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 25, 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
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 September 30, 2001, 16,526,070 shares of common stock, par value $.01 per
share, 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 25, 2001
(unaudited) and May 26, 2001 3
Consolidated Statements of Operations (unaudited) for
the three months ended August 25, 2001 and
August 26, 2000 4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended August 25, 2001 and
August 26, 2000 5
Notes to Consolidated Financial Statements (unaudited) 7
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 17
Item 6. Exhibits and Reports of Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS August 25, May 26,
2001 2001
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................... $ 1,262 $ 1,467
Accounts receivable, net........................ 959 806
Inventory....................................... 36,932 35,424
Prepaid expenses................................ 711 324
--------- ---------
Total current assets............................ 39,864 38,021
Property and equipment, at cost..................... 24,238 23,739
Less: Accumulated depreciation............... 17,435 16,970
--------- ---------
Property and equipment, net..................... 6,803 6,769
OTHER ASSETS........................................ 660 543
--------- ---------
TOTAL ASSETS........................................ $ 47,327 $ 45,333
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt................................. $ 2,800 $ --
Accounts payable................................ 12,170 11,714
Accrued income taxes............................ 1,624 1,678
Other accrued expenses.......................... 3,642 3,514
--------- ---------
Total current liabilities..................... 20,236 16,906
NOTES PAYABLE, net of unamortized discount.......... 1,568 1,522
LONG-TERM DEBT...................................... 2,500 2,500
OTHER NON-CURRENT LIABILITIES....................... 1,134 1,116
--------- ---------
Total liabilities 25,438 22,044
COMMITMENTS AND CONTINGENCIES (Note 9) -- --
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 - 16,497 and 16,436 shares
at August 25, 2001 and May 26, 2001,
respectively.................................. 165 165
Paid In Capital..................................... 26,827 26,681
Accumulated Deficit................................. (5,103) (3,557)
--------- ---------
Total stockholders' equity................ 21,889 23,289
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 47,327 $ 45,333
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
August 25, August 26,
2001 2000
------------ ------------
Net Sales ......................... $ 13,297 $ 9,959
Cost of Sales ..................... 7,228 5,510
--------- ---------
Gross Profit ...................... 6,069 4,449
Selling, General and Administrative
Expenses........................... 7,434 6,100
--------- ---------
Operating Loss .................... (1,365) (1,651)
Interest Expense, net ............. 131 284
--------- ---------
Loss before income taxes .......... (1,496) (1,935)
Provision for Income Taxes ........ 50 50
--------- ---------
NET LOSS .......................... (1,546) (1,985)
--------- ---------
BASIC AND DILUTED LOSS Per Share .. ($ .09) ($ .23)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 16,474 8,635
========= =========
Diluted 16,474 8,635
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three months ended
August 25, August 26,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,546) $ (1,985)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation 465 443
Amortization of discount on note payable 46 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (193) 92
Increase in inventory (1,508) (80)
Increase in prepaid expenses (387) (783)
Increase in other assets (117) (100)
Increase (decrease) in accounts payable 496 (1,086)
Increase in other accrued expenses 236 535
Decrease in accrued income taxes (54) (2)
Increase in other non-current liabilities 18 --
--------- ----------
Net cash used in operating activities (2,544) (2,966)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (499) (75)
Proceeds from sale of certain assets -- 3,442
--------- ----------
Net cash (used in) provided by investing
activities (499) 3,367
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 2,800 --
Proceeds from issuance of common stock 38 2
Purchase of subsidiary preferred stock -- (300)
--------- ----------
Net cash provided by (used in) financing
activities 2,838 (298)
--------- ----------
Net (decrease) increase in cash and cash
equivalents (205) 103
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,467 959
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,262 $ 1,062
========= ==========
5
CASH PAID DURING THE PERIOD FOR:
Interest $ 77 $ 285
Income Taxes $ 104 $ 52
NON-CASH FINANCING ACTIVITIES:
Paid-in capital related to purchase of
subsidiary preferred stock $ -- $ 1,319
Paid-in capital related to issuance of
restricted stock $ 128 $ --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. MANAGEMENT'S PLANS AND LIQUIDITY
Little Switzerland, Inc. ("Little Switzerland" or the "Company") has
incurred both operating losses and negative cash flows from operations
amounting to $1.5 million and $2.5 million for the three month period ended
August 25, 2001 and $2.0 million and $3.0 million for the corresponding
period last year. As of August 25, 2001 and May 26, 2001, the Company has an
accumulated deficit of $5.1 million and 3.6 million, respectively. The
Company has recently taken certain initiatives to improve its financial
condition and ongoing operations. During fiscal 2001, the Company entered
into an arrangement with Tiffany and Company ("Tiffany") and its affiliate,
Tiffany & Co. International ("Tiffany International") (collectively, the
"Tiffany Transaction") resulting in approximately $8.7 million in net equity
proceeds and a $2.5 million line of credit scheduled to expire on April 30,
2006. The Company reduced and refinanced its credit facility with The Chase
Manhattan Bank ("Chase") to $3.75 million and the Company has obtained a
commitment from Chase to extend this facility through November 30, 2002.
Operationally, in prior fiscal years 2001 and 2000, the Company eliminated
certain redundant and underperforming locations and has recently begun to
re-build its existing store base through improved merchandise selection and
store management.
Management's financing and operating plans for fiscal 2002 include: (1)
enhancing sales performance through improving merchandise mix, selected price
increases, reducing point of sale discounts, and improving product knowledge
and sales training for its staff, (2) managing its operating costs to
anticipated revenue levels, eliminating marketing programs which have not
supported sales growth plans and reducing its corporate overhead costs, (3)
selected store expansions and new locations in cruise line markets where the
Company either has a very limited presence, or no presence at all, and (4)
replacing its Chase credit facility with a long-term facility on more
favorable terms. Management can provide no assurance that its plans
will be successful. Management believes the Company's working capital and
existing credit facilities will be sufficient to fund its operations for the
current fiscal year. If the Company is unable to achieve its plans, it may be
required to seek additional equity or debt financing during the year, and
there is no assurance that such capital or financing will be available to the
Company or on terms acceptable to the Company.
2. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the operations
of Little Switzerland, Inc. and its wholly owned subsidiaries, L.S. Holding,
Inc. and L.S. Wholesale, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation. The interim consolidated
financial statements are unaudited and, in the opinion of management, contain
all adjustments necessary (which are of a normal recurring nature) to present
fairly the Company's financial position as of August 25, 2001 and the results
of its operations and cash flows for the fiscal three months ended August 25,
2001 and August 26, 2000. The consolidated balance sheet data from May 26,
2001 are derived from the audited financial statements which are included in
the Company's report on Form 10-K, which should be read in conjunction with
these financial statements. In accordance with the rules of the Securities
and Exchange Commission, these financial statements do not include all
disclosures required by generally accepted accounting principles.
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.
3. 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
7
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.
4. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141 and 142, "Business Combinations" ("SFAS 141") and "Goodwill and Other
Intangible Assets" ("SFAS 142"), respectively. SFAS 141 supersedes Accounting
Principles Board Opinion No. 16, Business Combinations. The most significant
changes made by SFAS 141 are (1) requiring that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
(2) establishing specific criteria for the recognition of intangible assets
separately from goodwill, and (3) requiring unallocated negative goodwill to be
written off immediately as an extraordinary gain (instead of being deferred and
amortized).
SFAS 142 supersedes APB 17, Intangible Assets. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., post-acquisition accounting). The provisions of SFAS 142 will
be effective for fiscal years beginning after December 15, 2001. However, early
adoption of SFAS 142 will be permitted for companies with a fiscal year
beginning after March 15, 2001, provided their first quarter financial
statements have not been previously issued. In all cases, SFAS 142 must be
adopted at the beginning of a fiscal year. The most significant changes made by
SFAS 142 are (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting unit level, (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually and (4) the amortization
period of intangible assets with finite lives will no longer be limited to forty
years.
The Company does not expect that the adoption of SFAS 141 or SFAS 142
will have a material impact on its financial statements, results of operations
or cash flows.
The FASB has recently issued SFAS 143, "Asset Retirement Obligations"
and SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company is presently evaluating the impact of these new pronouncements.
5. COMPREHENSIVE INCOME
Comprehensive loss/income is defined as the change in net assets of a
business enterprise during a period from transactions generated from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The
comprehensive loss is equal to the net loss for the periods ended August 25,
2001 and August 26, 2000.
6. STORE OPERATIONS
In fiscal 2001, the Company opened one new store in Skagway, Alaska and
one new store in Ketchikan, Alaska. Both stores are currently operating under
short-term leases for six months and twelve months, respectively. The Company
will evaluate the performance of these new stores to determine if a long-term
commitment in these locations is warranted.
On June 12, 2001, the Company completed a transaction with Colombian
Emeralds, Inc. ("CEI") to sublet CEI's Key West, Florida store and acquire
the furniture and fixtures therein, and assume the lease of CEI's former
Perfect Time store adjacent to the Company's flagship store on Main Street in
St. Thomas, USVI. The Company paid Colombian Emeralds $350,000 in connection
with the foregoing transaction. The Key West store is a 4,100 sq. ft.
location, which will operate as a clearance center until mid-November when it
is planned that the store will re-open with some of Little Switzerland's
finest timepieces as well as jewelry from renowned European and American
designers.
On July 31, 2001, the Company made the decision not to renew its lease
at its Gift Market store in St. Thomas and will vacate this location on or
before May 31, 2002. With the recent expansion of the Company's flagship store
on Main Street in St. Thomas, the Company has successfully provided many of the
large brands sold in the Gift Market store with Main Street frontage not
available at the Gift Market location. The Company will
8
continue to look for opportunities to continue to give china and crystal
suppliers better positioning in existing stores as well as new locations.
7. CREDIT ARRANGEMENTS
The Company maintains a senior collateralized credit facility with
Chase, which allows the Company to borrow up to $3.75 million, through June 1,
2002, at an interest rate of 3% per annum above LIBOR. Interest is payable
monthly and full principal and interest are due on or before June 1, 2002. The
credit facility is collateralized by substantially all of the Company's
assets, including the Company's U.S. based inventory, the pledge of the stock
of the Company's foreign subsidiaries, and a first priority leasehold mortgage
over the building occupied by the Company as its headquarters and main
warehouse. The Company also issued to Chase 50,000 warrants (as adjusted for
dilution) to purchase one share of common stock at an exercise price of $1 per
share until the expiration date on February 28, 2003. As of August 25, 2001
and May 26, 2001, the Company had utilized $2.8 million and $0 of this
facility, respectively, and no warrants had been exercised.
On September 4, 2001, the Company and Chase entered into an agreement
pursuant to which the Company, at its option and subject to the satisfaction of
certain conditions, may extend its credit facility with Chase for an additional
six months beyond its current maturity date of June 1, 2002. If on such date the
Company has not obtained alternative financing, Chase will be required to extend
the facility through November 30, 2002, provided the Company is not in violation
of any provision of the existing facility agreement and the Company pays an
additional fee and an increased interest rate during the extension term. The
Company will seek to obtain alternative financing prior to the current June 1,
2002 maturity date. Should such alternative financing not be obtained, the
Company intends to exercise this extension if necessary.
The Company also maintains a credit facility with Tiffany, which allows
the Company to borrow up to $2.5 million at an interest rate of 3% per annum
above LIBOR. Interest is payable semi-annually on January 31st and July 31st of
each calendar year with principal and unpaid interest due on or before April 30,
2006. The facility is collateralized by a subordinated interest in the Company's
U.S. based inventory, as well as the pledge of the stock of the Company's
foreign subsidiaries. As of August 25, 2001 and May 26, 2001, the Company had
utilized $2.5 million of this facility.
In addition to the above credit facilities, in November 2000, the
Company completed certain transactions with Almod Diamonds Ltd. ("Almod")
which resulted in the Company receiving $2.0 million of proceeds from the
issuance of a $2.0 million non-interest bearing note, collateralized by the
Company's Barbados inventory. A balloon payment is due on December 31, 2003.
If the Company is unable to repay such debt by the due date, Almod will have
the right to convert its preferred shares and/or its Class B Common Shares,
when and if acquired, in the Company's Barbados subsidiary into common stock
at a rate of one for one, or repurchase all or some Class A Common Shares of
the Company's Barbados subsidiary, at a price of $1 per share. As of August
25, 2001, Almod had not acquired the preferred shares or Class B Common Shares
in the Company's Barbados subsidiary because applicable governmental approval
had not yet been obtained. Interest on the note payable has been imputed at an
interest rate of 11.5%, which is a rate commensurate with the Company's then
current borrowings, and resulted in $570,000 of original discount, of which
$46,235 has been amortized to expense in the three months ended August 25,
2001.
8. EARNINGS PER SHARE
In accordance with the requirements of SFAS No. 128, 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 and warrants (as calculated utilizing the
treasury stock method). The Company's dilutive earnings per share calculation is
as follows (in thousands):
9
Three Months Ended
August 25, August 26,
2001 2000
---------- ----------
Weighted average number of shares used in basic
earnings per share calculation 16,474 8,635
Dilutive effects of options and warrants -- --
---------- ----------
Weighted average number of shares used in diluted
earnings per share calculation 16,474 8,635
========== ==========
Shares under and outside of option plans and warrants
excluded in computation of diluted earnings per
share due to antidilutive effects 1,801 1,015
========== ==========
The Company's calculation of dilutive earnings per share exclude the
effect of outstanding options and warrants that are anti-dilutive due to the
Company's net loss.
9. COMMITMENTS AND CONTINGENCIES
CLASS ACTION LAWSUIT
On May 14, 2001, a memorandum of understanding (the "MOU") was executed
which sets forth an agreement in principle of the terms of settlement with
respect to the class action complaint filed on March 22, 1999, 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, Destination
Retail Holdings Corporation ("DRHC") and Stephen G.E. Crane. The original
complaint alleged that the 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. Under the terms of the MOU,
none of the defendants have admitted any wrongdoing. If the terms of settlement
described in the MOU are approved by the court and holders of a certain agreed
upon number of shares held by the putative class do not opt out of the proposed
settlement, the case will be dismissed. The settlement amount payable in
accordance with the terms of the MOU is estimated at $1.0 million and will be
paid from the proceeds of existing insurance coverage. There can be no assurance
that the case will be settled as contemplated by the MOU.
The Company is also party to other various pending litigation, claims,
assessments and proceedings in the ordinary course of business. In the opinion
of the management of the Company, these suits and claims should not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
10. ALMOD TRANSACTION
During fiscal 2001, the Company engaged in negotiations with Almod
regarding various transactions, including the sale of the Company's Barbados
subsidiary, World Gift Imports ("WGI"). Due to various issues encountered during
the negotiations with Almod regarding the potential sale of the Company's
operations in Barbados, the parties agreed in lieu of the sale of WGI to Almod,
the Company would restructure the capital of this subsidiary. The final
arrangement resulted in the Company continuing to own this Barbados subsidiary
with Diamonds International Ltd. ("DI"), a subsidiary of Almod, offered a
minority interest in WGI pending government approval of the proposed changes in
this subsidiary's bylaws which was received on June 21, 2001. As of August 25,
2001, Almod had not received government approval to fund the purchase price to
DI and consequently, the purchase price had not been remitted to the Company.
Accordingly, no minority interest in WGI has been recognized. WGI has agreed
to pay profit share in the amount of $1.5 million by December 31, 2005, and/or
enable the store located in the Port Terminal in Barbados (the "Port store"),
currently operated by DI, to share in its net operating tax loss
carry-forwards ("NOL's"). If at such date, WGI has not paid this amount of
profit sharing to DI, or DI has not received an equivalent tax benefit in
excess of $0.7 million, DI's remedies include
10
converting their shares of WGI, when and if acquired, for a controlling
interest of this subsidiary.
As part of the overall Barbados transaction, the Company's Barbados
subsidiary and DI entered into a Management Agreement, which provides for DI
to manage the Port store, and retain all profits associated with such store
as a management fee. The Company does not include any results from the
operation of the Port store in its consolidated financial statements as of
the execution of the management agreement. The profits generated from the
Port store are entitled to share in the subsidiary's NOL's and the use of
such NOL's can be credited towards the profit sharing obligation of WGI as
described above.
The Company sold to DI a portion of the intercompany debt owed by the
Company's Barbados subsidiary to L.S. Wholesale. As more fully described in
Note 7, the Company received $2.0 million and sold, assigned and transferred
its receivable from its Barbados subsidiary to Almod, due December 31, 2003,
which is collateralized by the inventory of the Barbados subsidiary.
11
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 indebtedness to Chase 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 below and
changes in general economic conditions and interest and exchange rates.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 25, 2001
GENERAL
Little Switzerland, Inc. is a leading specialty retailer of brand name
watches, jewelry, crystal, china and accessories, operating 19 stores on five
Caribbean islands, Florida and Alaska. The Company's primary market consists of
vacationing tourists attracted by free-port pricing, duty-free allowances and a
wide variety of high quality merchandise.
RECENT DEVELOPMENTS
With the recent horrific terrorist attacks in New York and
Washington, D.C., on September 11, 2001, the Company has experienced a
reduction in sales as well as a decline in margin over last year, beginning
with the second half of September. Sales for the period of August 25, 2001
through October 8, 2001 increased approximately 9% over the prior year for
all stores while comparable stores over this same period decreased 4% and was
accompanied by a decline in margin due to the Company's decision to drive
cashflow. Sales for the period of September 11, 2001 through present are down
approximately 12% from the prior year for all stores and 23% for comparable
stores. The Company currently is experiencing better results in markets that
are more geared toward the cruise industry and has experienced larger drops
in hotel driven islands. The Company is monitoring this situation closely and
implementing expense reductions coupled with new sales initiatives. The
Company is also optimistic that the recent announcements by major cruise
lines to re-position ships into the Caribbean, beginning in late October,
will positively impact traffic in the Company's stores.
NET SALES
Net sales for the three-month period ended August 25, 2001, were $13.3
million, a 33.5% increase from net sales of $10.0 million for the corresponding
period last year. Net sales for comparable stores increased approximately 22.4%
for the quarter ended August 25, 2001 compared to the corresponding period last
year.
The first quarter sales performance met management's expectations
despite a slow start in June, the first month of the quarter. The Company is
particularly pleased with the strong performance in the Alaska market, which
generated a 48% comparable sales increase over the corresponding period last
year. The growth of the Alaska market, expansion of the Company's flagship
store in St. Thomas and better replenishment of
12
merchandise, helped produce strong results in the first quarter despite an
overall weakness in the U.S. business environment. Finally, the Company's new
location in Key West, Florida opened in early August and sold approximately
$250,000 of aged merchandise in the quarter.
GROSS PROFIT
Gross profit as a percentage of net sales was 45.6% for the three month
period ended August 25, 2001, compared to 44.7% for the respective period
last year. Management attributes this margin improvement to opportune
price increases, better focus on gift with purchase promotions and improved
product flow in the quarter of best sellers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the three
months ended August 25, 2001 were $7.4 million, or approximately 55.9% of net
sales, compared to $6.1 million, or approximately 61.3% of net sales for the
corresponding period last year. This decrease in SG&A expenses as a percentage
of sales was achieved despite the added costs incurred to open the new Key West
store as well as incremental expenses associated with an increased presence in
the Alaska market. The Company terminated its participation in the port lecturer
program offered by cruise lines, which reduced advertising costs. The Company
intends to remain off this program under its current form and will re-deploy a
percentage of the marketing dollars saved to other incentives over the balance
of the year. Finally, the Company also renegotiated its insurance program
resulting in a significant reduction of premiums beginning in July 2001.
INTEREST EXPENSE
Net interest expense for the three months ended August 25, 2001 was
$131,000 compared to $284,000 for the corresponding period last year. The
decrease in net interest expense reflects the reduced levels of borrowings and
reduced average borrowing rates compared to the corresponding period last year.
Included in interest expense for the three month period ended August 25, 2001,
is $46,235 of amortization attributable to note payable discount.
NET LOSS
The Company reported a 22.1% reduction in net loss or a net loss of
$1.55 million for the three month period ended August 25, 2001, compared to a
net loss of $2.0 million for the corresponding period last year.
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's primary needs for working capital are to
support its inventory requirements, which fluctuate during the year due to the
seasonal nature of the Company's business, and to maintain, refurbish 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 at the time of sale.
After operating under default under a forbearance agreement with its
historical lenders, the Company refinanced that indebtedness with the
proceeds from the transaction with Tiffany and Company, and its affiliate,
Tiffany & Co. International (collectively "Tiffany") which resulted in the
Company receiving approximately $8.7 million in equity, net of associated
expenses, and a $2.5 million revolving credit facility from Tiffany. As a
result of the refinancing, the Company was also able to negotiate a new
revolving $3.75 million credit facility with The Chase Manhattan Bank
("Chase"), who was a lender under the prior loan agreements.
As of August 25, 2001, the Company had utilized $2.8 million of the
Chase facility and $2.5 million of the facility with Tiffany. The revolving
credit facility with Chase matures in June 2002, and is subject to extension, at
the Company's option, to November 30, 2002 if certain conditions are satisfied
by the Company. This facility bears interest at LIBOR plus 3% and is
collateralized by the U.S. based inventory and stock of the Company's foreign
subsidiaries. The Company also agreed to issue to Chase 50,000 currently
exercisable
13
warrants expiring in February 2003. Each warrant represents the right to
purchase one share of common stock at an exercise price of $1 per share. The
Tiffany facility bears interest at LIBOR plus 3%, matures in April 2006 and is
subordinated to the Chase facility.
In addition to the above credit facilities, in November 2000, the
Company completed a transaction with Almod Diamonds Limited ("Almod") relating
to the restructuring of its Barbados operations, which resulted in the Company
receiving $2.0 million of proceeds from a $2.0 million, non-interest bearing
note payable to Almod, collateralized 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 then current borrowings and resulted in $570,000 of original issue
discount, of which $432,000 remained unamortized as of August 25, 2001.
Outstanding borrowings against collateralized credit arrangements
totaled $6.9 million and $4.0 million, net of unamortized discount, at
August 25, 2001 and May 26, 2001, respectively. The weighted average interest
rates incurred during fiscal 2001, 2000, and 1999 were approximately 10.9%,
9.6% and 8.4%, respectively.
Capital expenditures were approximately $0.5 million for the three
months ended August 25, 2001, compared to $0.1 million for the corresponding
period last year.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2000, the FASB issued SFAS 141 and 142, "Business Combinations"
("SFAS 141") and "Goodwill and Other Intangible Assets" ("SFAS 142"),
respectively. SFAS 141 supersedes Accounting Principles Board Opinion No. 16
(APB 16), Business Combinations. The most significant changes made by SFAS 141
are (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
SFAS 142 supersedes APB 17, Intangible Assets. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e. post-acquisition accounting). The provisions of SFAS 142 will
be effective for fiscal years beginning after December 15, 2001. However, early
adoption of SFAS 142 will be permitted for companies with a fiscal year
beginning after March 15, 2001, provided their first quarter financial
statements have not been previously issued. In all cases, SFAS 142 must be
adopted at the beginning of a fiscal year. The most significant changes made by
SFAS 142 are (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting until level, (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually, and (4) the amortization
period of intangible assets with finite lives will no longer be limited to forty
years.
The Company does not expect that the adoption of SFAS 141 or SFAS 142
will have a material impact on its financial statements, results of operations
or cash flows.
The FASB has recently issued SFAS 143, "Asset Retirement Obligations"
and SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company is presently evaluating the impact of these new pronouncements.
RISK FACTORS
You should carefully consider the risks described below and other
information in this report. The Company's business, financial condition and
operating results could be materially adversely affected if any of these risks
materialize. The trading price of the Company's common stock may also decline
due to any of these risks.
The Company Has Had Substantial Operating Losses in Recent Fiscal Years
The Company has had substantial operating losses in its recent fiscal
years. For the fiscal years ended May 26, 2001, May 27, 2000 and May 29, 1999,
the Company's net losses were $7.6 million, $15.5 million and $11.1 million,
respectively. If the Company is
14
unable to generate sufficient revenue from operations to cover its costs, its
business, financial condition and results of operations will be materially and
adversely affected.
The Company May Need Additional Financing
The Company requires additional capital to finance its growth and
working capital needs. The Company can provide no assurance that it will obtain
additional financing sufficient to meet its future needs on commercially
reasonable terms or otherwise.
Short-Term Risk of Disruption in Tourism
Due to the events of September 11, 2001 and widespread concern about
continuing terrorist acts directed against United States citizens,
transportation facilities and assets, a substantial risk exists that
significantly lower numbers of tourists will be willing to fly or travel on
cruise ships during the 2001/2002 tourist season. Should this occur, it will
have a significantly negative effect on the Company's sales and cash flows and
will result in greater losses and difficulties in obtaining financing.
There May Be Limited Liquidity in the Company's Common Stock and Its
Price May Be Subject to Fluctuation
The Company's common stock is currently traded on the OTC Bulletin
Board. The Company can provide no assurance that it will be able to have its
common stock listed on an exchange or quoted on Nasdaq or that it will continue
to be traded on the OTC Bulletin Board. The trading volume in the Company's
common stock has historically been low. Accordingly, investments in the
Company's common stock may not be liquid, and investors in the Company's common
stock must be prepared to bear the economic risks of such investment for an
indefinite period of time.
The Company's Business Depends on Tourism
The Company's revenues depend upon tourism in the Caribbean, Alaska and
Florida. During periods of economic slowdown, armed conflict or actions by
terrorists, fewer tourists may travel to these destinations and those who do
may make fewer purchases of luxury items. Tourist travel to these destinations
depends upon the development of cruise ship, airline and hotel operations, the
continued attractiveness of the Caribbean, Alaska and Florida compared to other
leisure travel destinations and the efforts of local governments to promote
tourism. Other factors such as poor weather, airline strikes, political and
economic instability in the Caribbean and the availability of duty-free shopping
could also affect tourism.
The Company Depends on Its Relationships with Its Suppliers
The Company's relationships with its merchandise suppliers are an
important factor in its business and have allowed the Company to become the
exclusive retailer of certain brands of merchandise in its Caribbean, Alaskan
and Florida markets. However, the Company does not have binding written
agreements with most of its suppliers, so it can provide no assurance that it
will remain the exclusive retailer for certain brands or that it will not lose
the right to market certain brands altogether.
The Company Needs to Expand to Grow Its Business
The growth of the Company's business depends in part on the addition of
new stores, expansion into other Caribbean islands where the Company does not
have stores and the expansion of existing stores and product lines. The
Company's ability to expand depends upon many factors, including the
availability of financing, the development of tourist facilities in proposed
locations, its ability to find suitable retail space, staffing, regulatory
restrictions and establishing suppliers.
Competition May Adversely Affect the Company's Business
Competition for tourist dollars is intense. The Company's ability to
attract customers depends in large part on the location and appearance of its
stores, its selection of products and pricing. The Company also competes with
stores selling similar products in the United States or in other markets from
which tourists have traveled.
15
The Company's Success Depends on Key Personnel
The Company's success is dependent upon the efforts of its senior
management. Competition for qualified personnel in the retailing industry is
intense, and the Company can provide no assurance that it will be able to retain
existing personnel or attract and retain additional qualified personnel
necessary to manage its business.
Stockholders Are Unlikely to Receive Dividends for the Foreseeable
Future
The Company has not paid dividends on its common stock and the Company
believes it is highly unlikely that it will pay dividends in the near future.
This means that the potential for gain from ownership of the Company's common
stock depends on appreciation in its value.
Certain Provisions of Delaware Law May Affect the Price of the
Company's Common Stock
The Company is incorporated in the State of Delaware. Certain
provisions of Delaware law applicable to the Company, including Section 203 of
the Delaware General Corporation Law, could have the effect of delaying,
deterring or preventing a change of control in the Company and may discourage
bids for the Company's common stock at a premium over the market price of the
Company's common stock. As a result, the price of the Company's common stock may
be adversely affected.
SEC Rules Concerning Sales of Low-Priced Securities May Hinder Re-Sales
of the Company's Common Stock
Because the Company's common stock has a market price that is less than
five dollars per share: (i) it is not listed on an exchange or quoted on Nasdaq
and is traded on the OTC Bulletin Board and (ii) brokers and dealers who handle
trades in the Company's common stock are subject to certain SEC disclosure rules
when effecting trades in the Company's common stock, including disclosure of the
following: the bid and offer prices of the Company's common stock, the
compensation of the brokerage firm and the salesperson handling a trade and
legal remedies available to the buyer. These requirements may hinder re-sales of
the Company's common stock and may adversely affect its market price.
If any circumstances giving rise to the above risks actually occur,
there could be a material and adverse effect on the Company's business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's credit facilities have variable interest rates which
fluctuate with established market rates. The Company does not believe that such
fluctuations will have a material adverse effect on the Company's operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Incorporated by reference from Note 9 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 August 25, 2001:
On May 30, 2001, the Company filed a Current Report on Form
8-K disclosing that the Company sold a 45% equity interest to
Tiffany & Co. International, Inc., an affiliate of Tiffany
and Company.
On June 1, 2001, the Company filed a Current Report on Form
8-K disclosing that as a result of the transaction with
Tiffany & Co. International, it dismissed its then current
independent accountants, Arthur Andersen LLP, and appointed
PricewaterhouseCoopers LLP as its independent accountants.
17
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: October 9, 2001 By: /s/ Patrick J. Hopper
--------------------------------------
Patrick J. Hopper
Chief Financial Officer,
Vice President and Treasurer
Authorized Officer and Principal
Financial and Accounting Officer
18
INDEX OF EXHIBITS
Exhibit
Number Exhibit
(3) Articles of Incorporation and By-Laws
3.1 The Amended and Restated Certificate of Incorporation of the Company. (1)
3.2 The Second Amended and Restated By-Laws of the Company. (2)
(10) Material Contracts
10.1 The Little Switzerland, Inc. 1991 Stock Option Plan. (1)
10.2 The Little Switzerland, Inc. 1992 Employee Stock Purchase Plan. (3)
10.3 The Little Switzerland, Inc. 1992 Non-Employee Directors' Nonqualified Stock Option Plan.
(4)
10.4 Stock Purchase Agreement, dated as of May 1, 2001, between Tiffany & Co. International and the
Company. (5)
10.5 Stockholder Agreement, dated as of May 1, 2001, between Tiffany & Co. International, Jewelcor
Management, Inc., Seymour Holtzman and the Company. (5)
10.6 Registration Rights Agreement, dated as of May 1, 2001, between Tiffany & Co. International
and the Company. (5)
10.7 Investor's Rights Agreement, dated as of May 1, 2001, between Jewelcor Management, Inc. and the
Company. (5)
10.8 Loan Agreement, dated as of May 1, 2001, among L.S. Wholesale, Inc., the Company and The Chase
Manhattan Bank. (6)
10.9 Loan Agreement, dated as of May 1, 2001, among L.S. Holding (USA), Inc., the Company and The
Chase Manhattan Bank. (6)
10.10 Loan Agreement, dated as of May 1, 2001, among L.S. Holding, Inc., the Company, and The Chase
Manhattan Bank. (6)
10.11 Security Agreement, dated as of May 1, 2001, among L.S. Wholesale, Inc., the Company and The
Chase Manhattan Bank. (6)
10.12 Security Agreement, dated as of May 1, 2001, among L.S. Holding (USA), Inc., the Company and
The Chase Manhattan Bank. (6)
10.13 Security Agreement, dated as of May 1, 2001, among L.S. Holding, Inc., the Company and The
Chase Manhattan Bank. (6)
10.14 Stock Pledge Agreement, dated as of May 1, 2001, from L.S. Wholesale, Inc. and the Company in
favor of The Chase Manhattan Bank. (6)
10.15 Stock Pledge Agreement, dated as of May 1, 2001, from L.S. Holding (USA), Inc. and the Company
in favor of The Chase Manhattan Bank. (6)
10.16 Stock Pledge Agreement, dated as of May 1, 2001, from L.S. Holding, Inc. and the Company in
favor of The Chase Manhattan Bank. (6)
10.17 Loan Agreement, dated as of May 1, 2001, among L.S. Wholesale, Inc., the Company, and Tiffany
and Company (6)
10.18 Loan Agreement, dated as of May 1, 2001, among L.S. Holding (USA), Inc., the Company, L.S.
Wholesale, Inc., and Tiffany and Company (6)
19
10.19 Loan Agreement, dated as of May 1, 2001, among L.S. Holding, Inc., the Company, L.S. Wholesale,
Inc. and Tiffany and Company (6)
10.20 Security, Pledge and Guaranty Agreement, dated as of May 1, 2001, among L.S. Wholesale, Inc.,
the Company and Tiffany and Company (6)
10.21 Security, Pledge and Guaranty Agreement, dated as of May 1, 2001, among L.S. Holding (USA),
Inc., the Company, L.S. Wholesale, Inc. and Tiffany and Company (6)
10.22 Security, Pledge and Guaranty Agreement, dated as of May 1, 2001, among L.S. Holding, Inc., the
Company, L.S. Wholesale, Inc. and Tiffany and Company (6)
10.23 Employment Agreement, dated as of August 17, 1999, between Robert L. Baumgardner and the
Company (the "Baumgardner Agreement"). (7)
10.24 Employment Agreement, dated as of August 17, 1999, between Patrick J. Hopper and the Company
(the "Hopper Agreement"). (7)
10.25 Amendment No. 1 to the Baumgardner Agreement, dated as of January 15, 2001. (8)
10.26 Amendment No. 1 to the Hopper Agreement, dated as of January 15, 2001. (8)
10.27 The Little Switzerland, Inc., 2000 Stock Option Plan. (8)
10.28 Employment Agreement, dated as of September 1, 1999, between Patrick Heron II
and the Company. (8)
(16) Letter re Change in Certifying Accountant.
16.1 Letter dated May 31, 2001 from Arthur Andersen LLP addressed to the
Securities and Exchange Commission. (9)
---------------------------
(1) Filed as an exhibit 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 and hereby incorporated by reference thereto.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on April 11, 2000 and hereby incorporated by reference
thereto.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K, filed with
the Commission on May 29, 1992 and hereby incorporated by reference thereto.
(4) Filed as an exhibit to the Company's Annual Report on 10-K, filed with the
Commission on May 26, 1993 and hereby incorporated by reference thereto.
(5) Filed as an exhibit to Tiffany & Co.'s Schedule 13D, filed with the
Commission on May 10, 2001 and hereby incorporated by reference thereto.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on May 30, 2001 and hereby incorporated by reference thereto.
(7) Filed as an exhibit 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
and hereby incorporated by reference thereto.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on April 10, 2001 and hereby incorporated by reference
thereto.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on June 1, 2001 and hereby incorporated by reference thereto.