-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P5udDBz5LE0CdJni7m1IZpz+jJLz4DvVc48iVa0Z6pFoNn229D4KU87X2OABaOag eHWk+MQVg0Lx0ChfimKiUg== /in/edgar/work/0000950136-00-001490/0000950136-00-001490.txt : 20001031 0000950136-00-001490.hdr.sgml : 20001031 ACCESSION NUMBER: 0000950136-00-001490 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000826 FILED AS OF DATE: 20001030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LITTLE SWITZERLAND INC/DE CENTRAL INDEX KEY: 0000875523 STANDARD INDUSTRIAL CLASSIFICATION: [5944 ] IRS NUMBER: 660476514 STATE OF INCORPORATION: DE FISCAL YEAR END: 0529 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19369 FILM NUMBER: 749036 BUSINESS ADDRESS: STREET 1: 161-B CROWN BAY CRUISE SHIP PORT CITY: ST THOMAS VIRGIN ISL STATE: V1 ZIP: 00802 BUSINESS PHONE: 3407762010 MAIL ADDRESS: STREET 1: 161B CROWN BAY CRUISE SHIP PORT CITY: ST THOMAS STATE: VI ZIP: 00804 10-Q 1 0001.txt FORM 10-Q 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. LITTLE SWITZERLAND, INC. INDEX TO FORM 10-Q
Page ---- 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
1 PART I. FINANCIAL INFORMATION Item 1. Financial statements LITTLE SWITZERLAND, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
August 26 2000 May 27 ASSETS (unaudited) 2000 ----------- ------------ 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 ----------- ------------ Total current assets............................................... 31,114 30,240 PROPERTY, PLANT AND EQUIPMENT, AT COST.......................................... 26,419 32,240 Less - Accumulated depreciation........................................... 18,371 20,382 ----------- ------------ 8,048 11,858 OTHER ASSETS 481 381 ----------- ------------ Total assets....................................................... $ 39,643 $ 42,279 =========== ============ 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 ----------- ------------ Total current liabilities............................................ 20,371 20,924 ----------- ------------ DEFERRED INCOME TAXES........................................................... 202 202 ----------- ------------ Total liabilities.................................................... 20,573 21,126 ----------- ------------ 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 ----------- ------------ Total stockholders' equity........................................... 19,070 19,734 ----------- ------------ Total liabilities, minority interest and stockholders' equity $ 39,643 $ 42,479 =========== ============
See accompanying notes to consolidated financial statements 2 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 ----------- ----------- NET SALES......................................... $ 9,959 $ 13,835 COST OF SALES..................................... 5,510 9,226 ----------- ----------- Gross profits............................ 4,449 4,609 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 6,100 8,165 ----------- ----------- Operating loss........................... (1,651) (3,556) INTEREST EXPENSE, NET............................. 284 277 ----------- ----------- Loss before income taxes................. (1,935) (3,833) PROVISION FOR INCOME TAXES........................ 50 100 ----------- ----------- NET LOSS.......................................... $ (1,985) $ (3,933) =========== =========== BASIC AND DILUTED LOSS Per share................................ $ (0.23) $ (0.46) =========== =========== See accompanying notes to consolidated financial statements 3 LITTLE SWITZERLAND, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
For the three months ended August 26, August 28, 2000 1999 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) ------------ ----------- Net cash (used in) provided by operating activities....................... (2,866) 160 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................................... (75) (21) (Increase) decrease in other assets....................................... (100) (74) Proceeds from sale of certain assets...................................... 3,442 -- ------------ ----------- Net cash provided by (used in) investing activities....................... 3,267 (95) ------------ ----------- 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) -- ------------ ----------- Net cash (used in) financing activities.............................. (298) -- ------------ ----------- Net increase in cash and cash equivalents............................ 103 65 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 959 2,739 ------------ ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 1,062 $ 2,804 ------------ -----------
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
See accompanying notes to consolidated financial statements 4 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 5 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 6 "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 7 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): 8 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............................... -- -- ----- ----- Weighted average number of shares used in diluted earnings per share calculation.......................................... 8,635 8,625 ===== ===== Shares under and outside the option plans excluded in computation of diluted earnings per share due to anti-dilutive effects............... 1,015 1,233 ===== ===== 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 9 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. 10 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 11 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 12 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 13 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 14 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. 15 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 16 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. 17 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 3-MOS MAY-27-2000 MAY-30-1999 AUG-26-2000 1,062 0 263 0 28,252 1,537 26,419 18,371 39,643 20,371 0 0 0 87 18,983 39,643 9,959 9,959 5,510 5,510 6,100 0 284 (1,935) 50 (1,985) 0 0 0 (1,985) (0.23) (0.23)
-----END PRIVACY-ENHANCED MESSAGE-----