SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
: Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended February 26, 2000
or
9 Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________ to ____________
Commission File No. 0-19369
-------
LITTLE SWITZERLAND, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0476514
(State of Incorporation) (I.R.S. Employer
Identification No.)
161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS U.S.V.I. 00804
(Address of Principal Executive Offices) (Zip Code)
(340) 776-2010
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
-----
At April 11, 2000, 8,630,995 shares of $.01 par value common stock of the
registrant were outstanding.
LITTLE SWITZERLAND, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 26, 2000
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated Balance Sheets as of February 26, 2000 (unaudited) and May 29, 1999 2
Consolidated Statements of Operations (unaudited) for the three and nine months ended
February 26, 2000 and February 27, 1999 3
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
February 26, 2000 and February 27, 1999 4
Notes to Consolidated Financial Statements (unaudited) 5-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings 21-22
Item 6. Exhibits and Reports of Form 8-K 22-23
Signature Page 24
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
(Unaudited)
February 26, May 29,
Assets 2000 1999
------- -------
Current Assets:
Cash and cash equivalents.......................................... $ 2,489 $ 2,739
Accounts receivable................................................ 1,284 560
Inventory.......................................................... 30,732 38,195
Prepaid expenses and other current assets.......................... 1,346 1,111
------- -------
Total current assets.............................................. 35,851 42,605
Property, Plant and Equipment, at Cost.............................. 34,706 36,999
Less -- Accumulated depreciation................................... 19,497 19,051
------- -------
15,209 17,948
Other assets........................................................ 472 291
------- -------
Total assets...................................................... $51,532 $60,844
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Secured demand notes.............................................. $10,175 $13,275
Accounts payable.................................................. 8,733 5,205
Accrued and currently deferred income taxes....................... 637 1,715
Other accrued expenses............................................ 4,468 3,641
------- -------
Total current liabilities......................................... 24,013 23,836
Long-term Debt...................................................... -- --
Deferred Income Taxes............................................... 202 202
------- -------
Total liabilities................................................. 24,215 24,038
------- -------
Commitments and Contingencies.......................................
Minority Interest................................................... 1,619 1,619
Stockholders' Equity:
Preferred stock, $.01 par value --
Authorized--5,000 shares
Issued and outstanding -- none................................. -- --
Common stock, $.01 par value --
Authorized -- 20,000 shares
Issued and outstanding--8,631 and 8,625 shares
at February 26, 2000 and May 29, 1999, respectively............ 87 87
Capital in excess of par.......................................... 15,605 15,601
Retained earnings................................................. 10,006 19,499
------- -------
Total stockholders' equity..................................... 25,698 35,187
------- -------
Total liabilities, minority interest and stockholders' equity.. $51,532 $60,844
======= =======
See accompanying notes to consolidated financial statements
2
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands except per share data)
(unaudited)
For the three months ended For the nine months ended
February 26, February 27, February 26, February 27,
2000 1999 2000 1999
------- ------- ------- -------
Net sales............................ $17,602 $25,787 $41,511 $57,574
Cost of sales (see Note 3)........... 10,153 15,253 26,910 33,444
------- ------- ------- -------
Gross profits....................... 7,449 10,534 14,601 24,130
Selling, general and administrative
expenses............................ 8,622 11,265 22,925 29,751
------- ------- ------- -------
Operating (loss).................... (1,173) (731) (8,324) (5,621)
Interest expense, net................ 277 307 869 1,018
------- ------- ------- -------
(Loss) before income taxes.......... (1,450) (1,038) (9,193) (6,639)
Provision for income taxes........... 100 300 300 900
------- ------- ------- -------
Net loss............................. $(1,550) $(1,338) $(9,493) $(7,539)
======= ======= ======= =======
Basic and diluted (loss)
Per share........................... $ (0.18) $ (.16) $ (1.10) $ (0.87)
======= ======= ======= =======
See accompanying notes to consolidated financial statements
3
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the nine months ended
February 26, February 27,
2000 1999
------- --------
Cash flows from operating activities:
Net (loss)........................................................................ $(9,493) $ (7,539)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities--
Depreciation..................................................................... 2,005 1,848
Store closings expense........................................................... --- 1,668
Gains (loss) on dispositions and sales of certain assets, net.................... (775) ---
Changes in assets and liabilities:
Decrease (increase) in accounts receivable..................................... (850) (459)
Decrease (increase) in inventory............................................... 4,490 6,187
(Increase) decrease in prepaid expenses and
other current assets.......................................................... 26 (219)
(Increase) Decrease in other assets............................................ --- 2
(Decrease) increase in accounts payable........................................ 3,528 (2,467)
(Decrease) in other accrued expenses and
deferred income............................................................... 827 547
(Decrease) in accrued and currently deferred
income taxes.................................................................. (1,078) 843
Net cash provided by (used in) operating activities............................... (1,320) 411
Cash flows from investing activities:
Capital expenditures.............................................................. (103) (614)
(Increase) Decrease in other assets............................................... (181) ---
Proceeds from sales of certain assets............................................. 4,450 ---
------- --------
Net cash (used in) investing activities........................................... 4,166 (614)
Cash flows from financing activities:
Proceeds from unsecured notes payable............................................. --- 24,998
Repayments of secured notes payable............................................... (3,100) ---
Repayments of unsecured notes payable............................................. --- (22,623)
Repayments of long term borrowings................................................ --- (1,669)
Issuance of common stock.......................................................... 4 ---
Net cash provided by financing activities........................................ (3,096) 706
Net (decrease) increase in cash and cash equivalents............................. (250) 503
Cash and cash equivalents, beginning of period...................................... 2,739 2,278
Cash and cash equivalents, end of period............................................ $ 2,489 $ 2,781
During the nine months ended February 26, 2000 and February 27, 1999, the
Company paid income taxes of $1,284 and $56, respectively, and paid interest of
$810 and $1,114, respectively.
See accompanying notes to consolidated financial statements
4
1. Consolidated Financial Statements
---------------------------------
The accompanying consolidated financial statements include the operations of
Little Switzerland, Inc. (the "Company") and its wholly owned subsidiaries, L.S.
Holding, Inc. and L.S. Wholesale, Inc. All significant intercompany balances
have been eliminated in consolidation. The interim financial statements are
unaudited and, in the opinion of management, contain all adjustments necessary
to present fairly the Company's financial position as of February 26, 2000 and
February 27, 1999 and the results of its operations and cash flows for the
interim periods presented. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K for the
fiscal year ended May 29, 1999 and latest Quarterly Report on Form 10-Q for the
quarterly periods ended August 28, 1999 and November 27, 1999.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of the Company's operations.
2. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Management's Plans
------------------
Existing Situation
------------------
The Company continues to operate without a long-term credit facility to fund
its working capital needs. The Company is negotiating a standstill agreement
with its existing lenders which would replace the Forbearance Agreement that
expired on August 31, 1999. (See "Notes to Consolidated Financial Statements
(unaudited) Footnote 5, Credit Arrangements" below). In addition, the Company is
currently in negotiations with an investment bank and an asset based lender to
secure new financing and repay its existing lenders. There is no assurance that
the Company will be able to successfully execute such measures.
The original Forbearance Agreement entered into on April 1, 1999,
effectively froze the Company's existing line of credit at its then level of
$17.5 million. This amount consisted of $13.3 million in outstanding cash
borrowings and approximately $4.2 million in contingent stand-by letters of
credit. The Company has since decreased its existing debt to approximately $12.8
million, consisting of approximately $10.2 million in outstanding cash
borrowings and approximately $2.6 million in contingent stand-by letters of
credit, as of April 11, 2000. This represents approximately a 27% reduction in
the Company's total outstanding debt.
5
In connection with the Forbearance Agreement, the Company and its
subsidiaries granted a security interest to the lenders against their personal
property. The forbearance period under the Forbearance Agreement expired on
August 31, 1999, and the Company is currently in default under certain of the
covenants contained in such Forbearance Agreement. As a result, the banks may
exercise their rights and remedies under the existing loan documents, including
declaring all amounts immediately due under the loan agreements. If the banks
accelerate the outstanding loans and declare amounts outstanding under such loan
agreements immediately due, the Company does not believe that it will have
sufficient funds available to make such payments and such action by the banks
will have a material adverse effect on the Company. The Company currently is in
the process of finalizing documents and the terms and conditions of a standstill
agreement with its lenders. There, however, is no assurance that such agreement
will be entered into or that the Company will be able to fulfill all of the
conditions to such agreement.
In addition, the Company is attempting to sell its Barbados operations,
which, if achieved, would generate cash for working capital purposes and
facilitate the removal of the remaining $2.6 million in contingent stand-by
letters of credit. If the sale is completed, the lenders have agreed to allow
the Company to use approximately 75% of the cash received from such sale for
working capital purposes and the Company would also anticipate the removal of
the $2.6 million in letters of credit.
Strategic Plan
--------------
Management continues to implement Phase I of its strategic plan to address
the Company's current financial condition and rebuild its business. The major
components of the strategic plan, in the order of priority, and the status of
each initiative are:
. Reduction of the Company's debt to existing lenders through, in part,
strategic sales of non-core assets, liquidation of older and/or
discontinued merchandise and securing a new working capital facility
with an asset based lender.
To date, the Company has successfully reduced its debt to existing
lenders while working to secure a new working capital facility. At
this time, there is no assurance that the Company will be successful
beyond the measures completed to date.
The Company had identified certain discontinued and/or slow moving
merchandise, which it had intended to sell for cash to a third party
liquidator. Due to the Company's inability to obtain a secondary lien
on its inventory for collateral purposes, the Company will not receive
an up-front payment for this transaction and, therefore, has not
entered into such an arrangement. In the alternative, the Company
employed the liquidator as a consultant to liquidate the merchandise
on the Company's behalf. This sale was completed on March 31, 2000.
See "Notes to Consolidated Financial Statements (Unaudited), Footnote
3, Management's Plans--Liquidation of Aged Inventory" below.
. Exiting redundant Eastern Caribbean locations and analyzing expansion
opportunities in the Western Caribbean as desirable space becomes
available.
The Company has determined which of its current markets are either
core, secondary or redundant markets. The Company has decided to exit
the redundant markets of St. Lucia
6
and Antigua and has sold its stores located on these islands (see
"Notes to Financial Statements (unaudited), Footnote 3, Management's
Plans-Actions Taken through April 11, 2000" below). In addition, due
in part to the requirements to maintain substantial stand-by letters
of credit, the Company has decided to exit the Barbados market and is
attempting to sell its operations there. This is the last of the
markets in which the Company maintains stores requiring stand-by
letters of credit to be maintained.
The Company has preliminarily identified locations in other markets as
expansion opportunities and intends to consider these opportunities
when additional financing becomes available.
Phase II of our Strategic Plan to return the Company to profitability is to
eliminate operating losses through executing a strategy that reduces overhead
expenses, improves margins and increases comparable store sales. This plan
reflects a streamlined business that, if achieved, would return the Company to
profitability over the next two years. This plan incorporates the following:
. Recruiting a senior operations team with a proven track record of
improving retail store sales productivity.
At the end of the third quarter, the Company recruited and hired a
seasoned Senior Vice President of store operations with over 12 years
multi-store operations experience as an Executive Officer. In
addition, the company has recruited and hired a new Director of Retail
Operations.
. Recruiting a seasoned marketing team to improve our market penetration
with the core cruise ship client market and the secondary hotel client
market.
At the beginning of the fourth quarter the Company recruited and hired
a seasoned Divisional Vice president of marketing with over 12 years
of experience in Duty Free Retail in the Eastern and Western
Caribbean. In addition, the Company also recruited and hired a
Director of Marketing with comparable experience with the cruise
industry in the Caribbean.
. Improving margins by improving our merchandise mix and eliminating
unnecessary point of sale markdowns.
The Company continues to receive a fresh mix of new merchandise,
which, when coupled with the clearance of discontinued products has
contributed to our third quarter margin improvement. In the third
quarter of 2000, gross margins improved to 42.3% from the prior year's
quarter of 40.8%.
Phase III of our Strategic Plan, which we plan to implement in the future,
to return the Company to profitability incorporates the following:
. Developing an assortment of branded Little Switzerland merchandise while
importing designer boutiques in existing Little Switzerland stores.
. Developing a new e-commerce strategy to leverage the Little Switzerland
duty free shopping concept.
7
The Company believes that the actions taken through April 11, 2000 were
necessary to raise cash to substantially pay down its existing lenders, maintain
current in obligations to its suppliers and reduce the exposure for a new
lender. Concurrently, the Company is working to obtain alternative financing
from and is still in active negotiations with an asset based lender that would
provide the Company with additional funds to repay its lenders and to fund the
Company's working capital requirements.
The Company is still in varying levels of discussions with potential
strategic partners regarding a potential investment in the Company. One party
elected not to move forward after completing due diligence. There is no
assurance that the Company will be able to reach a definitive agreement with the
remaining parties.
Finally, the Company is reviewing all aspects of its operations in an effort
to reduce its losses going forward. The Company will continue to take strategic
restructuring related charges into the fourth quarter of fiscal 2000 as it
continues to reduce its operating costs.
Actions Taken Through April 11, 2000
------------------------------------
Sale of St. Barthelmey Store
----------------------------
On August 31, 1999, the Company consummated the sale of all of the fixed
assets and inventory of its store located on the island of St. Barthelmey
pursuant to a purchase and sale agreement with a third party for an aggregate
amount equal to $1.3 million. In the third quarter of fiscal 2000, the Company
used $400,000 in proceeds that had been released from escrow, to pay down its
debt to its existing lenders under its credit facilities. The Company recorded a
gain of $537,000 on this transaction in the second quarter of fiscal 2000.
Sale of Antigua Store
---------------------
On November 12, 1999, the Company consummated the sale of all of the fixed
assets and inventory, of which $0.8 million was inventory, of its store located
on the island of Antigua for an aggregate purchase price of $2.0 million. In
addition, the Company has requested from the customs authority a release of the
Antigua contingent stand-by letter of credit in the amount of $330,000. The
Company anticipates that this contingent stand-by letter of credit will be
released without material exposure to the Company. The Company has received a
$1.5 million payment during the second quarter of fiscal 2000 and the balance of
the purchase price is to be paid in two installments in the spring of 2000. The
first installment payment of $.2 million was received in early March. The
Company used the $1.5 million in proceeds to pay down its debt to its existing
lenders under its credit facilities. The Company recorded a gain of $487,000 on
this transaction in the second quarter of fiscal 2000.
Sale of St. Lucia Fragrance Store
---------------------------------
On December 1, 1999, the Company consummated the sale of all of its
fragrance inventory and fixtures for the fragrance store located on the island
of St. Lucia for an aggregate purchase price of $150,000. In addition, the
Company was able to reduce $180,000 outstanding under a St. Lucia contingent
stand-by letter of credit. The Company used the proceeds from the sale to pay
down its debt to its existing lenders under its credit facilities. The Company
recorded a loss of ($41,000) on this transaction in the third quarter of fiscal
2000.
8
Sale of Two St. Lucia Stores
----------------------------
On December 28, 1999, the Company consummated the sale of all of the assets,
of which $ 0.6 million was inventory, of its two stores located on the island of
St. Lucia for an aggregate purchase price of approximately $1.0 million. In
addition, the Company has released the remaining $770,000 outstanding under
contingent stand-by letters of credit. Prior to such sale, the Company had
negotiated a reduction in its contingent stand-by letters of credit on the
island of St. Lucia by $330,000. The Company used the $1.0 million proceeds and
removal of the $770,000 contingent stand-by letters of credit to pay down its
debt to its existing lenders under its credit facilities. The Company recorded a
loss of ($208,000) on this transaction in the third quarter of fiscal 2000.
Liquidation of Aged Inventory
-----------------------------
In order to raise funds to pay down its bank debt, the Company decided to
accelerate the liquidation of discontinued and/or slow moving merchandise in a
transaction with a third party liquidator. The Company was to have received an
advance of $2.0 million for such sale, which, upon receipt by the Company, was
to be paid to its existing lenders to reduce its debt under the credit
facilities. Upon completion of the sale, the Company was to receive commissions
on any profits received in excess of the advanced $2.0 million and operational
cost of the sale. In the second quarter of fiscal 2000, the Company recorded a
$1.3 million charge to cost of goods sold reflecting the impairment of this
inventory.
The terms of this transaction were negatively impacted by Hurricane Lenny,
which caused damage to the infrastructure of St. Martin and reduced tourist
traffic to this island. As a result, the Company was required to make certain
concessions to compensate for the increased risk to the third party liquidator.
These concessions included granting a second lien on its inventory as collateral
to compensate for increased risk. The Company's lenders did not approve this
second lien, therefore, the Company was unable to consummate the sale of the
inventory as originally negotiated for an up-front cash payment. Instead, the
Company engaged the liquidator as a consultant to liquidate the merchandise on
the Company's behalf. The third party liquidator conducted the clearance sale
through the end of March 2000 in one of the Company's stores in Aruba and one
store in French St. Martin. Subsequently, the Company has taken control of the
clearance sale and will continue to operate it until its business interruption
claim, filed as a result of disruption due to Hurricane Lenny, is finalized. The
Company plans to request coverage for all concessions required as a result of
Hurricane Lenny in its business interruption insurance claim. See "Notes to
Consolidated Financial Statements (unaudited), Footnote 11, Commitments and
Contingencies" below.
Management Changes
------------------
In the month of February, the Company hired three senior level employees.
Joining the Company are Michael Pepper, Brenda Pepper and Zona Corbin as Senior
Vice President Operations, Director of Retail Operations and Director of
Marketing, respectively. In addition, the Company has also hired Walter Darr
Conradson as Divisional Vice President of Marketing effective April 1, 2000.
Finally, the company has promoted Alfred "Pat" Bailey to Divisional Vice
President Distribution and Store Development. Pat replaces Raoul Mills who
resigned in early March for personal reasons.
9
Actions In Progress
-------------------
The Company's new management team is committed to continuing progress on the
initiatives taken to date. This team will continue to attempt to secure a
greater range of world class luxury products for sale in the Company's stores.
Included in this process will be a focus on improving gross margin and inventory
turnover.
Through April 11, 2000, the Company has decreased its existing debt under
the credit facilities to approximately $12.8 million, which consists of
approximately $10.2 million in outstanding cash borrowings and approximately
$2.6 million in contingent stand-by letters of credit. This represents
approximately a 27% reduction in the Company's total outstanding debt.
The Company continues to operate without a long-term credit facility to fund
its working capital needs. The Company is negotiating a standstill agreement
with its existing lenders which would replace the Forbearance Agreement that
expired on August 31, 1999. (See "Notes to Consolidated Financial Statements
(unaudited) Footnote 5, Credit Arrangements" below). In addition, the Company is
currently in negotiations with an investment bank and an asset based lender to
secure new financing and repay its existing lenders. There is no assurance that
the Company will be able to successfully execute such measures.
In addition to the above actions, the Company has entered into discussions
to settle both the pending class action and the merger litigation. There,
however, can be no assurances that these discussions will result in settlement
of these actions or that any settlement will be on terms favorable to the
Company. See "Notes to Consolidated Financial Statements (unaudited), Footnote
11, Commitments and Contingencies--Destination Retail Holdings Corporation and--
Class Action Lawsuit" below.
Qualification
-------------
The Company's ability to achieve its operating results included in its
strategic plan is impacted by each of the factors described above. There can be
no assurance that the Company will successfully execute its strategic plan
including securing adequate financing to pay off its existing lenders and to
fund its additional working capital needs.
Included in this Note 3 is a discussion of management's planned actions to
improve its current financial condition. The planned actions include a thorough
review of each location and operation to determine what further actions are
required to return the Company to sustained profitability, including, without
limitation, the continued sale of certain store locations. Although the Company
believes no further impairment losses are required at February 26, 2000, future
strategic actions could result in additional store closings and material
strategic charges and impairment losses.
4. Income Taxes
------------
Under an agreement, which expired at the end of August 1998 (subject to
renewal), L.S. Wholesale benefited from a lower tax rate on its income earned
outside the United States Virgin Islands, which had been taxed at a rate of 3.7%
up through the end of fiscal 1998.
The Company submitted its application for renewal of benefits and was
notified by The Industrial Development Commission ("IDC") in October 1999 that
the IDC had granted such renewal for a five-year period. Thus, as a result of
the renewal, L.S. Wholesale will enjoy the benefit of a 75% exemption from taxes
on income received from activities conducted outside of the United States Virgin
Islands, which results
10
in an effective tax rate of approximately 9.3%. In addition, L.S. Wholesale will
enjoy a 75% exemption from gross receipts tax.
As the Company operates in multiple tax jurisdictions, it is subject to
various tax exposures. At this time, in the opinion of management any resulting
liability would not have a material impact on the Company's financial position.
5. Credit Arrangements
-------------------
Historically, the Company has utilized unsecured credit facilities with the
Company's two lead banks to support its inventory and capital requirements,
which fluctuate during the year due to the seasonal nature of the Company's
business, and to maintain and remodel its existing stores. As a result of
negotiations with its two lead banks regarding the Company's noncompliance with
certain financial covenants contained in the original loan agreements with the
banks and the nonpayment of amounts totaling approximately $1.5 million due
under the revolving term loan with one of the Company's banks, the Company and
its subsidiaries entered into a Forbearance Agreement, effective as of April 1,
1999 that effectively froze the Company's line of credit at its then and current
level of $17.5 million. This amount consisted of approximately $13.3 million in
outstanding cash borrowings and approximately $4.2 million in contingent stand-
by letters of credit.
Pursuant to the Forbearance Agreement, the banks agreed, through August 31,
1999, not to exercise their rights and remedies under the existing loan
documents with respect to existing defaults and certain expected future
defaults. In exchange, the Company and its subsidiaries granted a security
interest to the banks against their personal property. The Forbearance Agreement
also sets forth certain criteria that the Company had to meet regarding the
Company's inventory levels. The banks indicated that they would not make any
additional borrowings to the Company during the term of the Forbearance
Agreement.
In connection with the Forbearance Agreement, the Company and its
subsidiaries granted a security interest to the lenders against their personal
property. The forbearance period under the Forbearance Agreement expired on
August 31, 1999, and the Company is currently in default under certain of the
covenants contained in such Forbearance Agreement. As a result, the banks may
exercise their rights and remedies under the existing loan documents, including
declaring all amounts immediately due under the loan agreements. If the banks
accelerate the outstanding loans and declare amounts outstanding under such loan
agreements immediately due, the Company does not believe that it will have
sufficient funds available to make such payments and such action by the banks
will have a material adverse effect on the Company. The Company currently is in
the process of finalizing documents and the terms and conditions of a standstill
agreement with its lenders. There, however, is no assurance that such agreement
will be entered into or that the Company will be able to fulfill all of the
conditions to such agreement. The Company currently is actively exploring other
financing alternatives. At this time, however, the Company does not have any
firm commitments from other lenders or third parties to provide it with funds
that would be used to pay off its existing lenders or to finance its working
capital. There is no assurance that the Company will be successful in obtaining
any other financing.
11
Outstanding borrowings against these aforementioned now secured credit
facilities totaled $12.8 million and $14.4 million as of February 26, 2000 and
February 27, 1999, respectively. Outstanding stand-by letters of credit against
these credit facilities totaled $2.6 million and $4.1 million as of February 26,
2000 and February 27, 1999, respectively. The weighted average interest rates
incurred during fiscal 1999, 1998 and 1997 were approximately 8.4%, 8.1% and
7.9%, respectively.
The Company continues to operate without a long-term credit facility to fund
its working capital needs. The Company is negotiating a standstill agreement
with its existing lenders which would replace the Forbearance Agreement that
expired on August 31, 1999. In addition, the Company is currently in
negotiations with an investment bank and an asset based lender to secure new
financing and repay its existing lenders. There is no assurance that the Company
will be able to successfully execute such measures.
The Company has reduced its existing debt to approximately $12.8 million,
which consists of approximately $10.2 million in outstanding cash borrowings and
approximately $2.6 million in contingent stand-by letters of credit, as of April
11, 2000. This represents approximately a 27% reduction in the Company's total
outstanding debt.
6. Earnings per Share
------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings per Share, effective December 15, 1997. In accordance with the
requirements of SFAS No. 128, basic earnings per share is computed by dividing
net income by the weighted average number of shares outstanding and diluted
earnings per share reflects the dilutive effect of stock options (as calculated
utilizing the "Treasury Method"). The weighted average number of shares
outstanding, the dilutive effects of outstanding stock options, weighted average
number of shares used in diluted earnings calculation, and the shares under
option plans which were anti-dilutive for the periods included in this report
are as follows (in thousands):
Three Months Ended Nine Months Ended
------------------ ------------------
02/26/00 02/27/99 02/26/00 02/27/99
-------- -------- -------- --------
Weighted average number of shares
used in basic earnings per share
calculation.................................. 8,630 8,624 8,628 8,624
Dilutive effects of options................... --- --- --- ---
Weighted average number of shares
used in diluted earnings per share
calculation.................................. 8,630 8,624 8,628 8,624
Shares under and outside the option plans
excluded in computation of diluted earnings
per share due to anti-dilutive effects....... 1,344 904 1,344 904
7. Accounting for Income Taxes
---------------------------
The Company follows the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized
12
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. The amount of deferred tax asset or
liability is based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is
realizable, based upon the realization criteria defined in SFAS No. 109.
8. Long-lived Assets
-----------------
The Company accounts for long-lived and intangible assets in accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets To Be Disposed Of. In accordance with the requirements of SFAS No.
121, the Company periodically assesses whether events or circumstances have
occurred that may indicate the carrying value of its long-lived assets may not
be recoverable. When such events or circumstances indicate the carrying value of
an asset may be impaired, the Company uses an estimate of the future
undiscounted cash flows to be derived from the asset over the remaining useful
life of the asset to assess whether or not the asset is recoverable. If the
future undiscounted cash flows to be derived over the life of the asset do not
exceed the asset's net book value, the Company recognizes an impairment loss for
the amount by which the net book value of the asset exceeds its estimated fair
market value. Due to several factors, including the Company's relationship with
Rolex which is discussed further in Note 11, the Company recognized an
impairment loss relating to the goodwill at the Company's World Gift Imports
(Barbados) Limited subsidiary that totaled approximately $2.5 million during the
fourth quarter of fiscal 1998. The impairment loss was classified as a component
of selling, general and administrative expense for the year ended May 30, 1998.
No other impairment losses were recognized during the quarters ended February
26, 2000.
Included in Note 3 is a discussion of management's planned actions to
improve its current financial condition. The planned actions include a thorough
review of each location and operation to determine what further actions are
required to return the Company to sustained profitability. Although the Company
believes no further impairment losses are required at February 26, 2000, future
strategic actions could result in additional store closings and material
strategic charges and impairment losses.
9. Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
The Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
SFAS No. 133, in July 1999. SFAS No. 133 is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000; earlier adoption is
allowed. The statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not yet determined the effect that adoption of SFAS
No. 133 will have or when the provisions of the statement will be adopted.
However, the Company currently expects that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a material
effect on the Company's results of operations or financial position.
13
10. Advertising
-----------
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising expenses consist primarily of
advertisements with local, regional and national travel magazines, which are
produced on a periodic basis and distributed to visiting tourists. Additionally,
fees are expensed as paid for promotional "port lecturer" and other programs
directed primarily at cruise ship passengers.
11. Commitments and Contingencies
-----------------------------
Relationship with Rolex
- -----------------------
The Company had historically operated as the exclusive authorized retailer
for Montrex Rolex, S.A. and its affiliates (collectively, Rolex) on the islands
on which the Company operates. Following execution of the Agreement and Plan of
Merger, dated as of February 4, 1998 (the "Merger Agreement"), with Destination
Retail Holdings Corporation ("DRHC") and certain of its affiliates, Rolex
suspended shipments of its products to the Company and indicated that it did not
believe it would be in its best interest to begin a business relationship with
DRHC. Following termination of the Merger Agreement, on June 9, 1998, the
Company made numerous attempts to rebuild its business relationship with Rolex.
However, on July 15, 1998, the Company announced that it had learned that Rolex
had decided not to resume shipments of its watches to the Company for retail
sale through the Company's stores. The Company received its last shipment of
Rolex products in January 1998.
Sales of Rolex watches accounted for 3%, 26% and 24% of the Company's sales
in fiscal 1999, 1998 and 1997, respectively. Rolex is the only manufacturer
whose products accounted for more than 10% of the Company's sales in fiscal 1998
and 1997. Sales of products from the Swatch Group accounted for 10.4% in fiscal
year 1999. In order to mitigate the impact on sales of the loss of Rolex
products, the Company is exploring opportunities for expanding existing, and
adding new, world class product lines in both watches and jewelry. In addition,
the Company is increasing the showcase space allocated to jewelry in certain of
its larger stores to accommodate a greater variety of moderate to higher priced
fashion merchandise, including diamond, tanzanite, pearl and pearl accent
classifications.
To the extent that the Company is unable to mitigate the impact on sales of
the loss of Rolex products by expanding existing, and adding new, world class
product lines in both watches and jewelry, the Company believes that the loss of
Rolex will continue to have a material adverse effect on the Company's results
of operations for the fiscal year ending May 27, 2000 and beyond.
Employee Defalcation Loss
- -------------------------
On March 11, 1998, the Company filed a civil action in the Territorial Court
of the Virgin Islands against Lorraine Quetel, a former employee of the Company,
Lydia Magras and Bon Voyage Travel, Inc. The Company alleges that such parties
were involved in the employee defalcation that management believes occurred
during the Company's fiscal year ended May 31, 1997. The Company is seeking a
preliminary injunction and damages against the former employee and the other
parties allegedly involved in the theft against the Company.
On January 19, 1999, the defendant, Lydia Magras, filed a petition for
Bankruptcy (Chapter 7) in the United States Bankruptcy Court, District of St.
Thomas. A Notice of Appearance was filed on February 2,
14
1999 on behalf of the Company. A trustee was appointed in this matter at the
meeting of the creditors held on May 20, 1999.
Destination Retail Holdings Corporation
- ---------------------------------------
On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware against DRHC, Stephen G.E. Crane,
DRHC's controlling shareholder, Young Caribbean Jewelry Company Limited, a
Cayman Islands corporation, Alliance International Holdings Limited, a Bahamian
corporation, and CEI Distributors Inc., a British Virgin Islands corporation,
each an affiliate of DRHC. The Company alleges breach of the Merger Agreement,
among the Company, DRHC and certain affiliates of DRHC and also alleges claims
of misrepresentation and civil conspiracy, among other causes of action. The
Company is seeking monetary damages, including, without limitation,
consequential damages relating to harm to its business. On July 15, 1998, the
defendants moved to dismiss the complaint on jurisdictional grounds. On March
31, 1999, the court issued an order denying the defendants' motions to dismiss.
On May 21, 1999, the defendants filed their Answer, Affirmative Defenses,
Counterclaims and Third Party Complaint. The defendants allege counterclaims
against the Company and others for fraud, negligent misrepresentations, breach
of the covenant of good faith and fair dealing and breach of the Merger
Agreement, unfair competition and business libel, among others, primarily
stemming from their allegations that the Company was responsible for their
failure to consummate the Merger Agreement.
The Company is still in settlement negotiations with the defendant, however,
there are no assurances that these discussions will result in a settlement of
this action, or that any settlement will be on terms favorable to the Company.
Additionally, as a result of the parties' failure to reach a settlement to date,
the court has scheduled a trial to begin on May 22, 2000.
Class Action Lawsuit
- --------------------
On March 22, 1999, a complaint was filed as a putative class action on
behalf of certain stockholders of the Company in the United States District
Court for the District of Delaware against the Company, certain of its existing
and former officers and directors, DRHC and Stephen G.E. Crane. The complaint
alleges that the defendants violated the federal securities laws by failing to
disclose that DRHC's financing commitment to purchase the Company's shares
expired on April 30, 1998, before the Company's stockholders were scheduled to
vote to approve the merger between the Company and DRHC at the May 8, 1998
special meeting of stockholders. The plaintiffs are seeking monetary damages,
including, without limitation, reasonable expenses in connection with this
action. The plaintiffs amended their complaint on November 10, 1999 and the
Company filed a motion to dismiss the plaintiff's amended complaint on December
7, 1999. On January 28, 2000, the plaintiffs filed their opposition to the
motion to dismiss. The motion remains pending. The Company has entered into
discussions to settle this action. There, however, are no assurances that these
discussions will result in a settlement of this action, or that any settlement
will be on terms favorable to the Company. As a result, at this time, management
of the Company is unable to determine the financial impact this action may have
on the Company's financial condition or results of operations.
The Company is also party to various pending legal claims and proceedings.
In the opinion of management of the Company, these suits and claims should not
result in final judgments or settlements, which, in the aggregate, would have a
material adverse effect on the Company's financial condition or results of
operations. See Part II - Other Information, Item 1 "Legal Proceedings."
15
Hurricane Damage
- ----------------
On November 30, 1999, the Company announced that Hurricane Lenny, which hit
certain Caribbean islands during the Company's second fiscal quarter of 2000,
caused significant damage to the infrastructure of Dutch St. Maarten and French
St. Martin, including hotels, cruise ship docks and other tourist facilities.
While Little Switzerland sustained minimal property damage to its retail stores,
one of the Company's stores on St. Martin was closed for 24 days and one for 33
days, one store on St. Maarten was closed for 12 days and the four St. Thomas
stores were closed for 2 1/2 days each. As of December 20, 1999, all of the
Company's stores were restored to normal operations.
Interruption of the Company's business as a result of Hurricane Lenny has
had an adverse impact on the Company's plans to accomplish, among others items,
an extension of the Forbearance Agreement, repayment of debt to its existing
lenders, consummating a deal to sell liquidation goods to a third party and
obtaining alternative asset-based financing. In addition, the Hurricane has had
an adverse impact on second quarter and third quarter results. At this time, the
total financial impact on the Company's results of operations cannot be
determined.
The Company is currently in the process of preparing and filing insurance
claims with its insurance carrier in connection with the hurricane damage to
certain of the Company's properties and interruption of its business. In the
third quarter, the Company has received $500,000 in advance proceeds with
respect to such claims. However, at this time, the Company is unable to estimate
the extent of any other insurance proceeds it will collect once these claims
have been processed.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain statements that are
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the Company's ability to obtain alternative financing to provide it with
funds to pay off its existing lenders and to fund its working capital needs,
(ii) the Company's ability to maintain its relationship with its existing
lenders, including with respect to the negotiation of a Standstill Agreement,
(iii) the Company's ability to successfully complete its strategic plan, (iv)
the Company's ability to successfully remove the stand-by letters of credit in
Antigua and in Barbados; (v) the frequency of tourist visits to the locations
where the Company maintains retail stores, (vi) the Company's ability to retain
relationships with its major suppliers of products for resale, (vii) the
Company's ability to mitigate the impact on sales of the loss of Rolex products
by expanding existing, and adding new, world class product lines in both watches
and jewelry, (viii) weather in the Company's
16
markets, (ix) actions of the Company's competitors and the Company's ability to
respond to such actions and (x) economic conditions that affect the buying
patterns of the Company's customers. In addition to the foregoing, the Company's
actual future results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in the
Company's various filings with the Securities and Exchange Commission and of
changes in general economic conditions, changes in interest rates and/or
exchange rates and changes in the assumptions used in making such forward-
looking statements.
RECENT DEVELOPMENTS
NASDAQ Listing
- --------------
On November 10, 1999, The Nasdaq Stock Market, Inc. ("NASDAQ") informed the
Company that it would permit the transfer of the Company's common stock to the
NASDAQ SmallCap Market, effective as of the open of business on November 12,
1999. The Company's continued listing on the NASDAQ SmallCap Market was subject
to certain conditions, including obtaining asset-based financing to pay down its
existing debt and for working capital purposes and demonstrating a closing bid
price at or above $1.00 per share prior to December 22, 1999; immediately
thereafter, the Company was required to evidence a closing bid price at or above
$1.00 per share for a minimum of ten consecutive trading days. The Company also
had to be able to demonstrate compliance with all of the other NASDAQ SmallCap
Market continued listing requirements.
On December 21, 1999, the Company requested an additional extension from
NASDAQ in order to meet all of the continued listing requirements imposed by
NASDAQ. The stockholders of the Company approved a proposed reverse stock split
on December 21, 1999 at the Company's annual meeting of stockholders that was
initiated in an effort to meet the minimum bid price requirement. Subsequently,
on December 22, 1999, NASDAQ notified the Company that, based upon the Company's
failure to meet certain continued listing requirements, including obtaining
alternative asset-based financing to pay down existing debt and for working
capital purposes, NASDAQ had delisted the Company's common stock from the NASDAQ
SmallCap Market effective as of the close of business on December 22, 1999. The
Company's common stock began trading on NASDAQ's Over-the-Counter Bulletin Board
("OTC") beginning with the open of business on December 23, 1999. The trading
symbol for the Company's common stock on OTC is "LSVIC." As a result of Nasdaq's
decision, the Company did not effectuate the reverse stock split which was
approved by the Company's stockholders at its annual meeting held on December
21, 1999.
YEAR 2000 READINESS DISCLOSURE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning the Year 2000 Information and Readiness
Disclosure Act.
Year 2000. "Y2K Compliance" refers to the ability for information systems,
---------
software programs, computer hardware and other computer enhanced equipment to
properly handle the processing of dated
17
material properly for the year 2000 and beyond. Many existing computer programs
and databases use two digits to identify a year in the date field (i.e., 98
would represent 1998). These programs and databases were designed and developed
without considering the impact of the millennium. If not corrected, many
computer systems could fail or create erroneous results relating to the year
2000. If the Company or its significant suppliers have failed to make necessary
modifications and conversions, the year 2000 issue could have an adverse effect
on Company operations. The Company believes that its competitors face a similar
risk. Information contained in this Quarterly Report pertains to the initiatives
undertaken by the Company to insure full compliance with Y2K processing prior to
the year 2000 and any subsequent events relating to the year 2000 which have
occurred since January 1, 2000.
Costs to Address Year 2000 Compliance. Costs associated with year 2000
-------------------------------------
compliance were primarily associated with acquiring outside contract personnel
that have been required to modify and implement the various software systems.
Some equipment was necessary as well as travel expense related to the POS roll
out. Estimated total expenses related to the Y2K compliance were approximately
$600,000. It is management's belief that with the actions taken by the Company,
the Company was Y2K compliant before the beginning of year 2000. Continued
testing and re-evaluation occurred to insure full compliance. With efforts for
finalizing compliance, management believes that it has significantly reduced any
adverse effect on the Company's business due to Y2K issues. However, there can
be no assurance that the Company has identified and addressed all year 2000
issues before problems could arise.
Impact of Year 2000. To date, the Company has experienced minimal
-------------------
interruption due to Year 2000 issues. Problems encountered to date related to
customized programs that were inadvertently overlooked in converting to Y2K
compliant programs. The majority of these such programs have since been
converted to Y2K complaint programs and currently are running without problems.
As Y2K problems may arise throughout the calendar year, the Company will
continue to monitor all of its computer equipment and software on a periodic
basis.
The preceding "Year 2000 Readiness Disclosure" contains various forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. These forward-looking statements represent the Company's beliefs or
expectations regarding future events. When used in the "Year 2000 Readiness
Disclosure", the words "believes," "expects," "estimates" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements include, without limitation, the Company's expectations as to when it
will complete the modification and testing phases of its year 2000 project plan
as well as its year 2000 contingency plans; its estimated cost of achieving Year
2000 readiness; and the Company's belief that its internal systems were year
2000 compliant in a timely manner. All forward-looking statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources; the ability to identify and remediate
all date sensitive lines of computer code or to replace embedded computer chips
in affected systems or equipment; and the actions of governmental agencies or
other third parties with respect to year 2000 problems.
18
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED FEBRUARY 26,
2000
General
- -------
The Company operated 18 luxury gift and jewelry stores as of February 26,
2000. The company is initiating various stages of its strategic plan to address
the Company's current financial condition and rebuild its business See "Notes to
Consolidated Financial Statements (unaudited) Footnote 3, Management's Plans"
above.
Net Sales
- ---------
Net sales for the three-month period ended February 26, 2000, were $17.6
million, a 31.7% reduction from net sales of $25.8 million for the corresponding
three-month period last fiscal year. Net sales for the nine-month period ended
February 26, 2000, were $41.5 million, a 27.9% reduction from net sales of $57.6
million for the corresponding nine-month period last fiscal year. Net sales for
comparable stores decreased approximately 21.9% in the three-month period ended
February 26, 2000 and 22.5% in the nine-month period ended February 26, 2000.
Management attributes this reduction in sales primarily to the continuing impact
of Hurricanes Floyd, Jose and Lenny, as well as dramatically reduced tourist
traffic over the millennium due to Y2K and terrorism scares. These reductions
were partially offset by receipt of new merchandise, however, delays in
receiving merchandise at the Company's store locations over the Christmas and
New Year's holidays negatively impacted the sales effort.
Gross Profit
- ------------
Gross profit as a percentage of net sales was 42.3% for the three-month
period ended February 26, 2000 and 35.2% for the nine-month period ended
February 26, 2000, as compared to 40.9% and 41.9%, respectively, for the
corresponding periods last fiscal year. The increase in gross profit margin in
the three-month period ended February 26, 2000 was primarily due to the receipt
of significant new merchandise in the Company's stores and strong sell through
of this new merchandise in the peak-selling season. In the nine-month period
ended February 26, 2000, the Company took a $1.3 million charge for discontinued
and/or slow moving merchandise planned to be liquidated. Excluding the $1.3
million charge, gross profit as a percentage of net sales would have been 38.3%
for the nine-month period ended February 26, 2000. Management attributes the
remaining margin reduction to short term measures taken throughout the first and
second quarter of fiscal 2000 to improve liquidity.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, General and Administrative Expenses ("SG&A") for the three-month
period ended February 26, 2000 were $8.6 million, or approximately 49.0% of net
sales, and for the nine-month period ended February 26, 2000 were $22.9 million,
or approximately 55.2% of net sales. This compares to $11.3 million, or
approximately 43.7% of net sales and $29.8 million or 51.7% of net sales,
respectively, for the corresponding periods last fiscal year. The SG&A expense
for the three-month period ended February 26, 2000 included a $249,000 loss from
the sale of the Company's stores on the island of St Lucia. Excluding this loss,
SG&A expense for the three-month and nine-month periods ended February 26, 2000
would have been 47.6% and 54.6%, respectively. The reduction in sales from the
corresponding periods last year contributed to the higher SG&A cost as a percent
of net sales. In addition, management also attributes the increase in SG&A to
added costs for legal and consulting fees associated with the Company's actions
taken during the three-month and nine-month periods to address the financial
condition of the Company.
19
Other
- -----
Net interest expense for the three-month period ended February 26, 2000 was
$277,000 and $869,000 for the nine-month period ended February 26, 2000 as
compared to $307,000 and $1,018,000, respectively, for the corresponding periods
last fiscal year. The decrease in net interest expense reflects lower average
borrowings compared to the corresponding period's last fiscal year.
The Company's effective tax rates for the three-month and nine-month periods
ended February 26, 2000 were 0.0% and 0.0%, respectively, as compared to an
effective tax rate of 0.0% for the corresponding periods last fiscal year.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operations during the nine-month period ended February 26,
2000 was $1.3 million as compared to $.4 million net cash provided by operations
for the corresponding period last year. Net cash used was able to remain below
prior year despite increased losses due to reduction in inventory levels.
Historically, the Company has utilized unsecured credit facilities with the
Company's two lead banks to support its inventory and capital requirements,
which fluctuate during the year due to the seasonal nature of the Company's
business, and to maintain and remodel its existing stores. As a result of
negotiations with its two lead banks regarding the Company's noncompliance with
certain financial covenants contained in the original loan agreements with the
banks and the nonpayment of amounts totaling approximately $1.5 million due
under the revolving term loan with one of the Company's banks, the Company and
its subsidiaries entered into a Forbearance Agreement, effective as of April 1,
1999 that effectively froze the Company's line of credit at its then and current
level of $17.5 million. This amount consisted of approximately $13.3 million in
outstanding cash borrowings and approximately $4.2 million in contingent stand-
by letters of credit.
Pursuant to the Forbearance Agreement, the banks agreed, through August 31,
1999, not to exercise their rights and remedies under the existing loan
documents with respect to existing defaults and certain expected future
defaults. In exchange, the Company and its subsidiaries granted a security
interest to the banks against their personal property. The Forbearance Agreement
also sets forth certain criteria that the Company had to meet regarding the
Company's inventory levels. The banks indicated that they would not make any
additional borrowings to the Company during the term of the Forbearance
Agreement.
In connection with the Forbearance Agreement, the Company and its
subsidiaries granted a security interest to the lenders against their personal
property. The forbearance period under the Forbearance Agreement expired on
August 31, 1999, and the Company is currently in default under certain of the
covenants contained in such Forbearance Agreement. As a result, the banks may
exercise their rights and remedies under the existing loan documents, including
declaring all amounts immediately due under the loan agreements. If the banks
accelerate the outstanding loans and declare amounts outstanding under such loan
agreements immediately due, the Company does not believe that it will have
sufficient funds available to make such payments and such action by the banks
will have a material adverse effect on the Company. The Company currently is in
the process of finalizing documents and the terms and conditions of a standstill
agreement with its lenders. There, however, is no assurance that such agreement
will be entered into or that the Company will be able to fulfill all of the
conditions
20
to such agreement. The Company currently is actively exploring other financing
alternatives. At this time, however, the Company does not have any firm
commitments from other lenders or third parties to provide it with funds that
would be used to pay off its existing lenders or to finance its working capital.
There is no assurance that the Company will be successful in obtaining any other
financing.
Outstanding borrowings against these aforementioned now secured credit
facilities totaled $12.8 million and $14.4 million as of February 26, 2000 and
February 27, 1999, respectively. Outstanding stand-by letters of credit against
these credit facilities totaled $2.6 million and $4.1 million as of February 26,
2000 and February 27, 1999, respectively. The weighted average interest rates
incurred during fiscal 1999, 1998 and 1997 were approximately 8.4%, 8.1% and
7.9%, respectively.
The Company continues to operate without a long-term credit facility to fund
its working capital needs. The Company is negotiating a standstill agreement
with its existing lenders which would replace the Forbearance Agreement
that expired on August 31, 1999. (See "Notes to Consolidated Financial
Statements (unaudited) Footnote 5, Credit Arrangements" above). In addition, the
Company is currently in negotiations with an investment bank and an asset based
lender to secure new financing and repay its existing lenders. There is no
assurance that the Company will be able to successfully execute such measures.
The Company has reduced its existing debt to approximately $12.8 million,
which consists of approximately $10.2 million in outstanding cash borrowings and
approximately $2.6 million in contingent stand-by letters of credit, as of April
11, 2000. This represents approximately a 27% reduction in the Company's total
outstanding debt.
Capital expenditures were approximately $.1 million for the nine-month
period ended February 26, 2000 compared to $.6 million for the corresponding
period last year.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
None.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
There have been no changes in the third quarter of fiscal 2000 in the
Company's civil actions which are pending against Lorraine Quetel, Lydia Magras
and Bon Voyage Travel, Inc. in connection with the employee defalcation which
occurred during the Company's fiscal year ended May 31, 1997. See Part I, Item 1
"Notes to Consolidated Financial Statements (unaudited), Footnote 11,
Commitments and Contingencies--Employee Defalcation Loss."
21
On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware (Civil Action No. 98-315-SLR)
against DRHC, Stephen G.E. Crane, DRHC's controlling shareholder, Young
Caribbean Jewelry Company Limited, a Cayman Islands corporation, Alliance
International Holdings Limited, a Bahamian corporation, and CEI Distributors
Inc., a British Virgin Islands corporation, each an affiliate of DRHC. For a
summary of the litigation proceedings with respect to this action, see "Part 1,
Item 1, Notes to Financial Statements (unaudited), Footnote 11, Commitments and
Contingencies--Destination Retail Holdings Corporation." Additionally, as a
result of the failure of the parties to reach a settlement on the merger
litigation to date, the court has scheduled a trial to begin on May 22, 2000.
On March 22, 1999, a complaint was filed as a putative class action on
behalf of certain stockholders of the Company in the United States District
Court for the District of Delaware (Civil Action No.99-176) against the Company,
certain of its former officers and directors, DRHC and Stephen G.E. Crane. For a
summary of the litigation proceedings with respect to this action, see "Part 1,
Item 1, Notes to Financial Statements (unaudited), Footnote 11, Commitments and
Contingencies--Class Action Lawsuit." The plaintiffs amended their complaint on
November 10, 1999 and the Company filed a motion to dismiss the amended
complaint on December 7, 1999. This motion remains pending.
The Company has entered into discussions to settle both the pending class
action and the merger litigation. There, however, can be no assurances that
these discussions will result in settlement of these actions or that any
settlement will be on terms favorable to the Company. The Company is involved in
various other legal proceedings, which, in the opinion of management, are not
likely to result in a material adverse effect on the financial condition or
results of operations.
ITEM 6. Exhibits and Reports of Form 8-K
--------------------------------
(a) Exhibits
3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on Form
S-1, Registration No. 33-40907, filed with the Securities and
Exchange Commission on July 10, 1992 ("Amendment No. 1 to the
Form S-1").
3.2 The Second Amended and Restated By-Laws of the Company effective
as of January 26, 2000 are filed herewith as Exhibit 3.2.
10.45 Form of Indemnification Agreement between the Company and its
Directors is filed herewith as Exhibit 10.45.
27.1 Financial Data Schedule is filed herewith as Exhibit 27.1.
(b) Reports on Form 8-K during the quarter ended February 26, 2000. The
registrant filed the following Current Reports on Form 8-K during the
quarter ended February 26, 2000:
1. On January 4, 2000 , the Company filed a Current Report on Form
8-K announcing that on December 22, 1999 the Nasdaq Stock Market
had decided to delist the Company's securities
22
as of the closing of business that day from the Nasdaq SmallCap
Market. The Company's stock became eligible to trade on the OTC
Bulletin Board commencing on December 23, 1999.
23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE SWITZERLAND, INC.
Date: April 11, 2000 /s/ Patrick J. Hopper
---------------------
Patrick J. Hopper
Chief Financial Officer,
Vice President and Treasurer
[Authorized Officer and Principal Financial
and Accounting Officer]