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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended May 27, 2000
[ ] 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
(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
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None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 5, 2000, 8,636,379 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 $0.781 per
share for the registrant's Common Stock, as reported on the OTCBB as of October
5, 2000, was $4,420,521.
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PART I
ITEM 1. BUSINESS
GENERAL
Little Switzerland, Inc. ("Little Switzerland" or the "Company") is a
duty-free specialty retailer of luxury items operating 17 distinctively-designed
retail stores on five Caribbean islands and Alaska. For a description of the
Company's properties see Item 2, "Properties." 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. L.S. Wholesale, Inc. ("L.S. Wholesale") and L.S. Holding, Inc. ("L.S.
Holding") are wholly owned subsidiaries of Little Switzerland. 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. As of October 5,
2000, there were 10 subsidiaries of L.S. Holding incorporated in various
jurisdictions, of which six subsidiaries are currently operating retail outlets.
L.S. Wholesale acts as purchasing agent for items sold by the Company's stores.
As used throughout this report on Form 10-K, the terms fiscal 2000, 1999 and
1998 refer to the Company's 12-month periods ended May 27, 2000, May 29, 1999
and May 30, 1998, respectively. Unless otherwise specified, the term the
"Company" as used in this Form 10-K includes the subsidiaries of the Company.
MERCHANDISING
High-Quality Merchandise. Little Switzerland offers high-quality
merchandise generally available in the world's finest stores and, on some
islands, it is the exclusive retailer of certain brand name products. The
Company sells internationally renowned product lines such as:
Jewelry -- Alfieri St. John, Antonini, Bagley & Hotchkiss, Roberto
Coin and Stephan Hafner
Watches -- Baume Mercier, Breitling, Cartier, Concord, ESQ, Movado,
Omega, Rado, Raymond Weil and Tag-Heuer
Crystal -- Baccarat, Daum, Kosta Boda, Lalique, Orrefors, Swarovski
and Waterford
China/Gifts -- Christofle, D'Argenta, Goebel, Herend, Lladro and
Rosenthal
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. The Company has placed a strong emphasis
on superior customer service from a knowledgeable and courteous sales staff.
Availability of Merchandise. Little Switzerland's customers are
tourists, a large percentage traveling by cruise ship, who may be staying in one
location only a short time. 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
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delivery. This cruise ship customer base accounted for approximately 41% of the
Company's sales in the 12-month period ended May 27, 2000.
Name Recognition. Little Switzerland has strong name recognition in the
United States and in the Caribbean. The Company is working to capitalize on this
name recognition by linking all of its signage and marketing activities around
its trademark, Little Switzerland Shopping Bag. This bag represents Little
Switzerland's reputation for providing a wide variety of luxury products through
stores that are recognized as desirable places to shop.
PRODUCT LINES
The principal product lines offered by the Company are jewelry,
watches, crystal, china, fragrances and gifts. The Company has focused its
attention on building a business around its trademark and the world class brands
it represents. In addition, a stronger focus on jewelry has taken place over the
last two years. The Company continues to look for opportunities to grow this
segment of the business. To strengthen its name, the Company has added, over the
last two years, the following world class watch brands: Baume Mercier, Charriol,
Concord, ESQ, Montblanc and Movado. These brands accounted for $2.5 million in
sales in fiscal 2000 mitigating the impact on sales from the loss of Rolex in
1998 (as further explained below).
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 38%, 37% and
27% of sales in fiscal 2000, 1999 and 1998, respectively. Jewelry items include
rings, earrings, bracelets, necklaces, pendants and charms, which generally
range in price from $100 to over $10,000. Many new branded jewelry lines were
added over the past two seasons such as Aaron Basha, Alfieri St. John, Antonini,
Carrera Y Carrera, John Antencio, Lagos and Stefan Hafner.
Watches. The second most significant product line for Little
Switzerland is watches. Sales of watches accounted for approximately 33%, 34%
and 47% of sales in fiscal 2000, 1999 and 1998, respectively. The primary watch
lines marketed by Little Switzerland during the last three fiscal years included
such quality brand names as Baume Mercier, Breitling, Cartier, Citizen, ESQ,
Movado, Omega, Rado, Raymond Weil, Tag-Heuer and Tissot. Retail prices for these
watch lines generally range from $200 to over $10,000.
Historically, the Company was the exclusive authorized retailer for
Rolex watches on the Caribbean islands on which the Company operates. Following
the execution of an 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 0%, 3% and 26% of the Company's
sales in fiscal 2000, 1999 and 1998, 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
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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. As a result of losing Rolex, the Swatch Group,
which includes Omega, Rado, Longines, Tissot, Calvin Klein and Swatch, comprised
13.5% of the Company's sales in fiscal 2000 and 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, Christofle, Daum,
Goebel, Herend, Kosta Boda, Lalique, Lladro, Orrefors, Portmeirion, Rosenthal,
Swarovski and Waterford. Prices generally range from $20 to $3,000. Sales of
this product category accounted for 23%, 20% and 16% of sales in fiscal 2000,
1999 and 1998, respectively. The Company realizes the potential of this category
and is working closely with its suppliers to expand when warranted.
Fragrances. In late fiscal 1999, the Company had made a decision to
exit the fragrance category. However, such a decision was made too late into the
fiscal 2000 season for the Company to properly merchandise the resulting shelf
space. The Company decided to enter into a five-month license agreement with a
third party. This program has been successful to date and therefore the Company
has decided to extend the agreement for the 2000-2001 season and discuss longer
term options for its fragrance category. Sales of fragrances accounted for
approximately 4%, 6% and 6% of sales in fiscal 2000, 1999 and 1998,
respectively.
Accessories. The Company decided during fiscal 1999 to liquidate
inventory in its accessory category. Accessories included sunglasses, costume
jewelry and leather products. Sales of accessories accounted for approximately
1%, 3% and 4% of sales in fiscal 2000, 1999 and 1998, respectively. The Company
will re-merchandise this category going forward with a limited assortment of
price point top-selling items.
PRICING
Little Switzerland seeks to price its branded merchandise at levels
that compare favorably to prices generally available for the same products in
the United States. The majority of inventory purchased by the Company is at a
cost often lower than the cost to retail stores in other markets because the
Company does not have to pay a duty or tariff on most incoming products. In
addition, since the Company purchases inventory directly from manufacturers,
price advantages are passed along to the customer. 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 and the Company believes these relationships are an important factor
in its success. These relationships have enabled the Company to
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become the exclusive authorized retailer of selective brands of merchandise on
certain islands. Most of these exclusive relationships are not based on binding
agreements with suppliers, but rather are based on factors such as the Company's
effective representation of product lines 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.
The Company is working on increasing the frequency of its orders in its
high selling season enabling a better re-order of basic, high turn items. There
is a historical buildup of product coming into the Fall/Winter season, the start
of the high season. Merchandise is shipped by vendors to four distribution
points operated by the Company that supply the stores in their respective
regions. The Company is placing a high priority on reviewing and improving its
distribution capabilities.
Little Switzerland stores are designed to place the customer in an
environment that is conducive to the purchasing of luxury items. Most stores are
designed by the same architectural firm and decorated in a similar fashion to
present a consistent theme of luxury retailing. Stores are located in areas that
are easily accessible to tourists, often in duty-free ports 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
In fiscal 2000, the Company's marketing plan included targeted
advertising in high-circulation travel publications. These include island
specific magazines, cruise line magazines, travel magazines and in-flight
magazines. These publications are distributed to the overnight guest and cruise
ship passenger on each island and Alaska where Little Switzerland stores are
located. With approximately 41% of the Company's sales coming from tourists
traveling on cruise ships, participation in on-board promotional programs
offered by all cruise ship lines operating in the Caribbean is one of the
Company's most effective marketing tools. Shopping presentations by the on-board
representatives (Port Lecturers and Cruise Directors) that are live and on video
tape for 24-hour in-cabin access provide a direct means of name recognition and
product exposure for the Company. Desk hours and gangway duties also provide a
one-on-one form of promotion that has proven to be a viable means of direct
marketing and increasing store traffic. Similar talk programs in hotels are
currently being presented in St. Thomas with the possibility of expanding this
program in other markets as well.
At the same time, the Company is examining its marketing to the hotel
customer. This customer segment is a continuing growth opportunity for the
Company in key markets such as Aruba and Curacao as well as our other markets.
The Company is developing innovative marketing promotions geared directly at
this group aimed at increasing store traffic.
Finally, the Company is placing emphasis on in store point of sale
materials. As the Company works to draw customers to its stores through
innovative marketing programs, management believes that it is critical to
develop both in-store presentation and signage to assist our employees in
closing sales transactions.
INVENTORY CONTROL AND SECURITY
The Company's management utilizes inventory control and security
systems, careful personnel screening and well-articulated policies and
procedures to control losses and shrinkage.
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The Company has inventory control and management information systems that
integrate sales, inventory and financial reporting and control. These systems
provide vital management information such as store-by-store data, which include
sales, profitability and inventory levels by product category. The Company is
considering an upgrade to its systems to take advantage of the Internet to
reduce communication problems that arise in its overseas operations.
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 supervision. 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 that it believes to be customary
and adequate.
COMPETITION
The Company's markets contain numerous retail stores and the
competition for tourist dollars is intense. Little Switzerland also competes
with stores selling similar products in the United States and in other markets
where tourists travel. The majority of the Company's local competitors are
independently owned stores and do not offer the variety of brand name luxury
products that Little Switzerland markets. The Company believes that its present
and past 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. In addition, the Company has
leveraged its name to reflect high-end quality.
EMPLOYEES
As of May 27, 2000, Little Switzerland employed approximately 373
full-time employees. 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. This past year was a very difficult year for the Company and its
employees due to certain financial constraints under which the Company was
required to operate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." The
Company's employees were instrumental in moving the Company forward by their
positive and supportive attitude during a difficult period. The loss of the
support of its many employees could adversely affect the Company's ability to
compete in its markets.
MANAGEMENT CHANGES
Throughout the course of fiscal 2000, the Company has made efforts to
strengthen its management team. This process began with the hiring of a new CEO
and CFO at the beginning of fiscal 2000, as well as a strengthening of the
Company's Board of Directors.
On August 24, 1999, Robert L. Baumgardner joined the Company as the
permanent President and Chief Executive Officer of the Company. In addition, Mr.
Baumgardner was also appointed as a Class I Director of the Company, increasing
the Board of Directors to six members. Mr. Kenneth W. Watson, the former Acting
Chief Executive Officer of the Company, continues to serve as a Class II
Director of the Company.
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On June 6, 1999, Patrick J. Hopper joined the Company as its Vice
President - Finance and on July 3, 1999, became the Company's Chief Financial
Officer. Mr. Hopper replaced David J. Nace, the previous Chief Financial Officer
of the Company, who resigned due to personal reasons.
In January 2000, Patrick Heron assumed the responsibilities of Vice
President - General Merchandise Manager.
In February 2000, the Company hired three senior level employees:
Michael Pepper, Brenda Pepper and Zona Corbin joined the Company as Senior Vice
President Operations, Director of Retail Operations and Director of Marketing,
respectively.
In April 2000, the Company hired Walter Darr Conradson as Divisional
Vice President of Marketing. In addition, the Company promoted Alfred "Pat"
Bailey to Divisional Vice President of Store Planning and Property Development.
The Company believes it now has a well rounded executive group capable
of re-establishing the Company's dominant position in the duty-free retailing
arena. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Recent Developments - Management Changes."
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. The peak selling season in Alaska runs from Spring
through Summer. Working capital requirements generally reflect this seasonality
as the Company increases its inventory in anticipation of the peak selling
season. Historically, the Company has borrowed to fund its normal build-up of
inventory for its peak selling seasons. However, as more fully described below,
the Company does not have a working capital or other credit facility presently
available to fund its inventory requirements. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Liquidity and
Capital Resources." As a result, the Company is buying inventory more closely to
its needs and has been able to maintain a better inventory mix with continuous
purchases than this time in the prior year.
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 the accompanying Notes
to Consolidated Financial Statements.
Environmental. In the opinion of the Company, 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.
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Customers. The Company is not dependent upon any single customer or
upon any single group of customers, the loss of which would have a material
adverse effect on Little Switzerland.
Patents and Trademarks. The Company owns a number of licenses,
trademarks and trade names. Except for the trademarks and trade names related to
"Little Switzerland," the Company does not believe such intellectual property is
material to Little Switzerland.
Other. The Company does not have significant research and development
expenditures.
The Company does not have a significant backlog of orders and
inventory. Little Switzerland must carry adequate inventory to enable tourists
to receive immediate delivery of items.
The Company does not have any business under government contract.
ITEM 2. PROPERTIES
Little Switzerland's 17 stores operating today are all situated in
prime retail locations. This total does not include one store located in Marigot
on the island of St. Martin that was sold on June 13, 2000. See "Management's
Discussion and Analysis of Financial Conditions and Results - Recent Events." As
of May 27, 2000, the Company owned its facility in Philipsburg, St. Maarten, and
leased 17 other stores, the majority of which 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 on St.
Thomas, which houses its headquarters and warehouse, and leases the underlying
real property from the Virgin Islands Port Authority under a 10-year ground
lease. Currently, the Company is operating in the first of two five-year renewal
terms, with the first term expiring in April 2005. This lease 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.
As part of a series of transactions contemplated by the letter of
intent between the Company and a third-party strategic investor, which are more
fully described below under "Management's Discussion and Analysis - Recent
Developments - Letter of Intent," the Company sold its facility in Philipsburg,
St. Maarten for $4.5 million and entered into a leaseback arrangement for five
years with one five-year option at market rates. See also "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Recent Developments - Philipsburg Sale and Leaseback."
ITEM 3. LEGAL PROCEEDINGS
On June 22, 2000, Jewels at A.H. Riise ("NXP"), a St. Thomas competitor
of the Company, filed a complaint in the United States District Court for the
District of Delaware (Civil Action No. 00-630) against the Company. The
complaint alleges damages resulting from the Company's termination of a letter
of intent to sell the Company's Barbados operations to NXP. The Company
terminated this letter of intent because of NXP's failure to perform in
accordance with the terms thereof. NXP's complaint seeks, among other things,
certain injunctive relief and unspecified monetary damages. At a hearing in
August 2000, NXP's request for injunctive relief was denied. The Company has
filed its response to this complaint which includes counter claims for alleged
damages against NXP for its failure to perform in accordance with the letter of
intent on an expedited basis. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Recent Developments - NXP
Litigation."
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On April 24, 2000, the Company announced it had reached a settlement of
litigation with DRHC. Pursuant to the terms of the settlement, Little
Switzerland assumed the lease of the retail space on the island of St. Thomas
from one of DRHC's affiliates and also received an aggregate of $500,000 from
DRHC in a combination of cash and a promissory note for refitting and
modernizing the space. The retail space is located adjacent to Little
Switzerland's flagship store on Main Street in St. Thomas. The Company is in the
process of integrating this space with their main street location. Upon
completion, the Company's flagship store will increase its selling space from
approximately 3,650 to 7,650 square feet.
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 such 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 proposed 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 over-the-counter
bulletin board under the symbol "LSVIC.OB."
The Company's initial public offering of its Common Stock at $12.00 per
share occurred on July 18, 1991. The following table sets forth for the periods
indicated the high and low sale prices per share of the Common Stock on the
NASDAQ NMS as reported by NASDAQ through December 21, 1999 and the NASDAQ
Over-the-counter Bulletin Board ("OTC Bulletin Board") thereafter.
High Low
Fiscal Year ended May 27, 2000
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Quarter ended August 28, 1999 1 3/16 7/16
Quarter ended November 27, 1999 1 1/16 15/32
Quarter ended February 26, 2000 27/32 3/16
Quarter ended May 27, 2000 11/16 3/8
Fiscal Year ended May 29, 1999
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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
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain any earnings for use in the operation and
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
As of October 5, 2000, there were 114 holders of record of the
Company's Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
None.
NASDAQ LISTING CHANGE
On November 10, 1999, NASDAQ informed the Company that it would permit
the transfer of the Common Stock to the NASDAQ SmallCap Market, effective as of
the open of business on November 12, 1999. The Company's continued listing on
the NASDAQ SmallCap Market was subject to certain conditions, including
obtaining asset-based financing to pay down its existing debt and for working
capital purposes and demonstrating a closing bid price at or above $1.00 per
share prior to December 22, 1999; immediately thereafter, the Company was
required to evidence a closing bid price at or above $1.00 per share for a
minimum of 10 consecutive trading days. The Company was also required to
demonstrate compliance with all of the other NASDAQ SmallCap Market continued
listing requirements.
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On December 21, 1999, the Company requested an additional extension
from NASDAQ in order to meet all of the continued listing requirements imposed
by NASDAQ. The stockholders of the Company approved a proposed reverse stock
split on December 21, 1999 at the Company's annual meeting of stockholders that
was initiated in an effort to meet the minimum bid price requirement.
Subsequently, on December 22, 1999, NASDAQ notified the Company that, based upon
the Company's failure to meet certain continued listing requirements, including
obtaining alternative asset-based financing to pay down existing debt and for
working capital purposes, NASDAQ had delisted the Company's common stock from
the NASDAQ SmallCap Market effective as of the close of business on December 22,
1999. The Company's common stock began trading on the OTC Bulletin Board
beginning with the open of business on December 23, 1999. The trading symbol for
the Company's common stock on OTC Bulletin Board is "LSVIC." As a result of
NASDAQ's decision, the Company did not effectuate the reverse stock split that
was approved by the Company's stockholders at its annual meeting held on
December 21, 1999.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended
-------------------------------------------------------------------------
MAY 27, MAY 29, MAY 30, MAY 31, JUNE 1,
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 55,026 $ 76,435 $ 100,368 $ 88,314 $ 62,895
Operating (loss) income $ (13,320) $ (8,527) $ (1,165) $ 2,661 $ 1,666
(Loss) income before income $ (14,436) $ (9,882) $ (2,705) $ 1,159 $ 915
taxes and cumulative effect of
change in accounting principle
Net (loss) income $ (15,456) $ (11,082) $ (3,803) $ 1,159 $ 915
Basic and diluted (loss) $ (1.79) $ (1.29) $ (0.42) $ 0.14 $ 0.11
earnings per share before
cumulative effect of change in
accounting principle (1)
Basic and diluted (loss) $ (1.79) $ (1.29) $ (0.45) $ 0.14 $ 0.11
earnings per share (1)
BALANCE SHEET DATA:
Total assets $ 42,479 $ 60,844 $ 77,151 $ 77,391 $ 77,877
Current debt $ 10,175 $ 13,275 $ 10,050 $ 10,325 $ 7,932
Long-term debt $ - $ - $ 3,894 $ 6,119 $ 8,068
OPERATING DATA:
Gross profit margin 35.1% 40.4% 42.5% 43.7% 42.5%
Operating (loss) income margin (24.2)% (11.2)% (1.2)% 3.0% 2.7%
Stores open at period end (2) 18 (10) 22 (8) 26 (4) 27 (5) 27 (6)
Comparable store net sales
(decrease) increase (3) (18.2)% (11) (21.7)% (9) 8.7% (14.3)% (7) 17.3%
</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., has 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 that 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 one new Little Switzerland store on
the island of St. Lucia and one 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) 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.
(8) In fiscal 1999, the Company closed stores in Ketchikan, Alaska, St.
Kitts, Antigua and St. Croix, United States Virgin Islands.
(9) This decrease was primarily due to the absence of Rolex products during
fiscal 1999.
(10) In fiscal 2000, the Company closed stores in Antigua, St. Barths, and
two stores in St. Lucia.
(11) This decrease was primarily due to restructuring measures taken by the
Company throughout the fiscal year.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 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 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 and performance of the Company
to differ materially from anticipated future results and performance expressed
or implied by such forward-looking statements.
The future operating results and performance trends of the Company may
be affected by a number of factors, including the Company's ability to obtain
financing to pay off its existing lenders and fund its working capital needs,
the Company's relationship with its existing lenders, the volume of tourism in
the Company's markets, the Company's relationships with its suppliers, the
Company's ability to expand and add new product lines, weather in the Company's
markets, and economic conditions that affect the buying patterns of the
Company's core customer base. In addition to the foregoing, the Company's actual
future results could differ materially from forward-looking statements as a
result of the risk factors set forth in the Company's filings with the
Securities and Exchange Commission and changes in general economic conditions
and interest and exchange rates.
The following represents the components of operating results for the
years ended:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------
May 27, May 29, May 30,
2000 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.9 59.6 57.5
---------------- ------------------ ----------------
Gross profit 35.1 40.4 42.5
Selling, general and administrative expenses 59.3 52.0 43.7
Gain on insurance proceeds - (0.4) -
---------------- ------------------ ----------------
Operating loss (24.2) (11.2) (1.2)
Interest expense, net 2.0 1.8 1.5
---------------- ------------------ ----------------
Loss before provision for income taxes (26.2) (13.0) (2.7)
Provision for income taxes 1.9 1.5 0.9
---------------- ------------------ ----------------
Net loss before cumulative effect of change
in accounting principle (28.1) (14.5) (3.6)
Cumulative effect of change in accounting
principle - - (0.2)
---------------- ------------------ ----------------
Net loss (28.1)% (14.5)% (3.8)%
================ ================== ================
</TABLE>
13
<PAGE>
RECENT DEVELOPMENTS
Sale of Marigot Store
On June 13, 2000, the Company consummated the sale of substantially all
of the assets of its store located in Marigot on the island of St. Martin
pursuant to a purchase and sale agreement with a third party for an aggregate
amount equal to $365,000 for the lease and fixtures but such amount did not
include the inventory. The Company has recorded an asset impairment write-down
in the fourth quarter of fiscal 2000 of approximately $730,000 related to this
transaction. The impairment is reflected as a selling, general and
administrative expense in the Company's consolidated statement of operations.
Management Changes
On July 7, 2000, the Company received notification of the resignation
of Melanie L. Sturm, Richard C. Hunter and Richard Siegel as Directors of the
Company.
Philipsburg Sale and Leaseback
On July 28, 2000, as part of the transaction contemplated by the letter
of intent discussed below, the Company sold its facility in Philipsburg, St.
Maarten to a strategic investor for $4.5 million and simultaneously entered into
a leaseback arrangement for five years with one five-year option at market rates
(such transaction is hereafter referred to as the "Philipsburg Sale-Leaseback").
Letter of Intent
In August 2000, the Company entered into a letter of intent (the
"Letter of Intent") with Almod Diamonds Limited ("Almod") which, if consummated
in accordance with its terms, would result in the Company receiving an aggregate
of $14.0 million through a combination of real property related transactions,
including the Philipsburg Sale-Leaseback and the sale of a non-core operating
store, and a substantial investment in the Company's Common Stock. To date, the
Company has completed the Philipsburg Sale-Leaseback and received a $500,000
deposit in respect of the sale of a non-core operating store. The Company and
Almod are exploring various alternatives with respect to the terms of the
proposed sale of a non-core operating store which could result in the Company
maintaining a presence on the applicable Caribbean island. Pursuant to the
Letter of Intent, but subject to, among other things, the successful completion
of its due diligence, Almond has agreed to purchase approximately 7,069,000 new
shares of Common Stock, or 45% of the then outstanding shares, for an aggregate
cash purchase price of $6.9 million. The Company anticipates that the definitive
stock purchase agreement will contain certain customary "standstill" provisions
in transactions of this type, including provisions designed to ensure that Almod
would not control the Company. No assurance can be provided as to whether the
Company and Almod will be able to consummate the remaining two transactions
contemplated by the Letter of Intent or, if consummated, the definitive terms
thereof.
Repurchase of Barbados Preferred Shares
On August 4, 2000, the Company purchased all of the outstanding
preferred shares in its Barbados operations, which have been carried at $1.6
million for $0.3 million. This purchase
14
<PAGE>
terminates a management agreement associated with the shares requiring the
Company to pay 2.5% of its Barbados sales to the holder of the preferred shares.
Standstill Agreement
Pursuant to a standstill agreement between the Company and its existing
lenders (the "Standstill Agreement") effective through December 31, 2000, the
Company's lenders will not make any additional borrowings available to the
Company and thereby freeze the Company's line of credit at $10.2 million in
outstanding cash borrowings and approximately $2.6 million in contingent
stand-by letters of credit. However, the lenders have agreed to refrain from
exercising any remedies arising from existing defaults during the term of the
Standstill Agreement so long as the Company, among other things, (i) pays
interest on the outstanding borrowings and letters of credit, together with
related fees and expenses, (ii) maintains a certain inventory to outstanding
total debt coverage ratio, and (iii) reduces the outstanding borrowings and
letters of credit (in agreed upon amounts) from the proceeds of (x) the sale of
certain real property related assets to Almod as described above, (y) certain
estimated anticipated business interruption insurance proceeds for losses
sustained by the Company from Hurricane Lenny and (z) the sale of Common Stock
to Almod as described above. The Company is in compliance with, or has obtained
waivers for, the above mentioned provisions of the Standstill Agreement. The
Standstill Agreement will enable the Company to retain a significant portion of
such proceeds for working capital, and provides the Company with additional time
to attempt to consummate certain proposed transactions with Almod as
contemplated by the Letter of Intent and to seek a new working capital facility.
However, there an be no assurance that the Company will be able to consummate
its remaining transactions with Almod, and, as a consequence thereof, there can
be no assurance that the agreed upon forbearance period will continue until its
scheduled termination date.
As part of the Standstill Agreement, the Company's lenders agreed to
release their liens on the Company's Philipsburg location which enabled the
Company to complete the Philipsburg Sale-Leaseback. As a result of the
Philipsburg Sale-Leaseback, the Company received total proceeds of $4.5 million,
of which approximately $3.5 million was used as additional working capital and
the remainder will be used to reduce the Company's outstanding debt.
Settlement of Insurance Claim
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The Company negotiated a $2.2
million settlement of which $0.5 million had been advanced to the Company. After
applying a deductible of $0.3 million, the Company will receive proceeds of $1.4
million as final settlement of this claim.
FISCAL 2000 COMPARED TO FISCAL 1999
General
The Company operated 18 luxury gift and jewelry stores as of May 27,
2000, compared to 22 Company-operated stores as of May 29, 1999. The Company
sold one store in each of St. Barthelemy and Antigua, and two stores in St.
Lucia in fiscal 2000. During fiscal 1999, the Company closed one store in
Ketchikan, Alaska and one store each in Antigua, St. Kitts and St. Croix, United
States Virgin Islands ("USVI").
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.
15
<PAGE>
Net Sales
Net sales for fiscal 2000 were $55.0 million, a reduction of $21.4
million, or approximately 28.0%, from $76.4 million in fiscal 1999. Net sales in
comparable stores decreased $11.7 million, or approximately 18.2% in fiscal
2000, compared to fiscal 1999.
The decrease in both total and comparable store sales was attributable
to several factors both internal and external. Internal factors include the
Company's decision to reduce new product purchases in the first half of the
fiscal year in an effort to control the Company's inventory position. As a
result, the Company was able to reduce its aged inventory throughout the
off-season. In addition, constraints were placed on buying due to the Company's
inability to obtain a working capital facility. Finally, the Company's
restructuring efforts in Antigua, St. Lucia, Alaska and Barbados had a negative
impact on store performance due to reduced replenishment of merchandise.
External factors such as reduced ship calls in the off-season,
Hurricane Lenny and pre-payment requirements by vendors also had a material
impact on the Company's performance in fiscal 2000. Vendors who have supported
the Company in both product and payment terms have seen a strong increase in
their product sales compared to those requesting substantial pre-payments.
Additionally, the Company is still absorbing the impact of Hurricane Lenny on
its business and is in the process of settling a business interruption claim.
Total net sales were also reduced due to the sale of four stores in
fiscal 2000. These store closings and the resulting lost revenue contributed to
the sales reduction by approximately $6.7 million.
Gross Profit
Gross profit as a percentage of net sales was 35.1% in fiscal 2000
compared to 40.4% for fiscal 1999. Management attributes the decrease in gross
profit as a percentage of net sales in fiscal 2000 to the impact of markdowns
taken for competitive reasons, to stimulate sales in slow-moving categories and
to complete inventory liquidation in the fragrance/accessories category. In
addition, the Company incurred a $1.8 million write-down in the second quarter
of fiscal 2000 to liquidate older, slow-turn merchandise. Excluding this charge,
the gross profit percentage in fiscal 2000 would have been 38.4%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for fiscal 2000
increased as a percent of net sales by 7.3% from $39.7 million, or 52.0% of net
sales, in fiscal 1999 to 59.3% of net sales, or $32.7 million, in fiscal 2000.
SG&A includes a noncash charge of $2.6 million recorded for impairment
of fixed assets and leasehold improvements in the Company's stores in Alaska,
Barbados and St. Martin. This impairment was offset by a $0.8 million net gain
related to the sale of four stores during fiscal 2000. 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 2000 compared to fiscal
1999 associated with the restructuring of the Company.
16
<PAGE>
Net Interest Expense
Net interest expense was $1.1 million in fiscal 2000, a 17.7% reduction
compared to $1.4 million in fiscal 1999. The decrease in net interest expense
reflects lower average borrowings in fiscal 2000 compared to fiscal 1999.
Income Taxes
The Company's income is subject to taxation in each of the
jurisdictions in which it operates at rates ranging from 9.3% 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 ("IRC") of 1986, as amended. In fiscal 2000, the Company
was approved by the Industrial Development Commission ("IDC") for renewal of
benefits, retroactive through fiscal 1999, for a 75% benefit compared to the old
benefit of 90%, which the Company enjoyed in the past. L. S. Wholesale benefits
from a lower tax rate on its income earned outside the USVI, and is taxed at a
rate of 9.3% up through the end of fiscal 2000. The lower tax rate had the
effect of increasing earnings per share by $0.07 in fiscal 2000 and $0.02 in
fiscal 1999.
Aruba Audit
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 below ($455,000 of $650,000) and agreed to settle its
1997-1998 local tax returns. The cost to the Company of this settlement was
approximately $580,000, which has been paid to the Aruba taxing authorities.
In 1998, the Company entered into a settlement with the Aruba 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 had been assessed a profit tax in the amount of
$650,000, payable in ten equal installments of $65,000 per month commencing on
March 1, 1999. Interest of 6% per annum accrued on the outstanding amount
commencing March 1, 1999. The Company also had been assessed a wage tax in the
amount of $550,000, which was paid in six installments commencing June 1999.
Interest of 6% per annum was charged and paid on the outstanding amount starting
on June 1, 1999. This settlement resulted from the Company receiving an
assessment in 1997 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.
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales for fiscal 1999 were $76.4 million, a reduction of $24.0
million or approximately 23.8% from $100.4 million in fiscal 1998. Net sales in
comparable stores decreased 21.7% in fiscal 1999 compared to fiscal 1998.
17
<PAGE>
The decrease in both total Company net sales and comparable store net
sales was primarily due to the loss of Rolex products in 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 USVI.
Excluding the impact of the loss of Rolex sales, sales in comparable stores
increased 4.4% in fiscal 1999 compared to fiscal 1998. See "Business - Product
Lines - Watches."
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.
SG&A
SG&A for fiscal 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 "Legal Proceedings") and a $2.5 million noncash
charge resulting from the Company's recognition of impaired asset values related
to the goodwill at its 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 attributable to
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 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. L.
S. Wholesale has elected to be treated as a 936 Company under section 936 of the
IRC. Under an agreement with the IDC, which expired in August 1998 (subject to
renewal as discussed above), L. S. Wholesale benefited from a lower tax rate on
its income earned outside the United States Virgin
18
<PAGE>
Islands, which had been taxed at a rate of 3.7% through the end of fiscal 1998.
The lower tax rate had the effect of increasing earnings per share by $0.02 in
fiscal 1999 and $0.22 in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
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.
The Company continues to operate without a long-term credit facility to
fund its working capital needs. As discussed above under "Recent
Developments-Standstill Agreement," the Company entered into the Standstill
Agreement. The Forbearance Agreement entered into by the Company and its lenders
in April 1999 expired on August 31, 1999. Pursuant to the Forbearance Agreement,
the Company, among other things, granted liens to its lenders secured by
substantially all of the Company's assets, and established certain criteria that
the Company was required to meet regarding inventory levels, in consideration of
forbearance from the lenders exercising their rights and remedies under the then
existing loan documents, including declaring all amounts immediately due under
the loan agreements. Pursuant to the Standstill Agreement, the lenders have
agreed to forbear from exercising their rights and remedies under the existing
loan documents, including declaring all amounts immediately due under the loan
agreements, until December 31, 2000; provided, however, that such forbearance
period will terminate if the Company fails to satisfy its obligations under the
Standstill Agreement. If the agreed upon forbearance period terminates, the
lenders would be entitled to accelerate the outstanding loans and declare
amounts outstanding under such loan agreements immediately due, the Company
would not have sufficient funds available to make such payments and such action
by the lenders will have a material adverse effect on the Company.
Outstanding borrowings against such secured credit facilities totaled
$10.2 million and $13.3 million as of May 27, 2000 and May 29, 1999,
respectively. Outstanding stand-by letters of credit against these credit
facilities totaled $2.6 million and $4.2 million as of May 27, 2000 and May 29,
1999, respectively. The weighted average interest rates incurred during fiscal
2000, 1999 and 1998 were approximately 9.6%, 8.4% and 8.1%, respectively.
Capital expenditures (excluding acquisitions) during fiscal 2000, 1999
and 1998 were approximately $0.2 million, $0.8 million and $1.1 million
respectively. Capital expenditures during fiscal 2000 included store fixtures,
building and leasehold improvements, equipment, computer hardware and software
upgrades.
See Note 1 of the accompanying Notes to Consolidated Financial
Statements for a further discussion of the Company's liquidity status and
management's plans and actions to improve the Company's working capital
position.
The Company currently leases all 17 of its stores and anticipates
obtaining retail space for new stores through leases. This arrangement allows
the Company to utilize more effectively its cash to design and decorate its
stores with quality furnishings consistent with the prestigious image the
Company seeks to maintain.
19
<PAGE>
SEASONALITY
The Company's business is seasonal in nature, reflecting travel
patterns to the Caribbean and Alaska. The peak selling season in the Caribbean
runs from late Fall through Spring; the peak selling season in Alaska runs
through Spring and Summer. 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. Unaudited quarterly
financial information for the Company for fiscal 2000 and 1999 is included in
Note 8 of the accompanying Notes to Consolidated Financial Statements.
INFLATION
Historically, the Company has generally been able to increase prices to
reflect cost increases resulting from inflation and expects to be able to do so
in the future. While management cannot precisely determine the effect of
inflation on its operations, management does not believe that its operations
have been materially affected by inflation during the three most recent fiscal
years.
EXCHANGE RATES
While the Company receives United States dollars for most of its sales,
a significant portion of the Company's inventory purchases are transacted in
foreign currencies. Because of the Company's need to maintain adequate levels of
inventory, the Company must place large orders for merchandise many months in
advance of when it will receive payment for the merchandise from customers. The
Company's ability to offer attractive pricing of luxury goods purchased in
foreign currency depends in part on the relative exchange rates between the
United States dollar and the various foreign currencies. The Company 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 or Compliant" 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. Total expenses related to Y2K Compliance were
approximately $600,000. It is management's belief that with the actions taken by
the Company, the Company was Y2K Compliant before the beginning of year 2000.
Impact of Year 2000. To date, the Company has experienced minimal
interruption due to year 2000 issues. Problems encountered to date related to
customized programs that were inadvertently overlooked in converting to Y2K
Compliant programs. The majority of such programs have since been converted to
Y2K Complaint programs and currently are running without problems. As year 2000
problems may arise throughout the calendar year, the Company will continue to
monitor all of its computer equipment and software on a periodic basis.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Financial Statements For the Three Years Ended May 27, 2000
Report of Independent Public Accountants.....................................23
Consolidated Balance Sheets..................................................24
Consolidated Statements of Operations........................................25
Consolidated Statements of Changes in Stockholders' Equity...................26
Consolidated Statements of Cash Flows........................................27
Notes to Consolidated Financial Statements...................................28
22
<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 27, 2000
and May 29, 1999, and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the fiscal years ended May
27, 2000, May 29, 1999 and May 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Little Switzerland,
Inc. and subsidiaries as of May 27, 2000 and May 29, 1999, and the results of
its operations and its cash flows for each of the fiscal years ended May 27,
2000, May 29, 1999 and May 30, 1998, in conformity with accounting principles
generally accepted in the United States.
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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 4, 2000, (except with respect to the matters discussed in Notes 4 and 13,
as to which the dates are August 29, 2000 and October 16, 2000, respectively)
23
<PAGE>
LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
MAY 27, MAY 29,
2000 1999
-------------- ---------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 959 $ 2,739
Accounts receivable 355 560
Inventory 28,172 38,195
Prepaid expenses and other current assets 754 1,111
-------------- ---------------
Total current assets 30,240 42,605
Property, Plant and Equipment, at cost 32,240 36,999
Less--Accumulated depreciation 20,382 19,051
-------------- ---------------
11,858 17,948
Other Assets 381 291
-------------- ---------------
Total assets $ 42,479 $ 60,844
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured demand notes $ 10,175 $ 13,275
Accounts payable 5,814 5,205
Accrued and currently deferred income taxes 1,500 1,715
Other accrued expenses 3,435 3,641
-------------- ---------------
Total current liabilities 20,924 23,836
Deferred income taxes 202 202
-------------- ---------------
Total liabilities 21,126 24,038
-------------- ---------------
Commitments and Contingencies (Note 6)
Minority Interest 1,619 1,619
Stockholders' Equity:
Preferred stock, $0.01 par value--Authorized--5,000 shares
Issued and outstanding--none- - -
Common stock, $0.01 par value--Authorized--20,000 shares
Issued and outstanding--8,631 and 8,625 shares at May 27, 2000 and
May 29, 1999, respectively 87 87
Capital in excess of par value 15,604 15,601
Retained earnings 4,043 19,499
-------------- ---------------
Total stockholders' equity 19,734 35,187
-------------- ---------------
Total liabilities, minority interest and stockholders' equity $ 42,479 $ 60,844
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
24
<PAGE>
LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------
MAY 27, MAY 29, MAY 30,
2000 1999 1998
------------- ------------ ---------------
<S> <C> <C> <C>
Net sales $ 55,026 $ 76,435 $ 100,368
Cost of sales 35,689 45,560 57,728
------------- ------------ ---------------
Gross profit 19,337 30,875 42,640
Selling, general and administrative expenses 32,657 39,732 43,805
Gain on insurance proceeds - 330 -
------------- ------------ ---------------
Operating loss (13,320) (8,527) (1,165)
Interest expense, net 1,116 1,355 1,540
------------- ------------ ---------------
Loss before income taxes and cumulative effect of
change in accounting principle (14,436) (9,882) (2,705)
Provision for income taxes 1,020 1,200 863
------------- ------------ ---------------
Loss before cumulative effect of change in
accounting principle (15,456) (11,082) (3,568)
Cumulative effect of change in accounting
principle, net of applicable tax - - (235)
------------- ------------ ---------------
Net loss $ (15,456) $ (11,082) $ (3,803)
============= ============ ===============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss before cumulative effect of change in
accounting principle $ (1.79) $ (1.29) $ (0.42)
Cumulative effect of change in accounting
principle, net of applicable tax - - (0.03)
------------- ------------ ---------------
Basic and diluted loss per common share $ (1.79) $ (1.29) $ (0.45)
============= ============ ===============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 8,629 8,624 8,505
============= ============ ===============
Diluted 8,629 8,624 8,505
============= ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
25
<PAGE>
LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- CAPITAL IN RETAINED
SHARES AMOUNT EXCESS OF PAR EARNINGS TOTAL
---------------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 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
Net loss - - - (15,456) (15,456)
Shares issued under stock purchase
plan 6 - 3 - 3
---------------- ----------- --------------- ------------ -------------
Balance, May 27, 2000 8,631 $ 87 $ 15,604 $ 4,043 $ 19,734
================ =========== =============== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
26
<PAGE>
LITTLE SWITZERLAND, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------------
MAY 27, MAY 29, MAY 30,
2000 1999 1998
------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (15,456) $ (11,082) $ (3,803)
Adjustments to reconcile net loss to net cash (used in
cash) provided by operating activities-
Depreciation and amortization 2,949 3,194 3,379
Store closing expense - 1,797 -
Cumulative effect of change in accounting principle - - 235
Impairment of long-lived assets 2,574 - 2,508
Gain on sale of certain assets, net (783) - -
Increase in deferred income taxes - - 16
Changes in assets and liabilities-
Decrease in accounts receivable 205 1,439 84
Decrease (increase) in inventory 7,174 10,983 (4,450)
Decrease in prepaid expenses and other current
assets 357 833 189
Increase (decrease) in accounts payable 609 (5,635) 3,838
Increase (decrease) in other accrued expenses (206) (542) 1,069
(Decrease) increase in accrued and currently
deferred income taxes (215) 938 348
------------- --------------- --------------
Net cash provided by (used in) operating activities (2,792) 1,925 3,413
------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (213) (798) (1,123)
Proceeds from sale of certain assets 4,412 - -
Decrease (increase) in other assets (90) 3 (14)
------------- --------------- --------------
Net cash provided by (used in) investing activities 4,109 (795) (1,137)
------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under secured demand notes payable - 28,900 24,150
Repayment of secured demand notes payable (3,100) (27,625) (24,425)
Proceeds from long-term borrowings - 1,950 -
Repayments of long-term borrowings - (3,894) (2,225)
Proceeds from issuance of common stock 3 - 792
------------- --------------- --------------
Net cash used in financing activities (3,097) (669) (1,708)
------------- --------------- --------------
Net (decrease) increase in cash and cash equivalents (1,780) 461 568
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,739 2,278 1,710
------------- --------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 959 $ 2,739 $ 2,278
============= =============== ==============
CASH PAID DURING THE YEAR FOR:
Income taxes $ 1,235 $ 262 $ 515
============= =============== ==============
Interest $ 1,181 $ 1,575 $ 1,498
============= =============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 27, 2000
(1) BUSINESS ENVIRONMENT AND MANAGEMENT'S PLANS
Existing Situation
The Company continues to operate without a long-term credit facility to
fund its working capital needs. On August 29, 2000, the Company entered into a
standstill agreement with its lenders (the "Standstill Agreement") through
December 31, 2000 that effectively freezes the Company's line of credit at $10.2
million in outstanding cash borrowings and approximately $2.6 million in
contingent stand-by letters of credit. This agreement provides Little
Switzerland with the flexibility to close on the remaining approximately $9.0
million in proceeds from a series of proposed transactions with a Almod Diamonds
Limited ("Almod") for aggregate proceeds to the Company of $14.0 million. It
also provides the Company with needed time to secure a new working capital
facility.
Strategic Plan
Management continues to implement Phase I of its strategic plan to
address the Company's current financial condition and rebuild its business. The
major components of the strategic plan, in the order of priority, and the status
of each initiative are:
o Reduction of the Company's debt to existing lenders through, in
part, strategic sales of non-core assets, liquidation of older
and/or discontinued merchandise, and securing a new working
capital facility with an asset based lender and raising additional
equity.
To date, the Company has reduced its debt to existing lenders
while working to secure a new working capital facility. The
Company has reduced its debt from $13.3 million in secured
borrowings and $4.2 million in outstanding stand-by letters of
credit at May 29, 1999 to $10.2 million in secured borrowings
and $2.6 million in outstanding stand-by letters of credit at
May 27, 2000. At this time, there is no assurance that the
Company will be successful beyond the measures completed to
date.
The Company had identified certain discontinued and/or
slow-moving merchandise, which it had intended to sell for
cash to a third-party liquidator. Due to the impact of
Hurricane Lenny, the Company was not able to finalize this
arrangement. To mitigate its loss, the Company employed a new
liquidator as a consultant to liquidate the merchandise on the
Company's behalf through March 31, 2000. See "Liquidation of
Aged Inventory" below.
The Company has entered into a letter of intent with Almod
which would, if consummated in accordance with its terms,
result in the Company receiving the remaining approximately
$9.0 million of an aggregate $14.0 million through a
combination of the sale of a non-core operating store and the
issuance of additional shares of Common Stock.
o Exiting redundant Eastern Caribbean locations and analyzing
expansion opportunities in the Western Caribbean as desirable
space becomes available.
28
<PAGE>
The Company has determined which of its current markets are
either core, secondary or redundant markets. The Company has
decided to exit the redundant markets of St. Lucia and Antigua
and has sold its stores located on these islands (see "Notes
to Consolidated Financial Statements, Footnote 1, Management's
Plans-Actions Taken through
August 2000" below).
The Company is revisiting its decision to fully exit the
Barbados market. With the Company's recent repurchase of the
outstanding preferred shares and elimination of a fee paid to
its preferred shareholder, the Company is evaluating the
structure of its Barbados operations (see Note 13).
The Company has preliminarily identified other cruise ship
ports outside the Eastern Caribbean where it presently
operates as expansion opportunities. If additional financing
becomes available, the Company intends to pursue these
opportunities.
Phase II of the Company's Strategic Plan is to return the Company to
profitability by eliminating operating losses through executing a strategy to
reduce overhead expenses, improve margins and increase comparable store sales.
This plan reflects a streamlined business that, if achieved, could return the
Company to profitability over the next two years and potentially enable the
Company to meet the conditions for relisting on the Nasdaq. This plan
incorporates the following:
o Recruiting a senior operations team with a proven track record of
improving retail store sales productivity.
The Company has now hired a seasoned Senior Vice President of
store operations with over 12 years of multi-store operations
experience as an Executive Officer. In addition, the Company
has recruited and hired a new Director of Retail Operations.
o Recruiting a seasoned marketing team to improve our market
penetration with the core cruise ship client market and the
secondary hotel client market.
The Company has now hired a seasoned Divisional Vice President
of marketing with over 12 years of experience in Duty Free
Retail in the Eastern and Western Caribbean. In addition, the
Company has hired a Director of Marketing with comparable
experience with the cruise ship industry in the Caribbean.
o Improving margins by improving merchandise mix and eliminating
unnecessary point of sale markdowns.
The Company continues to receive new merchandise, which will
have a positive impact on its margins in fiscal 2001. Improved
sales training and product knowledge is being implemented
throughout the organization, which will increase sales with
fewer discounts.
o Identify and implement reductions in corporate overhead.
The Company has done a thorough study of its overhead
structure that will enable the Company to reduce excessive
costs throughout fiscal 2001. Over the past two years,
29
<PAGE>
the Company has incurred significant legal, auditing and
consulting costs and has taken steps to reduce these costs in
the future.
Phase III of the Company's Strategic Plan, which it plans to implement
in the future to return Little Switzerland to profitability, incorporates the
following:
o Developing an assortment of branded Little Switzerland merchandise
while pursuing designer boutiques in existing Little Switzerland
stores.
o Developing a new e-commerce strategy to leverage the Little
Switzerland duty free shopping concept.
ACTIONS TAKEN THROUGH AUGUST 2000
The Company believes that its actions taken to date were both prudent
and necessary to eliminate redundancy in locations, dispose of marginal
locations, raise cash to pay down substantially its existing lenders and
continue current in its obligations to its suppliers.
Sale of St. Barthelemy Store
On August 31, 1999, the Company consummated the sale of all of the
fixed assets and inventory of its store located on the island of St. Barthelemy
pursuant to a purchase and sale agreement with a third party for an aggregate
amount equal to $1.3 million. In the third quarter of fiscal 2000, the Company
used $400,000 in proceeds that had been released from escrow to pay down its
debt to its existing lenders under its credit facilities. The Company recorded a
gain of $537,000 on this transaction in the second quarter of fiscal 2000, which
is reflected as a reduction in selling, general and administrative expense.
Sale of Antigua Store
On November 12, 1999, the Company consummated the sale of all of the
fixed assets and inventory, of which $0.8 million was inventory of its store
located on the island of Antigua for an aggregate purchase price of $2.0
million. In addition, the Company has been released from an Antigua related
contingent stand-by letter of credit in the amount of $330,000. The Company used
the proceeds to pay down its debt to its existing lenders under its credit
facilities. The Company recorded a gain of $495,000 on this transaction in the
second quarter of fiscal 2000, which is reflected as a reduction in selling,
general and administrative expense.
Sale of St. Lucia Fragrance Store
On December 1, 1999, the Company consummated the sale of all of its
fragrance inventory and fixtures related to the fragrance store located on the
island of St. Lucia for an aggregate purchase price of $150,000. In addition,
the Company was able to reduce $180,000 of its outstanding obligations under a
St. Lucia related contingent stand-by letter of credit. The Company used the
proceeds from the sale to pay down its debt to its existing lenders under its
credit facilities. The Company recorded a loss of $41,000 on this transaction in
the third quarter of fiscal 2000, which is reflected in selling, general and
administrative expense.
30
<PAGE>
Sale of Two St. Lucia Stores
On December 28, 1999, the Company consummated the sale of all of the
assets, of which $0.6 million was inventory, of its two stores located on the
island of St. Lucia for an aggregate purchase price of approximately $1.0
million. In addition, the Company has been released from the remaining $770,000
outstanding under related contingent stand-by letters of credit. Prior to such
sale, the Company had negotiated a reduction in its contingent stand-by letters
of credit on the island of St. Lucia by $330,000. The Company used the $1.0
million proceeds and removal of the $770,000 contingent stand-by letters of
credit to pay down its debt to its existing lenders under its credit facilities.
The Company recorded a loss of $208,000 on this transaction in the third quarter
of fiscal 2000, which is reflected in selling, general and administrative
expense.
Liquidation of Aged Inventory
In order to raise funds to pay down its bank debt and to generate
additional working capital, the Company decided to accelerate the liquidation of
discontinued and/or slow moving merchandise in a transaction with a third-party
liquidator. The Company was to have received an advance of $2.0 million for such
sale which, upon receipt by the Company, was to be paid to its existing lenders
to reduce its debt under the credit facilities and for working capital purposes.
Upon completion of the sale, the Company was to receive commissions on any
profits received in excess of the advanced $2.0 million and operational cost of
the sale. In the second quarter of fiscal 2000, the Company recorded a $1.8
million charge to cost of goods sold reflecting the impairment of this
inventory.
The terms of this transaction were negatively impacted by Hurricane
Lenny, which caused damage to the infrastructure of St. Martin and reduced
tourist traffic to this island. As a result, the Company was unable to close the
original contract. To mitigate its losses, the Company engaged a new liquidator
as a consultant to liquidate the merchandise on the Company's behalf. The
third-party liquidator conducted the clearance sale through the end of March
2000 in one of the Company's stores in Aruba and one store in French St. Martin
(see Note 6).
Management Changes
Throughout the course of fiscal 2000, the Company has made efforts to
strengthen its management team. This process began with the hiring of a new CEO
and CFO at the beginning of fiscal 2000, as well as a strengthening of the
Company's board.
On August 24, 1999, Robert L. Baumgardner joined the Company as the
permanent President and Chief Executive Officer of the Company. In addition, Mr.
Baumgardner was also appointed as a Class I Director of the Company, increasing
the Board of Directors to six members. Mr. Kenneth W. Watson, the former Acting
Chief Executive Officer of the Company, continues to serve as a Class II
Director of the Company.
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. Mr. Hopper replaces David J. Nace, the previous Chief
Financial Officer of the Company, who resigned due to personal reasons.
In January 2000, Patrick Heron assumed the responsibilities of Vice
President General Merchandise Manager.
31
<PAGE>
In February 2000, the Company hired three senior level employees:
Michael Pepper, Brenda Pepper and Zona Corbin joined the Company as Senior Vice
President Operations, Director of Retail Operations and Director of Marketing,
respectively.
In April 2000, the Company hired Walter Darr Conradson as Divisional
Vice President of Marketing. In addition, the Company promoted Alfred "Pat"
Bailey to Divisional Vice President of Store Planning and Property Development.
The Company believes it now has a well rounded executive group capable
of re-establishing the Company's dominant position in the duty-free retailing
arena.
Recent Events
On June 13, 2000, the Company consummated the sale of the goodwill and
fixed assets of its store located in Marigot on the island of St. Martin
pursuant to a purchase and sale agreement with a third party for an aggregate
purchase price of $365,000. The Company has recorded an asset impairment
write-down in the fourth quarter of fiscal 2000 of $730,000 in connection with
this transaction. The impairment is reflected as a selling, general and
administrative expense in the Company's consolidated statement of operations.
On July 28, 2000, as part of the transaction contemplated by the Letter
of Intent with Almod, the Company sold its owned facility in Philipsburg, St.
Maarten for $4.5 million and entered into a leaseback arrangement for 5 years
with one five-year option at market rates (the "Philipsburg Sale-Leaseback").
In August 2000, the Company entered into a letter of intent (the
"Letter of Intent") with Almod which, if consummated in accordance with its
terms, would result in the Company receiving an aggregate of $14.0 million
through a combination of real property related transactions, including the
Philipsburg Sale-Leaseback and the sale of a non-core operating store, and a
substantial investment in the Company's Common Stock. To date, the Company has
completed the Philipsburg Sale-Leaseback and received a $500,000 deposit in
respect of the sale of a non-core operating store. The Company and Almod are
exploring various alternatives with respect to the terms of the proposed sale of
the non-core operating store that could result in the Company maintaining a
presence on the applicable Caribbean island. Pursuant to the Letter of Intent,
but subject to, among other things, the successful completion of its due
diligence, Almod has agreed to purchase approximately 7,069,000 new shares of
Common Stock, or 45% of the then outstanding shares, for an aggregate cash
purchase price of $6.9 million. The Company anticipates that the definitive
stock purchase agreement will contain certain customary "standstill" provisions
in transactions of this type, including provisions designed to ensure that Almod
would not control the Company. No assurance can be provided as to whether the
Company and Almod will be able to consummate the remaining two transactions
contemplated by the Letter of Intent or, if consummated, the definitive terms
thereof.
On August 4, 2000, the Company purchased all of the outstanding
preferred shares in its Barbados operations, which have been carried at $1.6
million for $0.3 million. This purchase terminates a management agreement
associated with the shares requiring the Company to pay 2.5% of sales to the
holder of the preferred shares.
32
<PAGE>
Actions in Progress
The Company's new management team is committed to continuing progress
on the initiatives taken to date. This team will continue to attempt to secure a
greater range of world class luxury products for sale in the Company's stores.
Included in this process will be a focus on improving gross margins and
inventory turnover.
Qualification
The Company's ability to achieve its operating results included in its
fiscal 2001 business plan is impacted by each of the factors described above.
There can be no assurance that the Company will successfully execute its
business plan, including securing adequate financing to pay off its existing
lenders and to fund its working capital needs.
Management's planned actions to improve its current financial condition
have been discussed above. 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. The Company believes no further
impairment losses are required at May 27, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Little Switzerland, Inc. is a duty-free 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 27, 2000, there were 10 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 (Caymans) 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, the French and
Netherlands Antilles, and Barbados. Little Switzerland (BVI) Limited,
incorporated in the British Virgin Islands, and Little Switzerland (Caymans)
Limited, incorporated in the Cayman Islands, were not yet in operation at May
27, 2000. L.S. Wholesale purchases inventory for distribution to L.S. Holding,
Inc.'s retail stores.
As of May 27, 2000, the Company operated 18 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.
Presentation
The accompanying consolidated 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. During the year
ended May 27, 2000, the Company incurred a loss of $15.5
33
<PAGE>
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 consolidated financial statements do not include any adjustment relating to
the recoverability of assets 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.
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 27, 2000 presentation.
All significant intercompany balances have been eliminated in consolidation. The
Company's fiscal year ends on the Saturday closest to May 31.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 2000, 1999 and 1998 was approximately
$2,122,000, $2,919,000 and $3,401,000, respectively. Prepaid advertising of
approximately $402,000 and $305,000 at May 27, 2000 and May 29, 1999,
respectively, is included in the consolidated balance sheets as prepaid expenses
and other current assets.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts. The following
is a rollforward of the Company's allowance for doubtful accounts:
<TABLE>
<CAPTION>
Balance at Balance at End of
Beginning of Period Additions Deductions Period
<S> <C> <C> <C> <C>
Year ended May 30, 1998 $ 325,000 $ 535,000 $ 611,000 $ 249,000
Year ended May 29, 1999 249,000 528,000 644,000 133,000
Year ended May 27, 2000 $ 133,000 $ 493,000 $ 75,000 $ 551,000
</TABLE>
34
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are depreciated over their estimated
useful lives, principally using the straight-line method. Maintenance and repair
costs are charged to expense as incurred. Property, plant and equipment consist
of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
RANGE MAY 27, 2000 MAY 29, 1999
<S> <C> <C> <C>
Land and buildings 20-40 years $ 7,323,000 $ 7,303,000
Furniture and fixtures 3-10 years 9,567,000 11,021,000
Equipment 3-20 years 4,997,000 5,139,000
Construction-in-progress - - 15,000
Life of the lease or
useful life, whichever is
Leasehold improvements shorter 10,353,000 13,521,000
------------------ -------------------
$ 32,240,000 $ 36,999,000
================== ===================
</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 consist primarily of amounts related to 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 are being amortized
over periods of up to 10 years (see below).
The Company accounts for long-lived and intangible assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. In accordance with the requirements of SFAS
No. 121, the Company periodically assesses whether events or circumstances have
occurred that may indicate the carrying value of its long-lived assets may not
be recoverable. When such events or circumstances indicate the carrying value of
an asset may be impaired, the Company uses an estimate of the future
undiscounted cash flows to be derived from the asset over the remaining useful
life of the asset to assess whether or not the asset is recoverable. If the
future undiscounted cash flows to be derived over the life of the asset do not
exceed the asset's net book value, the Company recognizes an impairment loss for
the amount by which the net book value of the asset exceeds its estimated fair
market value. The Company recognized an impairment loss of approximately
$2,574,000 during the year ended May 27, 2000 related to events and
circumstances that indicated the carrying value of certain long-lived assets may
not be recoverable. In addition, 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 losses have been
35
<PAGE>
classified as a component of selling, general and administrative expense for the
years ended May 27, 2000 and May 30, 1998. No other impairment loss was
recognized during the year ended May 29, 1999.
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 pre-opening, pre-operating 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. The Company had no foreign exchange contracts outstanding at
May 27, 2000.
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 statements of operations. 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 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.
36
<PAGE>
Other Accrued Expenses
Other accrued expenses are comprised of the following:
MAY 27, MAY 29,
2000 1999
--------------- ---------------
Customer deposits $ 149,000 $ 430,000
Payroll and related items 1,398,000 1,210,000
Store closing expenses - 683,000
Legal 375,000 150,000
Management fees (Note 10) 143,000 203,000
Other 1,370,000 965,000
--------------- ---------------
$ 3,435,000 $ 3,641,000
=============== ===============
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 27, 2000 and
May 29, 1999.
Net Income per Share
In accordance with the requirements of SFAS No. 128, Earnings per
Share, 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
of option plans, which were antidilutive for the periods included in this
report, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------
MAY 27, 2000 MAY 29, 1999 MAY 30, 1998
<S> <C> <C> <C>
Weighted average number of shares used in basic earnings
per share calculation 8,629 8,624 8,505
Dilutive effects of options - - -
--------------- ----------------- ----------------
Weighted average number of shares used in diluted earnings
per share calculation 8,629 8,624 8,505
=============== ================= ================
Shares under and outside of options plans excluded in
computation of diluted earnings per share due to
antidilutive effects 1,407 833 812
=============== ================= ================
</TABLE>
37
<PAGE>
Comprehensive Income
Comprehensive income is defined as the change in net assets of a
business enterprise during a period from transactions generated from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Comprehensive
income is equal to net income for the years ended May 27, 2000, May 29, 1999 and
May 30, 1998.
Segment Information
The Company complies with the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. 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.
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
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
Revenue Recognition. This bulletin establishes guidelines for revenue
recognition and is in effect for periods beginning May 26, 2001. The Company
does not expect that the adoption of this methodology will have a material
impact on their financial condition or results of operations.
In March 2000, the FASB issued interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25. The Interpretation clarifies the application of APB Opinion No.
25 in certain situations, as defined. The Interpretation is effective July 1,
2000, but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by this
Interpretation occur during the period after December 15, 1998, but before the
effective date, the effects of applying this Interpretation would be recognized
on a prospective basis from the effective date. This new Interpretation is not
anticipated to have a significant impact on the Company's consolidated financial
statements.
Foreign Operations
Net sales and operating income (loss) from foreign operations (non-U.S.
possessions) amounted to 56%, 62% and 61%, and 47%, 37% and 162% of total net
sales and operating income (loss), respectively, in fiscal 2000, 1999 and 1998,
respectively. Intersegment sales were not material for all periods presented.
Identifiable assets of foreign operations amounted to 58%, 62% and 56% of total
assets as of May 27, 2000, May 29, 1999 and May 30, 1998, respectively.
38
<PAGE>
(4) CREDIT ARRANGEMENTS
Historically, the Company had 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 current
level of $17.5 million. This amount consisted 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 substantially all of their personal
property. The Forbearance Agreement also sets forth certain criteria that the
Company had to 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 currently is actively
exploring other financing alternatives. At this time, however, the Company does
not have any firm commitments from other lenders 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 $10.2 million and $13.3 million as of May 27, 2000 and
May 29, 1999, respectively. Outstanding stand-by letters of credit against these
credit facilities totaled $2.6 million and $4.2 million as of May 27, 2000 and
May 29, 1999, respectively. The weighted average interest rates incurred during
fiscal 2000, 1999 and 1998 were approximately 9.6%, 8.4% and 8.1%, respectively.
On August 29, 2000 the Company entered into a Standstill Agreement
effective through December 31, 2000. Pursuant to the Standstill Agreement, the
Company's lenders will not make any additional borrowings available to the
Company and thereby freeze the Company's line of credit at $10.2 million in
outstanding cash borrowings and approximately $2.6 million in contingent
stand-by letters of credit. However, the lenders have agreed to refrain from
exercising any remedies arising from existing defaults during the term of the
Standstill Agreement so long as the Company, among other things, (i) pays
interest on the outstanding borrowings and letters of credit, together with
related fees and expenses, (ii) maintains a certain inventory to outstanding
total debt coverage ratio, and (iii) reduces the outstanding borrowings and
letters of credit (in agreed upon amounts) from the proceeds of (x) the sale of
certain real property related assets to Almod as described above, (y) certain
estimated anticipated business interruption insurance proceeds for losses
sustained by the Company from Hurricane Lenny and (z) the sale of Common Stock
to Almod as described above. The Company is in compliance with, or has waivers
for, the aforementioned provisions of the Standstill Agreement. The Standstill
Agreement will enable the Company to retain a significant portion of such
proceeds for working capital, and provides the Company with additional time to
attempt to consummate certain proposed transactions with Almod as contemplated
by the Letter of Intent and to seek a new working capital facility. As part of
the Standstill Agreement, the Company's lenders agreed to release their liens on
the Company's Philipsburg location which enabled the Company to complete the
Philipsburg Sale-Leaseback. As a result of the Philipsburg Sale-Leaseback, the
Company received total proceeds of $4.5 million, of which approximately $3.5
million was used as additional working capital and the remainder will be used to
reduce the Company's outstanding debt.
39
<PAGE>
(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 27, 2000 MAY 29, 1999 MAY 30, 1998
Domestic $ (5,609,000) $(5,141,000) $ 4,292,000
Foreign (8,827,000) (4,741,000) (6,997,000)
-------------- ---------------- ---------------
$(14,436,000) $(9,882,000) $(2,705,000)
============== ================ ===============
The components of the provision (benefit) for income taxes are as follows:
FISCAL YEARS ENDED
----------------------------------------------
MAY 27, 2000 MAY 29, 1999 MAY 30, 1998
Current-
Domestic $ 729,000 $ 66,000 $ 339,000
Foreign 291,000 1,134,000 508,000
------------- ---------------- -------------
1,020,000 1,200,000 847,000
------------- ---------------- -------------
Deferred-
Domestic - $ - $ 16,000
Foreign - - -
------------- ---------------- -------------
$ 1,020,000 $ 1,200,000 $ 863,000
============= ================ =============
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.
A reconciliation of the Company's effective tax rate to the USVI
statutory rate of 37.4% is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------
MAY 27, 2000 MAY 29, 1999 MAY 30, 1998
<S> <C> <C> <C>
Computed tax benefit at statutory rate $(5,399,000) $(3,696,000) $(1,012,000)
Increases (reductions) resulting from-
Differences between foreign provisions recorded and
provisions at USVI rate 284,000 946,000 442,000
Effect of earnings of subsidiary in USVI subject to
lower tax rate (595,000) (199,000) (1,836,000)
Effect of subsidiary net operating losses not benefited 6,730,000 4,149,000 3,269,000
--------------- ----------------- ---------------
$ 1,020,000 $ 1,200,000 $ 863,000
=============== ================= ===============
</TABLE>
40
<PAGE>
The Company's income is subject to taxation in each of the
jurisdictions in which it operates at rates ranging from 9.3% 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 $0.07, $0.02 and $0.22 in fiscal
2000, 1999 and 1998, respectively.
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 entered
into a settlement with the tax authorities regarding its 1988-1996 local tax
returns and recorded the cost of the settlement as incremental tax expense
during the fiscal year ended May 29, 1999. Pursuant to this settlement, the
Company was assessed a profit tax in the amount of $650,000, which was payable
in 10 equal installments of $65,000 per month commencing on March 1, 1999.
Interest of 6% per annum was charged on the outstanding amount starting on March
1, 1999. The Company also was assessed a wage tax in the amount of $550,000,
which was payable in six installments commencing in June 1999. Interest of 6%
per annum was charged on the outstanding amount starting on June 1, 1999. At
year-end May 27, 2000, all assessments and interest for income tax settlement
and wage tax settlement had been paid.
The deferred tax liability of $202,000 and $202,000 at May 27, 2000 and
May 29, 1999, respectively, is the result of the use of accelerated depreciation
methods for tax purposes. The Company's deferred tax assets consist primarily of
net operating loss carryforwards of certain subsidiaries totaling approximately
$15,713,000 and $9,174,000 as of May 27, 2000 and May 29, 1999, respectively. A
full valuation reserve has been recorded against these deferred tax assets. The
valuation allowance relates to uncertainty surrounding the realizability of the
deferred tax assets in excess of the deferred tax liabilities, principally the
net operating loss carryforwards. For tax reporting purposes, the Company has
net operating loss carryforwards of approximately $40,238,000 and $23,476,000 as
of May 27, 2000 and May 29, 1999, respectively. Utilization of the net operating
loss carryforward is contingent on the Company's ability to generate income in
future years. The net operating loss carryforwards will expire from 2011 to 2020
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 27, 2000 are as follows:
41
<PAGE>
LEASE COMMITMENT
YEAR
Fiscal 2001 $ 3,496,000
Fiscal 2002 2,831,000
Fiscal 2003 2,246,000
Fiscal 2004 1,263,000
Fiscal 2005 688,000
Thereafter 388,000
----------------
$ 10,912,000
================
The above table excludes approximately $3.2 million of rental
commitments related to the sale-leaseback of its Philipsburg location (see Note
13).
Rental expense included in the accompanying consolidated statements of
operations amounted to approximately $3,519,000, $4,301,000 and $4,104,000 in
fiscal 2000, 1999 and 1998, respectively.
The Company owns the building that houses its headquarters and
warehouse on St. Thomas and leases the underlying real property from the Virgin
Islands Port Authority under a five-year ground lease that expires in April
2005. The ground lease is subject to one five-year renewal term 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 a Merger Agreement
with Destination Retail Holding Corporation (DRHC), dated February 4, 1998,
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 0%, 3% and 26% of the Company's
sales in fiscal 2000, 1999 and 1998, respectively. Rolex is the only
manufacturer whose products accounted for more than 10% of the Company's sales
in fiscal 1998. 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 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
42
<PAGE>
jewelry, the Company believes that the loss of Rolex will continue to have a
material adverse effect on the Company's results of operations.
Destination Retail Holdings Corporation
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.
On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware against Destination Retail Holdings
Corporation (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 sought 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 April 24, 2000, the Company reached an agreement on the settlement
of litigation with DRHC. Pursuant to the terms of the settlement, Little
Switzerland will be assuming the lease of retail space on the island of St.
Thomas from one of DRHC's affiliates and also will receive an aggregate of
$500,000 from DRHC in a combination of cash and a promissory note for refitting
and modernizing the space. The Company received an initial cash payment of
$250,000 and a promissory note for the remaining $250,000.
The costs associated with this matter, which consist primarily of legal
and investment banking fees, amounted to approximately $0.05 million, $0.2
million and $2.7 million in fiscal 2000, 1999 and 1998, respectively, and have
been recorded in selling, general and administrative expense in the accompanying
consolidated financial statements.
43
<PAGE>
Legal Matters
On March 22, 1999, a complaint was filed as a putative class action on
behalf of certain stockholders of the Company 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 the 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. The plaintiffs are seeking monetary damages,
including, without limitation, reasonable expenses in connection with this
action. The plaintiffs amended their complaint on November 10, 1999 and the
Company filed a motion to dismiss the plaintiff's amended complaint on December
7, 1999. On January 28, 2000, the plaintiffs filed their opposition to the
motion to dismiss. The motion remains pending. The Company has entered into
discussions to settle this action. However, there are no assurances that these
discussions will result in a settlement of this action, or that any settlement
will be on terms favorable to the Company. 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.
There have been no changes in the Company's civil actions which are
pending against Lorraine Quetel, Lydia Magras and Bon Voyage Travel, Inc. in
connection with the employee defalcation which occurred during the Company's
fiscal year ended May 31, 1997 (see Note 13).
The Company is also party to other 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.
Hurricane Damage
On November 30, 1999, the Company announced that Hurricane Lenny, which
hit certain Caribbean islands during the Company's second fiscal quarter of
2000, caused significant damage to the infrastructure of Dutch St. Maarten and
French St. Martin, including hotels, cruise ship docks and other tourist
facilities. While Little Switzerland sustained minimal property damage to its
retail stores, one of the Company's stores on St. Martin was closed for 24 days
and one for 33 days, one store on St. Maarten was closed for 12 days and the
four St. Thomas stores were closed for 2 days each. As of December 20, 1999, all
of the Company's stores were restored to normal operations.
Interruption of the Company's business as a result of Hurricane Lenny
has had an adverse impact on the Company's plans to accomplish, among other
items, repayment of debt to its existing lenders, consummating a deal to sell
liquidation goods to a third party and obtaining alternative asset-based
financing.
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The Company negotiated a $2.2
million settlement of which $0.5 million had been advanced to the Company. After
applying a deductible of $0.3 million, the Company will receive proceeds of $1.4
million as final settlement of this claim.
44
<PAGE>
In September 1998, Hurricane George inflicted minor damage to several
of the Company's stores and caused significant damage to its St. Kitts store and
to various other islands' infrastructures, including hotels and other tourist
facilities, where the Company did business. As of October 16, 1998, all of the
Company's stores had reopened with the exception of the St. Kitts store, which
sustained major damage and was permanently closed. The Company settled all
outstanding claims related to Hurricane George 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 $0.3 million in fiscal 1999, after write-offs related
to damaged assets of approximately $0.7 million, including furniture and
fixtures, inventory and other assets related to the store affected by that
Hurricane.
Significant Suppliers
For the years ended May 27, 2000 and May 29, 1999, one supplier, the
Swatch Group, accounted for approximately $7.5 million, or 13.5% of net sales,
and $8.0 million, or 10.4% of net sales, respectively. No other supplier
accounted for greater than 10% of net sales in fiscal 2000 or 1999.
For the year ended May 30, 1998 one supplier, Rolex, accounted for
approximately $26.1 million, or 26% of net sales. No other supplier accounted
for greater than 10% of net sales in fiscal 1998.
(7) EMPLOYEE BENEFIT PLANS
The Company provided a tax-qualified discretionary contribution
retirement plan for eligible USVI employees to which the Company, at its
discretion, contributed. Each employee became a participant following completion
of one year's employment, or, if later, the attainment of age 21. All
participants became fully vested after seven years of service.
Effective June 1, 1996, the Company replaced its Discretionary
Contribution Plan with a 401(k) Plan under which the Company matches each
employee's contribution up to 50% of the first 3% of the employee's
contribution. During fiscal 2000, 1999 and 1998, the Company's matching totaled
approximately $41,000, $23,000 and $86,000, respectively. The Company's
contributions vest based on the employee's years of service, with full vesting
after five years of service.
(8) QUARTERLY DATA (UNAUDITED)
The following presents the unaudited quarterly results of operations
for the fiscal years ended May 27, 2000 and May 29, 1999 (in thousands except
per share data):
<TABLE>
<CAPTION>
FIRST QUARTER ENDED SECOND QUARTER THIRD QUARTER FOURTH QUARTER
AUGUST 28 ENDED NOVEMBER 27 ENDED FEBRUARY 26 ENDED MAY 27
<S> <C> <C> <C> <C>
FISCAL 2000
Net sales $ 13,835 $ 10,075 $ 17,602 $ 13,514
Gross profit 4,609 2,543 7,449 4,736
Net loss (3,933) (4,009) (1,550) (5,964)
Net loss per share (0.46) (0.46) (0.18) (0.69)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED SECOND QUARTER ENDED THIRD QUARTER ENDED FOURTH QUARTER ENDED
AUGUST 30 NOVEMBER 29 FEBRUARY 28 MAY 30
<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 (0.22) (0.50) (0.16) (0.41)
</TABLE>
(9) 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 the 1991 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 27, 2000, there
were 685,500 option shares outstanding under the 1991 Plan. Options granted
under the 1991 Plan vest ratably over three-to-five year periods and must be
exercised within 10 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 27, 2000, there were 37,000 option shares
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.
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 27, 2000, there have been 684,000 option shares granted outside of the 1991
Plan.
A summary of the status of the Company's stock option plans at May 27,
2000, May 29, 1999 and May 30, 1998, together with changes during the periods
then ended, are presented in the following table:
46
<PAGE>
<TABLE>
<CAPTION>
1999 1998
WEIGHTED WEIGHTED
2000 WEIGHTED AVERAGE AVERAGE
AVERAGE PRICE PRICE PER PRICE PER
SHARES PER SHARE SHARES SHARE SHARES SHARE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period 833,000 $ 4.53 712,000 $ 6.46 903,500 $ 6.24
Grants during period 650,000 0.60 292,000 2.25 37,000 6.15
Exercised during period - - - - (160,000) 4.87
Forfeitures/Cancellations
during period (76,500) 2.65 (171,000) 8.59 (68,500) 7.09
------------- --------------- -----------
Outstanding at end of period 1,406,500 2.82 833,000 4.53 712,000 6.46
============= =============== ===========
Options exercisable at end of
period 886,500 4.12 833,000 4.53 712,000 6.46
============= =============== ===========
</TABLE>
Statement of Financial Accounting Standards No. 123 (SFAS No. 123)
SFAS No. 123, Accounting for Stock-Based Compensation, 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 Opinion No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during fiscal 2000, 1999,
and 1998 using the Black-Scholes option pricing model as prescribed by SFAS No.
123 and the following weighted average assumptions used for grants:
2000 1999 1998
Risk-free interest rate 6.33% 5.38% 5.96%
Expected dividend yield 0% 0% 0%
Expected lives 10 years 10 years 10 years
Expected volatility 77.00% 64.00% 25.82%
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 2000, 1999 and 1998 was $0.51, $1.73 and
$3.25, respectively. If the Company had accounted for these plans in accordance
with SFAS No. 123, the Company's net loss and loss per share would have
increased to the following pro forma amounts:
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 27, 2000 MAY 29, 1999 MAY 30, 1998
Net loss-
As Reported $ (15,456,233) $ (11,081,825) $ (3,803,473)
Pro Forma (15,522,300) (11,586,595) (4,498,460)
Basic and Diluted EPS-
As Reported $ (1.79) $ (1.29) $ (0.45)
Pro Forma (1.80) (1.34) (0.53)
47
<PAGE>
Employee Stock Purchase Plan
During 1992, the Company approved an Employee Stock Purchase Plan
permitting eligible employees to purchase Common Stock, semiannually on June 30
and December 31, at the average trading price during the six-month period, but
not less than specified minimums. Under this plan, 33,052 shares have been
issued as of May 27, 2000.
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 the Shareholder Rights Agreement, effective as of May 20, 1999.
(10) 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 to
the seller of approximately $1.6 million by World Gift Imports (Barbados),
Limited. 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 $143,000, $155,000 and $202,000 for fiscal years 2000,
1999 and 1998, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations. The preferred stock may be redeemed by the Company at face value at
any time after three years from the date of close through nine years from the
date of close. Following that period, the Company retains the right of first
refusal to match any bona fide offer from a third party to purchase the
preferred stock (see Note 13).
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(11) STORE CLOSURES
Closure of Ketchikan, Alaska, St. Croix, Antigua and St. Kitts
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 George (see Note 6). 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 operations. Approximately $1.1 million of the charge relates to
the impairment of fixed assets and leasehold improvements at the closed stores.
Sale of St. Barthelemy Store
On August 31, 1999, the Company consummated the sale of all of the
fixed assets and inventory of its store located on the island of St. Barthelemy
pursuant to a purchase and sale agreement with a third party for an aggregate
amount equal to $1.3 million. In the third quarter of fiscal 2000, the Company
used $400,000 in proceeds that had been released from escrow to pay down its
debt to its existing lenders under its credit facilities. The Company recorded a
gain of $537,000 on this transaction in the second quarter of fiscal 2000, which
is reflected as a reduction in selling, general and administrative expense.
Sale of Antigua Store
On November 12, 1999, the Company consummated the sale of all of the
fixed assets and inventory, of which $0.8 million was inventory, of its store
located on the island of Antigua for an aggregate purchase price of $2.0
million. In addition, the Company has been released from an Antigua related
contingent stand-by letter of credit in the amount of $330,000. The Company used
the proceeds to pay down its debt to its existing lenders under its credit
facilities. The Company recorded a gain of $495,000 on this transaction in the
second quarter of fiscal 2000, which is reflected as a reduction in selling,
general and administrative expense.
Sale of St. Lucia Fragrance Store
On December 1, 1999, the Company consummated the sale of all of its
fragrance inventory and fixtures for the fragrance store located on the island
of St. Lucia for an aggregate purchase price of $150,000. In addition, the
Company was able to reduce by $180,000 outstanding under a St. Lucia related
contingent stand-by letter of credit. The Company used the proceeds from the
sale to pay down its debt to its existing lenders under its credit facilities.
The Company recorded a loss of $41,000 on this transaction in the third quarter
of fiscal 2000, which is reflected in selling, general and administrative
expense.
Sale of Two St. Lucia Stores
On December 28, 1999, the Company consummated the sale of all of the
assets, of which $0.6 million was inventory, of its two stores located on the
island of St. Lucia for an aggregate purchase price of approximately $1.0
million. In addition, the Company has been released from the remaining $770,000
outstanding under St. Lucia related contingent stand-by letters of credit. Prior
to such sale, the Company had negotiated a reduction in its contingent stand-by
letters of credit on the island of St. Lucia by $330,000. The Company used the
$1.0 million proceeds and removal of the
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$770,000 contingent stand-by letters of credit to pay down its debt to its
existing lenders under its credit facilities. The Company recorded a loss of
$208,000 on this transaction in the third quarter of fiscal 2000, which is
reflected in selling, general and administrative expense.
(12) 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 was recorded. As a
result of the charge, the Company filed amended financial statements on Form
10-Q for each of the quarters within fiscal 1997.
The Company has insurance coverage with a maximum claim limitation of
$1 million. A claim for the full amount of the loss was submitted and payment of
$1 million was received by the Company. The Company also intends to seek full
restitution from the charged individuals; however, the Company does not know
what, if any, of the funds are still in the possession of such individuals. The
Company has, to date, received $65,000 in restitution from the employee. In
addition to pursuing criminal charges, the Company commenced civil proceedings
against the two individuals on March 12, 1998 in an effort to reclaim any such
funds. The Company has classified the settlement from its insurance carrier as a
credit to selling, general and administrative expense for the year ended May 30,
1998. The legal and accounting costs associated with this matter amounted to
approximately $646,000 and have been recorded in selling, general and
administrative expense in the accompanying consolidated financial statements for
the fiscal year ended May 30, 1998.
(13) SUBSEQUENT EVENTS
On August 29, 2000, the Company entered into the Standstill Agreement
effective through December 31, 2000. Pursuant to the Standstill Agreement, the
Company's lenders will not make any additional borrowings available to the
Company and will freeze the Company's line of credit at $10.2 million in
outstanding cash borrowings and approximately $2.6 million in contingent
stand-by letters of credit. However, the lenders have agreed to refrain from
exercising any remedies arising from existing defaults during the term of the
Standstill Agreement so long as the Company, among other things, (i) pays
interest on the outstanding borrowings and letters of credit, together with
related fees and expenses, (ii) maintains a certain inventory to outstanding
total debt coverage ratio, and (iii) reduces the outstanding borrowings and
letters of credit (in agreed upon amounts) from the proceeds of the sale of
certain real property related assets to Almod as described above, certain
estimated anticipated business interruption insurance proceeds for losses
sustained by the Company from Hurricane Lenny and the sale of Common Stock to
Almod as described above. The Company is in compliance with, or has obtained
waivers for, the aforementioned provisions of the Standstill Agreement. The
Standstill Agreement will enable the Company to retain a significant portion of
such proceeds for working capital. The Standstill Agreement will provide the
Company with additional time to consummate certain proposed transactions with
Almod as contemplated by the Letter of Intent and to seek a new working capital
facility. As part of the Standstill Agreement, the Company's lenders agreed to
release their liens on the Company's Philipsburg location which enabled the
Company to complete the Philipsburg Sale-Leaseback with Almod referred to above.
As a result of the Philipsburg Sale-Leaseback, the Company received total
proceeds of $4.5 million, of which approximately $3.5
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million was used as additional working capital and the remainder will be used to
reduce the Company's outstanding debt.
On June 13, 2000, the Company consummated the sale of the goodwill and
fixed assets of its store located in Marigot on the island of St. Martin
pursuant to a purchase and sale agreement with a third party for an aggregate
amount equal to $365,000. The Company has recorded an asset impairment
write-down in the fourth quarter of fiscal year 2000 of approximately $730,000
in connection with this transaction. The impairment is reflected as a selling,
general and administrative expense in the Company's consolidated statement of
operations.
On June 22, 2000, NXP-Jewels Corporation ("NXP") filed a complaint in
the United States District Court for the District of Delaware against the
Company. The complaint alleges damages from the Company from its determination
to terminate a letter of intent to sell its Barbados operations to NXP due to
the Company's decision that NXP was in material breach of this letter of intent.
The Company has filed its response to this complaint, which included counter
claims for alleged damages against NXP for failure to close on an expedited
basis.
On July 28, 2000, as part of the transaction with Almod discussed
below, the Company completed the Philipsburg Sale-Leaseback.
In August 2000, the Company entered into the Letter of Intent with
Almod which, if consummated in accordance with its terms, would result in the
Company receiving an aggregate of $14.0 million through a combination of real
property related transactions, including the sale of a non-core operating store,
and a substantial investment in the Company's Common Stock. To date, the Company
has completed the Philipsburg Sale-Leaseback and received a $500,000 deposit in
respect of the sale of a non-core operating store. The Company and Almod are
exploring various alternatives with respect to the terms of the proposed sale of
a non-core operating store which could result in the Company maintaining a
presence on the applicable Caribbean island. Pursuant to the Letter of Intent,
but subject to, among other things, the successful completion of its due
diligence, Almod has agreed to purchase approximately 7,069,000 new shares of
Common Stock, or 45% of the then outstanding shares, for an aggregate cash
purchase price of $6.9 million. The Company anticipates that the definitive
stock purchase agreement will contain certain customary "standstill" provisions
in transactions of this type, including provisions designed to ensure that Almod
would not control the Company. No assurance can be provided as to whether the
Company and Almod will be able to consummate the remaining two transactions
contemplated by the Letter of Intent or, if consummated, the definitive terms
thereof.
On August 4, 2000, the Company purchased all of the outstanding
preferred shares in its Barbados operations valued at $1.6 million for $0.3
million. This purchase terminates a management agreement associated with the
shares requiring the Company to pay 2.5% of sales to the holder of the preferred
shares.
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The Company negotiated a $2.2
million settlement of which $0.5 million had been advanced to the Company. After
applying a deductible of $0.3 million, the Company will receive proceeds of $1.4
million as final settlement of this claim.
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.
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PART III
ITEMS 10-13.
The information called for by Items 10-13 will be filed as soon as
practicable with an amendment to this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1) Financial Statements
The financial statements filed as part of this report are listed on
the Index to Consolidated Financial Statements.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are not material and, therefore have
been omitted.
(b) Reports on Form 8-K. The Company did not file any Current Reports on
Form 8-K during the three month period ended May 27, 2000.
(c) Exhibits:
(3) Articles of Incorporation and By-Laws:
3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to 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 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 Amendment No. 1 to the
Form S-1.
10.2 The Little Switzerland, Inc. 1992 Employee Stock Purchase Plan
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.
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10.3 The Little Switzerland, Inc. 1992 Non-Employee Directors'
Nonqualified Stock Option Plan is incorporated herein by
reference to the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on May 26, 1993.
10.4 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 the
Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 24, 1999.
10.5 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 the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 20, 1999.
10.6 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 the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 20, 1999.
10.7 Standstill Agreement, dated July 28, 2000, by among the
Company, its affiliates named therein, the Chase Manhattan
Bank and the Bank of Nova Scotia (the "Standstill Agreement").
10.8 Extension of the Standstill Agreement, dated August 23, 2000.
10.9 Modification of the Standstill Agreement, dated October
13, 2000.
(21) Subsidiaries of Registrant: A list of subsidiaries of the Company is
incorporated herein by reference to Exhibit 21 of the Annual Report on
Form 10-K/A for the year ended May 31, 1997.
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
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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, as of the 6th day of
October, 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 as of October 6, 2000 by the following persons
on behalf of the Registrant and in the capacities indicated.
Signatures Title
/s/ Robert L. Baumgardner Chief Executive Officer
------------------------------ and Director (Principal Executive
Robert L. Baumgardner Officer)
/s/ Seymour Holtzman Director
------------------------------
Seymour Holtzman
/s/ Peter R. McMullin Director
------------------------------
Peter R. McMullin
/s/ Alex J.Nobile Director
------------------------------
Alex J. Nobile
/s/ Kenneth W. Watson Director
------------------------------
Kenneth W. Watson
/s/ Patrick J. Hopper Chief Financial Officer,
------------------------------ Executive Vice President and
Patrick J. Hopper Treasurer (Principal Financial
and Accounting Officer)
54
