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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended November 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
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 December 31, 2001, 16,526,070 shares of $.01 par value common stock of the
registrant were outstanding.
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LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of November 24, 2001
(unaudited) and May 26, 2001 3
Consolidated Statements of Operations (unaudited) for
the three and six months ended November 24, 2001 and
November 25, 2000 4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended November 24, 2001 and November 25, 2000 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
NOVEMBER 24, MAY 26,
ASSETS 2001 2001
(Unaudited)
-------- --------
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 1,290 $ 1,467
Accounts receivable, less allowances of $66 and $115 .. 1,145 806
Inventory ............................................. 33,122 35,424
Prepaid expenses ...................................... 552 324
-------- --------
Total current assets .................................. 36,109 38,021
-------- --------
Property and equipment, at cost ............................ 24,397 23,739
Less: Accumulated depreciation .................... 17,918 16,970
-------- --------
Property and equipment, net ........................... 6,479 6,769
OTHER ASSETS ............................................... 665 543
-------- --------
TOTAL ASSETS ............................................... $ 43,253 $ 45,333
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABLITIES:
Short-term debt ....................................... $ 3,650 $ --
Accounts payable ...................................... 9,938 11,714
Accrued income taxes .................................. 1,674 1,678
Other accrued expenses ................................ 3,221 3,514
-------- --------
Total current liabilities .................. 18,483 16,906
NOTE PAYABLE, net of unamortized discount .................. 1,615 1,522
LONG-TERM DEBT ............................................. 2,500 2,500
OTHER NON-CURRENT LIABILITIES .............................. 1,150 1,116
-------- --------
Total liabilities ......................................... 23,748 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 - 16,526 and 16,436 shares
at November 24, 2001 and May 26, 2001, respectively 165 165
Paid In Capital ............................................ 26,841 26,681
Accumulated deficit ........................................ (7,501) (3,557)
-------- --------
Total stockholders' equity ................. 19,505 23,289
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 43,253 $ 45,333
======== ========
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
November 24, November 25, November 24, November 25,
2001 2000 2001 2000
-------- -------- -------- --------
Net Sales .................................. $ 11,158 $ 11,356 $ 24,455 $ 21,315
Cost of Sales .............................. 6,466 6,421 13,694 11,930
-------- -------- -------- --------
Gross Profit ............................... 4,692 4,935 10,761 9,385
Selling, General and Administrative Expenses 6,909 6,636 14,343 12,736
Gain on Insurance Settlement ............... -- (1,352) -- (1,352)
-------- -------- -------- --------
Operating Loss ............................. (2,217) (349) (3,582) (1,999)
Interest Expense, net ...................... 131 257 262 542
-------- -------- -------- --------
Loss before income taxes ................... (2,348) (606) (3,844) (2,541)
Provision for Income Taxes ................. 50 50 100 100
-------- -------- -------- --------
NET LOSS ................................... (2,398) (656) (3,944) (2,641)
-------- -------- -------- --------
BASIC AND DILUTED LOSS Per Share ........... ($ 0.15) ($ 0.08) ($ 0.24) ($ 0.31)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................. 16,524 8,636 16,499 8,635
======== ======== ======== ========
Diluted ........................... 16,524 8,636 16,499 8,635
======== ======== ======== ========
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
For the six months ended
November 24, November 25,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $(3,944) $(2,641)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation ....................................... 952 890
Amortization of discount on note payable ........... 93 --
Gain on insurance settlement ....................... -- (1,352)
Stock based compensation ........................... (55) 49
Changes in assets and liabilities:
Increase in accounts receivable .................... (339) (399)
Decrease (increase) in inventory ................... 2,302 (1,180)
Increase in prepaid expenses ....................... (228) (761)
Increase in other assets ........................... (122) (111)
(Decrease) increase in accounts payable ............ (1,776) 835
(Decrease) increase in other accrued expenses ...... (185) 223
(Decrease) increase in accrued income taxes ........ (4) 48
Increase in other long-term liabilities ............ 34 --
------- -------
Net cash used in operating activities .................. (3,272) (4,399)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................... (662) (379)
Proceeds from sale of certain assets ................... -- 3,442
------- -------
Net cash (used in) provided by investing
activities ......................................... (662) 3,063
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of secured demand notes payable ............. -- (1,406)
Proceeds from unsecured notes payable .................. -- 2,000
Proceeds from short-term debt .......................... 3,650 --
Proceeds from insurance settlement ..................... -- 1,352
Proceeds from issuance of common stock ................. 107 2
Purchase of subsidiary preferred stock ................. -- (300)
------- -------
Net cash provided by financing activities .......... 3,757 1,648
------- -------
Net (decrease) increase in cash and cash equivalents (177) 312
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. 1,467 959
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................... $ 1,290 $ 1,271
======= =======
Supplemental disclosure of cash flow information:
CASH PAID DURING THE PERIOD FOR:
Interest ............................................... $ 124 $ 540
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 discount
on note payable ........................................... $ -- $ 570
Paid in Capital related to issuance of
restricted stock .......................................... $ 128 $ --
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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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")
incurred both operating losses and negative cash flows from operations amounting
to $3.9 million and $3.3 million, respectively, for the six-month period ended
November 24, 2001 and $2.6 million and $4.4 million, respectively, for the
corresponding period last year. As of November 24, 2001 and May 26, 2001, the
Company has an accumulated deficit of $7.5 million and $3.6 million,
respectively. The Company has taken certain initiatives to improve its financial
condition and ongoing operations. During fiscal 2001, the Company entered into
an arrangement with Tiffany & Co. ("Tiffany") and its affiliate, Tiffany & Co.
International, Inc. ("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, subject to the satisfaction
of certain conditions. Operationally, in fiscal 2001 and 2000, the Company
eliminated certain redundant and underperforming locations and has 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. There is no
assurance that management's plans will be successful. Management believes its
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., L.S. Wholesale, Inc. and L.S. Holding (Florida), 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
November 24, 2001 and the results of its operations and cash flows for the
interim periods presented. The consolidated balance sheet data at 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 connection 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.
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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 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 October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No.
144 supercedes many of the provisions of SFAS 121, and sets forth accounting
requirements for impaired long-lived assets to be held and used, long-lived
assets to be disposed of other than by sale and long-lived assets to be disposed
of by sale. The requirements of SFAS No. 144 will become effective for the
Company as of the beginning of its next fiscal year. The Company is currently in
the process of evaluating the effect of adopting SFAS No. 144.
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 November 24,
2001 and November 25, 2000.
6. STORE OPERATIONS
In late fiscal 2001, the Company opened two new stores in Alaska, one
in Skagway and one in Ketchikan. The Skagway store operated under a six-month
lease and the Company has decided to enter into a five-year lease commitment for
this location beginning in fiscal 2002. The Ketchikan store operates under a
12-month lease commitment and the Company has not yet made a decision on whether
to extend this lease.
On June 12, 2001, the Company completed a transaction with Columbian
Emeralds, Inc. ("CEI") to sublet CEI's Key West, Florida store and acquire the
furniture and fixtures therein, and also assumed 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 CEI $350,000 in connection with the foregoing
transaction. The Key West store is a 4,100 sq. ft. location, which operated as a
clearance center until November 19, 2001 when it was re-opened 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 continue to look for
opportunities to continue to give china and crystal suppliers better positioning
in existing stores as well as new locations.
7
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On November 19, 2001, the Company opened its second location in Key
West, a 850 square foot location in the Key West Hilton Hotel.
On December 15, 2001, the Company opened its first Tiffany Boutique in
its store in Barbados which is approximately 1,200 square feet.
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
two-thirds 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 November 24, 2001 and May 26, 2001, the Company had utilized
$3.65 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. If such alternative financing is not be obtained, the
Company intends to exercise this extension.
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 two-thirds of
the stock of the Company's foreign subsidiaries. As of November 24, 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")
(see Note 10), 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 the preferred shares and/or its
Class B Common Shares, in the Company's Barbados subsidiary into common stock
at a rate of one for one, or purchase all or some Class A Common Shares of
the Company's Barbados subsidiary, at a price of $1 per share. As of January
7, 2002, 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 $92,470 has been amortized to expense in the six months ended November
24, 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
8
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method). The Company's dilutive earnings per share calculation is as follows (in
thousands):
<Table>
<Caption>
Six Months Ended
November 24, November 25,
2001 2000
-------- --------
Net loss............................................. $ (3,944) $ (2,641)
======== ========
Weighted average number of shares used in basic
earnings per share calculation .................. 16,499 8,635
Dilutive effects of options and warrants ............ -- --
-------- --------
Weighted average number of shares used in diluted
earnings per share calculation .................. 16,499 8,635
======== ========
Shares under and outside of option plans and warrants
excluded in computation of diluted earnings per
share due to antidilutive effects ............... 1,811 557
======== ========
</Table>
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 proposed
settlement is scheduled to be heard by the Court for approval on January 7,
2002. 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 then 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
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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 January 7,
2002, the Company had not obtained an additional required governmental
approval to complete the funding of this transaction 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 a tax benefit equivalent to the agreed upon profit
share plus an additional tax benefit of $0.7 million, DI's remedies include
converting their shares of WGI 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.
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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 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.
RECENT EVENTS
On December 15, 2001, the Company opened its first Tiffany Boutique in its store
in Barbados. This Boutique, approximately 1,200 square feet, offers a broad
assortment of classic Tiffany designs in jewelry and gifts. Since the opening
of the Tiffany Boutique, sales in the Barbados store have increased
approximately 45% compared to last year.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 24, 2001
GENERAL
Little Switzerland, Inc. is a leading specialty retailer of brand name
watches, jewelry, crystal, china and accessories, operating 20 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.
With the terrorist attacks in New York and Washington, D.C. on
September 11, 2001 and the consequent adverse effect on travel, the Company
experienced a reduction in sales as well as a decline in margin over the last
year, beginning with the second half of September.
NET SALES
Net sales for the three-month period ended November 24, 2001, were $11.2
million, a 1.7% decrease from net sales of $11.4 million for the corresponding
period last year. Net sales for the six-month period ended November 24, 2001
were $24.5 million, an increase of 14.7% from net sales of $21.3 million for the
corresponding six-month period last fiscal year.
Net sales for comparable stores decreased approximately 10.5% for the
quarter ended November 24, 2001 compared to the corresponding period last year.
Comparable store sales for the six months ended November 24, 2001 increased 4.8%
compared to the corresponding six-month period last year.
The Company had been generating improved comparable and all store sales
results prior to the events of September 11, 2001. Comparable sales for the 16
days prior to September 11, 2001 had been increasing at a rate of approximately
26% continuing the performance experienced in the prior quarter, which reported
a
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comparable sales increase of 22.4%. Between September 11, 2001 and the end of
the second quarter, comparable store sales decreased approximately 17% from the
prior year. The Company experienced better results in markets that are geared
towards the cruise industry with larger drops in hotel driven islands.
Finally, the Company's sales were positively impacted by a new location in
Key West, Florida which opened in early August as a temporary liquidation
center and generated approximately $800,000 of sales of liquidation and aged
merchandise in the quarter. On November 18, 2001, this store was converted
from a clearance center to a store which carries some of Little Switzerland's
finest timepieces as well as jewelry from renown European and American
designers.
GROSS PROFIT
Gross profit as a percentage of net sales was 42.1% and 44.0% for the
three and six month periods ended November 24, 2001, compared to 43.5% and
44.0% for the respective periods last year. During the three month period
ended November 24, 2001, as a result of the events of September 11, 2001 and
the ensuing drop in traffic, the Company increased the level of discounting
to be more reflective of current market conditions and initiated programs
focused on selling slower moving inventory to generate cash and reduce
inventory levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the three and
six months ended November 24, 2001 were $6.9 million and $14.3 million, or
approximately 61.9% and 58.6% of net sales respectively, compared to $6.6
million and $12.7 million, or approximately 58.4% and 59.8% of net sales
respectively, for the corresponding periods last year. The increase in SG&A
expense as a percentage of net sales is primarily attributable to decrease in
net sales for the three-month period ended November 24, 2001 coupled with higher
expenses associated with new stores.
In the first quarter of the current fiscal year, the Company eliminated
its participation in the port lecturer program offered by cruise lines, which
has substantially reduced advertising costs. The Company does not intend to
participate in this program under its current form and has re-deployed a
percentage of the marketing dollars saved to other incentives which will be
launched in the third quarter. Finally, the Company also renegotiated its
insurance program resulting in a significant reduction in premiums beginning in
July 2001.
INTEREST EXPENSE
Net interest expense for the three and six months ended November 24, 2001
was $131,000 and $262,000 compared to $257,000 and $542,000, respectively,
for the corresponding periods 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 and six month periods ended November 24, 2001 is $46,235 and
$92,470, respectively, of amortization attributable to note payable discount.
NET LOSS
As a result of the above, the Company incurred a net loss of $2.4
million and $3.9 million for the three and six months ended November 24,
2001, respectively, compared to a net loss of $0.7 million and $2.6 million,
respectively, for the corresponding periods last year. Results for the prior
year three and six month periods ended November 25, 2000, included a $1.4
million one time gain on settlement of the Company's business interruption
claim associated with Hurricane Lenny. Excluding this one time gain, net loss
for the prior year three and six month periods would have been $2.1 million
and $4.0 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's primary needs for working capital are to support
its inventory requirements, which fluctuate during the year due to the seasonal
nature of the Company's business, and to maintain, 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
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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 & Co., and its affiliate, Tiffany
& Co. International, Inc. (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
(collectively, the "Tiffany Transaction"). As a result of the Tiffany
Transaction, the Company was also able to negotiate a new revolving credit
facility with Chase, who was a lender under the prior loan agreements.
The credit facility with Chase 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 two-thirds 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 November 24, 2001 and May 26,
2001, the Company had utilized $3.65 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 credit 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. If such
alternative financing is not obtained, the Company intends to exercise this
extension.
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 two-thirds of
the stock of the Company's foreign subsidiaries. As of November 24, 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 the preferred shares and/or its Class B Common Shares, in the
Company's Barbados subsidiary into common stock at a rate of one for one, or
purchase all or some Class A Common Shares of the Company's Barbados subsidiary,
at a price of $1 per share. 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
$92,470 has been amortized to expense in the six months ended November 24, 2001.
Outstanding borrowings against collateralized credit facilities totaled
$7.8 million and $4.0 million, net of unamortized discount, at November 24, 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 $0.7 million for the six months
ended November 24, 2001, compared to $0.4 million for the corresponding period
last year.
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NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supercedes many of the provisions of SFAS 121, and sets forth accounting
requirements for impaired long-lived assets to be held and used, long-lived
assets to be disposed of other than by sale and long-lived assets to be disposed
of by sale. The requirements of SFAS No. 144 will become effective for the
Company as of the beginning of its next fiscal year. The Company is currently in
the process of evaluating the effect of adopting SFAS No. 144.
SEASONALITY
The Company's business is seasonal in nature, reflecting travel
patterns to the Caribbean and Alaska. The peak selling season in the Caribbean
runs from late Fall through Spring; and the peak selling season for Alaska runs
from Spring through Summer. The third quarter of the Company's fiscal year
typically represents a proportionally greater percentage of annual sales and
cash flow. Management expects such seasonality to continue.
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 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 tourist 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
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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 tourist 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.
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
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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
the Company's Common Stock
Because the Company's common stock has a market price that is less
than five dollars per share, it is not listed on an exchange or quoted on Nasdaq
and is traded on the OTC Bulletin Board, 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 November 24,
2001:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE SWITZERLAND, INC.
Date: January 7, 2002 By: /s/ Patrick J. Hopper
--------------------------------------
Patrick J. Hopper
Chief Financial Officer,
Vice President and Treasurer
Authorized Officer and Principal
Financial and Accounting Officer
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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. (6)
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 Co. (6)
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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 Co. (6)
10.19 Loan Agreement, dated as of May 1, 2001, among L.S. Holding, Inc., the
Company, L.S. Wholesale, Inc. and Tiffany and Co. (6)
10.20 Security, Pledge and Guaranty Agreement, dated as of May 1, 2001, among
L.S. Wholesale, Inc., the Company and Tiffany and Co. (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 Co. (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
Co. (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)
16.1 Letter dated May 31, 2001 from Arthur Andersen LLP addressed to the
Commission. (9)
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(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.
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