows 23

Notes to Consolidated Financial Statements 24

18
<PAGE>

Report of Independent Public Accountants

To Little Switzerland, Inc.:

We have audited the accompanying consolidated balance sheets of Little
Switzerland, Inc. (a Delaware corporation) and subsidiaries as of May 29, 1999
and May 30, 1998, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the fiscal years ended May
29, 1999, May 30, 1998 and May 31, 1997. 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 29, 1999 and May 30, 1998,
and the results of their operations and their cash flows for each of the fiscal
years ended May 29, 1999, May 30, 1998 and May 31, 1997, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses and is currently operating without a credit facility which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Boston, Massachusetts
September 3, 1999

19
<PAGE>

Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
Assets

<TABLE>
<CAPTION>
May 29, 1999 May 30, 1998
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,739 $ 2,278
Accounts receivable 560 1,999
Inventory 38,195 49,178
Prepaid expenses and other current assets 1,111 1,944
------- -------
Total current assets 42,605 55,399

Property, Plant and Equipment, at Cost 36,999 39,688
Less--Accumulated depreciation 19,051 18,230
------- -------
17,948 21,458

Other Assets 291 294
------- -------

Total assets $60,844 $77,151
======= =======
</TABLE>

Liabilities and Stockholders' Equity
<TABLE>

Current Liabilities:
<S> <C> <C>
Secured demand notes $13,275 $ -
Current portion of long term debt - 2,225
Unsecured notes payable - 7,825
Accounts payable 5,205 10,840
Accrued and currently deferred income taxes 1,715 777
Other accrued expenses 3,641 3,500
------- -------
Total current liabilities 23,836 25,167

Long-term Debt - 3,894

Deferred Income Taxes 202 202
------- -------

Total liabilities 24,038 29,263
------- -------

Commitments and Contingencies (Note 6)

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--8,625 and 8,624
shares at May 29, 1999 and May 30, 1998,
respectively 87 87
Capital in excess of par 15,601 15,601
Retained earnings 19,499 30,581
------- -------
Total stockholders' equity 35,187 46,269
------- -------

Total liabilities, minority interest and
stockholders' equity $60,844 $77,151
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

20
<PAGE>

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>

NET SALES $ 76,435 $100,368 $88,314

COST OF SALES 45,560 57,728 49,721
-------- -------- -------

Gross profit 30,875 42,640 38,593

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 39,732 43,805 36,492

GAIN ON INSURANCE PROCEEDS 330 - 560
-------- -------- -------

Operating (loss) income (8,527) (1,165) 2,661

INTEREST EXPENSE, NET
1,355 1,540 1,502
-------- -------- -------
(Loss) income before income taxes and
cumulative effect of change in
accounting principle (9,882) (2,705) 1,159

PROVISION FOR INCOME TAXES
1,200 863 -
-------- -------- -------
(Loss) income before cumulative
effect of change in accounting
principle (11,082) (3,568) 1,159

CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF APPLICABLE TAX - (235) -
-------- -------- -------

Net (loss) income $(11,082) $ (3,803) $ 1,159
======== ======== =======

BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE:
(Loss) income before cumulative
effect of change in accounting
principle $(1.29) $ (0.42) $ 0.14
Cumulative effect of change in
accounting principle, net of
applicable tax - (0.03) -
-------- -------- -------

Basic and diluted (loss)
earnings per common share $(1.29) $ (0.45) $ 0.14
======== ======== =======

WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 8,624 8,505 8,459
-------- -------- -------
Diluted 8,624 8,505 8,543
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

21
<PAGE>

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, 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
Net loss - - - (11,082) (11,082)
Shares issued under
stock purchase plan 1 - - - -
----- --- ------- -------- --------

Balance, May 29, 1999 8,625 $87 $15,601 $ 19,499 $ 35,187
===== === ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

22
<PAGE>

Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>

Cash Flows from Operating Activities:
Net income (loss) $(11,082) $ (3,803) $ 1,159
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities-
Depreciation and amortization 3,194 3,379 3,077
Store closing expense 1,797 - -
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
Increase (decrease) in deferred
income taxes - 16 96
Changes in assets and liabilities-
Decrease (increase)
in accounts receivable 1,439 84 (191)
Decrease (increase) in inventory 10,983 (4,450) (1,050)
Decrease (increase) in
prepaid expenses and
other current assets 833 189 (522)
Increase (decrease) in accounts payable (5,635) 3,838 163
Increase (decrease) in
other accrued expenses (542) 1,069 (234)
Increase (decrease) in
accrued and currently
deferred income taxes 938 348 (1,573)
-------- -------- --------
Net cash provided by operating
activities 1,925 3,413 387
-------- -------- --------

Cash Flows from Investing Activities:
Capital expenditures (798) (1,123) (4,388)
Decrease (increase) in other assets 3 (14) (145)
-------- -------- --------
Net cash used in investing
activities (795) (1,137) (4,533)
-------- -------- --------

Cash Flows from Financing Activities:
Borrowing under unsecured notes
payable 28,900 24,150 26,950
Repayment of unsecured notes
payable (27,625) (24,425) (25,950)
Proceeds from long-term borrowings 1,950 - -
Repayments of long-term borrowings (3,894) (2,225) (556)
Issuance of common stock - 792 19
-------- -------- --------
Net cash (used in) provided by
financing activities (669) (1,708) 463
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 461 568 (3,683)

Cash and Cash Equivalents,
Beginning of Year 2,278 1,710 5,393
-------- -------- --------

Cash and Cash Equivalents,
End of Year $ 2,739 $ 2,278 $ 1,710
======== ======== ========

Cash Paid During the Year For:
Income taxes $ 262 $ 515 $ 1,543
======== ======== ========
Interest $ 1,575 $ 1,498 $ 1,450
======== ======== ========

</TABLE>

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

23
<PAGE>

Notes to Consolidated Financial Statements
May 29, 1999

(1) MANAGEMENT'S PLANS

Existing Situation
------------------

Little Switzerland, Inc. and its subsidiaries (the Company) incurred a
substantial loss during fiscal 1999. In addition, the Company is presently
operating without a long-term credit facility to fund its working capital needs.
This condition was triggered by, among other things, the following events: (i)
the absence of Rolex products due to the decision by Rolex to cease shipments
which resulted in a revenue loss of approximately $24 million versus fiscal
1998; (ii) the occurrence of store closings and the resulting charges to net
income of approximately $1.8 million; (iii) the Company's noncompliance with
certain financial covenants contained in the original loan agreements with its
lenders; and (iv) the nonpayment of amounts totaling approximately $1.5 million
due under the revolving term loan with one of the Company's lenders,

Effective April 1, 1999, the Company and its subsidiaries entered into a
Forbearance Agreement, which effectively freezes the Company's existing line of
credit at its then and current level of $17.5 million. Pursuant to the
Forbearance Agreement, the lenders have agreed, through August 31, 1999, not to
exercise their rights and remedies under the existing loan documents with
respect to existing defaults. In exchange, the Company and its subsidiaries
granted a security interest to the lenders against their personal property.

Actions Taken to Date
---------------------

The Company has been working, and continues to work, diligently at
addressing the above issues. The Company has been addressing operational,
merchandising, recruitment as well as financial issues. To date the Company has:

1. Explored, and continues to explore, opportunities for expanding existing
and adding new world class product lines in watches and jewelry, its two
most significant merchandise categories.

In order to mitigate the impact on sales of the loss of Rolex products, the
Company has added Movado, Baume & Mercier and Mont Blanc timepieces to its
watch lines and has added Breitling products to its flagship store in
Aruba. 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. The increased space has
been made available as a result of the decision to exit the accessories and
fragrance categories.

2. Closed stores that were no longer profitable.

During fiscal 1999, the Company closed three stores that were no longer
generating positive cash flows. The stores closed were Antigua, St. Croix
and Ketchikan, Alaska. In addition, the Company closed the St. Kitts store
as a result of such store being severely damaged in Hurricane Georges.
While these store closings resulted in immediate charges against earnings
in fiscal 1999, future periods will not be impacted by the projected
ongoing losses.

24
<PAGE>

3. Maintained relationships with its suppliers and vendors.

In the third quarter of fiscal 1999, the Company established payment plans
to pay its vendors past due amounts. The Company was able to use cash from
operations during the non-peak selling season to accomplish this objective.
The Company believes that this approach has kept its business relations
with its vendors good.

4. Hired a new Chief Executive Officer and Chief Financial Officer.

Management changes made subsequent to the end of fiscal 1999 are expected
to enhance the steps taken to date to revitalize the core business. On
August 24, 1999, the Company announced that Robert L. Baumgardner was
appointed as the President and Chief Executive Officer of the Company. Mr.
Baumgardner was also appointed as a Class I Director of the Company. In
addition, on June 28, 1999, the Company announced that Patrick J. Hopper
joined the Company as its Vice President - Finance and, on July 3, 1999
became the Company's new Chief Financial Officer.

5. Actively exploring other financing alternatives to pay off the Company's
existing lenders and to support the working capital needs of the
Company.

Currently, the Company is actively discussing with asset based lenders a
facility that would pay off its existing lenders. Although the Company is
working to obtain alternative financing, there is no assurance that such
financing will be obtained.

6. Short term measures have been adopted to raise liquidity

The Company has taken margin reductions to move older merchandise and
discontinued categories in order to improve liquidity. Measures to improve
liquidity could adversely affect short term earnings, but management
believes such measures are necessary to assist in maintaining the Company's
long term viability.

Actions Contemplated
--------------------

The Company's new management team is committed to continuing progress on
the above initiatives. This team will continue to attempt to secure a greater
range of world class luxury products for sale in Little Switzerland stores.
Included in this process will be a focus on attempting to improve gross margin
leverage and inventory turnover. Based on year-end results, a thorough review
of each location and operation will be made to determine what further actions
are required to return Little Switzerland to profitability.

The Company is currently in negotiations with its existing banks regarding
an extension of the term of the Forbearance Agreement to enable the Company to
find alternative financing to pay off the existing lenders and for working
capital. To date, the Company has been verbally informed that the banks are
willing to grant an extension until the end of November 1999, subject to certain
conditions and documentation. There, however, is no assurance that the Company
will be able to fulfill these conditions. The Company will continue to work
towards securing adequate permanent financing to pay off the existing lenders
and to fund the ongoing working capital requirements.

Although to date the Company has made limited purchases of new merchandise,
the Company will begin to purchase additional merchandise for the upcoming peak
selling season using proceeds from the St. Barthelmey sale and excess
operational cash flows (see Note 15).

25
<PAGE>

Qualification
-------------

The Company's ability to achieve its operating results included in its
fiscal 2000 business plan is impacted by each of the factors described above.
There can be no assurance that the Company will successfully execute its fiscal
2000 business plan including securing adequate financing to pay off its existing
lenders and to fund its additional working capital needs.

Included in this Note 1 is a discussion of management's planned actions to
improve its current financial condition. The planned actions include a thorough
review of each location and operation to determine what further actions are
required to return the Company to sustained profitability. Although the Company
believes no further impairment losses are required at May 29, 1999, future
strategic actions could result in additional store closings and material
restructuring charges and impairment losses.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization
------------

Little Switzerland, Inc. is a specialty retailer of luxury items. The Company
was incorporated in May 1991 as a wholly owned subsidiary of Town & Country
Corporation (Town & Country). On July 17, 1991, approximately 68% of the
outstanding common stock, par value $.01 per share, 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 May 29, 1999, there were ten subsidiaries of L.S. Holding incorporated
in various jurisdictions. 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 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 Islands, was not yet in operation at May 29, 1999. L.S. Wholesale
purchases inventory for distribution to L.S. Holding, Inc.'s retail stores.

As of May 29, 1999, the Company operated 22 distinctively-designed retail
stores on eight islands and Alaska. 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.

Merger Agreement
----------------

On February 4, 1998, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement) 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 its 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 announced
it had terminated its merger agreement with DRHC because of DRHC's inability to
raise the financing necessary to complete the merger (see Note 6).

<PAGE>

Presentation
------------

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the year ended May 29, 1999, the Company incurred a loss of
$11.1 million and is currently operating without a long-term credit facility.
These factors indicate that the Company may be unable to continue as a going
concern. The financial statements do not include any adjustment relating to the
recoverability and the classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis. Management's
plans with respect to these matters have been enumerated in Note 1--Management's
Plans.

The accompanying consolidated financial statements include the operations of
the Company and its wholly owned subsidiaries, L.S. Holding and L.S. Wholesale.
Certain reclassifications have been made to prior years' consolidated financial
statements to conform to the May 29, 1999 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.

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 1999, 1998 and 1997 was approximately
$2,919,000, $3,401,000 and $3,138,000, respectively. Prepaid advertising of
approximately $305,000 and $585,000 at May 29, 1999 and May 30, 1998,
respectively, is included in the consolidated balance sheets as prepaid expenses
and other current assets.

27
<PAGE>

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:

Estimated Useful Life Range May 29, 1999 May 30, 1998
<S> <C> <C> <C>

Land and buildings 20-40 years $ 7,303,000 $ 7,295,000
Furniture and fixtures 3-10 years 11,021,000 12,450,000
Equipment 3-20 years 5,139,000 5,102,000
Construction-in-progress - 15,000 37,000
Leasehold improvements Life of the lease or useful life,
whichever is shorter 13,521,000 14,804,000
----------- -----------

$36,999,000 $39,688,000
=========== ===========
</TABLE>

Income Taxes
------------

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

Other Assets
------------

Other assets have consisted primarily of amounts related to 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
goodwill and preopening and organization costs were 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 Company's relationship with
Rolex which is discussed further in Note 6, 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 was 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 years ended May 30, 1998 or
May 29, 1999.

Included in Note 1 is a discussion of management's planned actions to
improve its current financial condition. The planned actions include a thorough
review of each location and operation to determine what further actions are
required to return the Company to sustained profitability. Although the Company
believes

28
<PAGE>

no further impairment losses are required at May 29, 1999, future strategic
actions could result in additional store closings and material restructuring
charges and impairment losses.

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
--------------------------

Historically the Company entered 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 $0 and $140,000, respectively, are
included in the inventory balances at May 29, 1999 and May 30, 1998,
respectively. The Company had no foreign exchange contracts outstanding at May
29, 1999.

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. 137, Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of SFAS No. 133, in July 1999. SFAS No. 133 is now effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000; 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.

Other Accrued Expenses
----------------------

Other accrued expenses are comprised of the following:

May 29, 1999 May 30, 1998
<S> <C> <C>

Customer deposits $ 430,000 $ 400,000
Payroll and related items 1,210,000 1,267,000
Store closing expenses 683,000 --
Legal 150,000 778,000
Management fees (Note 11) 203,000 447,000
Other 965,000 608,000
---------- ----------

$3,641,000 $3,500,000
========== ==========
</TABLE>

29
<PAGE>

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 29, 1999 and May 30, 1998.

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 and outside option plans which
were antidilutive for the periods included in this report are as follows (in
thousands):

Fiscal Years Ended
----------------------------------------
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>
Weighted average number of shares
used in basic earnings per
share calculation 8,624 8,505 8,459

Dilutive effects of options - - 84
----- ----- -----

Weighted average number of shares
used in diluted earnings per
share calculation 8,624 8,505 8,543
===== ===== =====

Shares under and outside options plans
excluded in computation of diluted
earnings per share due to antidilutive effects 833 812 372
===== ===== =====
</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.

(3) NEW ACCOUNTING PRONOUNCEMENTS

The Company adopted SFAS No. 130, Reporting Comprehensive Income, in
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. Comprehensive income is equal to net
income for the years ended May 29, 1999, May 30, 1998 and May 31, 1997.

The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in fiscal year 1999. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to

30
<PAGE>

shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing their performance.

The Company operates one industry segment consisting of the sale of luxury
items. The Company's business is managed as one segment, or one strategic unit,
because it offers similar products in similar markets and the factors
determining strategic decisions are comparable for all products and markets.

Foreign Operations
------------------

Net sales and operating income (loss) from foreign operations (non-U.S.
possessions) amounted to 62%, 61% and 62%, and 37%, 162% and 22% of total net
sales and operating income (loss), respectively, in fiscal 1999, 1998 and 1997,
respectively. Intersegment sales were not material for all periods presented.
Identifiable assets of foreign operations amounted to 62%, 56% and 63% of total
assets as of May 29, 1999, May 30, 1998 and May 31, 1997, respectively.

(4) CREDIT ARRANGEMENTS

Historically, the Company has utilized unsecured credit facilities with the
Company's two lead banks to support its inventory and capital requirements,
which fluctuate during the year due to the seasonal nature of the Company's
business, and to maintain and remodel its existing stores. As a result of
negotiations with its two lead banks regarding the Company's noncompliance with
certain financial covenants contained in the original loan agreements with the
banks and the nonpayment of amounts totaling approximately $1.5 million due
under the revolving term loan with one of the Company's banks, the Company and
its subsidiaries entered into a Forbearance Agreement, effective as of April 1,
1999 that effectively froze the Company's line of credit at its then and current
level of $17.5 million. This amount consists of approximately $13.3 million in
outstanding cash borrowings and approximately $4.2 million in contingent stand-
by letters of credit. Pursuant to the Forbearance Agreement, the banks agreed,
through August 31, 1999, not to exercise their rights and remedies under the
existing loan documents with respect to existing defaults and certain expected
future defaults. In exchange, the Company and its subsidiaries granted a
security interest to the banks against their personal property. The Forbearance
Agreement also sets forth certain criteria that the Company must meet regarding
the Company's inventory levels. The banks indicated that they would not make
any additional borrowings to the Company during the terms of the Forbearance
Agreement. The Company is currently in negotiations with its banks regarding an
extension of the term of the Forbearance Agreement to enable the Company to find
alternative financing to pay off the existing lenders and to fund its working
capital needs. To date, the Company has been verbally informed that the banks
are willing to grant an extension until the end of November 1999, subject to
certain conditions and documentation. There is no assurance that such extension
will be on favorable terms to the Company or that alternative financing will be
obtained during the extension period. If the Company is unable to fulfill these
conditions, the banks may exercise their rights and remedies under the existing
loan documents, including declaring all amounts immediately due under the loan
agreements. If the banks declare amounts outstanding under such loan agreements
immediately due, the Company does not believe that it will have sufficient funds
available to make such payments and such action by the banks will have a
material adverse effect on the Company. The Company currently is actively
exploring other financing alternatives. At this time, however, the Company does
not have any firm commitments from other lenders or third parties to provide it
with funds that would be used to pay off its existing lenders or to finance its
working capital. There is no assurance that the Company will be successful in
obtaining any other financing.

Outstanding borrowings against these aforementioned now secured credit
facilities totaled $9.1 million and $7.8 million as of May 29, 1999 and May 30,
1998, respectively. Outstanding letters of credit against these credit
facilities totaled $4.2 million and $4.1 million as of May 29, 1999 and May 30,
1998,

31
<PAGE>

respectively. Additionally, in February 1996, the Company secured term
debt of approximately $8.9 million at an annual interest rate of 7.25%, payable
monthly. The principal was payable in equal quarterly payments over a four-year
period commencing March 1997. As of May 29, 1999 and May 30, 1998, the principal
outstanding on the term debt was approximately $4.2 million and $6.1 million
respectively. The weighted average interest rates incurred during fiscal 1999,
1998 and 1997 were approximately 8.4%, 8.1% and 7.9%, respectively.

(5) INCOME TAXES

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

Fiscal Years Ended
------------------------------------------------
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>
Domestic $(5,141,000) $ 4,292,000 $2,010,000

Foreign (4,741,000) (6,997,000) (851,000)
----------- ----------- ----------

$(9,882,000) $(2,705,000) $1,159,000
=========== =========== ==========
</TABLE>

The components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>
Current-
Domestic $ 66,000 $ 339,000 $ (96,000)
Foreign 1,134,000 508,000 -
----------- ----------- ----------

1,200,000 847,000 (96,000)
----------- ----------- ----------
Deferred-
Domestic - 16,000 96,000
Foreign - - -
----------- ----------- ----------

$ 1,200,000 $ 863,000 $ -
=========== =========== ==========
</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.

32
<PAGE>

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

Fiscal Years Ended
------------------------------------------------
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>
Computed tax provision (benefit)
at statutory rate $(3,696,000) $(1,012,000) $ 434,000
Increases (reductions) resulting from-
Differences between foreign
provisions recorded and
provisions at USVI rate 946,000 442,000 (441,000)
Effect of earnings of subsidiary
in USVI subject to lower tax rate (199,000) (1,836,000) (891,000)
Effect of subsidiary net operating
losses not benefited 4,149,000 3,269,000 898,000
----------- ----------- ---------

$ 1,200,000 $ 863,000 $ -
=========== =========== =========
</TABLE>

The Company's income is subject to taxation in each of the jurisdictions in
which it operates at rates ranging from 3.7% to 42.0%. 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 expired at the end
of August 1998 (subject to renewal), L.S. Wholesale benefited from a lower tax
rate on its income earned outside the USVI, which had been taxed at a rate of
3.7% up through the end of fiscal 1998. The lower tax rate had the effect of
increasing earnings per share by $.02, $0.22 and $0.12 in fiscal 1999, 1998 and
1997, respectively.

The Company has submitted its application for renewal of benefits and has
been verbally notified that the Industrial Development Commission (IDC) has
recommended to the governor of the U.S.V.I. that the Company be awarded up to
75% of the benefits which the Company enjoyed in the past. If such benefits
were granted at the 75% benefit rate, the effective tax rate for L.S. Wholesale
would be approximately 9.3%.

The Company anticipates that it will be notified with respect to such
renewal within the 60-day period in which the governor is permitted under
applicable law to determine the extent of the benefits, which the Company will
receive. Until it receives notification with respect to the renewal, the
Company must pay and is recording taxes on all of the Company's USVI income at
the statutory rate of 37.4%. However, if the renewal is granted, management
believes that the lower tax rate will be applied retroactively to the end of
August 1998 and the Company will be reimbursed for any excess payments; however,
there is no assurance that this will occur. If the IDC benefit is not granted,
then all of the Company's USVI-based income will be taxed at the statutory rate
of 37.4% and the Company will be subject to a higher gross receipt tax. Such
non-renewal may have a material and adverse effect on the Company's results of
operations.

During 1997, the Company received an assessment from the local government
in Aruba that related 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 Company has entered into a
settlement with the tax authorities regarding its 1988-1996 local tax returns
and has recorded the cost of the settlement as incremental tax expense during
the fiscal year ended May 29, 1999. Pursuant to this settlement, the Company
has been assessed a profit tax in the amount of $650,000, which is payable in
ten equal installments of $65,000 per month commencing on March 1, 1999.
Interest of 6% per annum will be charged on the outstanding amount starting on
March 1, 1999. The Company also has been assessed a wage tax in the amount of
$550,000, which is payable in six installments commencing in June 1999.
Interest of 6% per annum will be charged on the outstanding amount starting on
June 1, 1999.

33
<PAGE>

The deferred tax liability of $202,000 and $202,000 at May 29, 1999 and May
30, 1998, 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 the tax
effects of net operating loss carry forwards of certain subsidiaries totaling
approximately $9,174,000 and $5,025,000 as of May 29, 1999 and May 30, 1998,
respectively, 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 carry forwards. Utilization of the net operating loss carry
forward is contingent on the Company's ability to generate income in future
years in the various tax jurisdictions. The net operating loss carry forwards
will expire from 2011 to 2019 if not utilized.

(6) COMMITMENTS AND CONTINGENCIES

Lease Commitments
-----------------

Certain of the Company's facilities and retail stores are occupied under
operating leases expiring at various dates. The Company's rental commitments
under the noncancelable portion of these leases for each of the next five years
and, in total, thereafter at May 29, 1999 are as follows:

Year Lease Commitment
<S> <C>
Fiscal 2000 $ 3,529,000
Fiscal 2001 2,976,000
Fiscal 2002 2,241,000
Fiscal 2003 1,622,000
Fiscal 2004 799,000
Thereafter 416,000
-----------
$11,583,000
===========
</TABLE>

Rental expense included in the accompanying consolidated statements of
operations amounted to approximately $4,301,000, $4,104,000 and $4,167,000 in
fiscal 1999, 1998 and 1997, 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.

Relationship with Rolex
-----------------------

The Company had historically operated as the exclusive authorized retailer
for Montrex Rolex, S.A. and its affiliates (collectively, Rolex) on the islands
on which the Company operates. 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. 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 the Company's stores. The Company received its
last shipment of Rolex products in January 1998.

Sales of Rolex watches accounted for 3%, 26% and 24% of the Company's sales
in fiscal 1999, 1998 and 1997, respectively. Rolex is the only manufacturer
whose products accounted for more than 10% of the

34
<PAGE>

Company's sales in fiscal 1998 and 1997. In order to mitigate the impact on
sales of the loss of Rolex products, the Company is exploring opportunities for
expanding existing, and adding new, world class product lines in both watches
and jewelry. 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.

To the extent that the Company is unable 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, 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 30, 2000 and beyond.

Destination Retail Holdings Corporation
---------------------------------------

On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware against DRHC, Stephen G.E. 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 jurisdictional grounds. On March
31, 1999, the court issued an order denying the defendants' motions to dismiss.
On May 21, 1999, the defendants filed their Answer, Affirmative Defenses,
Counterclaims and Third Party Complaint. The defendants allege counterclaims
against the Company and others for fraud, negligent misrepresentations, breach
of the covenant of good faith and fair dealing and breach of the Merger
Agreement, unfair competition and business libel, among others, primarily
stemming from their allegations that the Company was responsible for their
failure to consummate the Merger Agreement. The Company will continue to
vigorously pursue its claims against the defendants in this matter and defend
itself against the defendants' counterclaims.

The costs associated with this matter, which consist primarily of legal and
investment banking fees, amounted to approximately $.2 million and $2.7 million
in fiscal 1999 and 1998, respectively and have been recorded in selling, general
and administrative expense in the accompanying consolidated financial
statements.

Class Action Lawsuit
--------------------

On March 22, 1999, a class action complaint was filed in the United States
District Court for the District of Delaware against the Company, certain of its
existing and former officers and directors, DRHC and Stephen G.E. Crane. The
complaint alleges that the defendants violated federal securities laws by
failing to disclose that DRHC's financing commitment to purchase the Company's
shares expired on April 30, 1998, before the Company's stockholders were
scheduled to vote to approve the merger between the Company and DRHC at the May
8, 1998 special meeting of stockholders. On August 5, 1999, the Company moved
to dismiss the complaint. This motion remains pending. At this early juncture,
management of the Company is not in a position to evaluate the outcome of this
action. As a result, at this time, management of the Company is unable to
determine the financial impact this action may have on the Company's financial
condition or results of operations.

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

On March 11, 1998, the Company filed a civil action in the Territorial
Court of the Virgin Islands 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

35
<PAGE>

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 Note 14)

On January 19, 1999, the defendant, Lydia Magras, filed a petition for
Bankruptcy (Chapter 7) in the United States Bankruptcy Court, District of St.
Thomas. A Notice of Appearance was filed on February 2, 1999 on behalf of the
Company. A trustee was appointed in this matter at the meeting of the creditors
held on May 20, 1999.

The Company is also party to various pending legal claims and proceedings.
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.

Significant Suppliers
---------------------

For the year ended May 29, 1999, one supplier, the Swatch Group, accounted
for approximately $8.0 million, or 10.4%, of net sales. No other supplier
accounted for greater than 10% of net sales in fiscal 1999.

For the years ended May 30, 1998 and May 31, 1997, one supplier, Rolex,
accounted for approximately $26.1 million, or 26% of net sales, and $21.2
million, or 24% of net sales, respectively. No other supplier accounted for
greater than 10% of net sales in fiscal 1998 or 1997.

(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. On July 21, 1998, the Company and Solomon mutually
agreed to terminate the franchise agreement as of November 1, 1998. These fees
totaled approximately $0, $100,000 and $100,000 for fiscal 1999, 1998 and 1997,
respectively.

(8) EMPLOYEE BENEFIT PLANS

The Company provided a tax-qualified discretionary contribution retirement
plan for eligible USVI employees to which the Company, at its discretion,
contributed. Each employee became a participant following completion of one
year's employment, or, if later, the attainment of age 21. All participants
became fully vested after seven years of service.

Effective June 1, 1996, the Company replaced its Discretionary Contribution
Plan with a 401(k) Plan under which the Company matches each employee's

36
<PAGE>

contribution up to 50% of the first 3% of the employee's contribution. During
fiscal 1999, 1998 and 1997 the Company's matching totaled approximately $23,000,
$86,000 and $82,000, respectively. The Company's contributions vest based on
the employee's years of service, with full vesting after five years of service.

(9) QUARTERLY DATA (UNAUDITED)

The following presents the unaudited quarterly results of operations for
the fiscal years ended May 29, 1999 and May 30, 1998 (in thousands except per
share data):

<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
Ended Ended Ended Ended
August 29 November 28 February 27 May 29
<S> <C> <C> <C> <C>
Fiscal 1999
Net sales $16,987 $14,800 $25,787 $18,861
Gross profit 7,683 5,914 10,534 6,744
Net loss (1,923) (4,277) (1,338) (3,544)
Net loss per share (.22) (.50) (.16) (.41)

August 30 November 29 February 28 May 30
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)
</TABLE>

(10) STOCKHOLDERS' EQUITY

Stock Options
-------------

During 1991, the Company established the 1991 Option Plan (1991 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 Plan to increase the aggregate
number of shares of the Common Stock of the Company available for grant under
the 1991 Plan from 500,000 to 900,000. As of May 29, 1999, 596,000 option
shares were outstanding under the 1991 Plan. Options granted under the 1991
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 as of February
4, 1998 automatically vested upon the execution of the Merger Agreement with
DRHC pursuant to the terms of the 1991 Plan. Each outstanding unvested option
as of February 23, 1999 automatically vested upon execution of the Settlement
Agreement (Settlement Agreement) with Donald L. Sturm, ValueVest Partners, L.P.,
Seymour Holtzman, Jewelcor Management, Inc. and others.

During 1992, the Company established the 1992 Option Plan (1992 Plan) for
nonemployee directors of the Company. Under the 1992 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 29, 1999, 37,000 option shares have been
granted and were outstanding under the 1992 Plan. Options granted under the
1992 Plan vest immediately and must be exercised within 10 years of the date of
grant.

37
<PAGE>

From time to time, the Company also grants stock options outside of the
1991 Plan to persons not previously employed by the Company as an inducement to
the individuals' entering into an employment agreement with the Company. As of
May 29, 1999, 200,000 option shares have been granted outside of the 1991 Plan.

A summary of the status of the Company's stock option plans at May 29,
1999, May 30, 1998 and May 31, 1997, together with changes during the periods
then ended, are presented in the following table:

<TABLE>
<CAPTION>
1999 1998 1997
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 712,000 $6.46 903,500 $6.24 839,344 $ 6.36
Grants during period 292,000 2.25 37,000 6.15 65,000 4.79
Exercised during period - - (160,000) 4.87 - -
Forfeitures/Cancellations
during period (171,000) 8.59 (68,500) 7.09 (844) 10.00
Outstanding at end of period 833,000 4.53 712,000 6.46 903,500 6.24
Options exercisable at end
of period 833,000 4.53 712,000 6.46 402,800 7.28
</TABLE>

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

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

The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during fiscal 1999, 1998 and 1997,
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 and
the following weighted average assumptions used for grants:

1999 1998 1997
<S> <C> <C> <C>

Risk-free interest rate 5.38% 5.96% 6.41%
Expected dividend yield 0% 0% 0%
Expected lives 10 years 10 years 10 years
Expected volatility 64.00% 25.82% 32.21%
</TABLE>

Adjustments are made for options forfeited prior to vesting. As a result
of the Merger Agreement and the Settlement Agreement, all unvested options under
and outside of the 1991 Plan became fully vested and exercisable. The total
value of options granted during fiscal 1998, 1997 and 1996, which were being
amortized on a straight-line basis over the vesting period of the options, were
accelerated into fiscal year 1998. The weighted average fair value of options
granted during fiscal years 1999, 1998 and 1997 was $1.73, $3.25 and $2.78,
respectively. If the Company had accounted for these plans in accordance with
SFAS No. 123, the Company's net (loss) income and (loss) earnings per share
would have been reduced to the following pro forma amounts:

38
<PAGE>

Year Ended Year Ended Year Ended
May 29, 1999 May 30, 1998 May 31, 1997
<S> <C> <C> <C>
Net (loss) Income-
As Reported $(11,081,825) $(3,803,473) $1,159,266
Pro Forma (11,586,595) (4,498,460) 967,129

Basic and Diluted EPS-
As Reported $ (1.29) $ (0.45) $ 0.14
Pro Forma (1.34) (0.53) 0.11
</TABLE>

Employee Stock Purchase Plan
----------------------------

During 1992, the Company approved an Employee Stock Purchase Agreement
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, 26,573 shares have been
issued as of May 29, 1999.

Shareholder Rights Agreement
----------------------------

On July 24, 1991, the Board of Directors adopted a Shareholder Rights
Agreement 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 became exercisable and
transferable apart from the Common Stock upon the occurrence of certain events.
During fiscal 1999, the Board of Directors of the Company determined that the
Company's Shareholder Rights Agreement was no longer in the best interests of
the holders of the Company's Common Stock and, therefore, voted unanimously to
terminate, effective as of May 20,1999, the Shareholder Rights Agreement.

(11) ACQUISITIONS

On February 16, 1996, World Gift Imports (Barbados), Inc., a subsidiary of
LS Holding, 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 consolidated 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 $155,000, $202,000 and $190,000 for fiscal years 1999,
1998 and 1997, 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

39
<PAGE>

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.

(12) STORE CLOSING EXPENSE

During fiscal 1999, the Company recorded charges associated with the
closure of its store in Ketchikan, Alaska and St. Croix, as well as one store in
each of Antigua and St. Kitts. The store in St. Kitts was closed due to damage
inflicted by Hurricane Georges (see Note 13). The charge related to these
closures amounted to approximately $1.8 million and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income. Approximately $1.1 million of the charge relates to the
impairment of fixed assets and leasehold improvements at the closed stores.

(13) GAIN ON INSURANCE PROCEEDS

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 and has been
permanently closed. The Company settled all outstanding claims related to
Hurricane Georges with its insurance carrier. In connection with the final
settlement, the Company received approximately $1.0 million in property and
business interruption proceeds. The Company recorded a net gain of approximately
$.3 million in fiscal 1999, after write-offs related to damaged assets of
approximately $.7 million, including furniture and fixtures, inventory and other
assets related to the store affected by the hurricane.

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.

(14) EMPLOYEE DEFALCATION LOSS

In July 1997, management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company. As a
result, the Company engaged Arthur Andersen LLP to evaluate the matter and
determine the impact, if any, on the Company's previously and currently reported
consolidated financial statements. After extensive review, analysis and
evaluation, which focused on unlocated differences in cash balances, management
believes that an employee defalcation occurred during fiscal 1997.

The estimated loss of approximately $2.4 million is recorded in general and
administrative expense in the accompanying consolidated financial statements for
the fiscal year ended May 31, 1997. As a result of the charge, the Company
filed amended financial statements on Form 10-Q for each of the quarters within

40
<PAGE>

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.

(15) SUBSEQUENT EVENTS

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

NASDAQ Delisting
----------------

The Company's Common Stock currently is traded on the NASDAQ National
Market System (NMS) under the symbol "LSVI." On June 7, 1999, NASDAQ notified
the Company that the Company will not remain eligible for continued listing on
NMS unless its Common Stock demonstrates compliance with NASDAQ's $1.00 minimum
bid price requirement during the period ending September 6, 1999. On July 9,
1999, NASDAQ notified the Company that the Company also was not in compliance
with NASDAQ's $5 million minimum public float value requirement. Should the
Company be unable to demonstrate compliance with these requirements, the Company
will consider actions to preserve its listing. The Company has requested a
hearing as permitted by applicable NASDAQ procedure and has been notified that
such hearing will be held on October 14, 1999. NASDAQ has informed the Company
that the delisting procedures have been stayed pending such hearing. In the
event that NASDAQ denies continued listing following such hearing, the Company's
current intent would be to seek listing on other markets or exchanges. However,
there is no assurance that any such actions will be effective or that listing
will not cease after October 14, 1999.

St. Barthelmey Store
--------------------

On June 28, 1999, the Company entered into a purchase and sale agreement
with a third party pursuant to which substantially all of the assets of the
store located in the island of St. Barthelmey will be sold for an aggregate
amount equal to $1.3 million. The Company consummated this transaction on

41
<PAGE>

August 31,1999. The Company expects to record a gain on this transaction in the
first quarter of fiscal year 2000.

Aruba Settlement
----------------

On July 29, 1999, the Company entered into a settlement agreement with the
Aruba tax authorities regarding its 1997-1998 local tax returns. The Company
agreed to accelerate the payment of the remaining balance of the profit tax
settlement discussed in Note 5 ($455,000 of $650,000) and settle its 1997-1998
local tax returns. The cost to the Company after this settlement was
approximately $580,000, which has been paid to the Aruba taxing authorities.

42
<PAGE>

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

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

PART III

ITEMS 10-13.

The information called for by Items 10-13 is incorporated herein by
reference to the Company's definitive proxy statement for the 1999 annual
meeting of stockholders to be filed with Securities and Exchange Commission,
pursuant to Regulation 14A, no later than 120 days after May 29, 1999.

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 19.

(2) Financial Statement Schedules

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

(3) Articles of Incorporation and By-Laws:

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

3.2 The Amended and Restated By-Laws of the Company are incorporated
herein by reference to Exhibit 3.3 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on February
24, 1999.

(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;

43
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

44
<PAGE>

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

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 to the Company's
Annual Report on Form 10-K 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 to the Company's Annual Report
on Form 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 Company's Annual
Report on Form 8-K report filed with the Securities and Exchange
Commission on February 16, 1996;

10.19 Employment agreement between John E. Toler, Jr. and the Company is
incorporated herein by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K 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 to the Company's
Annual Report on Form 10-K/A for the year ended May 31, 1997.

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

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

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

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

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

45
<PAGE>

10.26 Employment Agreement, dated as of September 10, 1998, between David
J. Nace and the Company is incorporated herein by reference to as
Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 28, 1998.

10.27 Employment Agreement, dated as of August 25, 1998, between Michael M.
Poole and the Company is incorporated herein by reference to as
Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 28, 1998.

10.28 Non-Qualified Stock Option Agreement, dated as of August 25, 1998,
between Michael M. Poole and the Company is incorporated herein by
reference as Exhibit 10.28 to the Company's Quarterly Report on Form
10-Q for the quarter ended November 28, 1998.

10.29 Employment Agreement, effective as of September 1, 1998, between the
Company and C. William Carey is incorporated herein by reference to
Exhibit 10.29 to the Company's Current Report on form 8-K filed with
the Securities and Exchange Commission on January 29, 1999.

10.30 Non-Qualified Stock Option Agreement, effective as of September 1,
1998, between the Company and C. William Carey is incorporated herein
by reference to Exhibit 10.30 to the Company's Current Report on form
8-K filed with the Securities and Exchange Commission on January 29,
1999.

10.31 Success Fee Agreement, dated as of January 15, 1999, between the
Company and C. William Carey is incorporated herein by reference to
Exhibit 10.31 to the Company's Current Report on form 8-K filed with
the Securities and Exchange Commission on January 29, 1999.

10.32 Settlement Agreement, dated as of February 23, 1999, by and among the
Company, Jewelcor Management, Inc., Seymour Holtzman, Donald L.
Sturm, ValueVest Partners, L.P. and C. William Carey is incorporated
herein by reference to Exhibit 10.32 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange Commission on
February 24, 1999.

10.33 Severance Agreement, dated as of February 23, 1999, between the
Company and C. William Carey is incorporated herein by reference to
Exhibit 10.33 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 24, 1999.

10.34 Consulting Agreement, dated as of February 23, 1999, between the
Company and C. William Carey is incorporated herein by reference to
Exhibit 10.34 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 24, 1999.

10.35 Amended and Restated Success Fee Agreement, dated as of February 23,
1999, between the Company and C. William Carey is incorporated herein
by reference to Exhibit 10.35 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on February 24,
1999.

10.36 Fourth Amendment to Shareholder Rights Agreement, dated as of
February 23, 1999, between the Company and State Street Bank and
Trust Company, as Rights Agent, is incorporated herein by reference
to Exhibit 10.36 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 24, 1999.

46
<PAGE>

10.37 Amendment of Employment Agreement, dated as of November 13, 1998,
between L.S. Wholesale, Inc. and William K. Canfield is incorporated
herein by reference to Exhibit 10.37 to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 27, 1999.

10.38 Forbearance Agreement, dated as of May 7, 1999, by and among L. S.
Wholesale, Inc., the Company, L. S. Holding, Inc., World Gift Imports
(Barbados) Limited, World Gift Imports, N. V., Montres Et Bijoux,
S.A.R.L., L. S. Holding (Aruba), N. V., L. S. Holding (Curacao), N.
V., Little Switzerland (Antigua), Limited, Little Switzerland (St.
Lucia) Limited, L. S. Holding (USA), Inc. and The Chase Manhattan
Bank and The Bank of Nova Scotia is incorporated herein by reference
to Exhibit 10.38 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 20, 1999.

10.39 Security Agreement, dated as of May 7, 1999, by and among L. S.
Wholesale, Inc., the Company, L. S. Holding, Inc., World Gift Imports
(Barbados) Limited, World Gift Imports, N. V., Montres Et Bijoux,
S.A.R.L., L. S. Holding (Aruba), N. V., L. S. Holding (Curacao), N.
V., Little Switzerland (Antigua), Limited, Little Switzerland (St.
Lucia) Limited, L. S. Holding (USA), Inc. and The Chase Manhattan
Bank and The Bank of Nova Scotia is incorporated herein by reference
to Exhibit 10.39 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 20, 1999.

10.40 Fifth Amendment to Shareholder Rights Agreement, dated as of May 20,
1999, between the Company and State Street Bank and Trust Company, as
Rights Agent, is filed herewith as Exhibit 10.40.

10.41 Employment Agreement, dated as of June 7, 1999, between Patrick J.
Hopper and the Company is filed herewith as Exhibit 10.41.

10.42 Employment Agreement, dated as of August 17, 1999, between Robert
L. Baumgardner and the Company is filed herewith as Exhibit 10.42.

10.43 Non-Qualified Stock Option Agreement, dated as of August 17, 1999,
between Robert L. Baumgardner and the Company is filed herewith as
Exhibit 10.43.

(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 Arthur Andersen LLP is filed herewith as Exhibit 23.

(27) Financial Data Schedule.

(b) Report on Form 8-K. The registrant filed the following Current Reports on
Form 8-K during the three month period ended May 29, 1999:

1. On April 2, 1999, the Company filed a Current Report on Form 8-K
announcing that Seymour Holtzman informed the Company that he would not
stand for election at the annual meeting of stockholders scheduled for
April 7, 1999.

2. On April 22,1999, the Company filed a Current Report on Form 8-K
announcing the results of the election of directors at the annual meeting
of stockholders held on April 7, 1999.

47
<PAGE>

3. On May 20, 1999, the Company filed a Current Report on Form 8-K
announcing that the Company had entered into a Forbearance Agreement with
its banks pursuant to which the Company and its subsidiaries granted a
security interest to the banks against their personal property. In
addition, the Company announced that the Board of Directors of the Company
terminated the Company's Shareholder Rights Agreement effective as of May
20, 1999.

48
<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 17th day of
September, 1999.

Little Switzerland, Inc.

By: /s/ Robert L. Baumgardner
-----------------------------------
Robert L. Baumgardner
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> <C> <C>
/s/ Robert L. Baumgardner Chief Executive Officer September 17, 1999
- --------------------------- and Director (Principal
Robert L. Baumgardner Executive Officer)

/s/ Peter McMullin Director September 17, 1999
- ---------------------------
Peter McMullin

/s/ Richard C. Hunter Director September 17, 1999
- ---------------------------
Richard C. Hunter

/s/ Alex J. Nobile Director September 17, 1999
- ---------------------------
Alex J. Nobile

/s/ Melanie L. Sturm Director September 17, 1999
- ---------------------------
Melanie L. Sturm

/s/ Kenneth W. Watson Director September 17, 1999
- ---------------------------
Kenneth W. Watson

/s/ Patrick J. Hopper Chief Financial Officer, September 17, 1999
- --------------------------- Executive Vice President and
Patrick J. Hopper Treasurer (Principal Financial
and Accounting Officer)
</TABLE>

<PAGE>

Exhibit 10.40

FIFTH AMENDMENT TO
SHAREHOLDER RIGHTS AGREEMENT
----------------------------

Fifth Amendment, effective as of May 20, 1999 (this "Fifth Amendment"), to
the Shareholder Rights Agreement, dated as of July 25, 1991, between Little
Switzerland, Inc., a Delaware corporation (the "Company"), and State Street Bank
and Trust Company, a Massachusetts trust company (the "Rights Agent"), as
amended by the First Amendment to Shareholder Rights Agreement, dated as of
November 8, 1991, between the Company and the Rights Agent, the Second Amendment
to Shareholder Rights Agreement, dated as of April 6, 1993, between the Company
and the Rights Agent, the Third Amendment to Shareholder Rights Agreement, dated
as of February 4, 1998, between the Company and the Rights Agent and the Fourth
Amendment to Shareholder Rights Agreement, dated as of February 23, 1999,
between the Company and the Rights Agent (the "Rights Agreement").

W I T N E S S E T H
- - - - - - - - - -

WHEREAS, Section 27 of the Rights Agreement provides that prior to the
Distribution Date (as defined therein), the Company and the Rights Agent shall,
if the Company so directs, amend or supplement any provision of the Rights
Agreement as the Company may deem necessary or desirable without the approval of
holders of the Company's common stock, par value $.01 per share (the "Common
Stock");

WHEREAS, the Company's Board of Directors have unanimously voted that the
Rights Agreement is no longer in the best interests of the holders of the
Company's Common Stock; and

WHEREAS, the Company desires to terminate the Rights Agreement prior to the
Final Expiration Date (as defined in the Rights Agreement).

NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree that the Rights Agreement is hereby
amended as follows:

1. Section 7(a) of the Rights Agreement is amended by deleting Section
7(a) in its entirety and replacing it with the following:

Section 7. Exercise of Rights; Exercise Price; Expiration Date of Rights.

(a) Subject to Section 7(e) hereof, the registered holder of any Right
Certificate may exercise the Rights evidenced hereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
and the certificate on the reverse side thereof duly executed, to the Rights
Agent at the office or offices of the Rights Agent designated for such purpose,
together with payment of the aggregate Exercise Price for the total number of
one one-hundredths of a share of Preferred Stock (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercised, at or prior to the earlier of (i) the close of business on May 20,
1999 (the "Final Expiration Date"), (ii) the time at which the Rights are
redeemed as provided in Section 23 hereof or (iii) the time at which such Rights
are exchanged as provided in Section 24 hereof (the earlier of (i), (ii) or
(iii) being referred to as the "Expiration Date"). Except as set forth in
Section 7(e) hereof and notwithstanding any other provision in this Agreement,
any Person who prior to the Distribution Date becomes a record holder of shares
of Common Stock may exercise all of the rights of a registered holder of a Right
Certificate with respect to the Rights associated with such shares
<PAGE>

of Common Stock in accordance with the provisions of this Agreement, as of the
date such Person becomes a record holder of shares of Common Stock.

IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
be duly executed as of the day and year first above written. This Fifth
Amendment may be executed in one or more counterparts all of which shall be
considered one and the same amendment and each of which shall be deemed to be an
original.

LITTLE SWITZERLAND, INC.

By:/s/ Kenneth W. Watson
---------------------
Kenneth W. Watson, Acting President and
Chief Executive Officer

STATE STREET BANK AND TRUST
COMPANY

By:/s/Charles V. Rossi
-------------------
Name: Charles V. Rossi
Title: Division President

DOCSC\752971.4

<PAGE>

Exhibit 10.41

EMPLOYMENT AGREEMENT
--------------------

AGREEMENT made as of the 7th day of June, 1999, by and among 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 Patrick J.
Hopper (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 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 June 7, 1999. Subject to the provisions of
Section 5 hereof, the term (the "Term") of the Executive's employment hereunder
shall be for one (1) year from the Commencement Date and shall be renewed
automatically for periods of one (1) year commencing at the first anniversary of
the Commencement Date and on each subsequent anniversary thereafter, unless
either the Executive or the Employer gives written notice to the other not less
than thirty (30) days prior to the date of any such anniversary of such party's
election not to extend 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 Fifty Thousand Dollars
($150,000).
<PAGE>

(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 certain
performance criteria (the "Performance Criteria") are met, the
Executive shall be entitled to receive 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 the 2000
fiscal year of Little Switzerland shall be mutually agreed upon by the
Employer and the Executive prior to September 1, 1999 and the
applicable Performance Criteria for any subsequent fiscal year of
Little Switzerland shall be established by the Compensation Committee
of Little Switzerland prior to the beginning of such fiscal year. For
any fiscal year, the determination of whether the Performance Criteria
have been met and whether any Annual Bonus shall be paid shall be made
in the sole discretion of the Compensation Committee of Little
Switzerland.

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. The Annual Bonus, if any, shall be
payable within ten (10) calendar days after the date on which Little
Switzerland determines from its business plan, 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 Bonus Plan. On the Commencement Date, the Executive will be
----------------
awarded an option (the "Option") to purchase 50,000 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, pursuant to
Little Switzerland's 1991 Stock Option Plan.

c. Living Expenses. The Executive shall be entitled to reimbursement
---------------
for reasonable expenses actually incurred for the purpose of maintaining a
temporary place of residence in St. Thomas, U.S.V.I. (the "Living Expense")
for a period not to exceed thirty (30) days from the Commencement Date.
The Executive shall account 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.

2
<PAGE>

d. Relocation and Out-of-Pocket Expenses. The Executive shall be
-------------------------------------
entitled to receive an aggregate amount equal to Thirty Thousand Dollars
($30,000) to cover all reasonable moving, relocation and out-of-pocket
expenses incurred by the Executive in moving to St. Thomas, U.S.V.I.

e. Regular Benefits. The Executive shall be entitled to four (4)
----------------
weeks of vacation time during each year of the Term. 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 (including, without limitation, any 401(k)
plans) from time to time in effect for senior executives of the Employer.
Such participation shall be subject to the terms of the applicable plan
documents, generally applicable policies of the Employer, applicable law
and the discretion of the Board of Directors, the Compensation Committee or
any administrative or other committee provided for in or contemplated by
any such plan; provided, however, that the Employer, if authorized by such
-------- -------
plan, shall waive the 90 day waiting period for inclusion of the Executive
in the Employer's medical insurance plan. Nothing contained in this
Agreement shall be construed to create any obligation on the part of the
Employer to establish any such plan or to maintain the effectiveness of any
such plan which may be in effect from time to time; provided, however, that
-------- -------
in the event the Company terminates or otherwise decreases the benefits
provided under any such plan, the Company shall be obligated to reimburse
the Executive for the benefit lost as a result of such termination or
decrease or otherwise provide a comparable benefit as may be mutually
agreed upon 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 Little Switzerland's and 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.

4. Capacity and Extent of Service.
------------------------------

a. The Executive shall serve the Employer as Vice President of
Finance beginning on the Commencement Date, Vice President, Chief Financial
Officer and Treasurer beginning on July 3, 1999 and shall serve the
Employer in such other or additional offices in which he, from time to
time, may be reasonably requested to serve.

3
<PAGE>

b. During his employment hereunder, the Executive shall, subject to
the direction and supervision of the Board of Directors of the Employer,
devote his full business time, best efforts and business judgment, skill
and knowledge to the advancement of 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 and Termination Benefits. Notwithstanding the provisions
------------------------------------
of Section 2, subject to the following provisions, the Executive's employment
hereunder shall terminate under the following circumstances without further
liability on the part of the Employer or right of the Executive to receive any
payments hereunder:

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) by written notice
to the Executive setting forth in reasonable detail the nature of such
cause, effective upon delivery of such notice. The determination of
whether cause existed for terminating the Executive's employment shall be
made by a vote of at least two-thirds of the Board of Directors of Little
Switzerland. Only the following shall constitute "cause" for termination
pursuant to this Section 5.b.:

(i) Deliberate dishonesty of the Executive with respect to
the Employer or any subsidiary or affiliate thereof;

4
<PAGE>

(ii) Conviction of the Executive of (A) a felony or (B) any
crime involving moral turpitude, deceit, dishonesty or fraud;

(iii) Gross negligence or willful misconduct of the
Executive with respect to the Employer or any subsidiary or affiliate
thereof;

(iv) Failure to perform to the reasonable satisfaction of
the Board of Directors of Little Switzerland a substantial portion
of the Executive's duties and responsibilities assigned or delegated
under this Agreement, which failure continues for more than thirty
(30) days, in the reasonable judgment of the Board of Directors of
Little Switzerland, after written notice given to the Executive by
the Board of Directors of Little Switzerland; or

(v) Material breach by the Executive of any of the
Executive's obligations under this Agreement.

c. Termination by the Employer Without Cause. Subject to the payment
-----------------------------------------
of the severance benefit pursuant to Section 5.f. hereof, 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.

d. 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.

e. 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-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. 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

5
<PAGE>

shall fail to submit such certification, the Employer's determination of
such issue shall be binding on the Executive.

f. Severance Benefit. In the event the Executive's employment
-----------------
hereunder is terminated pursuant to Section 5.c. hereof, on the date of
such termination, the Executive shall be entitled to receive the following:

(i) a lump sum payment equal to (A) six (6) months of Base
Salary in the event such termination occurs on or prior to
December 7, 1999; (B) seven (7) months of Base Salary in
the event such termination occurs after December 8, 1999
but on or prior to January 7, 2000; (C) eight (8) months of
Base Salary in the event such termination occurs after
January 8, 2000 but on or prior to February 7, 2000; (D)
nine (9) months of Base Salary in the event such
termination occurs after February 8, 2000 but on or prior
to March 7, 2000; (E) ten (10) months of Base Salary in the
event such termination occurs after March 8, 2000 but on or
prior to April 7, 2000; (F) eleven (11) months of Base
Salary in the event such termination occurs after April 8,
2000 but on or prior to May 7, 2000; or (G) twelve (12)
months of Base Salary if such termination occurs after May
8, 2000;

(ii) any accrued but unpaid Annual Bonus which the Executive has
earned pursuant to Section 3.a. of this Agreement, but in
no event shall such amount be less than 50% of the amount
set forth in a bonus plan, if any, for the Executive
adopted by the Board of Directors of Little Switzerland for
the fiscal year of Little Switzerland in which such
termination occurred;

(iii) out placement assistance in an aggregate amount not to
exceed Five Thousand Dollars ($5,000);

(iv) reimbursement to cover the reasonable fee for any early
lease cancellation by the Executive on his residence in St.
Thomas; and

(v) reimbursement up to an aggregate amount not to exceed Twenty
Thousand Dollars ($20,000) to cover all reasonable moving,
relocation and out-of-pocket expenses incurred by the
Executive in moving from St. Thomas, U.S.V.I.

6
<PAGE>

6. Termination Subsequent to Change in Control.
-------------------------------------------

a. In the event of a Terminating Event (as defined below) within one
(1) year from the date of a Change in Control (as defined below) of Little
Switzerland, as of the date of such Terminating Event, the Executive shall
be entitled to receive a lump sum payment as determined pursuant to Section
5.f.(i) above, plus any accrued and unpaid Annual Bonus which the Executive
has earned pursuant to Section 3.a. of this Agreement.

b. For purposes of this Agreement, a "Terminating Event" shall mean
termination by the Employer or its successor entity of the Executive for
any reason other than death, cause or disability pursuant to Section 5.a.,
Section 5.b. or Section 5.e. above or termination by the Executive with
"Good Reason."

c. For purposes of this Agreement, a "Change in Control" shall be
deemed to have occurred in the following instances: (i) when any "person"
(as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (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 fifty percent (50%) or more of the combined voting power of
Little Switzerland's then outstanding securities; (ii) the sale, transfer
or other disposition of all or substantially all of the assets of Little
Switzerland to another person or entity; (iii) the stockholders of Little
Switzerland approve a plan of complete liquidation of Little Switzerland;
(iv) the merger, consolidation or other business combination of Little
Switzerland with any other corporation or entity, other than (1) a merger
or consolidation which would result in the voting securities of Little
Switzerland outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the
combined voting power of the voting securities of Little Switzerland or
such surviving entity outstanding immediately after such merger or
consolidation or (2) a merger or consolidation effected to implement a
recapitalization of Little Switzerland (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than fifty percent (50%) of
the combined voting power of Little Switzerland's then outstanding
securities; or (v) the signing of an agreement, contract or other
arrangement providing for any of the transactions described above in this
definition of Change in Control.

d. For purposes of this Agreement, "Good Reason" shall be deemed to
include the following:

(i) a reduction of the Executive's salary or benefits; or

7
<PAGE>

(ii) a significant change in the Executive's responsibilities
and/or duties which constitutes, when compared to the Executive's
responsibilities and/or duties before the Change of Control, a demotion; or

(iii) a material loss of title or office.

e. The Executive shall provide the Employer with reasonable notice
and an opportunity to cure any of the events listed in Section 6.d. above and
shall not be entitled to compensation pursuant to this Section 6 unless the
Employer fails to cure within a reasonable period of time.

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 hereof), 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.

8
<PAGE>

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 7.a. or 7.b. 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. Taxation of Payments. The Employer shall undertake to make
--------------------
deductions, withholdings and tax reports with respect to payments and benefits
under this Agreement to the extent that it reasonably and in good faith believes
that it is required to make such deductions, withholdings and tax reports. All
payments made by the Employer under this Agreement shall be net of any tax or
other amounts required to be withheld by the Employer under applicable law.
Nothing in this Agreement shall be construed to require the Employer to make any
payments to compensate the Executive for any adverse tax effect associated with
any payments or benefits or for any deduction or withholding from any payment or
benefit.

11. Arbitration of Disputes. Any controversy or claim arising out of or
-----------------------
relating to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination of that employment (including, without
limitation, any claims of unlawful employment discrimination whether based on
age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration in any forum and form agreed upon by the parties or, in the absence
of such an agreement, under the auspices of the American Arbitration Association
("AAA") in Wilmington, Delaware in accordance with the Employment Dispute
Resolution Rules of the AAA, including, but not limited to, the rules and
procedures applicable to the selection of arbitrators. In the event that any
person or entity other than the Executive or the Employer may be a party with
regard to any such controversy or claim, such controversy or claim shall be
submitted to arbitration subject to such other person or entity's agreement.
Judgment upon the award rendered by the arbitrator may be entered in any court

9
<PAGE>

having jurisdiction thereof. This Section 11 shall be specifically enforceable.
Notwithstanding the foregoing, this Section 11 shall not preclude either party
from pursuing a court action for the sole purpose of obtaining a temporary
restraining order or a preliminary injunction in circumstances in which such
relief is appropriate; provided, however, that any other relief shall be pursued
-------- -------
through an arbitration proceeding pursuant to this Section 11.

12. 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.

13. 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.

14. 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.

15. Notices. All 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 (3)
days subsequent to the date on which such notice is mailed.

16. 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.

10
<PAGE>

17. Governing Law; Consent to Jurisdiction. It is the parties' intention
--------------------------------------
that the terms of employment under this Agreement shall be construed under and
be governed in all respects by the laws of the State of Delaware. To the extent
that any court action is permitted consistent with or to enforce Section 11 of
this Agreement, the parties hereby consent to the jurisdiction of the courts of
Delaware. Accordingly, with respect to any such court action, the Executive (a)
submits to the personal jurisdiction of such courts; (b) consents to service of
process; and (c) waives any other requirement (whether imposed by statute, rule
of court, or otherwise) with respect to personal jurisdiction or service of
process.

18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be taken to be
an original, but such counterparts shall together constitute one and the same
document.

[Remainder of Page Intentionally Left Blank]

11
<PAGE>

IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by each of the Employer and Little Switzerland, by their duly authorized
officers, and by the Executive, as of the date first above written.

L.S. WHOLESALE, INC.

By: /s/ Kenneth W. Watson
------------------------------
Name: Kenneth W. Watson
Title: President

LITTLE SWITZERLAND, INC.

By: /s/ Kenneth W. Watson
------------------------------
Name: Kenneth W. Watson
Title: Acting Chief Executive
Officer

/s/ Patrick J. Hopper
----------------------------------
Patrick J. Hopper

<PAGE>

Exhibit 10.42

EMPLOYMENT AGREEMENT
--------------------

AGREEMENT made as of the 17th day of August, 1999, by and among 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 Robert L.
Baumgardner (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 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 August 17, 1999. Subject to the provisions of
Section 5 hereof, the term (the "Term") of the Executive's employment hereunder
shall be for two (2) years from the Commencement Date. The last day of such
Term shall be August 18, 2001 and is herein sometimes referred to as the
"Expiration Date."

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 Two Hundred Thousand Dollars ($200,000). The Base Salary
shall be payable in periodic installments in accordance with the Employer's
usual practice for payment of compensation to its senior executives.

(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
<PAGE>

criteria (the "Performance Criteria"), the Executive shall be entitled to
receive a bonus (the "Annual Bonus") in an amount of up to three-quarters
(75%) of the Base Salary earned for that fiscal year, which shall be
prorated for periods shorter than a full fiscal. The applicable
Performance Criteria for the 2000 fiscal year of Little Switzerland shall
be mutually agreed upon by the Employer and the Executive prior to
September 15, 1999 and the applicable Performance Criteria for the 2001
fiscal year of Little Switzerland shall be established by the Compensation
Committee of Little Switzerland prior to the beginning of such fiscal
year. For any fiscal year, the determination of whether the Performance
Criteria have been met and whether any Annual Bonus shall be paid shall be
made by the Compensation Committee of Little Switzerland. The Annual
Bonus, if any, shall be payable within ten (10) calendar days after the
date on which the Compensation Committee of Little Switzerland determines
from its business plan, 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.

(b) Stock Bonus Plan. On the Commencement Date, the Executive will be
----------------
awarded an option (the "Option") to purchase 350,000 shares of common stock, par
value $.01 per share, of Little Switzerland upon the terms and conditions set
forth in the Non-Qualified Stock Option Agreement, dated as of the date hereof,
by and between the Executive and Little Switzerland.

(1) Monthly Commute. The Executive shall be entitled to
---------------
reimbursement for reasonable expenses actually incurred in connection with
one round trip commute per month between the Executive's place of residence
in Boca Raton, Florida, U.S. and his place of residence in St. Thomas,
U.S.V.I. The Executive shall account 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.

(2) Automobile. During the Term of this Agreement, the Employer
----------
shall provide the Executive with the use of an automobile in St. Thomas,
U.S.V.I. that is owned by the Employer. The Employer shall be responsible
for all reasonable maintenance and operation costs of such automobile.

(3) Apartment. During the Term of this Agreement, the Employer
---------
shall provide the Executive with use of an apartment that is leased by the
Employer. The Employer shall pay the costs associated with the rent and
utilities for such apartment.

2
<PAGE>

(d) Special Bonus. The Employer shall pay the Executive a special
-------------
bonus in an aggregate amount equal to One Hundred Twenty Five Thousand
Dollars ($125,000) and payable in twelve monthly installments commencing on
September 1, 1999.

(e) Regular Benefits. The Executive shall be entitled to four (4)
----------------
weeks of vacation time during each year of the Terms. 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 (including, without limitation, any 401(k) plans) from time to
time in effect for senior executives of the Employer. Such participation shall
be subject to the terms of the applicable plan documents, generally applicable
policies of the Employer, applicable law and the discretion of the Board of
Directors, the Compensation Committee or any administrative or other committee
provided for in or contemplated by any such plan. Nothing contained in this
Agreement shall be construed to create any obligation on the part of the
Employer to establish any such plan or to maintain the effectiveness of any such
plan which may be in effect from time to time.

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 Little Switzerland's and 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.

(f) Exclusivity of Salary and Benefits. The Executive shall not be
----------------------------------
entitled to any payments or benefits other than those provided under this
Agreement.

4. Capacity and Extent of Service.
------------------------------

(a) The Executive shall serve the Employer as President and Chief
Executive Officer beginning on the date hereof until the expiration of the Term
and shall serve the Employer in such other or additional offices in which he may
be reasonably requested to serve.

(b) The Executive shall serve as a member of the Board of Directors of
Little Switzerland beginning on the date hereof until his successor is duly
elected and qualified; provided, however, that upon termination of the
-------- -------
Executive's employment hereunder for any reason, the Executive agrees to
promptly resign his position as Director of Little Switzerland (if he is then
serving in such position) and to resign from such other positions of director or
officer of the Employer, Little Switzerland or any of their affiliates he then
holds. The Executive shall not vote in his capacity as a Director of Little
Switzerland on any matters related to this Agreement on which the Board of
Directors or any committee thereof of Little Switzerland shall vote, including,
without limitation, any termination pursuant to Section 5 below; provided,
--------
however, if he participates in a meeting of the Board of Directors pursuant to
- -------

3
<PAGE>

applicable law, then he may be included for purposes of determining whether
there is a quorum for such meeting. Pursuant to Article II of the Amended and
Restated Bylaws of Little Switzerland, as in effect on the date hereof, so long
as the Executive is employed by the Employer and remains a Director of Little
Switzerland, he shall not be entitled to receive any salary or other
compensation for his services as a Director of Little Switzerland, including,
without limitation, any director or committee member fees.

(c) During his employment hereunder, the Executive shall, subject to
the direction and supervision of the Board of Directors of the Employer, devote
his full business time, best efforts and business judgment, skill and knowledge
to the advancement of the Employer's and Little Switzerland'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
nonprofit activities which do not impair his ability to fulfill his duties
and responsibilities under this Agreement.

5. Termination. Notwithstanding the provisions of Section 2 hereof,
-----------
subject to the following provisions, the Executive's employment hereunder shall
terminate under the following circumstances without further liability on the
part of the Employer or Little Switzerland or right of the Executive to receive
any payments hereunder:

(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) by written notice to
the Executive setting forth in reasonable detail the nature of such cause,
effective upon delivery of such notice. The determination of whether cause
existed for terminating the Executive's employment shall be made by a vote of at
least two-thirds of the Board of Directors of Little Switzerland. Only the
following shall constitute "cause" for termination pursuant to this Section
5.b.:

4
<PAGE>

(i) Deliberate dishonesty of the Executive with respect to the
Employer or any subsidiary or affiliate thereof;

(ii) Conviction of the Executive of (A) a felony or (B) any crime
involving moral turpitude, deceit, dishonesty or fraud;

(iii) Gross negligence or willful misconduct of the Executive with
respect to the Employer or any subsidiary or affiliate thereof;

(iv) Failure to perform to the reasonable satisfaction of the Board
of Directors of Little Switzerland a substantial portion of the Executive's
duties and responsibilities assigned or delegated under this Agreement,
which failure continues for more than thirty (30) days, in the reasonable
judgment of the Board of Directors of Little Switzerland, after written
notice given to the Executive by the Board of Directors of Little
Switzerland; or

(v) Material breach by the Executive of any of the Executive's
obligations under this Agreement.

(c) Termination by the Employer Without Cause. Subject to the payment
-----------------------------------------
of the severance benefit pursuant to Section 5.f. hereof, 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.

(d) 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.

(e) 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-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. 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

5
<PAGE>

to submit such certification, the Employer's determination of such issue shall
be binding on the Executive.

(f) Severance Benefit. In the event the Executive's employment
-----------------
hereunder is terminated pursuant to Section 5.c. hereof, on the date of such
termination, the Executive shall be entitled to receive a lump sum payment equal
to twelve (12) months of Base Salary, plus any accrued but unpaid Annual Bonus
which the Executive has earned pursuant to Section 3.a. of this Agreement.

6. Termination Subsequent to Change in Control.
-------------------------------------------

(a) In the event of a Terminating Event (as defined below) within one
(1) year from the date of a Change in Control (as defined below) of Little
Switzerland, as of the date of such Terminating Event, the Executive shall be
entitled to receive the following:

(1) a lump sum payment equal to (A) the number of months of Base
Salary remaining in the Term in the event such termination occurs on or
prior to August 17, 2000 or (B) twelve (12) months of Base Salary in the
event such termination occurs after August 18, 2000, whichever is
applicable; and

(2) any accrued but unpaid Annual Bonus which the Executive has
earned pursuant to Section 3.a. of this Agreement.

(b) For purposes of this Agreement, a "Terminating Event" shall mean
termination by the Employer or its successor entity of the Executive for any
reason other than death, cause or disability pursuant to Section 5.a., Section
5.b. or Section 5.e. above or termination by the Executive with "Good Reason."

(c) For purposes of this Agreement, a "Change in Control" shall be
deemed to have occurred in the following instances: (i) when any "person" (as
such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (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 fifty percent (50%)
or more of the combined voting power of Little Switzerland's then outstanding
securities; (ii) the sale, transfer or other disposition of all or substantially
all of the assets of Little Switzerland to another person or entity; (iii) the
stockholders of Little Switzerland approve a plan of complete liquidation of
Little Switzerland; (iv) the merger, consolidation or other business combination
of Little Switzerland with any other corporation or entity, other than (1) a
merger or consolidation which would result in the voting securities of Little
Switzerland outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the combined voting power
of the voting securities of Little Switzerland or such surviving entity
outstanding immediately after such merger or consolidation or (2) a

6
<PAGE>

merger or consolidation effected to implement a recapitalization of Little
Switzerland (or similar transaction) in which no "person" (as hereinabove
defined) acquires more than fifty percent (50%) of the combined voting power of
Little Switzerland's then outstanding securities; or (v) the signing of an
agreement, contract or other arrangement providing for any of the transactions
described above in this definition of Change in Control.

(d) For purposes of this Agreement, "Good Reason" shall be deemed to
include the following:

(i) a reduction of the Executive's salary or benefits other than a
reduction that (1) is based on the Employer's financial performance or (2)
is similar to the reduction made to the salaries or benefits provided to
all or most other senior executives of the Employer; or

(ii) a significant change in the Executive's responsibilities and/or
duties which constitutes, when compared to the Executive's responsibilities
and/or duties before the Change of Control, a demotion; or

(iii) a material loss of title or office.

(e) The Executive shall provide the Employer with reasonable notice and
an opportunity to cure any of the events listed in Section 6.d. above and shall
not be entitled to compensation pursuant to this Section 6 unless the Employer
fails to cure within a reasonable period of time.

7. Noncompetition and Confidential Information.
-------------------------------------------

(a) Noncompetition. During the period of the Executive's employment by
--------------
the Employer pursuant to this Agreement, 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
hereof), 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

7
<PAGE>

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 this Section 7. 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.

10. Taxation of Payments. The Employer shall undertake to make deductions,
--------------------
withholdings and tax reports with respect to payments and benefits under this
Agreement to the extent that it reasonably and in good faith believes that it is
required to make such deductions, withholdings and tax reports. All payments
made by the Employer under this Agreement shall be net of any tax or other
amounts required to be withheld by the Employer under applicable law. Nothing
in this Agreement shall be construed to require the Employer to make any
payments to compensate the Executive for any adverse tax effect associated with
any payments or benefits or for any deduction or withholding from any payment or
benefit.

8
<PAGE>

Association ("AAA") in Wilmington, Delaware in accordance with the Employment
Dispute Resolution Rules of the AAA, including, but not limited to, the rules
and procedures applicable to the selection of arbitrators. In the event that
any person or entity other than the Executive or the Employer may be a party
with regard to any such controversy or claim, such controversy or claim shall
be submitted to arbitration subject to such other person or entity's agreement.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. This Section 11 shall be specifically
enforceable. Notwithstanding the foregoing, this Section 11 shall not preclude
either party from pursuing a court action for the sole purpose of obtaining a
temporary restraining order or a preliminary injunction in circumstances in
which such relief is appropriate; provided, however, that any other relief
-------- -------
shall be pursued through an arbitration proceeding pursuant to this Section 11.

13. 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.

9
<PAGE>

16. 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.

[END OF TEXT]

10
<PAGE>

IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by each of the Employer and Little Switzerland, by their duly authorized
officers and/or directors, and by the Executive, as of the date first above
written.

L.S. WHOLESALE, INC.

By:/s/ Kenneth W. Watson
--------------------------
Name: Kenneth W. Watson
Title: President

LITTLE SWITZERLAND, INC.

By:/s/ Kenneth W. Watson
-----------------------------
Name: Kenneth W. Watson
Title: Acting President and Chief
Executive Officer

EXECUTIVE:

/s/ Robert L. Baumgardner
---------------------------------
Robert L. Baumgardner

<PAGE>

Exhibit 10.43

NON-QUALIFIED STOCK OPTION AGREEMENT
------------------------------------

Name of Optionee: Robert L. Baumgardner
---------------------

No. Of Option Shares: 350,000 Grant Date: August 17, 1999
------- ---------------

Option Exercise Price: $.4375 Expiration Date: August 17, 2009
------ ---------------

Little Switzerland, Inc., a Delaware corporation (the "Company"),
hereby grants to the Optionee named above, who is now employed by the Company,
an option ("Stock Option") to purchase on or prior to the expiration date of
this Stock Option specified above (the "Expiration Date") all or any part of the
number of shares of common stock, par value $0.01 per share (the "Common
Stock"), of the Company specified above (the "Option Shares") at the per share
Stock Option exercise price specified above, subject to the terms and conditions
set forth herein. This Stock Option is not intended to qualify as an "incentive
stock option" under Section 422(b) of the Internal Revenue Code of 1986, as
amended from time to time (the "Code").

1. Vesting Schedule. No portion of this Stock Option may be
----------------
exercised until such portion shall have vested. Except as set forth below, and
subject to the determination of the Company in its sole discretion to accelerate
the vesting schedule hereunder due to other circumstances, this Stock Option
shall be vested and exercisable with respect to the following number of Option
Shares on the dates indicated:

Cumulative Number of
-----------------------
Option Shares Exercisable Vesting Date
------------------------- ------------
70,000 August 17, 1999
140,000 August 17, 2000
210,000 August 17, 2001
280,000 August 17, 2002
350,000 August 17, 2003
<PAGE>

In the event of a Change in Control of the Company (as defined in the
Optionee's Employment Agreement (the "Employment Agreement") with the Company
and L.S. Wholesale, Inc., dated August 17, 1999), all Stock Options then
outstanding granted to the Optionee prior to such Change in Control shall become
immediately vested and exercisable. In any event this Stock Option shall become
fully vested and exercisable with respect to all of the Option Shares on August
17, 2003. Once vested, this Stock Option shall continue to be exercisable at
any time or times prior to the Expiration Date, subject to the provisions
hereof.

2. Exercise of Stock Option.
------------------------
(a) The Optionee may exercise only vested portions of this Stock
Option and only in the following manner: Prior to the Expiration Date, the
Optionee may give written notice on any business day to the committee appointed
by the Board of Directors of the Company to administer stock options (the
"Committee") of his election to purchase some or all of the shares purchasable
at the time of such notice. Said notice shall specify the number of shares to be
purchased and shall be accompanied (i) by payment therefor in cash or, at the
Optionee's election, in shares of Common Stock of the Company having a fair
market value (as determined below) on the date of exercise equal to or less than
the total option exercise price, plus cash, in an amount equal to the amount, if
any, by which the total option exercise price exceeds the fair market value of
such shares of Common Stock, and (ii) by such agreement, statement or other
evidence as the Company may require in order to satisfy itself that the issuance
and conveyance of the shares being purchased pursuant to such exercise and any
subsequent resale thereof will be

-2-
<PAGE>

in compliance with applicable laws and regulations, including, without
limitation, all federal and state securities laws.

(b) Certificates for the shares so purchased will be issued and
delivered to the Optionee upon compliance to the satisfaction of the Company
with all requirements under applicable laws or regulations in connection with
such issuance. Until the Optionee shall have complied with the requirements
hereof, the Company shall be under no obligation to issue the shares subject to
this Stock Option, and the determination of the Committee (exclusive of the
Optionee, if at such time Optionee is a member of such Committee) as to such
compliance shall be final and binding on the Optionee. The Optionee shall not be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares of Common Stock subject to this Stock Option unless and
until this Stock Option shall have been exercised pursuant to the terms hereof,
the Company shall have issued and delivered the shares to the Optionee, and the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such shares of Common Stock.

(c) The minimum number of shares with respect to which this Stock
Option may be exercised at any one time shall be 100 shares, unless the number
of shares with respect to which this Stock Option is being exercised is the
total number of shares subject to exercise under this Stock Option at the time.

(d) Notwithstanding any other provision hereof, no portion of this
Stock Option shall be exercisable after the Expiration Date.

-3-
<PAGE>

(e) For purposes of this Agreement, the fair market value of the
Common Stock shall be determined in good faith by the Board of Directors of the
Company (exclusive of the Optionee, if at the time the Optionee is a member of
the Board of Directors), provided, however, that (x) if the Common Stock is
admitted to quotation on the National Association of Securities Dealers
Automated Quotation System on the date that the fair market value must be
determined, fair market value shall not be less than the average of the highest
bid and lowest asked prices of the Common Stock on such date or on the last
preceding date on which a sale was reported, or if the Common Stock is admitted
to trading on the National Association of Securities Dealers Automated Quotation
National Market System on the date that the fair market value must be
determined, fair market value shall not be less than the closing price reported
for the Common Stock on such National Market System on such date or on the last
preceding date on which a sale was reported, or (y) if the Common Stock is
admitted to trading on a national securities exchange on the date that the fair
market value must be determined, fair market value shall not be less than the
last sale price reported for the Common Stock on such exchange on such date or
on the last date preceding such date on which a sale was reported.

3. Termination of Employment.
-------------------------

(a) If the Optionee's employment by the Company terminates by reason
of his death or disability, this Stock Option may thereafter be exercised, to
the extent it was exercisable on the date of such termination, until the earlier
of (i) one year from the date of such termination of employment or (ii) the
Expiration Date.

(b) If the Optionee's employment by the Company terminates by reason
of his retirement in accordance with the Company's normal retirement policy as
determined by

-4-
<PAGE>

the Board of Directors of the Company, this Stock Option may thereafter be
exercised, to the extent it was exercisable on the date of such termination,
until the earlier of (i) one year from the date of such termination of
employment or (ii) the Expiration Date.

(c) If the Optionee's employment by the Company terminates by reason
of cause (as defined in the Employment Agreement), this Stock Option shall lapse
immediately upon the effective date of such termination and shall not be
exercisable at any time thereafter.

(d) If the Optionee's employment by the Company is terminated for any
reason other than death, disability, retirement or cause, this Stock Option may
thereafter be exercised, to the extent it was exercisable on the date of such
termination, until the earlier of (i) three months or (ii) the Expiration Date.

(e) The Committee shall have sole discretion to determine the reason
for the termination of the Optionee's employment by the Company.

4. Transferability. This Agreement is personal to the Optionee and is
---------------
not transferable by the Optionee in any manner other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code, or Title I of the Employee Retirement Income Security Act,
as amended, or the rules thereunder; provided, however, that the designation of
a beneficiary by the Optionee does not constitute a transfer. Options may be
exercised during the Optionee's lifetime only by the Optionee.

5. Restrictions on Issuance of Option Shares. The issuance of Option
-----------------------------------------
Shares upon exercise thereof shall be subject to compliance with all of the
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the

-5-
<PAGE>

Board of Directors of the Company.

6. Adjustment Upon Changes in Capitalization.
-----------------------------------------

(a) The shares of stock covered by this Stock Option are shares of
the Common Stock of the Company. If the shares of the Company's Common Stock as
a whole are increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Company, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or the like, an appropriate and proportionate adjustment
shall be made in the number and kind of shares, and the per share exercise price
of shares subject to any unexercised portion of this Stock Option. In the event
of any such adjustment in this Stock Option, the Optionee thereafter shall have
the right to purchase the number of shares under this Stock Option at the per
share price, as so adjusted, which the Optionee could purchase at the total
purchase price applicable to this Stock Option immediately prior to such
adjustment. Adjustments under this Paragraph 6 shall be made by the Board of
Directors (exclusive of the Optionee, if at such time Optionee is a member of
the Board of Directors) of the Company, whose determination as to what
adjustment shall be made, and the extent thereof, shall be conclusive. No
fractional shares of Common Stock shall be issued on account of any adjustment
specified above.

7. Effect of Certain Transactions. In the case of (a) the dissolution or
------------------------------
liquidation of the Company, (b) a merger, reorganization or consolidation in
which the Company is acquired by another person or in which the Company is not
the surviving corporation, or (c) the sale of all or substantially all of the
assets of the Company to another corporation, this Stock Option shall

-6-
<PAGE>

terminate on the effective date of such dissolution, liquidation, merger,
reorganization, consolidation or sale, unless provision is made in such
transaction for the assumption of this Stock Option or the substitution for this
Stock Option of a new Stock Option of the successor employer corporation or a
parent or subsidiary thereof, with appropriate adjustment as to the number and
kind of shares and the per share exercise price, as provided in Paragraph 6. In
the event of such a termination, the Optionee will receive written notice
thereof at least twenty (20) days prior to the effective date of such
transaction or the record date on which shareholders of the Company entitled to
participate in such transaction shall be determined, whichever comes first. In
the event of such termination, any unexercised portion of this Stock Option,
which is vested and exercisable, shall be exercisable in full for at least
fifteen (15) days prior to the date of such termination; provided, however, that
in no event shall this Stock Option be exercisable after the Expiration Date.

8. Tax Withholding.
---------------

(a) The Optionee, no later than the date as of which the value of
any Common Stock first becomes includable in the gross income of the Optionee
for federal income tax purposes, shall pay to the Company, or make arrangements
satisfactory to the Board of Directors regarding payment of any federal, state
or local taxes of any kind required by law to be withheld with respect to such
income. The Company shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Optionee.
(b) The Optionee may elect to have such tax withholding obligation
satisfied, in whole or in part, by:

-7-
<PAGE>

(i) authorizing the Company to withhold from shares of Common
Stock to be issued pursuant to the Stock Option a number of shares with an
aggregate fair market value that would satisfy the withholding amount due, or

(ii) transferring to the Company shares of Common Stock owned by
the Optionee with an aggregate fair market value that would satisfy the
withholding amount due. While the Optionee is a director or officer of the
Company within the meaning of Section 16(b) of the 1934 Act, the following
additional restrictions shall apply: (1) the election to satisfy tax withholding
obligations relating to the Stock Option in the manner permitted by this Section
8(b)(ii) shall be made either (A) during the period beginning on the third
business day following the date of release of quarterly or annual summary
statements of sales and earnings of the Company and ending on the twelfth
business day following such date, or (B) irrevocably at least six months prior
to the date as of which the receipt of such Common Stock first becomes a taxable
event for federal income tax purposes; and (2) such election shall not be made
within six months of the date of grant of the option.

9. Amendment. This Agreement may be amended or modified only by a
---------
written instrument signed by the Optionee and a duly authorized representative
of the Company.

10. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Delaware, except to the extent that such law is preempted by federal
law.

11. Miscellaneous. Notice hereunder shall be mailed or delivered to
-------------
the Company at its principal place of business, and shall be mailed or delivered
to the Optionee at the address set forth below, or in either case at such other
address as one party may subsequently furnish to the other party in writing.

-8-
<PAGE>

LITTLE SWITZERLAND, INC.

Dated: August 17, 1999 By: /s/ Kenneth W. Watson
------------------------ ---------------------------------
Name: Kenneth W. Watson
---------------------------------
Title: Acting President and Chief
Executive Officer

The foregoing Agreement is hereby accepted and the terms and conditions
thereof hereby agreed to by the undersigned.

Dated: August 18, 1999 /s/ Robert L. Baumgardner
-------------------------------------
Robert L. Baumgardner

Optionee's Address:

18524 Ocean Mist Drive
-------------------------------------
Baco Raton, FL 33498
-------------------------------------

-9-

<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 September 3, 1999, included in Little
Switzerland, Inc.'s Annual Report on Form 10-K for the year ended May 29,
1999, into the Company's previously filed Registration Statement on Form S-8
No. 33-46654 (filed on March 25, 1992), Registration Statement on Form S-8
No. 33-46656 (filed on March 25, 1992) and Registration Statement on Form S-8
No. 33-73056 (filed on December 17, 1993).

/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP

Boston, Massachusetts
September 10, 1999

<PAGE>
<ARTICLE> 5

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<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-START> MAY-31-1998
<PERIOD-END> MAY-29-1999
<CASH> 2,739
<SECURITIES> 0
<RECEIVABLES> 560
<ALLOWANCES> 0
<INVENTORY> 38,195
<CURRENT-ASSETS> 42,605
<PP&E> 36,999
<DEPRECIATION> 19,051
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0
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<COMMON> 87
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</TABLE>