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
February 24, 2001
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 April 10, 2001, 9,056,268 shares of $.01 par value 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 February 24, 2001
(unaudited) and May 27, 2000 3
Consolidated Statements of Operations (unaudited) for
the three and nine months ended February 24, 2001 and
February 26, 2000 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended February 24, 2001 and
February 26, 2000 5
Notes to the Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports of Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS FEBRUARY 24, May 27,
2001 2000
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................... $ 1,249 $ 959
Accounts receivable, net........................ 868 355
Inventory....................................... 31,720 28,172
Prepaid expenses and other assets............... 1,573 754
--------- -------
Total current assets............................ 35,410 30,240
Property and equipment, at cost..................... 27,123 32,240
Less: Accumulated depreciation............... 19,392 20,382
--------- -------
Property and equipment, net..................... 7,731 11,858
DEPOSITS AND OTHER ASSETS........................... 510 381
--------- -------
TOTAL............................................... $ 43,651 $42,749
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Secured demand notes............................ $ 8,769 10,175
Accounts payable................................ 10,073 5,814
Accrued and currently deferred income taxes..... 1,548 1,500
Note payable, net of unamortized discount....... 1,476 --
Other accrued expenses.......................... 4,614 3,435
--------- -------
Total current liabilities..................... 26,480 20,924
DEFERRED INCOME TAXES 202 202
--------- -------
Total liabilities 26,682 21,126
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 - 9,056 and 8,631 shares
at February 24, 2001 and May 27, 2000,
respectively.................................. 91 87
Capital in excess of par............................ 17,833 15,604
Retained (deficit) earnings......................... (955) 4,043
--------- -------
Total stockholders' equity................ 16,969 19,734
--------- -------
TOTAL............................................... $ 43,651 $42,479
========= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
February 24, February 26, February 24, February 26,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Sales ......................... $ 19,186 $ 17,602 $ 40,501 $ 41,511
Cost of Sales ..................... 11,721 10,153 23,651 26,910
-------- -------- -------- --------
Gross Profit ...................... 7,465 7,449 16,850 14,601
Selling, General and Administrative
Expenses........................... 9,540 8,373 22,276 23,700
Gain on Insurance Settlement ...... -- -- (1,352) --
Loss (Gain) on Disposition and Sale
of Certain Assets ................. -- 249 -- (775)
Operating Loss .................... (2,075) (1,173) (4,074) (8,324)
Interest Expense, net ............. 282 277 824 869
Loss before income taxes .......... (2,357) (1,450) (4,898) (9,193)
Provision for Income Taxes ........ -- 100 100 300
-------- -------- -------- --------
NET LOSS .......................... (2,357) (1,550) (4,998) (9,493)
-------- -------- -------- --------
BASIC AND DILUTED LOSS Per Share .. ($ .27) ($ .18) ($ .58) ($1.10)
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the nine months ended
February 24, February 26,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,998) $ (9,493)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation 1,464 2,005
Gain on disposition and sales of certain
assets -- (775)
Gain on insurance settlement (1,352) --
Imputed interest on amortization of
discount on note payable 46 --
Stock based compensation 307 --
Changes in assets and liabilities:
Increase in accounts receivable (513) (850)
Decrease (increase) in inventory (3,548) 4,490
Decrease (increase) in prepaid expenses and
other current assets (818) 26
Increase in accounts payable 4,259 3,528
Increase in other accrued expenses 1,179 827
(Decrease) increase in accrued and
currently deferred income taxes 48 (1,078)
-------- --------
Net cash used in operating activities (3,926) (1,320)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (785) (103)
Increase in other assets (129) (181)
Proceeds from sale of certain assets 3,447 4,450
-------- --------
Net cash provided by operating activities 2,533 4,166
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from unsecured notes payable 2,000 --
Repayments of secured demand notes payable (1,406) (3,100)
Proceeds from insurance settlement 1,352 --
Issuance of common stock 37 4
Repurchase of preferred shares (300) --
-------- --------
Net cash provided by (used in) financing
activities 1,683 (3,096)
-------- --------
Net increase (decrease) in cash and cash
equivalents 290 (250)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 959 2,739
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,249 $ 2,489
======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 816 $ 810
Cash payments for taxes $ 52 $ 1,284
Non-cash financing activities:
Additional Paid in Capital related to repurchase
of preferred stock minority interest $ 1,319 $ --
Additional Paid in Capital related to discount
on note payable $ 570 $ --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 February 24,
2001 and February 26, 2000 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. CREDIT ARRANGEMENTS
Historically, the Company 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 $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 covenants contained in such Forbearance Agreement.
The Company then entered into a standstill agreement, as amended (the
"Standstill Agreement") with its existing lenders effective 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 $8.8 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 (of
which a portion have now been released), (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 the requisite documentation
as soon as practicable.
The Standstill Agreement has provided the Company with additional time to
consummate certain proposed transactions, which could include a potential sale
of the Company, a sale of a minority interest in the Company, and/or 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.
Outstanding borrowings against these secured credit facilities totaled
$8.8 million and $10.2 million as of February 24, 2001 and May 27, 2000,
respectively. Outstanding stand-by letters of credit against these credit
facilities totaled $2.6 million as of February 24, 2001 and May 27, 2000. In
March 2001, the stand-by letters of credit were reduced to approximately $0.4
million as a result of the replacement of these amounts with an insurance bond
that resulted from the transaction entered into with Almod Diamonds Limited
("Almod") (See Note 11).
In November 2000, the Company completed 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 $570,000 of original discount, of
which $46,000 has been amortized to interest expense in the nine month period
ended February 24, 2001. This transaction received approval from the Central
Bank of Barbados on March 27, 2001 (See Note 11).
4. EARNINGS PER SHARE
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):
Three Months Ended Nine Months Ended
02/24/01 02/26/00 02/24/01 02/26/00
-------- -------- -------- --------
Weighted average number of
shares used in basic
earnings per share
calculation................ 8,857 8,630 8,665 8,628
Dilutive effects of options -- -- -- --
----------- ---------- ----------- ----------
Weighted average number of
shares used in diluted
earnings per share
calculation................ 8,857 8,630 8,665 8,628
===== ===== ===== =====
Shares under and outside
the option plans excluded
in computation of diluted
earnings per share due to
anti-dilutive effects...... 1,911 1,344 1,911 1,344
===== ===== ===== =====
5. 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.
6. 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. The Company believes no further impairment losses are required
at February 24, 2001.
7. STOCK BASED COMPENSATION
During the three-month period ended February 24, 2001, the Company issued
307,692 shares of common stock to Jewelcor Management, Inc. ("Jewelcor"), a
consulting firm, at a price of $0.78 per share, the fair value of the common
stock at the time the agreement was reached, in consideration of certain agreed
upon services. Jewelcor is an affiliate of Seymour Holtzman, a class III
Director and Chairman of the Board of the Company. The Company charged
approximately $240,000 to selling, general and administrative expense in the
three months ended February 24, 2001.
The Company previously issued 100,000 fully vested stock options to
Jewelcor at an exercise price of $.59 per share for certain agreed upon
services. The Company charged $49,000 to selling, general and administrative
expense, the estimated fair value of the options, for the nine-month period
ended February 24, 2001.
On December 4, 2000, the Company issued 20,000 shares of common stock at
a price of $0.875 per share, the fair value at the time of issuance, to a former
employee for past services rendered. The Company charged approximately $18,000
to selling, general and administrative expense in the three months ended
February 24, 2001.
8. FOREIGN CURRENCY
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.
9. 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, and catalogs,
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.
10. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LAWSUIT
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
"Financing Disclosure Allegations"). 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. In March 2001, the District Court, among other things,
granted the Company's motion to dismiss with respect to certain allegations in
the amended complaint that the defendants violated federal securities laws by
failing to disclose the status of the Company's relationship with a particular
watch vendor; however, the District Court denied the motion to dismiss with
respect to the Financing Disclosure Allegations. In addition, the District Court
dismissed the claims against defendants DRHC and Stephen G.E. Crane. The Company
has entered into discussions to settle this action. However, there can be no
assurance that these discussions will result in a settlement of this action, or
that any settlement will be on terms favorable to the Company.
NXP
On February 16, 2001, the Company and NXP-Jewels Corporation ("NXP")
entered into a settlement agreement and mutual general release from the
litigation arising between the Company and NXP with respect to their general
obligations under a letter of intent to sell the Company's Barbados operations
to NXP.
The Company, as part of the settlement, agreed to refund a $100,000
deposit currently held in escrow and make a $5,000 settlement payment. Both the
$100,000 escrow deposit and the $5,000 settlement payment by the Company were
paid to NXP in March 2001.
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 nine-month period
ended February 24, 2001.
TERMINATION OF DISCUSSIONS WITH ALMOD REGARDING
POTENTIAL EQUITY INVESTMENT
On February 1, 2001, the Company and Almod entered into a termination
agreement and related release with respect to the proposed 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 investment because the parties
were unable to reach agreement on certain material terms, including terms
relating to corporate control. 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. Almod remains subject to a
confidentiality and standstill agreement which provides, among other things,
that Almod is prohibited from making additional purchases of the Company's
Common Stock.
The Company has, however, completed all other transactions with Almod
contemplated by that certain July 2000 Letter of Intent between the Company and
Almod. See Notes 3 and 11 for further discussion.
11. ALMOD 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 pays Almod a management
fee equal to all profits received less all necessary expenses. As a consequence
of this license agreement, the Company's Barbados port store is effectively
operated as an Almod retail store doing business as "Diamonds International".
The Company is awaiting approval from the government of Barbados for the
transaction with Almod's subsidiary Diamonds International ("DI"), related to
DI's minority investment into the Company's Barbados subsidiary, World Gift
Imports (Barbados), Ltd. If approved, the transaction will result in DI holding
a minority common interest in addition to preferred shares. Once documentation
is completed, an additional payment of $0.6 million will be remitted to the
Company. The Company will then be subject to certain profit sharing arrangements
with DI over a five year period related to its Barbados business including, but
not limited to, the shared utilization of the Company's tax loss carryforwards.
See Note 3 for further discussion relating to the restructuring of the Company's
Barbados operations.
12. SUBSEQUENT EVENT
On April 10, 2001, the Company announced that it has agreed in principle
to sell a 45% equity interest in the Company to an affiliate of Tiffany & Co.
("Tiffany"), subject to final negotiation and execution of definitive agreements
and successful completion of customary closing conditions. It is contemplated
that Tiffany will agree to invest approximately $9.0 million to purchase an
approximate 45% equity interest as newly-issued shares of Common Stock and will
agree to provide debt financing of up to $2.5 million. The Company intends to
use the net proceeds from the transaction for working capital and to pay off a
portion of its existing bank indebtedness. The Company also intends to refinance
the balance of its indebtedness on more favorable terms. In connection with the
transaction, the Company will be required to terminate its arrangement with
Jewelcor for the provision of consulting services. Also in connection with the
transaction, the composition of the Board of Directors of the Company will be
changed as follows: two directors shall be nominees of Tiffany, one director
shall be a nominee of Jewelcor, one director shall be independent of the
Company, Tiffany and Jewelcor, and one director shall be the Chief Executive
Officer of the Company. The Company can provide no assurance that such
transactions will be completed on the above-referenced terms or at all.
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 other 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 NINE MONTHS ENDED FEBRUARY 24, 2001
GENERAL
The Company operated 16 luxury gift and jewelry stores as of February 24,
2001. 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 Securities and Exchange Commission on October 20, 2000.
The Company's management is committed to continuing to make progress
toward the goals it has established. The current increases in comparable store
sales and gross margins reflect the progress achieved on the initiatives taken
to date. Management 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 margins, however, the
Company may place more emphasis on competitive margins in the upcoming months to
ensure the current sales trends continue. Beginning in January 2001, the Company
increased its marketing efforts, which have contributed to a comparable store
sales increase of 17.8% for March 2001, the first period of the fourth quarter.
NET SALES
Net sales for the three-month period ended February 24, 2001, were $19.2
million, a 9.0% increase from net sales of $17.6 million for the corresponding
period last year. Net sales for the nine-month period ended February 24, 2001
were $40.5, a decrease of 2.4% from net sales of $41.5 million for the
corresponding nine-month period last fiscal year.
Net sales for comparable stores increased approximately 17.0% for the
quarter ended February 24, 2001 compared to the corresponding period last year.
Comparable store sales excluding the fragrance category, which is now run by a
third party licensee, increased 18.9%. Comparable store sales for the nine
months ended February 24, 2001 increased 8.3% compared to the corresponding nine
month period last year. Excluding the fragrance category, comparable store sales
increased 14.2%.
The increase in sales for the quarter 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 cruise ship traffic and improved inventory
management. Considering the recent economic slowdown, management considers the
Company's recent sales performance to be a positive development.
GROSS PROFIT
Gross profit as a percentage of net sales was 38.9% and 41.6% for the
three and nine month periods ended February 24, 2001, compared to 42.3% and
35.2% for the respective periods last year. During the three month period ended
February 24, 2001, the Company recorded a charge of $1.0 million for excess,
slow moving or obsolete inventory. The gross profit as a percentage of net
sales, excluding the $1.0 million charge would have been
44.1% for the three and nine months ended February 24, 2001. In the
corresponding nine 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 38.3% for the nine
months ended February 26, 2000.
Excluding the reserve adjustments, management attributes this margin
improvement to a strong focus on increasing sales through promotional activities
as opposed to aggressive, clearance type discounting. As a result, the Company
increased sales volume while holding margins at or above historical levels.
Management will continue to monitor margins 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
nine months ended February 24, 2001 were $9.5 million and $22.3 million, or
approximately 49.7% and 55.0% of net sales respectively, compared to $8.4
million and $23.7 million, or approximately 47.6% and 57.1% of net sales
respectively, for the corresponding periods last year. The decrease in SG&A
expense as a percentage of net sales for the nine month period ended February
24, 2001 is primarily attributable to strong net sales increases for the nine
month period coupled with management's efforts to limit expenses to budgeted
levels. Management continues to control its legal and consulting costs, which
historically have been at 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 nine months ended February 24, 2001. In
addition, the Company recorded a net gain in the amount of $0.8 million for the
nine months ended February 26, 2000, related to the disposition and sale of
certain assets.
INTEREST EXPENSE
Net interest expense for the three months ended February 24, 2001 was
$282,000 compared to $277,000 for the corresponding period last year. The
increase in net interest expense reflects increased average borrowing rates
offset by reduced levels of borrowings compared to the corresponding period last
year.
Net interest expense for the nine months ended February 24, 2001 was
$824,000 compared to $869,000 for the corresponding period last year. The
decrease in net interest expense for the nine-month period is attributed to
reduced borrowing levels. Included in interest expense for the three and nine
month periods ended February 24, 2001, is $46,000 of amortization on the note
payable discount discussed further in Note 3 to the consolidated financial
statements.
NET LOSS
As a result of the above, the Company incurred a net loss of $2.4 million
and $5.0 million for the three and nine month periods ended February 24, 2001,
compared to a net loss of $1.6 million and $9.5 million for the corresponding
periods 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 in Note 3 to the consolidated
financial statements, the Company entered into a Standstill Agreement. The
Forbearance Agreement entered into by the Company and its lenders effective
April 1, 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 dated October 13, 2000, 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 would 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 the requisite documentation
as soon as practicable.
Outstanding borrowings against such secured credit facilities totaled
$8.8 million and $10.2 million as of February 24, 2001 and May 27, 2000,
respectively. Outstanding stand-by letters of credit against these credit
facilities totaled $2.6 million as of February 24, 2001 and May 27, 2000.
In March 2001, the stand-by letters of credit were reduced to approximately $0.4
million as a result of the replacement of these amounts with an insurance bond.
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 $0.8 million for the nine months
ended February 24, 2001, compared to $0.1 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.
Incorporated by reference from Note 10 of the Notes to Consolidated
Financial Statements included in Part I of this report.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K.
(a) Exhibits:
The index to exhibits appears on the page immediately
following the signature page of this report.
(b) Reports on Form 8-K during the quarter ended February 24,
2001:
None.
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: April 10, 2001 By: /s/ Patrick J. Hopper
--------------------------------------
Patrick J. Hopper
Chief Financial Officer,
Vice President and Treasurer
Authorized Officer and Principal
Financial and Accounting Officer
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.
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/A-1 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 (the "Baumgardner
Agreement"), 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 (the
"Hopper Agreement"), incorporated herein by reference
to the 1999 Form 10-K.
10.13 Amendment No. 1 to the Baumgardner Agreement, dated
as of January 15, 2001.
10.14 Amendment No. 1 to the Hopper Agreement, dated as of
January 15, 2001.
10.15 The Little Switzerland, Inc., 2000 Stock Option and
Incentive Plan.
10.16 Consulting Agreement, dated as of January 15, 2001,
between the Company and Jewelcor Management Inc.
10.17 Employment Agreement, dated as of September 1, 1999,
between Patrick Heron II and the Company.