UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended October 29, 1995 Commission File No. 1-10952
DUTY FREE INTERNATIONAL, INC.
----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 52-1292246
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Copps Hill Road, Ridgefield, Connecticut
-------------------------------------------
(Address of principal executive offices)
06877
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(Zip Code)
Registrant's telephone number, including area code: 203-431-6057
------------
Indicate by checkmark 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 for 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 November 30, 1995, 27,263,155 shares of $.01 par value common stock of
the registrant were outstanding.
Page 1 of 17
Exhibit is on Page 17
<PAGE>
DUTY FREE INTERNATIONAL, INC.
October 29, 1995
INDEX
Part I. Financial Information Page
------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
October 29, 1995 (unaudited) and
January 29, 1995
Consolidated Statements of Earnings 4
(unaudited) for the three and nine months
ended October 29, 1995 and October 31, 1994
Consolidated Statement of Stockholders' 5
Equity (unaudited) for the nine months
ended October 29, 1995
Consolidated Statements of Cash Flows 6
(unaudited) for the nine months
ended October 29, 1995 and October 31, 1994
Notes to Consolidated Financial 7-8
Statements (unaudited)
Item 2. Management's Discussion and Analysis 9-14
of Financial Condition and Results of Operations
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE>
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<S> <C> <C>
October 29, January 29,
1995 1995
------------ -----------
(unaudited) (note 1)
Assets
------
Current assets:
Cash and cash equivalents $ 48,929 $ 31,353
Short-term investments (fair value of
$14,959 and $13,010, respectively) 15,088 13,086
Receivables:
Trade receivables, less allowance for
doubtful accounts of $932 and $795 21,151 20,183
Other 11,809 11,400
--------- ---------
32,960 31,583
--------- ---------
Merchandise inventories 103,550 95,112
Prepaid expenses and other current assets 7,707 9,962
--------- ---------
Total current assets 208,234 181,096
Long-term investments (fair value of
$2,865 and $9,500, respectively) 2,850 9,653
Property and equipment, net 91,539 82,533
Excess of cost over net assets of
subsidiaries acquired, net 65,413 64,682
Other intangible assets, net 24,997 25,571
Other assets, net 21,138 23,607
--------- ---------
$ 414,171 $ 387,142
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 2,339 $ 2,611
Accounts payable, trade 44,910 30,964
Other current liabilities 35,860 33,525
--------- ---------
Total current liabilities 83,109 67,100
Long-term debt, excluding current
maturities 118,422 115,798
Other liabilities 3,170 3,093
--------- ---------
Total liabilities 204,701 185,991
--------- ---------
Stockholders' equity:
Common stock, par value $.01
per share. Authorized 75,000,000
shares; issued and outstanding
27,262,571 and 27,243,550 shares,
respectively 273 272
Additional paid-in capital 80,222 80,121
Foreign currency translation
adjustments -- (603)
Retained earnings 128,975 121,361
--------- ---------
Total stockholders' equity 209,470 201,151
--------- ---------
$ 414,171 $ 387,142
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Form 10-Q
Page 4
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
Oct. 29,1995 Oct. 31, 1994 Oct. 29, 1995 Oct. 31, 1994
------------ ------------- ------------- -------------
(in thousands, except
earnings per share)
Net Sales $145,181 $144,856 $384,888 $365,340
Cost of sales 83,083 86,109 220,288 220,273
-------- -------- -------- --------
Gross profit 62,098 58,747 164,600 145,067
Advertising, storage and other
operating income 1,065 1,088 3,466 3,488
-------- -------- -------- --------
63,163 59,835 168,066 148,555
Selling, general and
administrative expenses 52,630 51,276 145,280 128,427
Restructuring expenses -- 7,571 -- 7,571
Revaluation of intangible assets -- 46,002 -- 46,002
-------- -------- -------- --------
Operating income (loss) 10,533 (45,014) 22,786 (33,445)
Other income (expense):
Interest income 649 692 1,891 2,664
Interest expense (2,175) (2,375) (6,526) (6,755)
Other, net 70 93 421 809
-------- -------- -------- --------
(1,456) (1,590) (4,214) (3,282)
-------- -------- --------
Earnings (loss) before
income taxes 9,077 (46,604) 18,572 (36,727)
Income tax expense (benefit) 3,358 (12,066) 6,871 (8,412)
-------- -------- -------- --------
Net earnings (loss) $ 5,719 $(34,538) $ 11,701 $(28,315)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share $ 0.21 $ (1.27) $ 0.43 $ (1.04)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number
of shares outstanding 27,251 27,213 27,246 27,221
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Form 10-Q
Page 5
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended October 29, 1995
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C>
Foreign
Additional currency Total
Common stock paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
-------- ------ --------- ----------- -------- -------------
Balance at January 29, 1995 27,244 $272 $80,121 $(603) $121,361 $201,151
Dividends ($0.15 per share) -- -- -- -- (4,087) (4,087)
Change in foreign currency
translation adjustment (note 5) -- -- -- 603 -- 603
Exercise of common stock options 19 1 101 -- -- 102
Net earnings -- -- -- -- 11,701 11,701
------ ------ -------- ---------- -------- --------
Balance at October 29, 1995 27,263 $273 $80,222 $ 0 $128,975 $209,470
------ ------ -------- ---------- -------- --------
------ ------ -------- ---------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Form 10-Q
Page 6
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<C> <C>
Nine Months Ended
-----------------------------
Oct. 29, 1995 Oct. 31, 1994
------------- -------------
(in thousands)
Cash flows from operating activities:
Net earnings (loss) $ 11,701 $ (28,315)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Revaluation and write-off of assets -- 47,790
Depreciation and amortization of
property and equipment 6,107 4,778
Other amortization 4,291 6,249
Provision for deferred income taxes 2,221 (14,639)
Changes in operating assets and
liabilities:
Accounts receivable (1,377) (1,444)
Merchandise inventories (7,111) (8,093)
Prepaid expenses and other current
assets 983 785
Accrued restructuring expenses (2,174) 5,577
Accounts payable, trade 13,949 11,900
Other current liabilities 5,646 5,436
Other (16) (854)
-------- --------
Net cash provided by operating
activities 34,220 29,170
-------- --------
Cash flows from investing activities:
Purchases of investments (24,858) (31,067)
Maturities of investments 29,535 37,931
Additions to property and equipment (8,499) (27,308)
Acquisitions of businesses, net of
cash acquired (5,050) (60,598)
Investments in and advances to
affiliates (539) (3,439)
Other (313) 1,694
-------- --------
Net cash used in investing
activities (9,724) (82,787)
-------- --------
Cash flows from financing activities:
Payment of borrowings (3,460) (14,127)
Dividends paid (4,087) (4,083)
Other 627 (536)
-------- --------
Net cash used in financing
activities (6,920) (18,746)
-------- --------
Net increase (decrease) in cash and
cash equivalents 17,576 (72,363)
Cash and cash equivalents at beginning
of period 31,353 99,669
-------- --------
Cash and cash equivalents at end of
period $ 48,929 $ 27,306
-------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Form 10-Q
Page 7
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements included herein do not include
all information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. For further information, such as the significant accounting
policies followed by the Company, refer to the notes to consolidated
financial statements set forth in the Company's annual report for the year
ended January 29, 1995.
In the opinion of management, the consolidated financial statements
include all necessary adjustments (consisting of normal recurring
accruals) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented.
The results of operations for the periods ended October 29, 1995 are
not necessarily indicative of the operating results to be expected for the
full year.
The balance sheet at January 29, 1995 has been derived from the
audited financial statements of the Company at that date.
(2) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Long-term investments in
affiliates in which the Company does not have a majority interest or
control are accounted for by the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(3) Earnings Per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period.
(4) Foreign Exchange Forward Contracts
The only financial derivatives used by the Company are foreign
exchange forward contracts. The Company had approximately $13,544,000 of
foreign exchange forward contracts outstanding at October 29, 1995 to
purchase British pounds, French francs, deutschmarks and Swiss francs.
The contracts outstanding at October 29, 1995 mature at various dates in
fiscal 1996. The fair values of these contracts were $13,759,000 as of
October 29, 1995. Fair values were estimated by obtaining quotes from
banks assuming all contracts were purchased on October 29, 1995.
(5) Restructuring
During the first nine months of fiscal 1996, the Company closed all
five of its Airport Division retail locations in Toronto, Canada, two
small speciality stores at airports in Bangor, Maine and Burlington,
Vermont, and sold its wholesale operations in Carson, California. The
Company's wholesale operations in Seattle, Washington, the only location
scheduled to be closed under the restructuring plan that has not been
closed as of October 29, 1995, is expected to be sold in the fourth
quarter of the current fiscal year. There were no material adjustments to
restructuring costs during the nine months ended October 29, 1995.
<PAGE>
Form 10-Q
Page 8
The Company paid approximately $2,174,000 relating to restructuring
obligations during the nine months ended October 29, 1995 which consisted
of $1,238,000 for employee severance and other arrangements, $785,000 to
terminate property leases and rent for closed stores, and $151,000 for
miscellaneous other expenses. As of October 29, 1995, remaining payments
of $2,358,000 are expected to be paid for obligations incurred pursuant to
the restructuring plan. As of October 29, 1995, 190 store and
administrative employees have been terminated under the restructuring
plan. Approximately 210 store and administrative employees in total will
have been terminated when the restructuring is completed.
Net sales and operating income/(losses) of the stores and business
locations closed or scheduled to be sold under the restructuring plan were
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
Oct. 29, 1995 Oct. 30, 1994 Oct. 29, 1995 Oct. 30, 1994
------------- ------------- ----------------- -----------------
Net Sales $1,490,000 $3,628,000 $4,556,000 $11,002,000
Operating Income/
(losses) $ 39,000 $ (770,000) $ 12,000 $(1,995,000)
</TABLE>
(6) Line of Credit and Letter of Credit Facility
On May 26, 1995, the Company signed a fully committed $75,000,000
revolving line of credit and letter of credit facility expiring in May
1998. Borrowings under the agreement bear interest at a rate selected by
the Company based on the prime rate, federal funds rate or the London
Interbank Offered Rate. The credit facility contains covenants which
require, among other things, maintenance of minimum tangible net worth, as
defined, and certain financial ratios. There were no borrowings under the
facility as of October 29, 1995. Currently, the Company has no plans to
make any borrowings under the facility.
(7) Accounting for Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation", which is effective for fiscal years beginning after
December 15, 1995 and for transactions occurring after December 15, 1995.
The Statement defines a fair value based method of accounting for an
employee stock option or similar equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. The Statement encourages all entities to adopt the
fair value method of accounting for an employee stock option or similar
equity instrument; however, it allows an entity to continue to measure
compensation costs for stock options or similar equity instruments using
the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation costs are the excess, if any, of the
quoted market price of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock. Entities
electing to remain with the accounting in Opinion 25 must make proforma
disclosure of net income and earnings per share as if the fair value based
method of accounting had been applied. The Company has elected to
continue to measure compensation costs for stock options or similar equity
instruments using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25 with proforma disclosure of net income
and earnings per share as if the fair value based method of accounting had
been applied.
<PAGE>
Form 10-Q
Page 9
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
- - ---------------------
A total pre-tax charge to earnings of $53,573,000 ($38,935,000 after
tax) was taken in the quarter ended October 31, 1994. This charge
included $7,571,000 for restructuring expenses and a write-down of
intangible asset value of $46,002,000 resulting from a change to a fair
value method of evaluating the recoverability of intangible assets.
Net earnings were $5,719,000, or $0.21 per share, for the quarter
ended October 29, 1995, an increase of $1,322,000 or 30.1% from
$4,397,000, or $0.16 per share, for the quarter ended October 31, 1994
before restructuring and revaluation charges. Net earnings were
$11,701,000, or $0.43 per share, for the nine months ended October 29,
1995, an increase of $1,081,000 or 10.2% from $10,620,000, or $0.39 per
share, for the nine months ended October 31, 1994 before restructuring and
revaluation charges. The increases for both periods reflect the
successful execution of the Company's cost containment programs as well as
sales increases by the Inflight, Airport and Northern Border Divisions.
The Inflight Division's net earnings increased significantly for both
periods when compared to the same periods in the prior year due to sales
increases resulting from increases in the number of foreign travelers to
the United States and an increase in the average amount of duty free
merchandise purchased from the Company by travelers on-board international
airlines. The Division's gross profit percentage increased for both
periods when compared to the prior year due primarily to a significant
increase, in absolute dollars and as a percentage of the Division's total
sales, in duty free sales made on-board international airlines, which
sales generally have higher profit margins than sales of amenity kits and
wholesale sales to airlines. The Inflight Division's financial results for
the nine months ended October 31, 1994 included only two quarters, because
Inflight was purchased on May 1, 1994. The Northern Border Division's net
earnings for both periods increased significantly from the same periods in
the prior year due primarily to expense reductions resulting from the
restructuring plan, a decrease in amortization expense resulting from the
intangible asset revaluation, and the Company's continued efforts to
increase the average amount of duty free merchandise purchased from the
Company by customers. The above was partially offset by the continued
negative trend in traffic across the United States/Canada border during
the current year. The Airport Division's net earnings increased
significantly for both periods when compared to the same periods in the
prior year due primarily to an increase in sales resulting from an
increase in foreign travelers to the United States during the current year
and new store openings, the closing of unprofitable locations under the
restructuring plan, and a decrease in amortization expense resulting from
the intangible asset revaluation. During the third quarter, the Airport
Division's sales and net earnings were adversely impacted by the severe
hurricanes on the Caribbean islands of St. Thomas and St. Martin. As
cruise ship operations to this region resume for the 1995/1996 season,
management anticipates a return to normal sales levels. Management
expects that fourth quarter fiscal 1996 sales and earnings on these
islands will be adversely affected by reduced levels of cruise ship travel
to these islands. Management is evaluating its business interruption
insurance and the damages to property and inventory and expects to
finalize the effects of such damage during the fourth quarter. The
Company believes that the effects will not be material to its financial
position and results of operations and that reserves charged to the third
quarter fiscal 1995 results of operations are adequate to cover any
potential losses.
<PAGE>
Form 10-Q
Page 10
The increases in net earnings for the Inflight, Northern Border and
Airport Divisions were partially offset by a substantial decrease in the
Southern Border Division's sales and net earnings during both periods as
a result of the significant devaluation of the Mexican peso versus the
U.S. dollar in December 1994. The drop in the value of the peso
destabilized the Mexican economy and increased the costs of the Company's
products for Mexican customers. The Southern Border Division reduced its
selling, general and administrative expenses by approximately $1,201,000
and $3,883,000 during the three and nine months ended October 29, 1995,
respectively, versus the comparable periods in the prior year. However,
these expense reductions were more than offset by a $8,238,000 and
$32,111,000 decrease in the Southern Border Division's net sales during
the quarter and nine months ended October 29, 1995, respectively, versus
the same periods in the prior year. The expense reductions related
primarily to lower employee and other operating expenses resulting from
employee terminations and a decrease in the number of hours stores are
open, and reductions of advertising and promotional expenses. The
decrease in advertising and promotional expenses is not expected to impact
sales due to the significant reduction in the number of customers in the
Southern Border market resulting from the peso devaluation. The
devaluation is expected to have a significant negative impact on the
Division's sales and earnings during the fourth quarter of fiscal 1996.
The decrease in the Southern Border Division's fourth quarter sales and
earnings will have more of an impact on the Company's fourth quarter
financial results than prior quarters, because it is the Southern Border
Division's busiest time of year and is a relatively slower period for the
Northern Border, Airport and Inflight Divisions. The Company will consider
further reductions of store hours and other cost reduction measures if
current sales trends continue.
Below are explanations of significant variances from the prior year
by income statement line item.
Net Sales
- - ---------
The following table sets forth, for the periods indicated, the net
sales and the percentage of total net sales for each of the Company's
divisions and the period to period change in such sales:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
(in thousands, except for percentages)
--------------------------------------
Increase/(Decrease)
Divisional Three Months Ended
Net Sales October 29, 1995 October 31, 1994 10/29/95 vs. 10/31/94
- - ----------- ---------------- ---------------- ---------------------
Border:
Southern $ 28,279 19.5% $ 36,517 25.2% $(8,238) (22.6)%
Northern 26,532 18.3 23,627 16.3 2,905 12.3 %
Inflight 48,008 33.0 42,170 29.1 5,838 13.8 %
Airport 26,885 18.5 24,216 16.7 2,669 11.0 %
Diplomatic
and Wholesale 15,477 10.7 18,326 12.7 (2,849) (15.5)%
--------- -------- -------
$145,181 100.0% $144,856 100.0% $ 325 0.2 %
--------- -------- -------
--------- -------- -------
</TABLE>
<PAGE>
Form 10-Q
Page 11
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended
(in thousands, except for percentages)
-------------------------------------
Increase/(Decrease)
Divisional Nine Months Ended
Net Sales October 29, 1995 October 31, 1994 10/30/95 vs. 10/31/94
- - ----------- ---------------- ---------------- ---------------------
Border:
Southern $ 71,255 18.5% $103,366 28.3% $(32,111) (31.1)%
Northern 63,516 16.5 60,601 16.6 2,915 4.8 %
Inflight 130,747 34.0 82,153 22.5 48,594 59.2 %
Airport 76,475 19.9 68,295 18.7 8,180 12.0 %
Diplomatic
and Wholesale 42,895 11.1 50,925 13.9 (8,030) (15.8)%
-------- -------- --------
$384,888 100.0% $365,340 100.0% $ 19,548 5.4 %
-------- -------- --------
-------- -------- --------
</TABLE>
The significant decreases in the Southern Border Division's sales for
the three and nine months ended October 29, 1995 were due to the
devaluation of the Mexican peso versus the U.S. dollar in December 1994
which destabilized the Mexican economy and increased the costs of the
Company's products for Mexican customers. The devaluation is expected to
have a significant negative impact on the Division's sales during the
fourth quarter of fiscal 1996. The Inflight Division's sales increased by
13.8% for the quarter ended October 29, 1995 when compared to the same
period in the prior year due primarily to increases in the number of
foreign travelers to the United States and in the average amount of duty
free merchandise purchased from the Company by travelers on-board
international airlines during the current fiscal year. The Inflight
Division's sales increased by 59.2% for the nine months ended October 29,
1995 when compared to the same period in the prior year due primarily to
Inflight having only two quarters of sales in the prior year's results
(Inflight was purchased on May 1, 1994) and the same reasons given above
for the increases in the third quarter of the current fiscal year. The
Northern Border Division's comparable store sales (excluding sales of
stores closed under the restructuring plan and two stores purchased in
July 1995) increased by 4.7% and 2.7% for the quarter and nine months
ended October 29, 1995, respectively, when compared to the same periods in
the prior year. The improvement in sales trends for the Northern Border
Division from fiscal 1995 is due primarily to the anniversary of the
decrease in Canadian tobacco taxes which occurred in the first quarter of
fiscal 1995 and increases in average transaction spend amounts by
customers resulting from the Division's marketing and promotion programs.
The above was partially offset by the continued negative trend in Canadian
traffic across the United States/Canada border during the current year.
The Airport Division's sales increases were due primarily to increases in
the number of foreign travelers to the United States, and store openings
at the new Denver International Airport, Boston's Logan International
Airport and San Juan International Airport in Puerto Rico during fiscal
1996. The above was partially offset by sales decreases due to store
closings under the Company's restructuring plan and the effects of the
severe hurricanes on the Company's St. Thomas and St. Martin locations.
Management expects that fourth quarter fiscal 1996 sales at the St. Thomas
and St. Martin locations will be adversely affected by reduced levels of
cruise ship travelers to these islands. As cruise ship operations to
these islands resume for the 1995/1996 season, management anticipates a
gradual return to normal sales levels. The Diplomatic and Wholesale
Division's sales decreased by 15.5% and 15.8% for the quarter and nine
months ended October 29, 1995, respectively, when compared to the same
periods in the prior year due primarily to the Company continuing to de-
emphasize what would have been relatively low gross margin sales in this
Division. Net sales of all the stores and businesses closed or scheduled
to be sold under the restructuring plan were $1,490,000 and $4,556,000 for
the quarter and nine months ended October 29, 1995, respectively, and
$3,628,000 and $11,002,000 for the quarter and nine months ended October
31, 1994, respectively.
<PAGE>
Form 10-Q
Page 12
Cost of Sales and Gross Profit
- - ------------------------------
Cost of sales includes the cost of merchandise purchased from
suppliers and the cost of distribution to store locations. Gross profit,
as a percentage of net sales, increased to 42.8% in the third quarter of
fiscal 1996 from 40.6% in the third quarter of last year. For the nine
months ended October 29, 1995, gross profit, as a percentage of net sales,
increased to 42.8% from 39.7% for the same period in the prior year. The
increases for the quarter and nine months were due primarily to increases
in the Inflight, Airport and Northern Border Divisions' net sales, and
significant decreases in the Southern Border and Diplomatic and Wholesale
Divisions' net sales in the current year versus the same periods in the
prior year. The Inflight, Airport and Northern Border Divisions have
significantly higher gross profit margins than the Southern Border and
Diplomatic and Wholesale Divisions. Also, the Inflight Division's gross
profit percentage increased during the current year when compared to the
same periods in the prior year. The increases were due primarily to
significant increases, in absolute dollars and as a percentage of the
Division's total sales, in duty free sales made on-board international
airlines, which generally have higher gross profit margins than amenity
kit and wholesale sales to airlines.
The restructuring plan, implemented in fiscal 1995, did not and will
not have a material effect on the Company's gross profit.
Selling, General, and Administrative Expenses
- - ---------------------------------------------
Selling, general and administrative expenses, as a percentage of net
sales, increased to 36.3% in the third quarter of fiscal 1996 from 35.4%
in the third quarter of fiscal 1995. For the nine months ended October
29, 1995, selling, general and administrative expenses, as a percentage of
net sales, increased to 37.7% from 35.2% for the nine months ended October
31, 1994. The increases were due primarily to the following factors:
* A significant increase in the Inflight Division's net sales in
the current year, as a percentage of the Company's total
sales, when compared to the prior year. (Inflight was
purchased May 1, 1994). The Inflight Division has selling,
general and administrative expenses, as a percentage of net
sales, higher than the Company average due primarily to
commission expenses paid to airlines and the amortization of
intangible assets related to the purchase.
* An increase in the Airport Division's net sales in the current
year, as a percentage of the Company's total sales, when
compared to the prior year. The Airport Division's operating
expenses, as a percentage of net sales, are higher than the
Company's other Divisions due to rents based on sales and
other variable expenses.
* Significant decreases in the Southern Border Division's net
sales in the current year versus the prior year. The Southern
Border Division has selling, general and administrative
expenses, as a percentage of net sales, significantly lower
than the Company average. The Company reduced the Southern
Border Division's selling, general and administrative expenses
by approximately $1,201,000 during the third quarter of fiscal
1996 and $3,883,000 for the nine months ended October 29, 1995
when compared to the same periods in the prior year. However,
these expense reductions were more than offset by a $8,238,000
and $32,111,000 decrease in the Division's net sales during
the quarter and nine months ended October 29, 1995,
respectively, when compared to the same periods in the prior
year. The expense reductions related primarily to lower
employee and other operating expenses resulting from employee
terminations and a reduction in the number of hours stores are
open, and reductions of advertising and promotion expenses.
The decrease in advertising and promotion expenses is not
expected to impact sales in view of the significant reduction
in the number of customers in the Southern Border market. The
Company will consider further reductions of store hours and
other cost reduction measures if current sales trends
continue.
<PAGE>
Form 10-Q
Page 13
The restructuring plan and the revaluation of intangible assets in
the third quarter of fiscal 1995 reduced the Company's selling, general
and administrative expenses by approximately $2,400,000 in the third
quarter of fiscal 1996 and $7,200,000 for the nine months ended October
29, 1995 when compared to the same periods in the prior year.
Other Income (Expense)
- - ---------------------
Interest income decreased by $773,000 for the nine months ended
October 29, 1995 when compared to the same periods in the prior year.
There was a small decrease for the quarter. The decrease for the nine
months was due primarily to a decrease in funds available for investment
during most of the current year when compared to the prior year resulting
from the purchase of Inflight in fiscal 1995 for approximately
$73,300,000. Other non-operating income was virtually the same for the
quarter ended October 29, 1995 when compared to the same period in the
prior year. Other non-operating income decreased by $388,000 for the nine
months ended October 29, 1995 when compared to the same period in the
prior year due primarily to a $900,000 gain on the sale of the Company's
15% interest in Natural Energy Unlimited in the first quarter of last year
partially offset by customs penalties at the Company's Seattle, Washington
operations incurred in the prior year.
Income Taxes
- - ------------
Income taxes, as a percentage of earnings before income taxes, was
37.0% for the quarter and nine months ended October 29, 1995 virtually
unchanged from the same periods in fiscal 1995 when the charges and tax
benefits from the intangible revaluation and restructuring are excluded
from the prior year.
RESTRUCTURING
- - -------------
During the first nine months of fiscal 1996, the Company closed all
five of its Airport Division retail locations in Toronto, Canada, two
small speciality stores at airports in Bangor, Maine and Burlington,
Vermont, and sold its wholesale operations in Carson, California. The
Company's wholesale operations in Seattle, Washington, the only location
scheduled to be closed under the restructuring plan that has not been
closed as of October 29, 1995, is expected to be sold in the fourth
quarter of the current fiscal year. There were no material adjustments to
restructuring costs during the nine months ended October 29, 1995.
The Company paid approximately $2,174,000 relating to restructuring
obligations during the nine months ended October 29, 1995 which consisted
of $1,238,000 for employee severance and other arrangements, $785,000 to
terminate property leases and rent for closed stores, and $151,000 for
miscellaneous other expenses. As of October 29, 1995, remaining payments
of $2,358,000 are expected to be paid for obligations incurred pursuant to
the restructuring plan. As of October 29, 1995, 190 store and
administrative employees have been terminated under the restructuring
plan. Approximately 210 store and administrative employees in total will
have been terminated when the restructuring is completed.
Net sales and operating income/(losses) of the stores and business
locations closed or scheduled to be sold under the restructuring plan were
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
Oct. 29, 1995 Oct. 30, 1994 Oct. 29, 1995 Oct. 30, 1994
------------- ------------- ----------------- -----------------
Net Sales $1,490,000 $3,628,000 $4,556,000 $11,002,000
Operating Income/
(losses) $ 39,000 $ (770,000) $ 12,000 $(1,995,000)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
On May 26, 1995, the Company signed a fully committed $75,000,000
revolving line of credit and letter of credit facility expiring in May
1998. Borrowings under the agreement bear interest at a rate selected by
the Company based on the prime rate, federal funds rate or the London
Interbank Offered Rate. The credit facility contains covenants which
require, among other things, maintenance of minimum tangible net worth, as
defined, and certain financial ratios. There were no borrowings under the
facility as of October 29, 1995. Currently, the Company has no plans to
make any borrowings under the facility.
<PAGE>
Form 10-Q
Page 14
In March 1995, Standard and Poor's downgraded its rating of the
Company's $115,000,000 senior notes from BBB to BBB-, and in July 1995,
Moody's Investor Services downgraded its rating of the Company's
$115,000,000 senior notes from Bal to Ba2, primarily in response to the
devaluation of the Mexican peso. The downgrades will not affect the
Company's current borrowing costs under the senior notes, and the
Company's senior notes remain investment grade according to Standard and
Poor's. However, the downgrades will increase the costs of any borrowings
pursuant to the provisions of the $75,000,000 revolving line of credit and
letter of credit facility.
Net cash provided by operating activities was $34,220,000 for the
nine months ended October 29, 1995. Working capital was $125,125,000 as
of October 29, 1995, an increase of $11,129,000 from $113,996,000 as of
January 29, 1995. The Company believes its existing funds, cash provided
by operating activities and available borrowings will be sufficient to
meet its current liquidity and capital requirements.
REGULATION AND ECONOMIC FACTORS AFFECTING THE DUTY FREE INDUSTRY
- - ----------------------------------------------------------------
The Company's sales and gross profit margins are affected by factors
specifically related to the duty free industry. Most countries have
allowances on the import of duty free goods. Decreases in the duty free
allowances of foreign countries or stricter eligibility requirements for
duty free purchases, as well as decreases in tax and duty rates imposed by
foreign jurisdictions (particularly in Canada and Mexico) could have a
negative effect on the Company's sales and gross profit margins.
Conversely, increases could have a positive effect on the Company's sales
and gross profit.
The principal customers of the Company are residents of foreign
countries whose purchases of duty free merchandise may be affected by
trends in the economies of foreign countries and changes in the value of
the U.S. dollar relative to their own currencies. Any significant
increase in the value of the U.S. dollar relative to the currencies of
foreign countries, particularly Canada, Mexico and Japan, could have an
adverse impact on the number of travelers visiting the United States and
the dollar amount of duty free purchases made by them from the Company.
A significant increase in gasoline prices or a shortage of fuel may also
reduce the number of international travelers and thereby adversely affect
the Company's sales. In addition, the Company imports a significant
portion of its products from Western Europe and Canada at prices
negotiated either in U.S. dollars or foreign currencies. As a result, the
Company's costs are affected by fluctuations in the value of the U.S.
dollar in relation to major Western European and Canadian currencies. A
decrease in the purchasing power of the U.S. dollar relative to other
currencies causes a corresponding increase in the purchase price of
products. The Company enters into foreign exchange forward contracts as
a hedge against a portion of its exposure to currency fluctuations on
commitments to purchase merchandise.
<PAGE>
Form 10-Q
Page 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
With respect to the action commenced by certain former stockholders
of UETA, Inc., against the Company and Goldman, Sachs & Co., in the
District Court, 285th Judicial District, Bexar County, Texas, (which was
described in the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1995), the Supreme Court of Texas, on October 17, 1995,
denied the plaintiffs leave to file a petition for a writ of mandamus.
Plaintiffs were seeking review of the District Court's order (entered
January 24, 1995) which abated and stayed the District Court action
pending the final determination of the plaintiff's claims against the
defendants in Delaware. On March 1, 1995, the Texas Court of Appeals,
Fourth District (San Antonio) had denied the plaintiffs leave to file a
similar petition. In November, 1995, plaintiffs filed a motion in the
District court seeking reconsideration of its original order abating and
staying the action.
The United States Customs Services is investigating the operations
of a subsidiary's bonded warehouse in Seattle, Washington. In addition to
the notice of liquidated damages issued by U.S. Customs Service that were
referred to in the Registrants's Annual Report on form 10-K for the fiscal
year ended January 29, 1995 (Item 3 Legal Proceedings), the Customs
Service has issued a penalty notice in the amount of $145,731 plus duties
in the amount of $36,433 which supersedes the estimated pre-penalty notice
referred to in the Registrants 10-Q for the Quarter Ended April 30, 1995
(Item 1 Legal Proceedings).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) The Company did not file a report on Form 8-K for the quarter
ended October 29, 1995.
<PAGE>
Form 10-Q
Page 16
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.
DUTY FREE INTERNATIONAL, INC.
Date: 12/12/95 /s/ Gerald F. Egan
------------ ------------------
Gerald F. Egan
Vice President-Finance and
Chief Financial Officer
<PAGE>
Form 10-Q
Page 17
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000820756
<NAME> DUTY FREE INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-END> OCT-29-1995
<CASH> 48,929
<SECURITIES> 15,088
<RECEIVABLES> 22,083
<ALLOWANCES> 932
<INVENTORY> 103,550
<CURRENT-ASSETS> 208,234
<PP&E> 130,282
<DEPRECIATION> 38,743
<TOTAL-ASSETS> 414,171
<CURRENT-LIABILITIES> 83,109
<BONDS> 118,422
<COMMON> 273
0
0
<OTHER-SE> 209,197
<TOTAL-LIABILITY-AND-EQUITY> 414,171
<SALES> 384,888
<TOTAL-REVENUES> 388,354
<CGS> 220,288
<TOTAL-COSTS> 220,288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 539
<INTEREST-EXPENSE> 6,526
<INCOME-PRETAX> 18,572
<INCOME-TAX> 6,871
<INCOME-CONTINUING> 11,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,701
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
