<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 25, 2000
Commission File No. 0-19369
LITTLE SWITZERLAND, INC.
Delaware 66-0476514
(State of Incorporation) (I.R.S. Employer
Identification No.)
161-B Crown Bay Cruise Ship Port
St. Thomas U.S.V.I. 00802
(Address of Principal Executive Offices) (Zip Code)
(340) 776-2010
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At January 3, 2001, 8,636,379 shares of $.01 par value common stock of the
registrant were outstanding.
<PAGE>
LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of November 25, 2000 (unaudited) and May 27, 2000 3
Consolidated Statements of Operations (unaudited) for the three and six months ended
November 25, 2000 and November 27, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended
November 25, 2000 and November 27, 1999 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES 17
EXHIBIT INDEX 18
</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 25, MAY 27,
ASSETS 2000 2000
-------------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $1,271 $959
Accounts receivable, net......................................... 754 355
Inventory ...................................................... 29,352 28,172
Prepaid expenses and other assets................................ 1,515 754
-------------------- ----------------
Total current assets............................................. 32,892 30,240
Property and equipment, at cost....................................... 26,723 32,240
Less: Accumulated depreciation............................... 18,818 20,382
-------------------- ----------------
-------------------- ----------------
Property and equipment, net...................................... 7,905 11,858
DEPOSITS AND OTHER ASSETS............................................. 492 381
-------------------- ----------------
TOTAL $41,289 $42,279
==================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABLITIES:
Secured demand notes ............................................ $8,769 $10,175
Accounts payable................................................. 6,649 5,814
Accrued and currently deferred income taxes...................... 1,498 1,500
Note payable less unamortized discount........................... 1,430 --
Other accrued expenses and deferred income....................... 3,708 3,435
-------------------- ----------------
Total current liabilities............................. 22,054 20,924
DEFERRED INCOME TAXES 202 202
Total liabilities 22,256 21,126
MINORITY INTEREST -- 1,619
STOCKHOLDERS' EQUITY (DEFICIENCY):
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 8,625 shares
at November 25, 2000 and May 27, 2000, respectfully.......... 87 87
Capital in excess of par.............................................. 17,544 15,604
Retained earnings..................................................... 1,402 4,043
-------------------- ----------------
Total stockholders' equity............................ 19,033 19,734
-------------------- ----------------
$41,289 $42,479
TOTAL.................................................................
==================== ================
</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>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- -----------------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales......................................... $11,356 $10,075 $21,315 $23,909
Cost of Sales..................................... 6,421 7,532 11,930 16,757
--------------- --------------- ---------------- ----------------
Gross Profits..................................... 4,935 2,543 9,385 7,152
Selling, General and Administrative Expenses...... 6,636 7,161 12,736 15,326
Gain on Insurance Settlement...................... (1,352) -- (1,352) --
Gain on Disposition and Sale of Certain Assets.... -- (1,024) -- (1,024)
Operating (Loss).................................. (349) (3,594) (1,999) (7,150)
Interest Expense, net............................. 257 315 542 593
(Loss) before income taxes........................ (606) (3,909) (2,541) (7,743)
Provision for Income Taxes........................ 50 100 100 200
--------------- --------------- ---------------- ----------------
NET (LOSS)........................................ (656) (4,009) (2,641) (7,943)
--------------- --------------- ---------------- ----------------
BASIC AND DILUTED (LOSS)..........................
Per Share..................................... ($ .08) ($ .46) ($ .31) ($ .92)
=============== =============== ================ ================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
November 25 November 27,
2000, 1999
---------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (2,641) $ (7,943)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities -- 890 1,361
Depreciation
Gain on disposition and sales of certain assets -- (1,024)
Gain on insurance settlement (1,352) --
Stock based compensation 49 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (399) (596)
Decrease (increase) in inventory (1,180) 10,277
Decrease (increase) in prepaid expenses and
other current assets (761) (258)
(Decrease) increase in accounts payable 835 (2,709)
(Decrease) increase in other accrued expenses and
deferred income 223 (73)
(Decrease) increase in accrued and currently deferred
income taxes 48 (844)
---------------- -------------------
Net cash (used in) operating activities (4,288) (1,809)
---------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (379) (166)
Decrease (increase) in other assets (111) (51)
Proceeds from sale of certain assets 3,442 3,295
---------------- -------------------
Net cash provided by (used in) investing activities 2,952 3,078
---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of secured demand notes payable (1,406) (1,500)
Proceeds from long term borrowings 2,000 --
Proceeds from insurance settlement 1,352 --
Issuance of common stock 2 --
Repurchase of preferred shares (300) --
---------------- -------------------
Net cash provided by (used in) financing activities 1,648 (1,500)
---------------- -------------------
Net (decrease) in cash and cash equivalents 312 (231)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 959 2,739
---------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,271 $ 2,508
================ ===================
Supplemental disclosure of cash flow information
Cash payments for interest $ 540 $ 618
Cash payments for taxes 52 621
Noncash financing activities
Additional paid in capital related to the repurchase of preferred
stock minority interest $ 1,319 $ --
Additional paid in capital related to discount on note payable $ 570 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 25, 2000 and November 27, 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 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. RECENT DEVELOPMENTS
TERMINATION OF DISCUSSIONS WITH ALMOD DIAMONDS LIMITED REGARDING
POTENTIAL EQUITY INVESTMENT
In July 2000, the Company entered into a letter of intent (the "Letter
of Intent") with Almod Diamonds Limited ("Almod") which, among other things,
contemplated an equity investment in the Company by Almod in an aggregate amount
of $6.9 million to purchase approximately 7,069,000 new shares of Common Stock,
or 45% of the then outstanding shares. On December 21, 2000, the Company
announced that it had terminated further discussions with Almod relating to the
proposed issuance of shares of Common Stock because the parties were unable to
reach agreement on certain material terms, including terms relating to corporate
control. The Company has, however, completed (or substantially completed) other
transactions contemplated by the Letter of Intent. See Notes 4 and 12 for
further discussion.
On or about December 18, 2000, Albert Gad, Donna Gad-Hecht and Morris
Gad, principals of Almod, filed a statement on Schedule 13D which indicates,
among other things, that such persons are the beneficial owners of approximately
8% of the Company's Common Stock. The Company and its counsel are currently
reviewing such Schedule 13D and considering appropriate responses thereto.
6
<PAGE>
STANDSTILL AGREEMENT
On August 23, 2000, the Company and its lenders agreed to an extension
of the standstill agreement (the "Standstill Agreement") between the Company and
its lenders, through December 31, 2000, pursuant to which the Company's lenders
agreed that they would not make any additional borrowings available to the
Company and thereby freeze the Company's line of credit at $8.6 million in
outstanding cash borrowings and approximately $2.6 million in contingent
stand-by letters of credit. However, pursuant to the Standstill Agreement, the
lenders 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) paid interest on the outstanding borrowings and letters
of credit, together with related fees and expenses, (ii) maintained a certain
inventory to outstanding total debt coverage ratio, (iii) reduced the Barbados
letters of credit (which are awaiting approvals for release), (iv) continued to
achieve its planned EBITDA projections and (v) continued discussions with
lenders and equity investors with the goal of refinancing its existing debt to
the banks.
Prior to December 31, 2000, the Company initiated discussions with its
lenders to obtain an additional extension of the Standstill Agreement. Although
the Company's lenders have agreed in principle to an extension of the Standstill
Agreement, the Company and its lenders have not yet completed the documentation
for such extension. The Company expects to complete such documentation in the
immediate future.
The Standstill Agreement has provided the Company with additional
time to attempt to consummate certain proposed transactions, which could
include a potential sale of the Company and obtaining a new working capital
facility. There can be no assurance that the Company's lenders will continue
to refrain from exercising remedies available to them.
4. CREDIT ARRANGEMENTS
Historically, the Company has utilized unsecured credit facilities with
the Company's two lead banks to support its inventory and capital requirements,
which fluctuate during the year due to the seasonal nature of the Company's
business, and to maintain and remodel its existing stores. As a result of
negotiations with its two lead banks regarding the Company's noncompliance with
certain financial covenants contained in the original loan agreements with the
banks and the nonpayment of amounts totaling approximately $1.5 million due
under the revolving term loan with one of the Company's banks, the Company and
its subsidiaries entered into a Forbearance Agreement, effective as of April 1,
1999, that effectively froze the Company's line of credit at its then and
current level of $17.5 million. This amount 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 certain of their respective
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 on August 31, 1999 and the Company was in default
under certain of the covenants contained in such Forbearance Agreement.
Outstanding borrowings against these secured credit facilities totaled
$8.8 million and $10.2 million as of November 25, 2000 and May 27, 2000,
respectively. Outstanding stand-by letters of credit against these credit
facilities totaled $2.6 million as of November 25, 2000 and May 27, 2000.
7
<PAGE>
In November 2000, the Company completed the first stage of a
transaction with Almod relating to the restructuring of its Barbados operations,
which resulted in the Company receiving $2.0 million of proceeds and issuing a
$2.0 million non-interest bearing note payable to Almod secured by the Company's
Barbados inventory. A balloon payment is due on December 31, 2003. Interest on
the note payable has been imputed at an interest rate of 11.5%, which is a rate
commensurate with the Company's current borrowings, and resulted in $570,231 of
unamortized original discount at November 25, 2000. This transaction is subject
to government approval and certain other conditions, which if not met would
require the Company to repay the loan immediately.
5. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, 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, 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
11/25/00 11/27/99 11/25/00 11/27/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average number of shares
used in basic earnings per share
Calculation................................... 8,636 8,625 8,635 8,625
Dilutive effects of options......................
Weighted average number of shares
used in diluted earnings per share
Calculation................................... 8,636 8,625 8,635 8,625
Shares under and outside the option plans
excluded in computation of diluted earnings
per share due to anti-dilutive effects........ 557 1,233 557 1,233
--------- -------- --------- --------
</TABLE>
6. ACCOUNTING FOR INCOME TAXES
The Company follows the liability method of accounting for income taxes
as set forth in SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. The amount of deferred tax asset or liability is based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to occur.
7. 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
8
<PAGE>
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. No other impairment loss was recognized during the year ended May 29,
1999. The Company believes no further impairment losses are required at November
25, 2000.
8. STOCK BASED COMPENSATION
During the six-month period ended November 25, 2000, the Company
issued 100,000 fully-vested options to a consulting firm at an exercise price
of $0.59 per share in consideration of the provision of certain agreed upon
services. Such consulting firm is an affiliate of Seymour Holtzman, a Class
III director and Chairman of the Board of the Company. The Company charged
approximately $49,000 to expense, the estimated fair value of the options, in
the six-months ended November 25, 2000. The expense is reflected in selling,
general and administrative expenses for the six-month period ended November
25, 2000.
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 statements of operations. Gains and losses for all periods
presented were not material.
The Financial Accounting Standards Board issued SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF SFAS NO. 133, in July 1999. SFAS No. 133 is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000; earlier
adoption is allowed. The statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company currently expects that, due to its limited use
of derivative instruments, the adoption of SFAS No. 133 will not have a material
effect on the Company's results of operations or financial position.
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.
9
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
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, 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 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.
NXP
On June 22, 2000, NXP-Jewels Corporation ("NXP") filed a complaint in
the United States District Court for the District of Delaware against the
Company. The complaint alleges, among other things, damages from the Company
from its determination to terminate a letter of intent to sell its Barbados
operations to NXP due to the Company's decision that NXP was in material breach
of this letter of intent. The Company has filed its response to this complaint,
which included counter claims for alleged damages against NXP for failure to
close on an expedited basis. The parties are commencing scheduling discovery. At
this time, management is unable to determine the financial impact this action
may have on the Company's financial condition or results of operations.
INSURANCE SETTLEMENT
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The settlement totaled $2.2
million of which $0.5 million had been previously advanced to the Company.
After applying a deductible of $0.3 million, the Company received net
proceeds of approximately $1.4 million in October of 2000. The Company
recorded a gain on insurance settlement of approximately $1.4 million for the
six-month period ended November 25, 2000.
12. ALMOD MANAGEMENT AGREEMENT
On November 7, 2000, the Company entered into a license agreement
granting Almod the exclusive right to manage operations in one of the Company's
Barbados stores beginning in December 2000. The Company will pay Almod a
management fee equal to all profits received less all necessary expenses. As of
November 25, 2000, there has been no financial impact related to this agreement.
10
<PAGE>
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 and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "believe," "expect," "anticipate," "intend," "estimate" and other
expressions, which are predictions of or indicate future events and trends and
which do not relate to historical matters, identify forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause the actual results 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 but not limited to 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 (the "Commission") and changes in general
economic conditions and interest and exchange rates.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 25, 2000
GENERAL
The Company operated 17 luxury gift and jewelry stores as of November
25, 2000. The Company continues to address operational, merchandising,
marketing, recruiting as well as financial issues, some of which are outlined in
its "Strategic Plan", set forth in Note 1 to the Consolidated Financial
Statements in its Annual Report on Form 10-K for the fiscal year ended May 27,
2000, filed with the Commission on October 20, 2000.
The Company's new management team is committed to continuing to make
progress toward the goals it has established. The increases in comparable store
sales and gross margins reflect the progress achieved on the initiatives taken
to date. Our team will continue to attempt to secure a greater range of
world-class luxury products for sale in Little Switzerland stores. In addition,
focus will continue to be placed on improvements in gross margin, however, the
Company may place more emphasis on competitive margins in the upcoming months to
ensure the current sales trends continue. The Company has increased its
marketing efforts, which have resulted in a comparable store increases of 7.6%
for the month of December, the first period of our third quarter.
NET SALES
Net sales for the three-month period ended November 25, 2000, were
$11.4 million, a 12.7% increase from net sales of $10.1 million for the
corresponding period last year. Net sales for the six-month period ended
November 25, 2000 were $21.3, a decrease of (10.9%) from net sales of $23.9
million for the corresponding six-month period last fiscal year.
11
<PAGE>
Net sales for comparable stores increased approximately 26.6% for the
quarter ended November 25, 2000 compared to the corresponding period last year.
Excluding Barbados and the Fragrance category, which is now merchandised through
a third party (and therefore, not included in current year-end sales) the sales
for comparable stores increased approximately 38.6% for the quarter ended
November 25, 2000 compared to the corresponding period last year.
The increase in sales was consistent with management's expectations,
which is a positive sign that Company initiatives are producing the desired
results. Also contributing to the strong sales increase was a mild hurricane
season, increased ship traffic and tight inventory management. Management
believes that this was a very positive performance considering the recent retail
sales slowdown in the U.S. and abroad. The Company is closely monitoring these
retail trends and is prepared to take appropriate actions if necessary.
GROSS PROFIT
Gross profit as a percentage of net sales was 43.5% and 44.0% for the
three and six months ended November 25, 2000, compared to 25.2% and 29.9% for
the respective periods last year. In the corresponding three months last year,
the Company took a $1.3 million charge for discontinued and liquidation
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 and six months ended
November 27, 1999.
Management attributes this margin improvement to a strong focus on
increasing sales through promotional activities as opposed to aggressive,
clearance type discounting. Management was gratified with the sales volume the
Company achieved while keeping its margins at or above historical levels.
Margins will be monitored closely to ensure the Company remains competitive for
comparable merchandise.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the three and
six months ended November 25, 2000 were $6.6 million and $12.7 million, or
approximately 58.4% and 59.7% of net sales respectively, compared to $7.2
million and $15.3 million, or approximately 71.1% and 64.1% of net sales
respectively, for the corresponding period last year. The decrease in SG&A
expense as a percentage of net sales is primarily attributable to strong net
sales increases for the three months ended November 25, 2000, coupled with
strong expense control at budgeted levels. Management was pleased with its
ability to control its legal and consulting costs, which traditionally have been
running at very high levels.
GAIN ON INSURANCE SETTLEMENT
On October 16, 2000, the Company settled its business interruption
insurance claim related to Hurricane Lenny. The settlement totaled $2.2 million
of which $0.5 million had been previously advanced to the Company. After
applying a deductible of $0.3 million, the Company received net proceeds of
approximately $1.4 million. The Company recorded a gain on insurance settlement
of approximately $1.4 million for the six months ended November 25, 2000. In
addition, the Company recorded one-time gains in the amount of $1.0 million for
the six months ended November 27, 1999, related to the disposition and sale of
certain assets.
INTEREST EXPENSE
Net interest expense for the three months ended November 25, 2000 was
$257,000 compared to $315,000 for the corresponding period last year. The
decrease in net interest expense reflects reduced
12
<PAGE>
levels of borrowings offset by increased average borrowing rates compared to the
corresponding period last year.
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's primary needs for working capital are to
support its inventory requirements, which fluctuate during the year due to the
seasonal nature of the Company's business, and to maintain and remodel its
existing stores. In addition, a significant investment in inventory is required
at all times in order to meet the demands of its customers who, as tourists,
require immediate delivery of purchased goods. As a general policy, the Company
does not sell merchandise on account. Virtually all sales are paid by cash,
check or major credit card.
The Company continues to operate without a long-term credit facility to
fund its working capital needs. As discussed above under "Recent
Developments-Standstill Agreement," the Company entered into the Standstill
Agreement. The Forbearance Agreement entered into by the Company and its lenders
in April 1999 expired on August 31, 1999.
Pursuant to the Forbearance Agreement, the Company, among other things,
granted liens to its lenders secured by substantially all of the Company's
assets, and established certain criteria that the Company was required to meet
regarding inventory levels, in consideration of forbearance from the lenders
exercising their rights and remedies under the then existing loan documents,
including declaring all amounts immediately due under the loan agreements.
Pursuant to the Standstill Agreement, effective through December 31,
2000, the Company's lenders agreed to forbear from exercising their rights and
remedies under the existing loan documents, including declaring all amounts
immediately due under the loan agreements, until December 31, 2000; provided,
however, that the lenders would have the right to terminate the forbearance
period if the Company failed to satisfy its obligations under the Standstill
Agreement. If the lenders terminate the forbearance period, 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.
Prior to December 31, 2000, the Company initiated discussions with its
lenders to obtain an additional extension of the Standstill Agreement. Although
the Company's lenders have agreed in principle to an extension of the Standstill
Agreement, the Company and its lenders have not yet completed the documentation
for such extension. The Company expects to complete such documentation in the
immediate future.
Outstanding borrowings against such secured credit facilities totaled
$8.8 million and $10.2 million as of November 25, 2000 and May 27, 2000,
respectively. Outstanding stand-by letters of credit against these credit
facilities totaled $2.6 million and $4.2 million as of November 25, 2000 and May
27, 2000, respectively. The weighted average interest rates incurred during
fiscal 2000, 1999 and 1998 were approximately 9.6%, 8.4% and 8.1%, respectively.
Capital expenditures were approximately $0.4 million for the six months
ended November 25, 2000, compared to $0.2 million for the corresponding period
last year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 22, 2000, Jewels at A.H. Riise ("NXP"), a St. Thomas competitor
of the Company, filed a complaint in the United States District Court for the
District of Delaware (Civil Action No. 00-630) against the Company. The
complaint alleges damages resulting from the Company's termination of a letter
of intent to sell 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. The parties are commencing scheduling discovery. See "Part I,
Item 1, Notes to Financial Statements (unaudited), Footnote 10, Commitments and
Contingencies."
On April 24, 2000, the Company announced it had reached a settlement of
litigation with DRHC. Pursuant to the terms of the settlement, Little
Switzerland assumed the lease of the retail space on the island of St. Thomas
from one of DRHC's affiliates and also received an aggregate of $500,000 from
DRHC in a combination of cash and a promissory note for refitting and
modernizing the space. The retail space is located adjacent to Little
Switzerland's flagship store on Main Street in St. Thomas. The Company is in the
process of integrating this space with its Main Street location. Upon
completion, the Company's flagship store will increase its selling space from
approximately 3,650 to 7,650 square feet.
On March 22, 1999, a class action complaint was filed in the United
States District Court for the District of Delaware (Civil Action No. 99-176)
against the Company, certain of its former officers and directors, DRHC and
Stephen G.E. Crane. The complaint alleges that such defendants violated federal
securities laws by failing to disclose that DRHC's financing commitment to
purchase the Company's shares expired on April 30, 1998 before the Company's
stockholders were scheduled to vote to approve the proposed merger between the
Company and DRHC at the May 8, 1998 special meeting of stockholders. The
plaintiffs are seeking monetary damages, including, without limitation,
reasonable expenses in connection with this action. The plaintiffs amended their
complaint on November 10, 1999 and the Company filed a motion to dismiss the
plaintiff's amended complaint on December 7, 1999. On January 28, 2000, the
plaintiffs filed their opposition to the motion to dismiss. The motion remains
pending. The Company has entered into discussions to settle this action.
However, there are no assurances that these discussions will result in a
settlement of this action, or that any settlement will be on terms favorable to
the Company. See "Part I, Item 1, Notes to Financial Statements (unaudited),
Footnote 10, Commitments and Contingencies."
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,
Registration No. 33-40907, filed with the Commission on
July 10, 1992 ("Amendment No. 1 to the Form S-1").
14
<PAGE>
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 Commission on February 24,
1999.
10.1 The Little Switzerland, Inc. 1991 Stock Option Plan,
incorporated herein by reference to Amendment No. 1 to the
Form S-1.
10.2 The Little Switzerland, Inc. 1992 Employee Stock Purchase
Plan, incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the Commission on May
29, 1992.
10.3 The Little Switzerland, Inc. 1992 Non-Employee Directors'
Nonqualified Stock Option Plan, incorporated herein by
reference to the Company's Annual Report on Form 10-K filed
with the Commission on May 26, 1993.
10.4 Settlement Agreement, dated as of February 23, 1999, by and
among the Company, Jewelcor Management, Inc., Seymour
Holtzman, Donald L. Sturm, ValueVest Partners, L.P. and C.
William Carey, incorporated herein by reference to the
Company's Current Report on Form 8-K filed with the
Commission on February 24, 1999.
10.5 Forbearance Agreement, dated as of May 7, 1999, by and among
L. S. Wholesale, Inc., the Company, L. S. Holding, Inc.,
World Gift Imports (Barbados) Limited, World Gift Imports,
N. V., Montres Et Bijoux, S.A.R.L., L. S. Holding (Aruba),
N. V., L. S. Holding (Curacao), N. V., Little Switzerland
(Antigua), Limited, Little Switzerland (St. Lucia) Limited,
L. S. Holding (USA), Inc. and The Chase Manhattan Bank and
The Bank of Nova Scotia, incorporated herein by reference to
the Company's Current Report on Form 8-K filed with the
Commission on May 20, 1999.
10.6 Security Agreement, dated as of May 7, 1999, by and among
L. S. Wholesale, Inc., the Company, L. S. Holding, Inc.,
World Gift Imports (Barbados) Limited, World Gift Imports,
N. V., Montres Et Bijoux, S.A.R.L., L. S. Holding (Aruba),
N. V., L. S. Holding (Curacao), N. V., Little Switzerland
(Antigua), Limited, Little Switzerland (St. Lucia) Limited,
L. S. Holding (USA), Inc. and The Chase Manhattan Bank and
The Bank of Nova Scotia, incorporated herein by reference to
the Company's Current Report on Form 8-K filed with the
Commission on May 20, 1999.
10.7 Standstill Agreement, dated April 7, 2000, by among the
Company, its affiliates named therein, the Chase Manhattan
Bank and the Bank of Nova Scotia (the "Standstill Agreement"),
incorporated herein by reference to the Company's Amendment
No. 1 to its Annual Report on Form 10-K for the fiscal year
ended May 27, 2000, filed with the Commission on January 12,
2001.
10.8 Extension of the Standstill Agreement, dated July 28, 2000,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended May 27, 2000,
filed with the Commission on October 20, 2000 (the "2000 Form
10-K").
15
<PAGE>
10.9 Extension of the Standstill Agreement, dated August 23, 2000,
incorporated by reference to the 2000 Form 10-K.
10.10 Extension of the Standstill Agreement, dated October 13, 2000,
incorporated by reference to the 2000 Form 10-K.
10.11 Employment Agreement, dated as of August 17, 1999, between
Robert L. Baumgardner and the Company, incorporated herein by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended May 29, 1999, filed with the Commission on
September 17, 1999 (the "1999 Form 10-K").
10.12 Employment Agreement, dated as of August 17, 1999, between
Patrick J. Hopper and the Company, incorporated herein by
reference to the 1999 Form 10-K.
(b) Reports on Form 8-K during the quarter ended November 25,
2000: On December 22, 2000, the Company filed a Current Report
on Form 8-K disclosing that it terminated further discussions
with Almod relating to the proposed issuance of shares of
Common Stock because the parties were unable to reach
agreement on certain material terms, including terms relating
to corporate control.
16
<PAGE>
SIGNATURE
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 12, 2001 By: /s/ PATRICK J. HOPPER
--------------------------------
Patrick J. Hopper
Chief Financial Officer,
Vice President and Treasurer
Authorized Officer and Principal
Financial and Accounting Officer
17
<PAGE>
INDEX OF EXHIBITS
EXHIBIT
NUMBER EXHIBIT
3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Amendment No.
1 to the Company's Registration Statement on Form S-1,
Registration No. 33-40907, filed with the Commission on July
10, 1992 ("Amendment No. 1 to the Form S-1").
3.2 The Amended and Restated By-Laws of the Company are
incorporated herein by reference to the Company's Current
Report on Form 8-K filed with the Commission on February 24,
1999.
10.1 The Little Switzerland, Inc. 1991 Stock Option Plan,
incorporated herein by reference to Amendment No. 1 to the
Form S-1.
10.2 The Little Switzerland, Inc. 1992 Employee Stock Purchase
Plan, incorporated herein by reference to the Company's
Annual Report on Form 10-K filed with the Commission on May
29, 1992.
10.3 The Little Switzerland, Inc. 1992 Non-Employee Directors'
Nonqualified Stock Option Plan, incorporated herein by
reference to the Company's Annual Report on Form 10-K filed
with the Commission on May 26, 1993.
10.4 Settlement Agreement, dated as of February 23, 1999, by and
among the Company, Jewelcor Management, Inc., Seymour
Holtzman, Donald L. Sturm, ValueVest Partners, L.P. and C.
William Carey, incorporated herein by reference to the
Company's Current Report on Form 8-K filed with the
Commission on February 24, 1999.
10.5 Forbearance Agreement, dated as of May 7, 1999, by and among
L. S. Wholesale, Inc., the Company, L. S. Holding, Inc.,
World Gift Imports (Barbados) Limited, World Gift Imports,
N. V., Montres Et Bijoux, S.A.R.L., L. S. Holding (Aruba),
N. V., L. S. Holding (Curacao), N. V., Little Switzerland
(Antigua), Limited, Little Switzerland (St. Lucia) Limited,
L. S. Holding (USA), Inc. and The Chase Manhattan Bank and
The Bank of Nova Scotia, incorporated herein by reference to
the Company's Current Report on Form 8-K filed with the
Commission on May 20, 1999.
10.6 Security Agreement, dated as of May 7, 1999, by and among
L. S. Wholesale, Inc., the Company, L. S. Holding, Inc.,
World Gift Imports (Barbados) Limited, World Gift Imports,
N. V., Montres Et Bijoux, S.A.R.L., L. S. Holding (Aruba),
N. V., L. S. Holding (Curacao), N. V., Little Switzerland
(Antigua), Limited, Little Switzerland (St. Lucia) Limited,
L. S. Holding (USA), Inc. and The Chase Manhattan Bank and
The Bank of Nova Scotia, incorporated herein by reference to
the Company's Current Report on Form 8-K filed with the
Commission on May 20, 1999.
18
<PAGE>
10.7 Standstill Agreement, dated April 7, 2000, by among the
Company, its affiliates named therein, the Chase Manhattan
Bank and the Bank of Nova Scotia (the "Standstill Agreement"),
incorporated herein by reference to the Company's Amendment
No. 1 to its Annual Report on Form 10-K for the fiscal year
ended May 27, 2000, filed with the Commission on January 12,
2001.
10.8 Extension of the Standstill Agreement, dated July 28, 2000,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended May 27, 2000,
filed with the Commission on October 20, 2000 (the "2000 Form
10-K").
10.9 Extension of the Standstill Agreement, dated August 23, 2000,
incorporated by reference to the 2000 Form 10-K.
10.10 Extension of the Standstill Agreement, dated October 13, 2000,
incorporated by reference to the 2000 Form 10-K.
10.11 Employment Agreement, dated as of August 17, 1999, between
Robert L. Baumgardner and the Company, incorporated herein
by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended May 29, 1999, filed with the
Commission on September 17, 1999 (the "1999 Form 10-K").
10.12 Employment Agreement, dated as of August 17, 1999, between
Patrick J. Hopper and the Company, incorporated herein by
reference to the 1999 Form 10-K.
19
