<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended November 27, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________ to ____________
Commission File No. 0-19369
-------
LITTLE SWITZERLAND, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0476514
(State of Incorporation) (I.R.S. Employer
Identification No.)
161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS U.S.V.I. 00804
(Address of Principal Executive Offices) (Zip Code)
(340) 776-2010
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _______
------
At January 5, 2000, 8,627,209 shares of $.01 par value common stock of the
registrant were outstanding.
<PAGE>
LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 27, 1999
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION....................................................................... 3
Item 1. Financial statements....................................................................... 3
Consolidated Balance Sheets as of November 27, 1999 (unaudited) and May 29, 1999........... 3
Consolidated Statements of Operations (unaudited) for the three and six months ended
November 27, 1999 and November 28, 1998.................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended
November 27, 1999 and November 28, 1998.................................................... 5
Notes to Consolidated Financial Statements (unaudited)..................................... 6-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 17-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 22
PART II. OTHER INFORMATION.......................................................................... 23
Item 1. Legal Proceedings........................................................................... 23
Item 6. Exhibits and Reports of Form 8-K............................................................ 23-24
Signature Page....................................................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
November 27, May 29,
Assets 1999 1999
------------ -------
<S> <C> <C>
Current Assets: (unaudited)
Cash and cash equivalents......................................... $ 2,508 $ 2,739
Accounts receivable............................................... 1,156 560
Inventory......................................................... 25,923 38,195
Prepaid expenses and other current assets......................... 1,369 1,111
------- -------
Total current assets........................................... 30,956 42,605
Property, Plant and Equipment, at Cost.............................. 35,956 36,999
Less -- Accumulated depreciation.................................. 19,479 19,051
------- -------
16,477 17,948
Other assets........................................................ 342 291
------- -------
Total assets................................................... $47,775 $60,844
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Secured demand notes.............................................. $11,775 $13,275
Accounts payable.................................................. 2,496 5,205
Accrued and currently deferred income taxes....................... 871 1,715
Other accrued expenses............................................ 3,568 3,641
------- -------
Total current liabilities..................................... 18,710 23,836
Long-term Debt...................................................... -- --
Deferred Income Taxes............................................... 202 202
------- -------
Total liabilities................................................. 18,912 24,038
------- -------
Commitments and Contingencies.......................................
Minority Interest................................................... 1,619 1,619
Stockholders' Equity:
Preferred stock, $.01 par value --
Authorized--5,000 shares
Issued and outstanding -- none................................. -- --
Common stock, $.01 par value --
Authorized -- 20,000 shares
Issued and outstanding--8,625 and 8,625 shares
at November 27, 1999 and May 29, 1999, respectively............ 87 87
Capital in excess of par.......................................... 15,601 15,601
Retained earnings................................................. 11,556 19,499
------- -------
Total stockholders' equity..................................... 28,862 35,187
------- -------
Total liabilities, minority interest and stockholders' equity.. $47,775 $60,844
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................ $10,075 $14,800 $23,909 $31,787
Cost of sales (see Note 3)........... 7,532 8,886 16,757 18,190
------- ------- ------- -------
Gross profits....................... 2,543 5,914 7,152 13,597
Selling, general and administrative
expenses............................ 6,137 9,224 14,302 18,485
------- ------- ------- -------
Operating (loss).................... (3,594) (3,310) (7,150) (4,888)
Interest expense, net................ 315 367 593 711
------- ------- ------- -------
(Loss) before income taxes.......... (3,909) (3,677) (7,743) (5,599)
Provision for income taxes........... 100 600 200 600
------- ------- ------- -------
Net loss............................. $(4,009) $(4,277) $(7,943) $(6,199)
======= ======= ======= =======
Basic and diluted (loss)
Per share........................... $ (0.46) $ (0.50) $ (0.92) $ (0.72)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
November 27, November 28,
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss).................................................... $(7,943) $ (6,199)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities--
Depreciation................................................. 1,361 1,539
Store closings expense....................................... --- 1,668
Gains on dispositions and sales of certain assets............ (1,024) ---
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................ (596) (735)
Decrease (increase) in inventory.......................... 10,277 2,756
(Increase) decrease in prepaid expenses and
other current assets.................................... (258) (413)
(Increase) Decrease in other assets....................... (51) 2
(Decrease) increase in accounts payable................... (2,709) (3,249)
(Decrease) in other accrued expenses and
deferred income......................................... (73) (972)
(Decrease) in accrued and currently deferred
income taxes............................................. (844) 543
Net cash provided by (used in) operating activities.......... (1,860) (5,060)
Cash flows from investing activities:
Capital expenditures......................................... (166) (437)
Proceeds from sales of certain assets........................ 3,295 ---
------- --------
Net cash (used in) investing activities...................... 3,129 (437)
Cash flows from financing activities:
Proceeds from unsecured notes payable........................ --- 18,056
Repayments of secured notes payable.......................... (1,500) ---
Repayments of unsecured notes payable........................ --- (11,581)
Repayments of long term borrowings........................... --- (1,113)
Issuance of common stock..................................... --- ---
Net cash provided by financing activities................... (1,500) 5,362
Net (decrease) increase in cash and cash equivalents........ (231) (135)
Cash and cash equivalents, beginning of period................. 2,739 2,278
Cash and cash equivalents, end of period....................... $ 2,508 $ 2,143
</TABLE>
During the six months ended November 27, 1999 and November 28, 1998, the Company
paid income taxes of $621 and $56, respectively, and paid interest of $618 and
$718, respectively.
See accompanying notes to consolidated financial statements
5
<PAGE>
1. Consolidated Financial Statements
---------------------------------
The accompanying consolidated financial statements include the operations
of Little Switzerland, Inc. (the "Company") and its wholly owned subsidiaries,
L.S. Holding, Inc. and L.S. Wholesale, Inc. All significant intercompany
balances have been eliminated in consolidation. The interim financial statements
are unaudited and, in the opinion of management, contain all adjustments
necessary to present fairly the Company's financial position as of November 27,
1999 and November 28, 1998 and the results of its operations and cash flows for
the interim periods presented. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K for the
fiscal year ended May 29, 1999 and latest Quarterly Report on Form 10-Q for the
quarterly period ended August 28, 1999.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of the Company's operations.
2. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Management's Plans
------------------
Existing Situation
------------------
The Company is presently operating without a long-term credit facility to
fund its working capital needs. Effective April 1, 1999, the Company and its
subsidiaries entered into a Forbearance Agreement with its existing lenders,
which effectively froze the Company's existing line of credit at its then 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. The Company has decreased its existing debt to
approximately $13.0 million, which consists of approximately $10.2 million in
outstanding cash borrowings and approximately $2.8 million in contingent stand-
by letters of credit, as of January 12, 2000. This represents approximately a
25% reduction in the Company's total outstanding debt. The Company anticipates
receiving the proceeds from the liquidation of certain merchandise (see "--
Actions Taken Through January 12, 2000--Liquidation of Aged Inventory" below)
and the release of the Antigua stand-by letters of credit in the third quarter
of fiscal 2000. Upon payment to the banks, these additional payments will reduce
the Company's existing debt to approximately $10.8 million, which will then
consist of approximately $8.2 million in outstanding cash borrowings and
approximately $2.6 million in contingent stand-by letters of credit. This will
represent a reduction of approximately 38.1%. In addition, the Company is
currently exploring ways to remove the $2.6 million in stand-by letters of
credit in Barbados, which if successful, would further reduce the Company's
outstanding total debt to approximately $8.2 million, or a reduction of 53%.
However, there is no assurance that the Company will be able to successfully
execute all of such measures and that the amounts outstanding will be reduced.
In connection with the Forbearance Agreement, the Company and its
subsidiaries granted a security interest to the lenders against their personal
property. The forbearance period under the Forbearance Agreement expired on
August 31, 1999, and the Company is currently in default under certain of the
covenants contained in such Forbearance Agreement. As a result, the banks may
exercise their rights and remedies under the existing loan documents, including
declaring all amounts immediately due under the loan
6
<PAGE>
agreements. If the banks accelerate the outstanding loans and declare amounts
outstanding under such loan agreements immediately due, the Company does not
believe that it will have sufficient funds available to make such payments and
such action by the banks will have a material adverse effect on the Company. The
Company currently is in the process of finalizing documents and the terms and
conditions to extend this agreement. There, however, is no assurance that such
extension will be granted or that the Company will be able to fulfill all of the
conditions to such extension.
Strategic Plan
--------------
Management has prepared and is in the process of implementing a strategic
plan to address the Company's current financial condition and to rebuild its
business. The major components of the strategic plan, in the order of priority
are:
. paying off the Company's debt to existing lenders through, in part,
strategic sales of non-core assets and liquidation of older and/or
discontinued merchandise and securing a new working capital facility
with an asset based lender;
. reducing redundant Eastern Caribbean locations and analyzing expansion
opportunities in the Western Caribbean as desirable space becomes
available;
. eliminating operating losses by executing a strategy that reduces
overhead expenses, improves margins and increases comparable store
sales;
. developing and implementing innovative marketing programs;
. developing an assortment of branded Little Switzerland merchandise
while importing designer boutiques in existing Little Switzerland
stores; and
. developing a new e-commerce strategy to leverage the Little Switzerland
duty free shopping concept.
To date, the Company has completed some of the initiatives to pay off debt
to existing lenders, while working to secure a new working capital facility. At
this time, there is no assurance that the Company will be successful beyond the
measures completed to date.
The Company has reviewed its Eastern Caribbean presence and identified St.
Thomas, Aruba, and Dutch St. Maarten as primary core markets, identified French
St. Martin, Curacao, Alaska, and Barbados as secondary markets and finally, St.
Lucia and Antigua as redundant non-core markets. Additionally, the Company has
identified certain discontinued and/or slow moving merchandise to sell for cash
to a third party liquidator.
The Company is in the process of executing the initial steps of this
strategic plan, which is the sale of non-core assets and unproductive inventory
to raise funds to pay down its existing lenders. See "--Actions Taken Through
January 12, 2000" below. The Company believes that the steps taken through
January 12, 2000 were necessary to raise cash to substantially pay down its
existing lenders. However, timely completion of the Company's stage one
initiatives was adversely impacted by the business interruption and island
infrastructure damage caused by Hurricane Lenny, which hit certain Caribbean
islands in November 1999.
7
<PAGE>
Concurrently, the Company is working to obtain alternative financing from
and is still in active negotiations with an asset based lender that would
provide the Company with additional funds to pay off its lenders and to fund the
Company's working capital requirements. The measures taken to date on strategic
asset sales have substantially reduced the Company's working capital needs. In
addition, the Company has been in varying levels of discussions with potential
strategic partners regarding a potential investment in the Company and these
discussions are continuing. There, however, is no assurance that the Company
will be able to reach a definitive agreement with any of these parties.
Finally, the Company is reviewing all aspects of its operations in an
effort to reduce its losses on a going forward basis. The Company will continue
to take strategic related charges in the third and fourth quarters of fiscal
2000 as it continues to reduce its operating costs.
Actions Taken Through January 12, 2000
----------------------------------------
Sale of St. Barthelmey Store
----------------------------
On August 31, 1999, the Company consummated the sale of the fixed assets
and inventory of its store located on the island of St. Barthelmey pursuant to a
purchase and sale agreement with a third party for an aggregate amount equal to
$1.3 million. 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.
Sale of Antigua Store
---------------------
On November 12, 1999, the Company announced that it had sold all of the
assets, 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 requested from the customs authority a release of the Antigua
contingent stand-by letter of credit in the amount of $330,000. The Company
anticipates that this contingent stand-by letter of credit will be released
without material exposure to the Company. The Company has received a $1.5
million payment during the second quarter of fiscal 2000 and the balance of the
purchase price is to be paid in two installments in the spring of 2000. The
Company used the $1.5 million in proceeds to pay down its debt to its existing
lenders under its credit facilities. The Company recorded a gain of $487,000 on
this transaction in the second quarter of fiscal 2000.
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 $180,000 outstanding under a St. Lucia 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
anticipates recording a minor loss on this transaction in the third quarter of
fiscal 2000.
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
8
<PAGE>
approximately $1.0 million. In addition, the Company has been given approval by
the St. Lucia customs authority to release the remaining $770,000 outstanding
under 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
anticipates recording a minor loss on this transaction in the third quarter of
fiscal 2000.
Liquidation of Aged Inventory
-----------------------------
In order to raise funds to pay down its bank debt, the Company decided to
accelerate the liquidation of discontinued and/or slow moving merchandise to a
third party liquidator. The Company will receive an advance of $2.0 million for
such sale, which, upon receipt by the Company, will be paid to its existing
lenders to pay down its debt under the credit facilities. Upon completion of the
sale, the Company will receive commissions on a pro-rated portion of 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 has recorded a $1.3
million charge to cost of goods sold reflecting the impairment of this
inventory.
The third party liquidator will run a clearance sale through the end of May
2000 in one of the Company's Aruba stores and one store in French St. Martin.
Upon completion of the clearance sale, the Company anticipates converting this
Aruba store into an ongoing clearance center for the Company. In addition, the
Company will review the operations of its two stores in French St. Martin to
evaluate their future viability.
The terms of this transaction were negatively impacted by Hurricane Lenny
which caused damage to the infrastructure of St. Martin and has reduced tourist
traffic to this island. As a result, the Company was required to make certain
concessions to compensate for the increased risk to the third party liquidator.
The Company plans to request coverage for these concessions in its business
interruption insurance claim. See "Notes to Consolidated Financial Statements
(unaudited), Footnote 12, Commitments and Contingencies" below.
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 margin and inventory
turnover.
Through January 12, 2000, the Company has decreased its existing debt under
the credit facilities to approximately $13.0 million, which consists of
approximately $10.2 million in outstanding cash borrowings and approximately
$2.8 million in contingent stand-by letters of credit. In addition, the Company
is currently in negotiations with its existing banks regarding an extension of
the term of the Forbearance Agreement to enable the Company to find alternative
financing to pay off the existing lenders and to fund its working capital
requirements. The Company currently is in the process of finalizing documents
and the terms and conditions of the extension, which the Company believes will
be granted. There, however, is no assurance that such extension will be granted
or that the Company will be able to fulfill all of the conditions to such
extension. The Company will continue to work towards securing adequate permanent
financing to pay off the existing lenders and to fund its ongoing working
capital requirements.
9
<PAGE>
The Company has placed orders to support its peak selling season using
proceeds from the St. Barthelmey store sale as well as excess operational cash
flows, including, those generated from the sale of older merchandise and
discontinued categories.
In addition to the above actions, the Company has entered into discussions
to settle both the pending class action and the merger litigation. There,
however, can be no assurances that these discussions will result in settlement
of these actions or that any settlement will be on terms favorable to the
Company.
Qualification
-------------
The Company's ability to achieve its operating results included in its
strategic plan is impacted by each of the factors described above. There can be
no assurance that the Company will successfully execute its strategic plan
including securing adequate financing to pay off its existing lenders and to
fund its additional working capital needs.
Included in this Note 3 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, including, without
limitation, the continued sale of certain store locations. Although the Company
believes no further impairment losses are required at November 27, 1999, future
strategic actions could result in additional store closings and material
strategic charges and impairment losses.
4. Income Taxes
------------
Under an agreement, which expired at the end of August 1998 (subject to
renewal), L.S. Wholesale benefited from a lower tax rate on its income earned
outside the United States Virgin Islands, which had been taxed at a rate of 3.7%
up through the end of fiscal 1998.
The Company submitted its application for renewal of benefits and was
notified by The Industrial Development Commission ("IDC") in October 1999 that
the IDC had granted such renewal for a five year period. Thus, as a result of
the renewal, L.S. Wholesale will enjoy the benefit of a 75% exemption from taxes
on income received from activities conducted outside of the United States Virgin
Islands, which results in an effective tax rate of approximately 9.3%. In
addition, L.S. Wholesale will enjoy a 75% exemption from gross receipts tax.
As the Company operates in multiple tax jurisdictions, it is subject to
various tax exposure. At this time, in the opinion of management any resulting
liability would not have a material impact on the Company's financial position.
5. Credit Arrangements
-------------------
Historically, the Company has utilized unsecured credit facilities with the
Company's two lead banks to support its inventory and capital requirements,
which fluctuate during the year due to the seasonal nature of the Company's
business, and to maintain and remodel its existing stores. As a result of
negotiations with its two lead banks regarding the Company's noncompliance with
certain financial covenants contained in the original loan agreements with the
banks and the nonpayment of amounts totaling approximately $1.5 million due
under the revolving term loan with one of the Company's banks, the Company and
its subsidiaries entered into a Forbearance Agreement, effective as of April 1,
1999 that effectively froze the Company's line of credit at its then and current
level of $17.5 million. This amount consisted of approximately $13.3 million in
outstanding cash borrowings and approximately $4.2 million in contingent stand-
by letters of credit. The Company has reduced its existing debt to
approximately $13.0 million, which consists of approximately $10.2 million in
outstanding cash borrowings and approximately $2.8 million in contingent
10
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stand-by letters of credit, as of January 12, 2000. This represents
approximately a 25% reduction in the Company's total outstanding debt. Upon
release of the Antigua contingent stand-by letter of credit and the receipt of
$2.0 million from the third party liquidator and payment of these funds to the
banks, the Company will have reduced its outstanding debt to $10.8 million, or
approximately a 38% reduction.
Pursuant to the Forbearance Agreement, the banks agreed, through August 31,
1999, not to exercise their rights and remedies under the existing loan
documents with respect to existing defaults and certain expected future
defaults. In exchange, the Company and its subsidiaries granted a security
interest to the banks against their personal property. The Forbearance Agreement
also sets forth certain criteria that the Company 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 forbearance period under the Forbearance Agreement expired, and the
Company is currently in default under certain of the covenants contained in such
Forbearance Agreement. The Company, however, is currently in negotiations with
its banks regarding an extension of the term of the Forbearance Agreement to
enable the Company to find alternative financing to pay off its existing lenders
and to fund its working capital needs. The Company currently is in the process
of finalizing documents and the terms and conditions of the extension, which the
Company believes will be granted. There is no assurance that such extension
will be granted, that the extension will be on favorable terms to the Company or
that alternative financing will be obtained during any extension period. If the
Company is unable to fulfill all of the conditions to such extension, the banks
may exercise their rights and remedies under the existing loan documents,
including declaring all amounts immediately due under the loan agreements. If
the banks accelerate the outstanding loans and declare amounts outstanding under
such loan agreements immediately due, the Company does not believe that it will
have sufficient funds available to make such payments and such action by the
banks will have a material adverse effect on the Company. The Company currently
is actively exploring other financing alternatives. At this time, however, the
Company does not have any firm commitments from other lenders or third parties
to provide it with funds that would be used to pay off its existing lenders or
to finance its working capital. There is no assurance that the Company will be
successful in obtaining any other financing.
Outstanding borrowings against these aforementioned now secured credit
facilities totaled $8.4 million and $14.3 million as of November 27, 1999 and
November 28, 1998, respectively. Outstanding stand-by letters of credit against
these credit facilities totaled $3.7 million and $4.1 million as of November 27,
1999 and November 28, 1998, respectively. Additionally, in February 1996, the
Company secured term debt of approximately $8.9 million at an annual interest
rate of 7.25%, payable monthly. The principal was payable in equal quarterly
payments over a four-year period commencing March 1997. As of November 27, 1999
and November 28, 1998, the principal outstanding on the term debt was
approximately $3.4 million and $5.0 million, respectively. The weighted average
interest rates incurred during fiscal 1999, 1998 and 1997 were approximately
8.4%, 8.1% and 7.9%, respectively.
6. Earnings per Share
------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share, effective December 15, 1997. In accordance with the
requirements of SFAS No. 128, basic earnings per share is computed by dividing
net income by the weighted average number of shares outstanding and diluted
earnings per share reflects the dilutive effect of stock options (as calculated
utilizing the "Treasury Method"). The weighted average number of shares
outstanding, the dilutive effects of outstanding stock options, weighted average
number of shares used in diluted earnings calculation, and the
11
<PAGE>
shares under option plans which were anti-dilutive for the periods included in
this report are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ----------------------
11/27/99 11/28/98 11/27/99 11/28/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average number of shares
used in basic earnings per share
calculation.................................. 8,625 8,624 8,625 8,624
Dilutive effects of options................... --- --- --- ---
Weighted average number of shares
used in diluted earnings per share
calculation.................................. 8,625 8,624 8,625 8,624
Shares under and outside the option plans
excluded in computation of diluted earnings
per share due to anti-dilutive effects....... 1,233 944 1,233 944
</TABLE>
7. Accounting for Income Taxes
---------------------------
The Company follows the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. The amount of deferred tax asset or liability is based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that is realizable, based
upon the realization criteria defined in SFAS No. 109.
8. Long-lived Assets
-----------------
The Company accounts for long-lived and intangible assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of. In accordance with the requirements of SFAS
No. 121, the Company periodically assesses whether events or circumstances have
occurred that may indicate the carrying value of its long-lived assets may not
be recoverable. When such events or circumstances indicate the carrying value of
an asset may be impaired, the Company uses an estimate of the future
undiscounted cash flows to be derived from the asset over the remaining useful
life of the asset to assess whether or not the asset is recoverable. If the
future undiscounted cash flows to be derived over the life of the asset do not
exceed the asset's net book value, the Company recognizes an impairment loss for
the amount by which the net book value of the asset exceeds its estimated fair
market value. Due to several factors, including the Company's relationship with
Rolex which is discussed further in Note 12, the Company recognized an
impairment loss relating to the goodwill at the Company's World Gift Imports
(Barbados) Limited subsidiary that totaled approximately $2.5 million during the
fourth quarter of fiscal 1998. The impairment loss was classified as a component
of selling, general and administrative expense for the year ended May 30, 1998.
No other impairment losses were recognized during the quarters ended November
28, 1998.
Included in Note 3 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
12
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further actions are required to return the Company to sustained profitability.
Although the Company believes no further impairment losses are required at
November 27, 1999, future strategic actions could result in additional store
closings and material strategic charges and impairment losses.
9. Statement of Financial Accounting Standards No. 123 - Accounting for Stock-
---------------------------------------------------------------------------
based Compensation
------------------
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which became effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 requires employee stock-
based compensation to be either recorded or disclosed at its fair value.
Management continues to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25 and did not adopt the new accounting
provision for employee stock-based compensation under SFAS No. 123. The
additional required disclosures have been included in the Company's fiscal year
end financial statements in the Company's Annual Report on Form 10-K for the
fiscal year ended May 29, 1999.
10. Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
The Financial Accounting Standards Board issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of SFAS No. 133, in July 1999. SFAS No. 133 is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000; earlier adoption is
allowed. The statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not yet determined the effect that adoption of SFAS
No. 133 will have or when the provisions of the statement will be adopted.
However, the Company currently expects that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a material
effect on the Company's results of operations or financial position.
11. Advertising
-----------
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising expenses consist primarily of
advertisements with local, regional and national travel magazines, which are
produced on a periodic basis and distributed to visiting tourists.
Additionally, fees are expensed as paid for promotional "port lecturer" and
other programs directed primarily at cruise ship passengers.
12. Commitments and Contingencies
-----------------------------
Relationship with Rolex
- -----------------------
The Company had historically operated as the exclusive authorized retailer
for Montrex Rolex, S.A. and its affiliates (collectively, Rolex) on the islands
on which the Company operates. Following execution of the 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 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.
13
<PAGE>
Sales of Rolex watches accounted for 3%, 26% and 24% of the Company's sales
in fiscal 1999, 1998 and 1997, respectively. Rolex is the only manufacturer
whose products accounted for more than 10% of the Company's sales in fiscal 1998
and 1997. Sales of products from the Swatch Group accounted for 10.4% in fiscal
year 1999. 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 jewelry, the Company believes that the loss of
Rolex will continue to have a material adverse effect on the Company's results
of operations for the fiscal year ending May 27, 2000 and beyond.
Employee Defalcation Loss
- -------------------------
On March 11, 1998, the Company filed a civil action in the Territorial
Court of the Virgin Islands against Lorraine Quetel, a former employee of the
Company, Lydia Magras and Bon Voyage Travel, Inc. The Company alleges that such
parties were involved in the employee defalcation that management believes
occurred during the Company's fiscal year ended May 31, 1997. The Company is
seeking a preliminary injunction and damages against the former employee and the
other parties allegedly involved in the theft against the Company.
On January 19, 1999, the defendant, Lydia Magras, filed a petition for
Bankruptcy (Chapter 7) in the United States Bankruptcy Court, District of St.
Thomas. A Notice of Appearance was filed on February 2, 1999 on behalf of the
Company. A trustee was appointed in this matter at the meeting of the creditors
held on May 20, 1999.
The Company is also party to various pending legal claims and proceedings.
In the opinion of management of the Company, these suits and claims should not
result in final judgments or settlements which, in the aggregate, would have a
material adverse effect on the Company's financial condition or results of
operations. See Part II - Other Information, Item 1 "Legal Proceedings."
Destination Retail Holdings Corporation
- ---------------------------------------
On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware against DRHC, Stephen G.E. Crane,
DRHC's controlling shareholder, Young Caribbean Jewelry Company Limited, a
Cayman Islands corporation, Alliance International Holdings Limited, a Bahamian
corporation, and CEI Distributors Inc., a British Virgin Islands corporation,
each an affiliate of DRHC. The Company alleges breach of the Merger Agreement,
among the Company, DRHC and certain affiliates of DRHC and also alleges claims
of misrepresentation and civil conspiracy, among other causes of action. The
Company is seeking monetary damages, including, without limitation,
consequential damages relating to harm to its business. On July 15, 1998, the
defendants moved to dismiss the complaint on jurisdictional grounds. On March
31, 1999, the court issued an order denying the defendants' motions to dismiss.
On May 21, 1999, the defendants filed their Answer, Affirmative Defenses,
Counterclaims and Third Party Complaint. The defendants allege counterclaims
against the Company and others for fraud, negligent misrepresentations, breach
of the covenant of good faith and fair dealing and breach of the Merger
Agreement, unfair competition and business libel, among others, primarily
stemming from their allegations
14
<PAGE>
that the Company was responsible for their failure to consummate the Merger
Agreement. The Company has entered into settlement discussions with the
plaintiffs and all litigation related processes have been stayed pending
resolution of these discussions. There, however, 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.
Class Action Lawsuit
- --------------------
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. The motion remains pending. The Company has entered into discussions
to settle this action. There, however, 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.
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 1/2 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 others items,
an extension of the Forbearance Agreement, repayment of debt to its existing
lenders and obtaining alternative asset-based financing. In addition, the
Hurricane has had an adverse impact on second quarter results, and is expected
to have an adverse impact on third quarter results. At this time, the total
financial impact on the Company's results of operations cannot be determined.
The Company is currently in the process of preparing and filing insurance
claims with its insurance carrier in connection with the hurricane damage to
certain of the Company's properties and interruption of its business. In the
third quarter, the Company has received $500,000 in advance proceeds with
respect to such claims. However, at this time, the Company is unable to estimate
the extent of any other insurance proceeds it will collect once these claims
have been processed.
13. Subsequent Events
-----------------
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
15
<PAGE>
$150,000. In addition, the Company was able to reduce $180,000 outstanding under
a St. Lucia 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 anticipates recording a minor loss on this transaction
in the third quarter of fiscal 2000.
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 given approval by the St. Lucia
customs authority to release the remaining $770,000 outstanding under 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 anticipates recording
a minor loss on this transaction in the third quarter of fiscal 2000.
Liquidation of Aged Inventory
-----------------------------
In order to raise funds to pay down its bank debt, the Company decided to
accelerate the liquidation of discontinued and/or slow moving merchandise to a
third party liquidator. The Company will receive an advance of $2.0 million for
such sale, which, upon receipt by the Company, will be paid to its existing
lenders to pay down its debt under the credit facilities. Upon completion of the
sale, the Company will receive commissions on a pro-rated portion of 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 has recorded a $1.3
million charge to cost of goods sold reflecting the impairment of this
inventory.
The third party liquidators will run a clearance sale through the end of
May 2000 in one of the Company's Aruba stores and one store in French St.
Martin. Upon completion of the clearance sale, the Company anticipates
converting this Aruba store into an ongoing clearance center for the Company. In
addition, the Company will review the operations of its two stores in French St.
Martin to evaluate their future viability.
The terms of this transaction were negatively impacted by Hurricane Lenny
which caused damage to the infrastructure of St. Martin and has reduced tourist
traffic to this island. As a result, the Company was required to make certain
concessions to compensate for the increased risk to the third party liquidator.
The Company plans to request coverage for these concessions in its business
interruption insurance claim. See "Notes to Consolidated Financial Statements
(unaudited), Footnote 12, Commitments and Contingencies" above.
16
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain statements that are
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the Company's ability to obtain alternative financing to provide it with
funds to pay off its existing lenders and to fund its working capital needs,
(ii) the Company's ability to maintain its relationship with its existing
lenders, including with respect to the negotiation of the extension of the
Forbearance Agreement, (iii) the Company's ability to successfully complete its
strategic plan, (iv) the Company's ability to successfully remove the stand-by
letters of credit in Antigua and in Barbados; (v) the frequency of tourist
visits to the locations where the Company maintains retail stores, (vi) the
Company's ability to retain relationships with its major suppliers of products
for resale, (vii) the Company's ability to mitigate the impact on sales of the
loss of Rolex products by expanding existing, and adding new, world class
product lines in both watches and jewelry, (viii) weather in the Company's
markets, (ix) actions of the Company's competitors and the Company's ability to
respond to such actions and (x) economic conditions that affect the buying
patterns of the Company's customers. In addition to the foregoing, the Company's
actual future results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in the
Company's various filings with the Securities and Exchange Commission and of
changes in general economic conditions, changes in interest rates and/or
exchange rates and changes in the assumptions used in making such forward-
looking statements.
RECENT DEVELOPMENTS
NASDAQ Listing
- --------------
On November 10, 1999, The Nasdaq Stock Market, Inc. ("NASDAQ") informed the
Company that it would permit the transfer of the Company's 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 ten consecutive trading days. The Company also
had to be able to demonstrate compliance with all of the other NASDAQ SmallCap
Market continued listing requirements.
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
17
<PAGE>
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 NASDAQ's Over-the-Counter Bulletin Board
("OTC") beginning with the open of business on December 23, 1999. The trading
symbol for the Company's common stock on OTC is "LSVIC." As a result of Nasdaq's
decision, the Company will not effectuate the reverse stock split which was
approved by the Company's stockholders at its annual meeting held on
December 21, 1999.
Subsequent Events
- -----------------
For a description of certain events that occurred since November 27, 1999,
see "Notes to Consolidated Financial Statements (unaudited), Footnote 13,
Subsequent Events."
Increased Marketing Efforts
- ---------------------------
The Company has traditionally relied upon advertising in travel magazines
and "port lectures" aboard major cruise ships to increase sales to cruise
passengers. The Company has recently initiated a new sales promotion to
supplement its existing marketing efforts. The Company has negotiated an
exclusive arrangement with a major cruise line whereby cruise passengers will
receive a gift while en route to a cruise ship destination where the Company has
a store. The value of the gift can only be identified by presenting the gift at
one of the Company's stores. Initial tests of this program have been successful
in attracting an above average number of customers into our stores. There,
however, is no assurance that these initial tests are indicative of the future
number of customers.
YEAR 2000 READINESS DISCLOSURE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning the Year 2000 Information and Readiness
Disclosure Act.
Year 2000. "Y2K Compliance" refers to the ability for information systems,
---------
software programs, computer hardware and other computer enhanced equipment to
properly handle the processing of dated material properly for the year 2000 and
beyond. Many existing computer programs and databases use two digits to identify
a year in the date field (i.e., 98 would represent 1998). These programs and
databases were designed and developed without considering the impact of the
millennium. If not corrected, many computer systems could fail or create
erroneous results relating to the year 2000. If the Company or its significant
suppliers have failed to make necessary modifications and conversions, the year
2000 issue could have an adverse effect on Company operations. The Company
believes that its competitors face a similar risk. Information contained in this
Quarterly Report pertains to the initiatives undertaken by the Company to insure
full compliance with Y2K processing prior to the year 2000 and any subsequent
events relating to the year 2000 which have occurred since January 1, 2000.
Company's State of Readiness. The Company developed plans to address the
----------------------------
possible exposures related to the impact on its computer systems of the year
2000 issue. Key financial, information and operational systems, including
equipment with embedded microprocessors, have been inventoried and assessed, and
detailed plans have been developed for the required systems modifications or
replacements. Progress against these plans was monitored and reported to
management on a regular basis. Implementation of required changes to critical
systems was completed prior to the end of the calendar year. The Company also
focused on major suppliers to assess their compliance. The Company received
assurances from certain suppliers that such suppliers would be year 2000
compliant and sought such assurances from its other material suppliers.
Nevertheless, there can be no assurance that there will not be an adverse effect
on the Company if third party governmental or business entities have not
converted or replaced their systems in a
18
<PAGE>
timely manner and in a way that is compatible with the Company's systems. In the
event a material supplier is not year 2000 compliant, the Company's business,
financial condition and results of operations could be adversely affected.
Compliance readiness analysis was conducted to determine the impact and
requirements associated with all operational aspects of the Company, both
internally and externally. Plans were implemented to modify, upgrade or replace
equipment and software where necessary. Procedures were instituted to require
all new and future contracts with outside vendors to ensure Y2K compliance in
all products provided to the Company. Additionally, vendors providing services
to the Company, such as security systems or banking services, were required to
submit a statement of Y2K compliance.
Outside servicers were contracted to upgrade all merchandising, warehouse
and most financial systems. The majority of these systems were upgraded in May
1999 to full Y2K compliance. Upgrading and testing of all point of sale ("POS")
and store systems was completed during the second quarter of fiscal 2000. A
parallel test of the upgraded payroll system was completed by the end of
September 1999. The Company determined that its existing general ledger system,
which was upgraded to be compliant with Y2K requirements, should be replaced
with a more efficient system. As a result, a project plan was developed and
completed prior to December 31, 1999.
Costs to Address Year 2000 Compliance. Costs associated with year 2000
-------------------------------------
compliance were primarily associated with acquiring outside contract personnel
that have been required to modify and implement the various software systems.
Some equipment was necessary as well as travel expense related to the POS roll
out. Estimated total expenses related to the 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. Continued
testing and re-evaluation occurred to insure full compliance. With efforts for
finalizing compliance, management believes that it has significantly reduced any
adverse effect on the Company's business due to Y2K issues. However, there can
be no assurance that the Company has identified and addressed all year 2000
issues before problems could arise.
Contingency Plan. As the Company is already operating in its fiscal year
----------------
2000, in July 1999, the Company upgraded its existing general ledger package to
a version that was certified as being Y2K compliant. The Company developed a
contingency plan to restore its store operations, merchandising and logistics,
financial systems and computer operations in the event of a year 2000 failure.
The Company has operating plans to guide key managers in the case of any
material systems failure throughout the Company. As mentioned previously and as
a contingent strategy, the Company upgraded and tested to Y2K standards its
current financial system and installed a replacement financial system that is
Y2K compliant.
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 these programs have since been converted to
Y2K complaint programs and currently are running without problems. As Y2K
problems may arise throughout the calendar year, the Company will continue to
monitor all of its computer equipment and software on a periodic basis.
The preceding "Year 2000 Readiness Disclosure" contains various forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. These forward-looking statements represent the Company's beliefs or
expectations regarding future events. When used in the "Year 2000 Readiness
Disclosure", the words "believes," "expects," "estimates" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include, without limitation, the Company's expectations as to when it
will complete the modification and testing phases of its year 2000 project plan
as well as its year 2000
19
<PAGE>
contingency plans; its estimated cost of achieving Year 2000 readiness; and the
Company's belief that its internal systems were year 2000 compliant in a timely
manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause these differences include, but are not
limited to, the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date sensitive
lines of computer code or to replace embedded computer chips in affected systems
or equipment; and the actions of governmental agencies or other third parties
with respect to year 2000 problems.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED NOVEMBER 27,
1999
General
- -------
The Company operated 20 luxury gift and jewelry stores as of November 27,
1999. However, subsequent to November 27, 1999, the Company consummated the
sale of its two stores located on St. Lucia for an aggregate amount of
approximately $1.8 million, thus reducing the current number of stores to 18.
See "--Subsequent Events--Sale of Two St. Lucia Stores."
Net Sales
- ---------
Net sales for the three-month period ended November 27, 1999, were $10.1
million, a 31.8% reduction from net sales of $14.8 million for the corresponding
three-month period last fiscal year. Net sales for the six-month period ended
November 27, 1999, were $23.9 million, a 24.8% reduction from net sales of $31.8
million for the corresponding six-month period last fiscal year. Net sales for
comparable stores decreased approximately 26.3% in the three-month period ended
November 27, 1999 and 17.5% in the six-month period ended November 27, 1999.
Management attributes this reduction in sales primarily as a result of the
absence of Rolex products in the Company's stores in the quarter ended November
27, 1999. (see Part I, Item 1 "Notes to Consolidated Financial Statements
(unaudited)") and the impact of Hurricanes Floyd, Jose and Lenny. In addition,
the Company was negatively impacted by lack of new merchandise receipts,
uncertainty with the future of the Company at store level and significant
reductions of ship calls in the Eastern Caribbean from the prior year. Cruise
ship traffic was beginning to trend higher in November 1999 until the
devastating impact of Hurricane Lenny.
Gross Profit
- ------------
Gross profit as a percentage of net sales was 25.2% for the three-month
period ended November 27, 1999 and 29.9% for the six-month period ended November
27, 1999, as compared to 40.0% and 42.8%, respectively, for the corresponding
periods last fiscal year. In the three-month period ended November 27, 1999, the
Company took a $1.3 million charge for merchandise sold to a third party
liquidator for discontinued and/or slow moving merchandise. Excluding the $1.3
million charge, gross profit as a percentage of net sales would have been 38.5%
and 35.5% for the three-month and six-month periods ended November 27, 1999,
respectively. Management attributes the remaining margin reduction to short
term measures taken throughout the second quarter of fiscal 2000 to raise
liquidity.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, General and Administrative Expenses ("SG&A") for the three-month
period ended November 27, 1999 were $6.1 million, or approximately 60.5% of net
sales, and for the six-month period ended November 27, 1999 were $14.3 million,
or approximately 59.7% of net sales. This compares to $9.2
20
<PAGE>
million, or approximately 62.3% of net sales and $18.5 million or 58.2% of net
sales, respectively, for the corresponding periods last fiscal year. The SG&A
expense for the three-month period ended November 27, 1999 included a $1.0
million gain from the sale of the Company's stores on the islands of Antigua and
St. Barthelmey. Excluding these gains, SG&A expense for the three-month and six-
month periods ended November 27, 1999 would have been 71.4% and 64.0%,
respectfully. The reduction in sales from the corresponding periods last year
contributed to the higher SG&A cost as a percent of net sales. In addition,
management also attributes the increase in SG&A to added costs for legal and
consulting fees associated with the Company's actions taken during the three-
month and six-month period to address the financial condition of the Company.
Other
- -----
Net interest expense for the three-month period ended November 27, 1999 was
$315,000 and $593,000 for the six-month period ended November 27, 1999 as
compared to $367,000 and $711,000, respectively, for the corresponding periods
last fiscal year. The decrease in net interest expense reflects lower average
borrowings compared to the corresponding periods last fiscal year.
The Company's effective tax rates for the three-month and six-month periods
ended November 27, 1999 were 0.0% and 0.0%, respectively, as compared to an
effective tax rate of 0.0% for the corresponding periods last fiscal year.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operations during the six-month period ended November 27,
1999 was $1.9 million as compared to $5.1 million for the corresponding period
last year. Net cash used was able to remain below prior year despite increased
losses due to reduction in inventory levels.
Historically, the Company has utilized unsecured credit facilities with the
Company's two lead banks to support its inventory and capital requirements,
which fluctuate during the year due to the seasonal nature of the Company's
business, and to maintain and remodel its existing stores. As a result of
negotiations with its two lead banks regarding the Company's noncompliance with
certain financial covenants contained in the original loan agreements with the
banks and the nonpayment of amounts totaling approximately $1.5 million due
under the revolving term loan with one of the Company's banks, the Company and
its subsidiaries entered into a Forbearance Agreement, effective as of April 1,
1999 that effectively froze the Company's line of credit at its then and current
level of $17.5 million. This amount consisted of approximately $13.3 million in
outstanding cash borrowings and approximately $4.2 million in contingent stand-
by letters of credit. Through January 12, 2000, the Company has reduced its
existing debt under the credit facilities to approximately $13.0 million, which
consists of approximately $10.2 million in outstanding cash borrowings and
approximately $2.8 million in contingent stand-by letters of credit. This
represents approximately a 25% reduction in the Company's total debt. Upon
release of the Antigua contingent stand-by letter of credit and receipt of $2.0
million from the third party liquidator and the payment of such funds to the
banks, the Company will have reduced its outstanding debt to $10.7 million, or
approximately a 38% reduction.
Pursuant to the Forbearance Agreement, the banks agreed, through August 31,
1999, not to exercise their rights and remedies under the existing loan
documents with respect to existing defaults and certain expected future
defaults. In exchange, the Company and its subsidiaries granted a security
interest to the banks against their personal property. The Forbearance Agreement
also sets forth certain criteria that the Company 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.
21
<PAGE>
The forbearance period under the Forbearance Agreement expired, and the
Company is currently in default under certain of the covenants contained in such
Forbearance Agreement. The Company, however, is currently in negotiations with
its banks regarding an extension of the term of the Forbearance Agreement to
enable the Company to find alternative financing to pay off the existing lenders
and to fund its working capital needs. The Company currently is in the process
of finalizing documents and the terms and conditions of the extension, which the
Company believes will be granted. There is no assurance that such extension will
be granted, that such extension will be on favorable terms to the Company or
that alternative financing will be obtained during any extension period. If the
Company is unable to fulfill all of the conditions to such extension, the banks
may exercise their rights and remedies under the existing loan documents,
including declaring all amounts immediately due under the loan agreements. If
the banks accelerate the outstanding loans and declare amounts outstanding under
such loan agreements immediately due, the Company does not believe that it will
have sufficient funds available to make such payments and such action by the
banks will have a material adverse effect on the Company. The Company currently
is actively exploring other financing alternatives, including asset-based
financing. In addition, the Company has been in varying levels of discussions
with potential strategic partners regarding a potential investment in the
Company and these discussions are continuing. At this time, however, the Company
does not have any firm commitments from other lenders or third parties to
provide it with funds that would be used to pay off its existing lenders or to
finance its working capital. There is no assurance that the Company will be
successful in obtaining any other financing or that it will be able to reach a
definitive agreement with any third party.
Outstanding borrowings against these aforementioned now secured credit
facilities totaled $8.4 million and $14.3 million as of November 27, 1999 and
November 28, 1998, respectively. Outstanding letters of credit against these
credit facilities totaled $3.7 million and $4.1 million as of November 27, 1999
and November 28, 1998, respectively. Additionally, in February 1996, the Company
secured term debt of approximately $8.9 million at an annual interest rate of
7.25%, payable monthly. The principal was payable in equal quarterly payments
over a four-year period commencing March 1997. As of November 27, 1999 and
November 28, 1998, the principal outstanding on the term debt was approximately
$3.4 million and $5.0 million, respectively. The weighted average interest rates
incurred during fiscal 1999, 1998 and 1997 were approximately 8.4%, 8.1% and
7.9%, respectively.
Capital expenditures were approximately $.2 million for the six-month
period ended November 27, 1999 compared to $.4 million for the corresponding
period last year.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
None.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
There have been no material changes in the second quarter of fiscal 2000 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 "Notes
to Consolidated Financial Statements (unaudited), Footnote 12, Commitments and
Contingencies, Employee Defalcation Loss."
On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware (Civil Action No. 98-315-SLR)
against DRHC, Stephen G.E. Crane, DRHC's controlling shareholder, Young
Caribbean Jewelry Company Limited, a Cayman Islands corporation,
22
<PAGE>
Alliance International Holdings Limited, a Bahamian corporation, and CEI
Distributors Inc., a British Virgin Islands corporation, each an affiliate of
DRHC. For a summary of the litigation proceedings with respect to this action,
see "Part 1, Item 1, Notes to Financial Statements (unaudited), Footnote 12,
Commitments and Contingencies." During the Company's second quarter of Fiscal
2000, the Company entered into settlement discussions with the plaintiffs in
this action and all litigation related processes have been stayed pending
resolution of these discussions. There, however, 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.
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 (Civil Action No.99-176) against the Company,
certain of its former officers and directors, DRHC and Stephen G.E. Crane. For a
summary of the litigation proceedings with respect to this action, see "Part 1,
Item 1, Notes to Financial Statements (unaudited), Footnote 12, Commitments and
Contingencies." The plaintiffs amended their complaint on November 10, 1999 and
the Company filed a motion to dismiss the amended complaint on December 7, 1999.
This motion remains pending. The Company also has entered into discussions to
settle this action. There, however, 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.
The Company is involved in various other legal proceedings which, in the
opinion of management, are not likely to result in a material adverse effect on
the financial condition or results of operations.
ITEM 6. Exhibits and Reports of Form 8-K
--------------------------------
(a) Exhibits
3.1 The Amended and Restated Certificate of Incorporation of the Company
is incorporated herein by reference to Exhibit 3.3 to Amendment No. 1
to the Company's Registration Statement on Form S-1, Registration No.
33-40907, filed with the Securities and Exchange Commission on July
10, 1992 ("Amendment No. 1 to the Form S-1").
3.2 The Amended and Restated By-Laws of the Company are incorporated
herein by reference to Exhibit 3.3 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on February
24, 1999.
27.1 Financial Data Schedule is filed herewith as Exhibit 27.1.
(b) Reports on Form 8-K during the quarter ended November 27, 1999. The
registrant filed the following Current Reports on Form 8-K during the
quarter ended November 27, 1999:
1. On November 19, 1999, the Company filed a Current Report on Form 8-K
disclosing that a proposal for a one-for-five reverse stock split of
the Company's common stock would be voted on at the annual meeting of
shareholders scheduled for December 21, 1999 (the "Annual Meeting"),
and that The Nasdaq Stock Market, Inc. ("NASDAQ") approved the
transfer of the Company's common stock to the NASDAQ SmallCap Market
under the symbol "LSVIC", subject to certain conditions and effective
as of the open of business on November 12, 1999. In addition, the
Company reported that certain tax benefits had been renewed for its
wholly-owned subsidiary, L.S. Wholesale, Inc., and that the Company's
store on the island of Antigua had been sold. Finally, the report
indicated that the Company's board of directors nominated Peter R.
McMullin and Kenneth W. Watson for
23
<PAGE>
election as Class II directors at the Annual Meeting and that the
board of directors expanded from a six to eight member board with the
appointment of Seymour Holtzman as a Class III director (for a term
expiring at the 2000 annual meeting of shareholders) and Richard
Siegel as a Class I director (for a term expiring at the annual
meeting of shareholders in 2001), each effective as of December 21,
1999.
24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE SWITZERLAND, INC.
Date: January ___, 2000 /s/ Patrick J. Hopper
------------------------------
Patrick J. Hopper
Chief Financial Officer,
Vice President and Treasurer
[Authorized Officer and Principal Financial and
Accounting Officer]
25
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