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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended August 26, 2000
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. 00802
(Address of Principal Executive Offices) (Zip Code)
(340) 776-2010
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
At October 26, 2000, 8,636,379 shares of common stock of the registrant
were outstanding.
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LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 26, 2000 (unaudited) and
May 27, 2000 2
Consolidated Statements of Operations (unaudited) for three months
ended August 26, 2000 and August 28, 1999 3
Consolidated Statements of Cash Flows (unaudited) for the three months
ended August 26, 2000 and August 28, 1999 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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August 26
2000 May 27
ASSETS (unaudited) 2000
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CURRENT ASSETS:
Cash and cash equivalents................................................. $ 1,062 $ 959
Accounts receivable....................................................... 263 355
Inventory................................................................. 28,252 28,172
Prepaid expenses and other current assets................................. 1,537 754
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Total current assets............................................... 31,114 30,240
PROPERTY, PLANT AND EQUIPMENT, AT COST.......................................... 26,419 32,240
Less - Accumulated depreciation........................................... 18,371 20,382
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8,048 11,858
OTHER ASSETS 481 381
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Total assets....................................................... $ 39,643 $ 42,279
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured demand notes...................................................... $ 10,175 $ 10,175
Accounts payable.......................................................... 4,728 5,814
Accrued and currently deferred income taxes............................... 1,498 1,500
Other accrued expenses and deferred income................................ 3,970 3,435
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Total current liabilities............................................ 20,371 20,924
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DEFERRED INCOME TAXES........................................................... 202 202
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Total liabilities.................................................... 20,573 21,126
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COMMITMENTS AND CONTINGENCIES...................................................
MINORITY INTEREST............................................................... -- 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 - 8,636 and 8,631 shares
at August 26, 2000 and May 27, 2000, respectively.................... 87 87
Capital in excess of par.................................................. 16,925 15,604
Retained earnings......................................................... 2,058 4,043
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Total stockholders' equity........................................... 19,070 19,734
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Total liabilities, minority interest and stockholders' equity $ 39,643 $ 42,479
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See accompanying notes to consolidated financial statements
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months ended
August 26, August 28,
2000 1999
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NET SALES......................................... $ 9,959 $ 13,835
COST OF SALES..................................... 5,510 9,226
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Gross profits............................ 4,449 4,609
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 6,100 8,165
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Operating loss........................... (1,651) (3,556)
INTEREST EXPENSE, NET............................. 284 277
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Loss before income taxes................. (1,935) (3,833)
PROVISION FOR INCOME TAXES........................ 50 100
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NET LOSS.......................................... $ (1,985) $ (3,933)
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BASIC AND DILUTED LOSS
Per share................................ $ (0.23) $ (0.46)
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See accompanying notes to consolidated financial statements
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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For the three months ended
August 26, August 28,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,985) $ (3,933)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities --
Depreciation......................................................... 443 655
Changes in assets and liabilities:
Decrease (increase) in accounts receivable...................... 92 146
Decrease (increase) in inventory................................ (80) 7,679
Increase in prepaid expenses and
other current assets....................................... (783) (76)
(Decrease) in accounts payable.................................. (1,086) (3,474)
(Decrease) increase in other accrued expenses and
deferred income............................................ 535 (133)
(Decrease) in accrued and currently deferred
income taxes............................................... (2) (704)
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Net cash (used in) provided by operating activities....................... (2,866) 160
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (75) (21)
(Increase) decrease in other assets....................................... (100) (74)
Proceeds from sale of certain assets...................................... 3,442 --
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Net cash provided by (used in) investing activities....................... 3,267 (95)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from unsecured notes payable..................................... -- --
Repayments of unsecured notes payable..................................... -- --
Repayments of long term borrowings........................................ -- --
Issuance of common stock.................................................. 2 --
Repurchase of preferred shares............................................ (300) --
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Net cash (used in) financing activities.............................. (298) --
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Net increase in cash and cash equivalents............................ 103 65
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 959 2,739
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CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 1,062 $ 2,804
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Supplemental disclosures of cash flow information
Cash payments for interest $ 285 $ 304
Cash payments for taxes 52 604
Noncash financing activities
Additional paid in capital related to the repurchase of preferred stock $ 1,319 $ --
minority interest
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See accompanying notes to consolidated financial statements
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the
operations of Little Switzerland, Inc. (the "Company") and its wholly owned
subsidiaries, L.S. Holding, Inc. and L.S. Wholesale, Inc. All significant
intercompany balances have been eliminated in consolidation. The interim
financial statements are unaudited and, in the opinion of management, contain
all adjustments necessary to present fairly the Company's financial position as
of August 26, 2000 and August 28, 1999 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 27, 2000 (the "Form 10-K").
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 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 with Almod Diamonds Limited ("Almod")
on the remaining approximately $9.0 million proceeds from a series of proposed
transactions more particularly described below which, if consummated, would
result in the Company's receipt of aggregate proceeds of $14.0 million. It also
provides the Company with needed time to secure a new working capital facility.
Actions Taken to Date
The Company has been diligently working to address current issues
concerning the Company's finances, operations, merchandising and recruiting. For
a complete description of the
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Company's strategic plan and the actions taken by the Company through August
2000, see Note 1 to the Consolidated Financial Statements in the Form 10-K for
the fiscal year ended May 27, 2000. The Company's new management team is
committed to continue to make progress on the initiatives referenced therein.
Management will continue to attempt to secure a greater range of world class
luxury products for sale in Little Switzerland stores. Included in this process
will be a focus on improving gross margin leverage and inventory turnover.
Qualification
The Company's ability to achieve the operating results discussed in its
fiscal 2000 strategic plan is impacted by each of the factors referenced in Note
1 to the Consolidated Financial Statements in the Form 10-K. There can be no
assurance that the Company will be able to successfully execute its fiscal 2000
strategic plan, which includes securing adequate financing to pay off the
Company's existing lenders and to fund its additional working capital needs.
4. 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. Such
sale was effected 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 any inventory.
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 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 would 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 approximately 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
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"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 for $0.3 million, which shares had
been carried on its books at $1.6 million. This purchase 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. The Company has recorded
this as a capital transaction and thus recorded additional paid in capital of
$1.3 million.
Standstill Agreement
Pursuant to the Standstill Agreement, effective through December 31,
2000, the Company's lenders will continue not to 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 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 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 can 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.
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
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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 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. 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 forbearance period under the Forbearance Agreement expired on August
31, 1999. Pursuant to the Standstill Agreement, the lenders have agreed to
forbear from exercising their rights and remedies under the existing loan
documents, which include the ability to declare 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.
The Company 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 August 26, 2000 and August 28, 1999, respectively.
Outstanding stand-by letters of credit against these credit facilities totaled
$2.6 million and $4.2 million as of August 26, 2000 and August 28, 1999,
respectively. The weighted average interest rates incurred during fiscal 2000,
1999 and 1998 were approximately 9.6%, 8.4% and 8.1% respectively.
6. EARNINGS PER SHARE
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, the weighted average number of shares used in diluted earnings
calculation, and the shares under option plans which were anti-dilutive for the
periods included in this report are as follows (in thousands):
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Three Months Ended
8/26/00 8/28/99
Weighted average number of shares
used in basic earnings per share
calculation.......................................... 8,635 8,625
Dilutive effects of options............................... -- --
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Weighted average number of shares
used in diluted earnings per share
calculation.......................................... 8,635 8,625
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Shares under and outside the option plans
excluded in computation of diluted earnings
per share due to anti-dilutive effects............... 1,015 1,233
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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 occur.
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. 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. The impairment losses have been classified as a component of
selling, general and administrative expense for the year ended May 27, 2000.
There were no impairment losses recognized during the quarters ended
August 28, 1999 or August 26, 2000.
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 store location
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and operation to determine what further actions are required to return the
Company to sustained profitability. Although the Company believes no further
impairment losses are required at August 26, 2000, future strategic actions
could result in additional store closings and impairment losses.
9. 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 statement 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.
10. ADVERTISING
The Company expenses the costs of advertising as advertisements are
printed and distributed. The Company's advertising expenses consist primarily of
advertisements with local, regional and national travel magazines, which are
produced on a periodic basis and distributed to visiting tourists. Additionally,
fees are expensed as paid for promotional "port lecturer" programs directed
primarily at cruise ship passengers.
11. COMMITMENTS AND CONTINGENCIES
Hurricane Damage
On November 30, 1999, the Company announced that Hurricane Lenny, which
hit certain Caribbean islands during the second quarter of fiscal 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 stores were restored to normal operations.
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Interruption of the Company's business as a result of Hurricane Lenny
has had an adverse impact on the Company's plans to, among others things, repay
debt to its existing lenders, consummate a transaction to sell liquidation goods
to a third party and obtain alternative asset-based financing.
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The Company received a $2.2 million
settlement of which $0.5 million had been previously 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.
Class Action Lawsuit
On March 22, 1999, a complaint was filed in the United States District
Court for the District of Delaware as a putative class action on behalf of
certain stockholders of the Company against the Company, certain of its existing
and former officers and directors, Destination Retail Holdings Corporation
("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 can be 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.
NXP
On June 22, 2000, NXP Jewels Corporation d/b/a Jewels at A.H. Riise
("NXP"), a St. Thomas competitor of the Company, filed a complaint against the
Company in the United States District Court for the District of Delaware (Civil
Action No. 00-630). The complaint alleges damages resulting from the Company's
termination of a letter of intent to sell its 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.
12. SUBSEQUENT EVENT
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The Company received a $2.2 million
settlement of which $0.5
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million had been previously advanced to the Company. After applying a deductible
of $0.3 million, the Company will receive proceeds of approximately $1.4 million
as final settlement of this claim.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain statements that are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 26, 2000
General
The Company operated 17 luxury gift and jewelry stores as of August 26,
2000. The Company's performance in the quarter ended August 26, 2000 resulted in
a substantial reduction in the net loss reported by the Company compared to the
quarter ended August 28, 1999. This reduction of the net loss was accomplished
through management's increased focus on controlling margins and expenses
compared to the corresponding quarter in the prior year.
Net Sales
Net sales for the first quarter ended August 26, 2000, were $10.0
million, a 28.0% reduction from net sales of $13.8 million for the corresponding
period last year. Net sales for comparable stores decreased approximately 13.5%
for the quarter ended August 26, 2000 compared to the corresponding period last
year.
Management attributes this reduction in sales primarily to strong sales
in the prior year resulting from aggressive markdowns taken to discontinue the
Company's fragrance category. Excluding this category, sales in comparable
stores decreased 4.6%. The Company had a sales increase of 3.6% from the prior
year in its St. Thomas market, which may indicate that new Company initiatives
are having a positive effect on sales, and that the Company is benefitting
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from increased ship traffic during the quarter.
Gross Profit
Gross profit as a percentage of net sales was 44.7% for the quarter
ended August 26, 2000 as compared to 33.3% for the corresponding period last
year. Management attributes this margin improvement to its focus on improving
sales through promotional activities as opposed to discounting. This increased
sales volume, coupled with the Company's maintenance of margins at or above
historical levels, is a positive sign for the Company. This strong margin
performance offset the decrease in sales from the year ago period.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("SG&A) for the first
quarter ended August 26, 2000 were $6.1 million, or approximately 61.3% of net
sales compared to $8.2 million, or approximately 59.0% of net sales for the
corresponding period last year. The increase in SG&A expense as a percentage of
net sales is primarily attributable to the reduction in net sales for the three
month period ended August 26, 2000. Management has been effective in controlling
the Company's legal and consulting expenses, which have been substantial in
prior periods.
Other
Net interest expense for the first quarter ended August 26, 2000 was
$284,000 compared to $277,000 for the corresponding period last year. The
increase in net interest expense reflects increased average borrowing rates
compared to the corresponding period last year.
The Company's effective tax rates for the three-month periods ended
August 26, 2000 and August 28, 1999 were approximately 2.6% and 2.6%
respectively.
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, the Company entered into the
Standstill Agreement effective through December 31, 2000. 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 such documents.
Pursuant to the Standstill Agreement, the lenders have
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agreed to forbear from exercising their rights and remedies under the existing
loan documents, including declaring all amounts immediately due under such
documents, 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 would 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.
Net cash used in operations during the three-month period ended August
26, 2000 was $2.9 million, compared to $0.2 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
On June 22, 2000, NXP Jewels Corporation d/b/a 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 its 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.
On March 22, 1999, a complaint was filed in the United States District
Court for the District of Delaware as a putative class action on behalf of
certain stockholders of the Company 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
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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 can be 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.
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
Amendment No. 1 to the Company's Registration
Statement on Form S-1, filed with the Securities and
Exchange Commission on July 10, 1992.
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.
27 Financial Data Schedule.
(b) Reports on Form 8-K during the quarter ended August 26, 2000.
None.
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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.
Dated as of October 27, 2000 By: /s/ Patrick J. Hopper
-----------------------------------------
Patrick J. Hopper
Chief Financial Officer, Vice President
and Treasurer
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EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER
3.1 The Amended and Restated Certificate of Incorporation of the Company is
incorporated herein by reference to 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.
27 Financial Data Schedule.
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