SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For quarterly period ended August 30, 1997
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)
(809) 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 October 10, 1997, 8,462,359 shares of $.01 par value common stock of the
registrant were outstanding.
LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED August 30, 1997
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
August 30, 1997 (unaudited) and
May 31, 1997 3
Consolidated Statements of Income
for the three months ended
August 30, 1997 and August 31,
1996 4
Consolidated Statements of Cash Flows
for the three months ended August 30,
1997 and August 31, 1996 (unaudited) 5
Notes to Consolidated Financial
Statements (unaudited) 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 14
PART II. OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
PART I. FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial Statements Page 3
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except per share data)
August 30, May 31,
ASSETS 1997 1997
------ ------
Current assets: (unaudited)
Cash and cash equivalents........................$ 952 $ 1,710
Accounts receivable.............................. 2,881 2,083
Inventory........................................ 49,062 44,728
Prepaid expenses and other current assets........ 3,726 2,172
------ ------
Total current assets....................... 56,621 50,693
------ ------
Property, plant and equipment, at cost.............. 38,854 38,565
Less -- Accumulated depreciation................. (15,842) (15,201)
------ ------
23,012 23,364
------ ------
Other assets........................................ 3,250 3,334
------ ------
Total assets...............................$ 82,883 $ 77,391
====== ======
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of long term debt................$ 2,225 $ 2,225
Unsecured notes payable.......................... 10,025 8,100
Accounts payable................................. 11,447 7,002
Accrued and currently deferred income taxes...... 364 429
Other accrued expenses and deferred income....... 2,327 2,431
------ ------
Total current liabilities.................. 26,388 20,187
Long term debt...................................... 5,563 6,119
Deferred income taxes............................... 186 186
------ ------
Total liabilities.......................... 32,137 26,492
------ ------
Commitments and contingencies....................... --- ---
Minority interest................................... 1,619 1,619
------ ------
Stockholders' equity:
Preferred stock, $.01 par value--
Authorized--5,000 shares
Issued and outstanding--none.................... --- ---
Common stock, $.01 par value--
Authorized--20,000 shares
Issued and outstanding--8,462 shares
at August 30, 1997 and at May 31, 1997 ....... 85 85
Capital in excess of par............................ 14,814 14,811
Retained earnings................................... 34,228 34,384
------ ------
Total stockholders' equity.................... 49,127 49,280
------ ------
Total liabilities, minority interest
and stockholders' equity...................$ 82,883 $ 77,391
====== ======
See accompanying notes to consolidated financial statements
PART I. FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial statements Page 4
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share data)
(unaudited)
For the three
months ended
August 30, August 31,
1997 1996
------ ------
Net sales..................................$ 20,370 $ 15,868
Cost of sales.............................. 11,713 8,972
------ ------
Gross profit............................... 8,657 6,896
Selling, general and
administrative expenses.................... 8,479 7,929
Business interruption
insurance (proceeds)....................... --- (428)
------ ------
Operating income (loss)................. 178 (605)
Interest expense, net...................... 370 332
------ ------
(Loss) before
income taxes......................... (192) (937)
(Benefit) for
income taxes............................... (35) (168)
------ ------
Net (loss).................................$ (157) $ (769)
====== ======
Net (loss)
Per share...............................$ (0.02) $ (0.09)
====== ======
Weighted average shares
outstanding............................. 8,682 8,458
====== ======
See accompany notes to consolidated financial statements
PART I. FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial statements Page 5
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the three months ended
August 30, August 31,
1997 1996
Cash flows from operating activities: ------- -------
Net (loss)............................................$ (157) $ (769)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities--
Depreciation................................... 641 828
Changes in assets and liabilities:
(Increase) decrease in accounts receivable... (798) 276
(Increase) in inventory...................... (4,334) (5,830)
(Increase) in prepaid expenses
and other current assets................... (1,554) (1,217)
Decrease in other assets.................... 84 48
Increase in accounts payable................ 4,445 5,097
(Decrease) in other accrued
expenses and deferred income.............. (103) (332)
(Decrease) in accrued and currently
deferred income taxes...................... (65) (1,036)
------- -------
Net cash (used in) operating activities............ (1,841) (2,935)
------- -------
Cash flows from investing activities:
Capital expenditures............................. (289) (856)
------- -------
Net cash (used in) investing activities............ (289) (856)
------- -------
Cash flows from financing activities:
Proceeds from unsecured notes payable............ 3,825 5,700
Repayments of unsecured notes payable............ (1,900) (3,600)
Repayments of long term borrowings............... (556) --
Issuance of common stock......................... 3 9
------- -------
Net cash provided by financing activities............. 1,372 2,109
------- -------
Net decrease in cash and cash equivalents............. (758) (1,682)
Cash and cash equivalents, beginning of period........ 1,710 5,393
------- -------
Cash and cash equivalents, end of period..............$ 952 $ 3,711
======= =======
During the three months ended August 30, 1997 and August 31, 1996, the Company
paid income taxes of $29 and $837, respectively, and paid interest of $415 and
$259, respectively.
See accompanying notes to consolidated financial statements
FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial statements Page 6
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 August 30,
1997 and August 31, 1996 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 report on 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. TRANSACTIONS WITH AFFILIATES
The Company enters into a number of transactions with Town & Country
Corporation and its affiliates ("Town & Country"), of which one of the Company's
Directors is an Executive Officer. The Company purchases a portion of its
merchandise from Town & Country at prices which approximate arm's-length
transactions.
FORM 10-Q
Page 7
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
4. CREDIT ARRANGEMENTS
The Company has available a total of $19.7 million in unsecured credit
facilities, of which $5.5 million is available for borrowing. Approximately $4.2
million of the credit facilities is utilized to secure customs bonds and other
bank guarantees required in the normal course of business. Any unfunded portion
of the facilities can be withdrawn at the bank's discretion. Outstanding
borrowings against these credit facilities totaled approximately $10.0 million
as of August 30, 1997. Additionally, in February 1996, the Company secured term
debt of approximately $8.9 million from its two lead banks to finance the
acquisition of the fixtures, leasehold rights and inventories of two stores in
Barbados. Interest on this debt accrues at an annual interest rate of
approximately 7.25%, and is payable monthly. The principal is payable in equal
quarterly payments over a four year period, commencing March 1997. As of August
30, 1997, the Company had $7.8 million of term debt outstanding and was in
compliance with all restrictive covenants related to its unsecured and term debt
agreements. Additionally, the Company has available separate facilities for
foreign exchange contracts.
5. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common and
dilutive common equivalent shares (stock options) outstanding during each
period.
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 reverse.
FORM 10-Q
Page 8
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
7. OTHER ASSETS
Other assets consist primarily of amounts related to non- competition
agreements, rental deposits and the excess of cost over the fair market value of
the net assets of the business acquired (goodwill). Amounts related to
non-competition agreements are amortized over the lives of the respective
agreements. Amounts related to goodwill are being amortized over periods of up
to 10 years. Accumulated amortization totaled approximately $418,000 and
$110,000 at August 30, 1997 and August 31, 1996, respectively.
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. The Company continually reviews applicable
assets for events or changes in circumstances which might indicate the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of these assets by determining whether the amortization over
their remaining lives can be recovered through projected undiscounted future
results. The amount of impairment, if any, is measured based on projected
discounted future results using a discount rate commensurate with the risks
involved. No such impairment existed as of August 30, 1997.
8. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 - EARNINGS
PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share, which
supersedes Accounting Principles Board Opinion 15, the existing authoritative
guidance. SFAS No. 128 is designed to improve the earnings per share information
provided in the financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of earnings per share on an international basis. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 and requires restatement of all prior-period earnings
per share data presented.
FORM 10-Q
Page 9
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The new statement modifies the calculations of primary and fully diluted
earnings per share and replaces them with basic and diluted earnings per share.
Basic earnings per share includes no dilution and is calculated by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of stock
options that could share in the earnings of an entity, similar to fully diluted
earnings per share. Earnings per share in these financial statements would not
be affected under the new pronouncement.
9. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 -
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which is to become effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 requires employee
stock-based compensation to be either recorded or disclosed at its fair value.
Management continues to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25 and will not adopt the new accounting
provision for employee stock-based compensation under SFAS No. 123, but will
include the additional required disclosures in its fiscal year end financial
statements.
10. ADVERTISING
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising consists primarily of advertisements
with local and national travel magazines which are produced on a periodic basis
and distributed to visiting tourists, and fees paid for promotional "port
lecturer" programs directed primarily at cruise ship passengers.
FORM 10-Q
Page 10
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
11. COMMITMENTS AND CONTINGENCIES
In September 1995, Hurricanes Luis and Marilyn inflicted damage to several
of the Company's stores and caused significant damage to various islands'
infrastructures, including hotels and other tourist facilities. As of November
20, 1996, all stores had reopened.
The Company has settled all outstanding claims related to the hurricanes
with its insurance carrier. In connection with this final settlement, the
Company received approximately $13.4 million in property and business
interruption proceeds. The Company recorded a net gain of approximately $4.7
million in fiscal 1996, after write-offs related to damaged assets of
approximately $8.1 million, including furniture and fixtures, inventory and
other assets related to stores affected by the hurricanes. In addition,
approximately $560,000, representing fiscal 1997 lost profits for a store in
Marigot not reopened until November 1996, was recorded as deferred income on the
Company's consolidated balance sheet as of June 1, 1996. In the three month
period ended August 31, 1996, the Company recorded $428,000 of that amount as
business interruption insurance proceeds.
In July 1997 management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company for the
fiscal year ended May 31, 1997. As a result, the Company engaged Arthur
Andersen, LLP to evaluate the matter and determine the impact, if any, on the
Company's previously and currently reported consolidated financial statements.
After extensive review, analysis and evaluation, which focused on unlocated
differences in cash balances, management believes that an employee defalcation
occurred during the 1997 fiscal year. The estimated loss of approximately $2.4
million was classified as a general and administrative expense in the
consolidated financial statements for the fiscal year ended May 31, 1997. The
Company is in the process of reviewing its insurance coverage which calls for a
maximum claim limitation of $1,000,000, and intends to submit a claim to its
fidelity bond carrier and seek full restitution from the employee. The amount of
insurance recovery from its insurance carrier, if any, relating to these losses
has not been reflected in the accompanying financial statements.
FORM 10-Q
Page 11
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
NET SALES
Net sales for the first quarter ended August 30, 1997 were $20.4 million or
28.4% higher than net sales of $15.9 million for the same period last year.
Sales for the stores which were open for the full three month period this year
and last year improved to $18.0 million or 18.5% from $15.2 million last year.
Management attributes both improvements to strong sales in Alaska, an
increase in tourism in the Caribbean resulting from an increase in the number of
hotel rooms available, concentration on core product lines and suppliers and the
Company's aggressive promotional programs directed toward Caribbean hotels and
resorts.
GROSS PROFIT
Gross profit as a percentage of net sales during the three month periods
ended August 30, 1997 and August 31, 1996 were 42.5% and 43.5%, respectively.
Management attributes the decline in gross margin percentage to clearance
markdowns to liquidate discontinued product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expenses ("SG&A") for the first quarter
were $8.5 million or 6.9% higher than expenses of $7.9 million in the first
quarter last year. The increase of approximately $550,000 is primarily due to
$280,000 associated with new stores in Skagway, Alaska and in St. Lucia and
incremental expenses directly associated with sales. As a percentage of sales,
SG&A expenses improved from 50.0% to 41.6%, reflecting the effect of an increase
in sales on non-variable expenses.
FORM 10-Q
Page 12
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
OTHER
In July 1997 management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company. As a
result, the Company engaged Arthur Andersen, LLP to evaluate the matter and
determine the impact, if any, on the Company's consolidated financial
statements. After extensive review, analysis and evaluation, which focused on
unlocated differences in cash balances, management determined that an employee
theft occurred during the fiscal year ended May 31, 1997. The estimated loss of
approximately $2.4 million was charged to general and administrative expense for
the fiscal year ended May 31, 1997. As a result of the charge, the Company filed
amended financial statements on Form 10-Q for each of the quarters within the
fiscal year. Accordingly, the comparative consolidated Statement of Income for
the three month period ended August 31, 1996 reflects a net loss of $769,000 or
$0.09 per share, including a charge to general and administrative expense of
$277,000 which, after tax, negatively impacted net income and earnings per share
by $227,000 and $0.03, respectively.
Net interest expense for the quarter was $370,000 compared to $332,000 in
the same period last year. The increase reflects slightly higher average
borrowings.
The Company's effective tax rates for the three month periods ended August
30, 1997 and August 31, 1996 was approximately 18%.
This quarterly report on Form 10-Q contains certain statements that are
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
FORM 10-Q
Page 13
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
future results, performance or achievements expressed or implied by such
forward- looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the frequency of tourist visits to the locations where the Company maintains
retail stores (ii) the Company's ability to retain relationships with its major
suppliers of product for resale (iii) weather in the Company's markets (iv)
actions of the Company's competitors and the Company's ability to respond to
such actions (v) economic conditions that affect the buying patterns of the
Company's customers (vi) availability of new tourist markets for expansion and
(vii) the continued success of the Company's efforts to implement its planned
strategic initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations during the three month period ended August 30,
1997 was $1.8 million, compared to $2.9 million for the same three month period
last year. The decrease in net cash used in operations primarily reflects a
smaller increase in inventory balances during the current quarter.
The Company's working capital position as of August 30, 1997 decreased
slightly to $30.2 million from $30.5 million at May 31, 1997. Current ratios
were 2.1 and 2.5 as of the same periods, respectively. Capital expenditures were
approximately $289,000 during the three month period ended August 30, 1997,
compared to $856,000 during the same period last year.
The Company has available a total of $19.7 million in unsecured credit
facilities, of which $5.5 million is available for borrowing. Approximately $4.2
million of the credit facilities is utilized to secure customs bonds and other
FORM 10-Q
Page 14
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
bank guarantees required in the normal course of business. Any unfunded portion
of the facilities can be withdrawn at the bank's discretion. Outstanding
borrowings against these credit facilities totaled approximately $10.0 million
as of August 30, 1997. Additionally, in February 1996, the Company secured term
debt of approximately $8.9 million from its two lead banks to finance the
acquisition of the fixtures, leasehold rights and inventories of two stores in
Barbados. Interest on this debt accrues at an annual interest rate of
approximately 7.25%, and is payable monthly. The principal is payable in equal
quarterly payments over a four year period, commencing March 1997. As of August
30, 1997, the Company had $7.8 million of term debt outstanding and was in
compliance with all restrictive covenants related to its unsecured and term debt
agreements. Additionally, the Company has available separate facilities for
foreign exchange contracts. It remains management's expectation that funds
available from operations and bank financing will be sufficient to fund
operations and expansion for at least the next three years.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
During fiscal 1997, the Company received inquiries from third parties
regarding a possible strategic transaction with the Company. After completing an
operational and strategic review of the Company, Little Switzerland announced in
August 1997 that it was pursuing various strategic alternatives and that its
financial advisor, Wasserstein Perella & Co., Inc., would discuss possible
business combinations with certain third parties.
FORM 10-Q
Page 15
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
3.1 The Amended and Restated Certificate of Incorpo-
ration of the Company is incorporated herein by
reference to Exhibit 3.3 to Amendment No. 1 to
the Company's Registration Statement on Form
S-1, Registration No. 33-40907, files with the
Securities and Exchange Commission on July 10,
1992 ("Amendment No. 1 to the Form S-1").
3.2 The Amended and Restated By-Laws of the Company
are incorporated herein by reference to Exhibit
3.4 to Amendment No. 1 to the Form S-1/
(b) Reports on Form 8-K
No Form 8-K was issued by the registrant during the three month period
ended August 30, 1997.
FORM 10-Q
Page 16
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on it behalf
by the undersigned thereunto duly authorized.
LITTLE SWITZERLAND, INC.
Date: October 14, 1997 /s/ Ronald J. Lataille
---------------- ----------------------
Ronald J. Lataille
Vice President, Treasurer
and Chief Financial Officer