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DFI DUTY FREE INTERNATIONAL AT-A-GLANCE
[MAP]
INTERNATIONAL LOCATIONS
Caribbean
Hong Kong
Puerto Rico
Singapore
United Kingdom
COMPANY PROFILE
Founded in 1983, Duty Free International, Inc. is the leading operator of duty
free and retail stores along the United States' Canadian and Mexican borders
and in international airports throughout the United States. We are also a prime
concessionaire and supplier of merchandise to international airlines' inflight
duty free shops. Additionally, DFI is the largest supplier of duty free
merchandise to U.S.-based foreign diplomats and a major supplier to merchant
and cruise ships from ports in the Northeast United States and Miami.
We sell quality brand-name merchandise such as liquor, tobacco products,
cosmetics, fragrances and luxury items at prices 20 to 60 percent below retail
prices for the same merchandise found in our travel and expatriate customers'
destination countries.
Through our AIRPORT, BORDER, DIPLOMATIC and WHOLESALE, and INFLIGHT operating
divisions, DFI currently serves travelers at 160 duty free shops and retail
operations in locations throughout the United States, Puerto Rico, the U.S.
Virgin Islands, Aruba, St. Maarten, Bonaire and Curacao. Our standard and
specialty retail businesses include shops featuring American-made merchandise;
natural personal care products boutiques; regional sports-theme shops; branded
athletic footwear and apparel shops; gourmet food and confection shops;
convenience stores; news and gift shops; book stores; currency exchanges and
gas stations.
Headquartered in Ridgefield, Connecticut, Duty Free International employs more
than 2,000 people and has been publicly-held since 1989.
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LETTER TO SHAREHOLDERS
[PHOTO]
DEAR FELLOW SHAREHOLDERS:
During fiscal 1995, Duty Free International once again achieved substantial
sales growth. These results were achieved despite the continued presence of
adverse economic factors impacting Northern border sales and earnings. We
undertook a number of management initiatives to offset regional and divisional
weaknesses going forward which clearly demonstrate our continued commitment to
diversification and maximizing value. These included continued expansion in our
Airport division, the addition of our new Inflight division, de-emphasis of the
wholesale aspect of our Diplomatic and Wholesale division, and an overall
comprehensive restructuring effort designed to maximize profitability. We also
changed the method of evaluating the recoverability of intangible assets.
OPERATING RESULTS
For the fiscal year ended January 29, 1995, net sales totaled $501,761,000,
a 33 percent increase over the prior year's sales of $376,436,000. Net
earnings for the fiscal year, excluding the after-tax effects of our
restructuring plan and the intangible assets revaluations, were $14,133,000, or
$.52 per share, compared with $27,393,000 or $1.01 per share for the prior
year.
For the fourth quarter ended January 29, 1995, net sales were $136,421,000,
up 44 percent from $94,665,000 for the same period in 1994. Net earnings for
the quarter decreased to $3,513,000 or $.13 per share, from $6,261,000 or $.23
per share for the same period a year ago.
As of January 29, 1995, total assets were $387,142,000, working capital
totaled $113,996,000, and total stockholders' equity was $201,151,000. Total
debt to total capitalization at fiscal year-end was 37.1 percent.
THE YEAR IN REVIEW
In the second quarter, we completed our purchase of Inflight Services
Group Limited, a leading concessionaire, operator and supplier of onboard duty
free merchandise to international airlines through its wholesale program and
onboard concessions. Inflight is also a major supplier of international
airlines' first class and premium class amenity kits.
The new division has already proven profitable, and was almost entirely
responsible for DFI's net sales growth during the past year. As additional
consolidation, economies of scale and synergies are realized, we expect this
division to continue to strongly impact DFI's profitability going forward.
During the third quarter, we instituted a series of management initiatives
designed to improve DFI's profitability. Following a comprehensive assessment
of each of DFI's operating businesses and their administrative functions, we
began a program of store and business closures, and workforce reductions
expected to be completed in early fiscal 1996.
When fully implemented, 23 stores and business locations, which had been
generating approximately $14,500,000 in sales annually, will be closed. These
include seven Airport, 14 Northern Border and two Diplomatic and Wholesale
division operations. These closings are expected to reduce our workforce, and
lower direct operating costs by approximately $7,400,000 annually. A pre-tax
charge to earnings of $7,571,000 was taken during the third quarter ended
October 31, 1994 as a result of these actions.
We believe this restructuring, when completed, will bring DFI near-term
improvements in profitability and enable us to focus DFI's considerable
resources on those markets which we believe offer prospects for growth and
financial returns in line with our requirements. We will continue to monitor
DFI's operating costs and seek out expense savings opportunities as we endeavor
to make DFI a more efficient company. Among these efforts was a recently
completed warehousing consolidation arising from the Inflight acquisition which
will, along with other expense reductions in our Inflight Division, yield
approximately $1,000,000 of annual savings as compared with the current
existing cost base.
Additionally, we adopted a discounted cash flow method of evaluating the
recoverability of intangible assets at the same time recognizing that the
projected profit and cash flow from certain acquired businesses will
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be below expectations set by DFI management at the time of the acquisitions.
The result was a write-down of asset value and a one-time, pre-tax charge to
earnings of $46,002,000 which was taken during the third quarter. The fiscal
year 1996 pre-tax amortization charge associated with the assets written down
would have been $3,500,000. While not impacting DFI's cash position, the
write-down will create a more appropriate and conservative balance sheet
valuation of remaining goodwill and other intangible assets.
A total pre-tax charge against earnings of $53,573,000 ($38,935,000
after-tax), resulting from the closures and new accounting method for valuing
intangible assets, was taken during DFI's third quarter.
LOOKING AHEAD
We believe the management initiatives described above and our plans to
capitalize on these and other efforts give us ample reason to be excited and
confident in our ability to continue to grow and enhance shareholder value.
At the airports we'll continue to increase our presence through strategic
alliances with major companies and expand our existing portfolio of retail
formats to maintain and broaden our appeal to airport authorities. Together
with one of our equity partners, we were the successful bidder for the lease
to operate the duty free shops at Logan International Airport in Boston,
Massachusetts. Two duty free shops were opened on March 1, 1995 and a third
shop is planned to open later in 1995. Through another of our equity
partnerships, we've designed and stocked 12 stores in the new Denver
International Airport in Colorado, which opened on February 28, 1995.
In our Border division, we are well-positioned for a rebound in the
Canadian economy, and improvement in the value of the Canadian dollar, with
leaner, financially stronger stores on the Northern border. Along the Southern
border, we have revamped stores and products to meet anticipated growth in the
numbers of customers and greater demographic mix resulting from the North
American Free Trade Agreement (NAFTA). We have also responded to the late 1994,
and continuing devaluation of the Mexican peso and resulting reduction in sales
volumes with significant expense and working capital reduction programs
designed to lessen the adverse effect on our profits and cash flow.
Our newly-completed 100,000 square foot distribution center in Miami
enables us to more aggressively pursue additional cruise business and build on
our 10 retail store presence on the passenger piers in the port of Miami. We're
focused on increasing our market share of duty free supply to cruise lines,
particularly those serving Caribbean routes, and seeking opportunities at
additional ports as cruise markets expand.
Additionally, we have begun a marketing campaign to educate Americans and
foreign visitors of the value of duty free shopping -- especially in these
economically-trying times. Increased awareness of the cost savings associated
with duty free shopping will help us achieve our goal of attracting customers
of all economic levels and encourage the highest possible average transaction
spend at each of our many and varied locations. Most importantly, we'll
continue to foster a corporate environment that encourages creativity and
risk-taking, which we believe yields improved financial performance.
Our intention is to maintain and further our position in the travel
industry to be recognized by customers and competitors alike as the leader in
duty free and travel retailing. Our goal is as simple as ever: to be a billion
dollar company that consistently achieves superior financial returns. Our
confidence in achieving this goal is matched only by our gratitude to our
shareholders, employees, customers and vendors for your continued support. Our
unwavering commitment to you is to merit this loyalty and reward it with
consistent, strong performance in the years ahead.
Sincerely,
Alfred Carfora
President and Chief Executive Officer
March 15, 1995
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AIRPORT DIVISION: FENTON HILL AMERICAN LTD.
HQ: British Airways Building/
John F. Kennedy International Airport, New York
LOCATIONS: 80 duty free and retail stores
MARKETS: 14 international airports,
the Caribbean and South Florida
As in years past, the Airport division, operating under the name Fenton Hill
American Limited, continued its record of solid sales growth and expansion, and
contributed substantially to our fiscal 1995 sales. With total sales of $92.9
million -- a 21 percent increase over fiscal 1994 sales -- Fenton Hill
accounted for 18 percent of overall sales. During the past year we recognized
strong sales input from our late 1993 and early 1994 acquisition of 10
Caribbean locations.
Fenton Hill's fine results stem directly from our commitment to focused
diversification which is successfully implemented through our portfolio
approach to airport retailing. The portfolio approach combines a wide variety
of retailing concepts in an attractive manner which is especially appealing to
airport management and domestic and foreign travelers.
Our retail mix currently includes duty free shops, specialty stores such as
The Athlete's Foot (branded athletic-wear), Bodyography (natural personal care
products) and The Sports Section (regional sports-theme shops), standard news
and gift shops and bookstores.
Additionally, through a number of equity partnerships and strategic
alliances, we are able to participate in duty free and retail concessions in a
number of other international airports. Chicago Aviation Partners, our joint
venture with McDonald's Corporation, last year developed and now manages all
the concession space at the new international terminal at Chicago's O'Hare
Airport. In affiliation with another venture partner we've designed and stocked
12 stores which opened in February 1995 in the new Denver International
Airport. And, in March 1995, we, and our venture partners, opened two new duty
free shops in Boston's Logan International Airport, with a third store
scheduled to open later in fiscal 1996. Given the success of relationships
like these, we'll continue to explore new opportunities with existing partners
and other innovative approaches.
Percent of Fiscal 1995
Consolidated Net Sales
18%
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INFLIGHT DIVISION: INFLIGHT DUTY FREE SHOP, INC.
HQ: New York, New York
LOCATIONS: 64 international
airline fleets
MARKETS: 21 onboard duty free concessions; 14 wholesale accounts from 48
operations bases in Europe, the United States, Asia/Pacific and Latin America
and the Caribbean; 29 amenity kit supplier accounts.
During the second quarter of fiscal 1995, we acquired Inflight Sales Group
Limited. A fitting complement to our existing businesses, Inflight is a leading
concessionaire, operator and supplier of onboard duty free merchandise to
international airlines through onboard concessions and a wholesale program, and
a major supplier of international airlines' first class and premium class
amenity kits.
We believe Inflight's purchase price -- $60 million in cash, $10 million in
notes and additional payments as earnings goals are achieved -- has already
been more than justified. The new division was profitable as soon as the
acquisition was completed, and with just three quarters of sales, it
contributed a substantial $121.9 million or 24 percent of consolidated fiscal
1995 sales and was almost entirely responsible for total company net sales
growth during the past year.
Inflight's three business areas contribute significantly to the division's
performance. Thirty percent of the division's sales derive from the manufacture
and marketing of amenity kits for international airlines' first class and
premium class passengers.
Another 20 to 30 percent of sales are obtained from the division's
wholesale program which provides merchandise for duty free programs which
airlines run on their international flights. The carrier runs all promotions,
manages the program and even owns the inventory which is bought from Inflight.
The remaining 30 to 50 percent of sales come from the division's
concession program through which Inflight fully operates airlines' on-board
duty free concession. We purchase products and manage every aspect of duty
free sales service on the airlines' flights, including magazine and videotape
promotions. With a percentage of total sales paid in royalties to the
airline, this program provides airlines with a risk-free means of incrementally
increasing their earnings.
Inflight has exclusive distribution agreements for various parts of the
world with many well-recognized names in the luxury products industry,
including Chanel, Christian Dior, Hermes, Mont Blanc, Yves Saint Laurent,
Elizabeth Arden and Lancaster. Additionally, it maintains warehouse and station
locations throughout the U.S., Pacific Rim, Europe and South America.
We're confident that Inflight will continue to contribute handsomely to our
overall business as air travel and airline competition grows, and as it is more
thoroughly absorbed into our operations.
Percent of Fiscal 1995
Consolidated Net Sales
24%
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BORDER SOUTH DIVISION: UETA, INC.
HQ: San Antonio, Texas
LOCATIONS: 30 duty free stores
MARKETS: 14 border crossings in Arizona, California and Texas
During the past year, UETA once again delivered on the promise we perceived
when we purchased it two years ago, contributing a whopping 29 percent of
consolidated sales. UETA's total sales were $144.6 million, an increase of 14
percent over fiscal 1994 performance -- despite a fall-off in sales toward
year-end as a result of the devaluation in the peso.
To ensure its continued solid contribution, we maintained a number of
strategies introduced during fiscal 1994 which were found to be successful. We
continued our marketing and advertising programs targeted to Mexicans working
in U.S./Mexican border plants. To better meet the purchase needs of a broader
demographic mix, we've adjusted inventories and created an enhanced value line
of products which include private label liquor and five-pack cigarette cartons.
Our store upgrade program, now completed, has given a consistent visual image
to all UETA stores.
Going forward, our intention is to meet the impact of the devalued peso
head-on. Marketing and promotion programs have been adjusted, and expense
reductions of approximately $3,800,000 annually have been effected. We'll apply
the important lessons we've learned from the ongoing recession on the northern
border to maintain the vitality of this important franchise.
Percent of Fiscal 1995
Consolidated Net Sales
29%
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BORDER NORTH DIVISION:
AMMEX TAX AND DUTY FREE SHOP
HQ: Ridgefield, Connecticut
LOCATIONS: 50 duty free and
retail stores
MARKETS: 32 border crossings in Idaho, Maine, Minnesota, Montana, New York,
North Dakota, Vermont and Washington
Sales in our northern border division, which operates under the name AMMEX Tax
and Duty Free Shops, continued to be battered by the ongoing recession in
Canada and the weak Canadian dollar. Although total sales of $73.6 million
contributed a sizable 15 percent of consolidated sales for fiscal 1995, this
total represents a 22 percent decrease from fiscal 1994 sales.
We are well-prepared for the day when the Canadian economy and dollar
rebound. In the meantime, we have directed our selling strategies toward
average transaction spend improvements. We've protected our franchise with
lower shelf prices and carefully calibrated individual store product mix to
provide maximum value to our customers. As in years past, we'll implement
marketing campaigns during peak travel months to capture customers and sales.
We've reduced overall costs by closing 14 stores at secondary crossings.
This effort has enabled us to focus our attention and resources on those
operations contributing the most to the division's overall performance. Tough
times have taught us tough lessons. We're leaner, but smarter, than ever
before.
Percent of Fiscal 1995
Consolidated Net Sales
15%
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DIPLOMATIC AND WHOLESALE DIVISION:
SAMUEL MEISEL & COMPANY, INC., LIPSCHUTZ BROTHERS, INC.,
CARISAM INTERNATIONAL CORPORATION
HQ: Glen Burnie, Maryland
LOCATIONS: Two distribution centers, four ports
MARKETS: Embassies and consulates throughout the United States, primarily in
New York and Washington, DC. Merchant and cruise ship ports in Miami,
Baltimore, New York and Philadelphia.
Last year, our Diplomatic and Wholesale division, which operates under the
names Samuel Meisel & Company, Inc., Lipschutz Brothers, Inc. and Carisam
International Corporation, contributed 14 percent of fiscal 1995 consolidated
sales with total sales of $68.8 million. This was a decrease of 12 percent from
fiscal 1994 performance which we attribute to our overall de-emphasis of
wholesale business. Nonetheless, this division continues to be the leading
domestic supplier of duty free merchandise to the foreign diplomatic community
in the United States and a major supplier to international merchant and
passenger ships from ports in Miami, Baltimore, New York and Philadelphia.
Our newly-completed 100,000 square foot administrative, wholesale and
distribution facility in Miami has enabled us to decrease our rental
requirements, consolidate our administrative functions and increase our
inventory capacity -- all of which has improved our purchasing power.
To further augment the impact of this effort, we've continued to
de-emphasize the less profitable wholesale aspect of the division's efforts to
dedicate more space and resources on greater revenue generating retail avenues.
With our newly strengthened position, we're focused on building on our 10
retail store presence on the passenger piers in the port of Miami, and more
aggressively increasing our market share of duty free supply to cruise lines,
particularly those serving Caribbean routes, and seeking opportunities at
additional ports as cruise markets expand.
Percent of Fiscal 1995
Consolidated Net Sales
14%
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REPORT OF MANAGEMENT
To Our Shareholders:
The management of Duty Free International, Inc. has prepared the financial
statements and related information contained in this Annual Report. The
Company's financial statements have been prepared in conformity with generally
accepted accounting principles and using estimates, where appropriate, based on
the judgments of management. Management is responsible for the integrity and
objectivity of the financial statements and other financial information
included in this report. To meet this responsibility, management maintains a
system of internal accounting procedures and controls to provide reasonable
assurance that assets are safeguarded and that transactions are properly
executed and recorded by qualified personnel. The system of procedures and
controls is regularly reviewed by officers, key employees of the Company and
the Company's Internal Audit department.
The Audit Committee of the Board of Directors is composed solely of outside
directors. The Committee meets periodically and, when appropriate, separately,
with representatives of the independent auditors, personnel from the Company's
Internal Audit department and officers of the Company to review their
activities. The independent auditors have full and free access to the Audit
Committee and meet with it to discuss auditing, financial reporting and other
matters.
The Audit Committee recommends, and the Board of Directors appoints, the
independent auditors.
Alfred Carfora Gerald F. Egan
President and Vice President Finance and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Duty Free International, Inc.:
We have audited the accompanying consolidated balance sheets of Duty Free
International, Inc. and subsidiaries as of January 29, 1995 and January 31,
1994 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
January 29, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Duty Free
International, Inc. and subsidiaries as of January 29, 1995 and January 31,
1994 and the results of their operations and their cash flows for each of the
years in the three-year period ended January 29, 1995, in conformity with
generally accepted accounting principles.
As discussed in the accompanying notes to the financial statements, the Company
changed its method of evaluating the recoverability of intangible assets.
Because the change in accounting principle is inseparable from the change in
estimate, it has been accounted for as a change in estimate in the year ended
January 29, 1995.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
February 27, 1995
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Duty Free International, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ACQUISITIONS IN FISCAL 1995
On May 1, 1994, the Company purchased Inflight Sales Group Limited
("Inflight"), and certain non-competition rights, for approximately
$73,300,000. Inflight is the leading concessionaire and supplier of on-board
duty free merchandise to international airlines and is a leading supplier of
amenity kits to international airlines for distribution to first class and
premium class travelers. Inflight currently operates the on-board duty free
concessions for over 20 international airlines, including Delta and Northwest
Airlines, and secured the rights to operate the on-board duty free concessions
for United Airlines as of April 15, 1994. In addition, through its exclusive
arrangements with certain suppliers, Inflight sells duty free merchandise to
numerous other international airlines. Inflight has significant warehouse,
distribution and administrative facilities in Miami, New York, Singapore, Hong
Kong and the United Kingdom. The Inflight operations comprise the Company's
fourth operating division.
Inflight Division operations, including amortization of intangible assets
related to the purchase, had an accretive effect on the Company's net income
during fiscal 1995.
RESULTS OF OPERATIONS
The following table presents, for the fiscal periods indicated,
certain selected financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Percent of Net Sales
Fiscal Year Ended
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JANUARY 29, January 31, January 31,
1995 1994 1993
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<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Gross Profit 39.9 39.2 40.5
Selling, general and
administrative expenses 35.5 30.1 28.0
Operating income excluding
restructuring expenses and
revaluation of intangible assets 5.4 10.5 13.7
Other income (expense) (0.9) 0.9 1.3
Net earnings excluding the
after-tax provision for
restructuring expenses and
revaluation of intangible assets 2.8 7.3 8.4
</TABLE>
FISCAL 1995 COMPARED WITH 1994
Restructuring Expenses
During the third quarter of fiscal 1995, management undertook a
restructuring plan which will include the closing of 23 stores and business
locations, and the consolidation of administrative and warehouse operations.
The Company closed 14 unprofitable or marginally profitable stores at secondary
crossings along the United States/Canada border. The closings were prompted by
the Company's experience with declining sales on the Northern Border during the
summer of 1994. Initially, the Company had believed that its Northern Border
Division sales had been adversely affected in fiscal 1993 and 1994 by cyclical
factors such as unusually inclement weather and the Canadian economic
recession, as well as the reduced purchasing power of the Canadian dollar. Its
experience during last summer's important sales season with further significant
reductions in sales, following the Canadian government's precipitous and
dramatic reduction in tobacco taxes in February 1994, led it to conclude that
the changes in sales on the Northern Border were to be of a more long-term
nature. Seven unprofitable Airport Division retail locations are scheduled to
be closed, which include all five of the Company's stores in Toronto, Canada
and two other smaller specialty stores at airports in Bangor, Maine and
Burlington, Vermont. These stores are scheduled to be closed due to current and
projected sales levels not being high enough to cover fixed operating costs.
Two unprofitable wholesale operations are scheduled to be closed in Seattle,
Washington and Carson, California due to the Company deemphasizing wholesale
sales during fiscal 1995, and the Company's ability to service wholesale
customers from other locations. As part of the restructuring plan, the Company
also eliminated regional manager positions in the Northern Border Division, and
will consolidate warehouse and administrative operations into the Company's new
100,000 square foot distribution and administrative center in Miami, Florida.
The Northern Border Division stores closed in September 1994. The remaining
stores and business locations are scheduled to be closed in the spring of 1995.
When fully implemented, the restructuring plan is expected to reduce the
Company's annual sales by approximately $14,500,000, reduce gross profit by
approximately $3,700,000 per year, reduce direct operating costs by
approximately $7,400,000 per year, and increase earnings before taxes by
approximately $3,700,000 a year. The restructuring plan will also reduce the
Company's store and administrative workforce by approximately 210 people.
A pre-tax charge to earnings of $7,571,000 was taken during fiscal 1995 as
a result of the restructuring. Restructuring costs include the following (in
thousands):
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<S> <C>
Termination of property leases $1,262
Abandonment of leasehold improvements
and other fixed assets 1,026
Severance and other related payments 3,559
Cumulative currency translation adjustments
related to foreign operations closed 615
Write-down of inventory below cost 503
Other 606
- - -------------------------------------------------------------------
$7,571
- - -------------------------------------------------------------------
- - -------------------------------------------------------------------
<FN>
The following methods were used to calculate the restructuring charges:
* Termination of property leases -- based on amounts due under
terminated lease agreements and agreements with lessors.
* Abandonment of leasehold improvements and other fixed assets -- net book
value of leasehold improvement and other fixed assets that cannot be
transferred to other stores/locations or sold. The Company does not expect to
receive any material proceeds from sales of the leasehold improvements and
other fixed assets.
* Severance and other related payments -- based on severance and other
agreements with employees. Severance amounts were based on years of service and
paid over the number of pay weeks owed the employees. Severance payments also
include health insurance costs for terminated employees, which were based on
the number of employees terminated and the average cost per employee for health
insurance coverage for one year, less premiums to be paid by terminated
employees.
* Cumulative currency translation adjustments related to foreign operations
closed -- relates to the Company's Toronto airport operations. Based on January
29, 1995 U.S. dollar/Canadian dollar exchange rate. These operations will be
closed in February 1995.
* Write-down of inventory below cost -- estimate of expected sales
below cost for close-out sales.
</TABLE>
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The Company will pay approximately $5,427,000 in cash relating to
restructuring costs. Approximately $2,144,000 of the restructuring costs relate
to non-cash write-offs of recorded assets. As of January 29, 1995, the Company
has closed 14 of its Northern Border stores and eliminated certain
administrative functions relating to the Northern Border Division. The Company
has paid approximately $734,000 for employee severance and other arrangements,
and $107,000 for rent and miscellaneous other expenses relating to closed
stores as of January 29, 1995. As of January 29, 1995, 130 store and
administrative employees have been terminated. The Airport and Diplomatic and
Wholesale locations are scheduled to be closed in the spring of 1995.
Net sales of the stores and business locations which will be closed under
the restructuring plan were $13,931,000, $15,233,000 and $17,460,000 for
fiscal 1995, 1994 and 1993, respectively. Operating income (losses) of the
stores and businesses to be closed under the restructuring plan were
$(2,508,000), $(1,022,000) and $789,000 for fiscal 1995, 1994 and 1993,
respectively.
Revaluation of Intangible Assets
In the third quarter of fiscal 1995, the Company changed its method of
evaluating the recoverability of intangible assets. Under the new method, fair
values of intangible assets are determined based on the estimated discounted
future operating cash flows of the related acquired operations over the life
of each intangible asset. Previously, impairment was measured using
undiscounted cash flows. The new method is preferable in the circumstances,
because it results in a more appropriate balance sheet valuation of intangible
assets. The projected financial results of each operation are based on
management's best estimate of expected future operating cash flows. Discount
rates take into account the risk associated with each operation, based on the
type of business, geographic location, and other matters, in relation to risk
free investments. Discount rates are reviewed on a periodic basis by the
Company's independent auditors, as part of their annual audit, to determine
their appropriateness. Management reviews the valuation and amortization of all
its intangible assets on an ongoing basis, including the intangible assets
related to the purchase of Inflight on May 1, 1994. As part of this ongoing
review, management determined that cash flow from certain acquired businesses
will be below the expectations set by management when the business acquisitions
were completed. Accordingly, under its new policy, the Company reduced the
carrying amount of its intangible assets by $46,002,000 during fiscal 1995.
Because the change in accounting principle is inseparable from the change in
estimate, it has been accounted for as a change in estimate. Had the previous
method remained in effect, there would have been no significant impairment at
January 29, 1995.
The Company acquired various duty free and related businesses along the
United States/Canada border from November 1990 through June 1993, which
included the purchase of 16 duty free stores and related businesses on February
1, 1991 and other smaller acquisitions. Subsequent to the acquisitions, the
financial results of these operations, and the Northern Border Division as a
whole, have been significantly below the expectations set by management when
the acquisitions were completed due primarily to reduced travel across the
United States/Canada border, and substantial price reductions on tobacco
products in the Canadian domestic market as a result of a decrease in Canadian
taxes on tobacco products in fiscal 1995. Management has determined that travel
across the United States/Canada border will not increase substantially from
current levels, due primarily to the fact that travel across the border has not
increased as the Canadian economy has improved in fiscal 1995, and reduced
Canadian tobacco prices and taxes will continue to have a negative effect on
duty free operations along the border. The projected results for the businesses
acquired along the United States/Canada border based on a five percent
long-term growth rate from fiscal 1995 financial results over 30 years, using a
20% discount rate (the same discount rate used by the Company and its
appraisers when acquiring the businesses), resulted in a significant decrease
in the fair value and carrying amount of intangible assets related to these
acquisitions. Accordingly, under its new policy, the Company reduced the
carrying amount of its Northern Border intangible assets by $30,839,000.
On May 7, 1993, the Company acquired a 75 percent interest in Bared
Jewelers of the Virgin Islands ("Bared Jewelers"). Bared Jewelers operates
three stores in the primary shopping area of St. Thomas, U.S.V.I. Since the
acquisition, the operations of Bared Jewelers have not achieved the sales and
earnings projections prepared at the time of the acquisition due primarily to a
decrease in the number of cruise ship travelers to St. Thomas. Management has
determined that the number of cruise ship travelers to St. Thomas will not
increase significantly from current levels, because of an increase in the
number of ports in the Caribbean and throughout the world serviced by the
cruise ship industry. The projected results for the operations acquired in the
Bared Jewelers acquisition based on a five percent long-term growth rate from
fiscal 1995 financial results over the length of the related leases, using a
15% discount rate (the same discount rate used by the Company and its
appraisers when acquiring Bared Jewelers), resulted in a significant decrease
in the fair value and carrying amount of intangible assets related to this
acquisition. Accordingly, under its new policy, the Company reduced the
carrying amount of its Bared Jewelers intangible assets by $7,813,000.
The remaining $7,350,000 write-down of intangible assets related to five
Airport and Diplomatic and Wholesale Division acquisitions. These write-downs
were a result of the Company adopting the discounted cash flow method for
evaluating the recoverability of intangible assets, and the Company revising
cash flow projections for these businesses due to the Company deemphasizing
wholesale sales in fiscal 1995, and projected results for smaller Airport
Division acquisitions being below the expectations set by management when the
acquisitions were completed. The discount rates used were between 15% and 20%
and were the same rates used by the Company and its appraisers when acquiring
the businesses.
The intangible asset revaluation write-down by type of intangible asset and
division is as follows (in thousands):
<TABLE>
<CAPTION>
Diplomatic
Northern and
Border Airport Wholesale
Division Division Division Total
- - ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Excess of cost over
net assets of
subsidiaries acquired $ 7,880 $ 3,734 $3,229 $14,843
Non-competition
agreements 13,201 835 -- 14,036
Purchase options 2,238 1,200 -- 3,438
Operating rights/leaseholds 7,354 4,939 -- 12,293
Other 166 1,226 -- 1,392
- - ---------------------------------------------------------------------------
$30,839 $11,934 $3,229 $46,002
- - ---------------------------------------------------------------------------
- - ---------------------------------------------------------------------------
</TABLE>
The $46,002,000 reduction of the carrying amount of intangible assets will
reduce amortization expense by approximately $3,500,000 in fiscal 1996. The
write-downs will not require any cash payments in the future.
Net Earnings
A total pre-tax charge to earnings of $53,573,000, $38,935,000 after-tax,
was taken in the year ended January 29, 1995, encompassing all costs associated
with both the restructuring plan and the intangible asset revaluations
described above. Net earnings for the year ended January 29, 1995, excluding
the after-tax affects of the restructuring plan and the intangible asset
revaluations, were $14,133,000, or $0.52 per share, a decrease of $13,260,000,
or 48%, from net earnings of $27,393,000, or $1.01 per share, for the year
ended January 31, 1994. The decrease was due primarily to a significant
decrease in the Northern Border Division's net sales and earnings, and interest
expense resulting from the issuance of the $115,000,000 7% senior notes on
January 25, 1994.
11
<PAGE>
Net Sales
The following table sets forth, for the fiscal years indicated, the net
sales and the percentage of total net sales for each of the Company's four
divisions and the period to period change in such sales (in thousands, except
for percentages):
<TABLE>
<CAPTION>
Fiscal Year Ended Increase/(Decrease)
Divisional --------------------------------------- Fiscal
Net Sales JANUARY 29, 1995 January 31, 1994 1995 vs. 1994
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Border:
Southern $144,602 28.8% $126,583 33.6% $ 18,019 14.2 %
Northern 73,631 14.7 94,569 25.1 (20,938) (22.1)%
Airport 92,887 18.5 76,887 20.5 16,000 20.8 %
Diplomatic and
Wholesale 68,751 13.7 78,397 20.8 (9,646) (12.3)%
Inflight 121,890 24.3 -- N/A 121,890 N/A
- - ----------------------------------------------------------------------------------
$501,761 100.0% $376,436 100.0% $125,325 33.3 %
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
</TABLE>
The Company's net sales, excluding the Inflight Division's net sales, were
$379,871,000 for fiscal 1995, an increase of $3,435,000, or 0.9%, from fiscal
1994. Southern Border Division net sales increased by 14.2% due primarily to
the continued expansion of the Mexican economy during most of fiscal 1995, the
Company's advertising campaign within Mexico, which management believes
continued to increase the awareness of the value of duty free shopping among
the mass market, and the development of new merchandising programs by the
Company. In December 1994, the Mexican government devalued the peso resulting
in a significant drop in the value of the peso versus the U.S. dollar. The
devaluation significantly reduced the Southern Border Division's net sales
during the last ten days of December and all of January when compared to the
same periods in fiscal 1994, and is expected to have a significant negative
impact on the Southern Border Division's net sales during fiscal 1996. Northern
Border Division net sales decreased by 22.1% during fiscal 1995 when compared
to the prior fiscal year. Management believes the decrease was due primarily to
reduced travel across the United States/Canada border and the lower value of
the Canadian dollar when compared to last year. In addition, substantial price
reductions on tobacco products in the Canadian domestic market, due to a
decrease in Canadian taxes on tobacco products, have resulted in a significant
decrease in tobacco product sales by the Northern Border Division, and
reductions in selling prices and gross margins. Management expects that travel
across the border will not increase substantially from current levels in the
foreseeable future and reduced Canadian tobacco prices and taxes will continue
to have a negative effect on duty free operations along the border during
fiscal 1996. Airport Division net sales increased by 20.8% due primarily to new
duty free and retail locations at O'Hare International Airport (Chicago), which
opened in October 1993, new stores on the Caribbean islands of Aruba, St.
Maarten, Bonaire and Curacao, which opened in January 1994 and the first
quarter of fiscal 1995, and the Bared Jewelers acquisition on May 7, 1993.
Diplomatic and Wholesale Division net sales decreased by 12.3% during fiscal
1995 when compared to the prior fiscal year. As management continued to focus
on improving the Company's financial performance and cash flow, it
de-emphasized what would have been relatively low gross margin sales in this
division and, accordingly, reduced the working capital investment needed to
support those sales. The Company purchased Inflight, and established its
Inflight Division, on May 1, 1994. The Inflight Division had net sales of
$121,890,000 for the nine months ended January 29, 1995. Management believes
the restructuring plan will reduce the Company's net sales by approximately
$14,500,000 per year.
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, was 39.9% for fiscal 1995 compared to 39.2% for fiscal 1994. The
increase was due primarily to the Inflight Division having higher gross profit
margins than the Company's average gross profit margin and a decrease in the
Diplomatic and Wholesale Division's low gross margin wholesale sales. The above
was partially offset by the Northern Border Division reducing tobacco prices in
fiscal 1995 and a significant decrease in the Northern Border Division's sales,
which generally have gross profit margins higher than the Company's average
gross profit margin.
The restructuring plan did not and will not have a material effect on the
Company's gross profit.
Advertising, Storage and Other Operating Income
Advertising, storage and other operating income decreased by $788,000 from
fiscal 1994. The decrease was due primarily to the businesses purchased in the
Bared Jewelers acquisitions having one-time advertising programs with vendors
during fiscal 1994.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales,
increased to 35.5% during fiscal 1995 from 30.1% during fiscal 1994. The
increase was due primarily to the following factors:
*The Inflight Division having 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 sales in the Airport Division which generally has higher
operating costs, as a percentage of net sales, than the Company's other
divisions.
*A significant decrease in Northern Border Division sales without a
proportionate decrease in relatively fixed operating costs.
The restructuring plan and revaluation of intangible assets, as described
above, will reduce the Company's selling, general and administrative expenses
by approximately $10,900,000 in fiscal 1996.
Other Income (Expense)
Other income decreased by $7,974,000 from fiscal 1994 due primarily to an
increase in interest expense resulting from the issuance of the $115,000,000,
7% senior notes on January 25, 1994. Approximately $71,400,000 (net of cash
acquired) of the proceeds from the issuance of the senior notes was used to
purchase Inflight during fiscal 1995.
Income Taxes
Income taxes, excluding the tax benefits from the intangible asset
revaluations and restructuring described above, as a percentage of earnings
before income taxes, were virtually unchanged when compared to fiscal 1994
(37.0% in fiscal 1995 compared to 36.4% in fiscal 1994). The revaluation of
intangible assets and the restructuring reserves resulted in $10,627,000 of
deferred tax assets as of January 29, 1995. Management has determined, based on
the Company's history of prior operating earnings and projected future
operating earnings, that taxable income of the Company in the future will more
likely than not be sufficient to fully recognize these deferred tax assets.
FISCAL 1994 COMPARED WITH 1993
Net Sales
The following table sets forth, for the years 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>
<CAPTION>
Year ended January 31, Increase/(Decrease)
-------------------------------------- Year ended
Divisional (In thousands, except for percentages) January 31, 1994
Net Sales 1994 1993 vs. 1993
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Border:
Northern $ 94,569 25.1% $113,249 31.3% $(18,680) (16.5)%
Southern 126,583 33.6 114,228 31.6 12,355 10.8 %
Airport 76,887 20.5 58,512 16.2 18,375 31.4 %
Diplomatic and
Wholesale 78,397 20.8 75,834 20.9 2,563 3.4 %
- - ------------------------------------------------------------------------------
$376,436 100.0% $361,823 100.0% $ 14,613 4.0 %
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
The Company's net sales increased to $376,436,000 in fiscal 1994 from
$361,823,000, in fiscal 1993, an increase of $14,613,000, or 4.0%. Increases in
the Southern Border, Airport and Diplomatic and Wholesale Divisions' net sales
were partially offset by a decrease in Northern Border Division sales. Northern
Border Division net sales decreased by 16.5% for the year ended January 31,
1994 when compared to the prior year. The decrease was due primarily to reduced
travel across the United States/Canada border which management believes is
attributable to the continuing economic recession in Canada, the reduced value
of the Canadian dollar versus the U.S. dollar, and the Canadian government
reducing tariffs on many popular items to encourage spending in Canada.
Southern Border Division net sales increased by 10.8% due primarily to the
Company's advertising campaign within Mexico, which management believes
increased the awareness of duty free shopping among the mass market, and the
development of new merchandising programs, which included adding lower-priced
items to attract a larger market segment. Airport Division net sales increased
by 31.4% due primarily to the new duty free and retail locations in San Juan,
Puerto Rico, Pittsburgh, PA, St. Thomas, USVI and Chicago, IL. Diplomatic and
Wholesale Division net sales remained relatively the same when compared to the
prior year.
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, decreased to 39.2% for the year ended January 31, 1994 from 40.5%
for the year ended January 31, 1993. The decrease was due primarily to a
decrease in the net sales of the Northern Border Division, which generally has
higher gross profit margins than the Company's other divisions, and a reduction
of the Northern Border Division's tobacco gross profit margins as a result of
the Company reducing tobacco prices to attract a greater percentage of
travelers crossing the United States/Canada border.
Advertising, Storage and Other Operating Income
Advertising, storage and other operating income increased by 11.6% to
$5,160,000 for the year ended January 31, 1994 from $4,623,000 for the year
ended January 31, 1993. The increase was due primarily to an increase in
advertising and other operating income from the businesses acquired in the
Bared Jewelers acquisition on May 7, 1993.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales,
increased to 30.1% for the year ended January 31, 1994 from 28.0% for the year
ended January 31, 1993. The increase was due primarily to the following
factors: an increase in advertising and promotion expenses for the Northern and
Southern Border Divisions; an increase in depreciation expense due to capital
expenditures for new store locations and renovations of existing stores; an
increase in health insurance costs; and operating expenses, including
amortization of intangible assets and pre-opening costs, at the new airport
locations in San Juan, St. Thomas, Pittsburgh and Chicago. The Airport Division
typically has higher operating costs, as a percentage of net sales, than the
Company's other divisions.
Other Income (Expense)
Other income decreased by $981,000 for the year ended January 31, 1994 when
compared to the year ended January 31, 1993. The decrease was due primarily to
the following factors: a decrease in interest income resulting from a decrease
in funds available for investment and lower interest rates in the current year;
an increase in interest expense resulting from an increase in borrowings in
fiscal 1994; and a decrease in currency exchange income due to a decrease in
the value of the Canadian dollar versus the U.S. dollar and the reduced level
of travel across the United States/Canada border. The above was partially
offset by a $1,000,000 fee earned during fiscal 1994 from the termination of a
contract to provide consulting services.
Merger-Related Expenses
Merger-related expenses for the year ended January 31, 1993 resulted from
the UETA merger on April 24, 1992.
Income Taxes
Income taxes, as a percentage of earnings before income taxes, decreased to
36.4% in fiscal 1994 from 39.0% in fiscal 1993. The decrease was due primarily
to merger-related expenses of $4,389,000 in the first quarter of fiscal 1993
being non-deductible for federal and state income tax purposes. The above was
partially offset by the Company's United Kingdom operations, acquired in the
UETA merger, not being subject to income taxes in the first quarter of fiscal
1993.
Net Earnings
Net earnings for the year ended January 31, 1994 were $27,393,000, or $1.01
per share, a decrease of $2,980,000, or 9.8%, from $30,373,000, or $1.08 per
share, for the year ended January 31, 1993. The decrease was due primarily to a
decrease in Northern Border Division net sales, which has higher operating
margins than the Company's other divisions, and a decrease in other
non-operating income. The above was partially offset by $4,389,000 of
merger-related expenses incurred in the first quarter of fiscal 1993, which
were non-deductible for federal and state income tax purposes. Earnings before
merger-related expenses were $34,762,000, or $1.24 per share, for the year
ended January 31, 1993.
FISCAL 1996 OUTLOOK
The Company expects that fiscal 1996 net earnings will be
favorably affected by the following factors and assumptions:
*The closing in fiscal 1995 and 1996 of unprofitable or marginally profitable
stores and business locations and increased efficiencies from the consolidation
of administrative and warehouse operations under the restructuring plan.
*A decrease in amortization expense resulting from the revaluation
of intangible assets during fiscal 1995.
*The Northern Border Division's fiscal 1996 sales are projected to be about
the same as fiscal 1995 sales based on the following: improvement in sales and
Canadian travel trends in the fourth quarter of fiscal 1995 compared with the
prior year; travel across the United States/Canada border during fiscal 1996
assumed to be approximately equal to fiscal 1995; annualization of the adverse
affects of the reduction of Canadian taxes on tobacco products which occurred
early in fiscal 1995; the assumption that the value of the Canadian dollar will
not vary significantly from current levels.
*Inflight Division operations will be included in the Company's results for all
of fiscal 1996 (Inflight was purchased May 1, 1994), and improvements in
Inflight's operating results during fiscal 1996.
The devaluation of the Mexican peso is expected to have a significant
adverse impact on the Southern Border Division's fiscal 1996 sales and
earnings. Credible and protracted stability in the value of the Mexican peso
versus the U.S. dollar is an important element in projecting the Southern
Border Division's sales and earnings for fiscal 1996. The devaluation may have
a more significant impact on the Company's financial results than is currently
projected by the Company. During January and February 1995, management adjusted
its marketing and promotion programs for the Southern Border Division, and
effected expense reductions of approximately $3,800,000 annually. Management
will continue to monitor the Southern Border Division's fiscal 1996 sales and
earnings and take additional actions if required.
The Company estimates that the restructuring plan and the intangible asset
revaluations would have increased fiscal 1995 net earnings by approximately
$4,000,000, or $.15 per share, if the restructuring plan and the intangible
asset revaluations had occurred as of February 1, 1994.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity and capital requirements for fiscal 1996
will be working capital needs, primarily inventory and receivables, and
purchases of property and equipment. The Company believes its existing funds
and cash provided by operations will be sufficient to meet its current
liquidity and capital requirements.
The restructuring plan and the intangible asset revaluations did not have a
material effect on the Company's liquidity and capital resources during fiscal
1995 and are not expected to have a material effect in the future. The Company
believes it will continue to generate significant cash flow from operations
during fiscal 1996 in spite of the difficulties currently facing the Southern
Border Division.
In March 1995, Standard and Poor's downgraded the rating of the Company's
$115,000,000 senior notes from BBB to BBB-, primarily in response to the
devaluation of the Mexican peso. The downgrade 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
downgrade could increase the costs of any borrowings in the future. In January
1995, Moody's Investors Service placed the Company's Ba1 senior debt rating
under review for potential downgrade in response to the devaluation of the
Mexican peso.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $41,938,000 for fiscal 1995,
an increase of $24,085,000 from $17,853,000 for fiscal 1994. The increase was
due primarily to the following factors: a significant decrease in accounts
receivable, excluding Inflight, from January 31, 1994 as a result of a decrease
in low gross margin wholesale sales in fiscal 1995; a significant decrease in
inventory, excluding Inflight, from January 31, 1994 due to the inventory
reduction program instituted by the Company in the fourth quarter of fiscal
1994; and net cash provided by operating activities from the Inflight
operations purchased on May 1, 1994. The above were partially offset by a
significant decrease in net earnings, excluding the non-cash expenses of the
intangible asset revaluations and restructuring expenses, for fiscal 1995 when
compared to fiscal 1994.
Net Cash Used in Investing Activities
Net cash used in investing activities was $89,887,000 for the fiscal year
ended January 29, 1995. During fiscal 1995, the Company purchased Inflight for
approximately $71,400,000 in cash, net of cash acquired. The Company spent
approximately $31,230,000 on capital expenditures (excluding acquisitions of
businesses) during the fiscal year ended January 29, 1995, consisting primarily
of the purchase of leased and other property on the United States/Mexico
border, construction of the 100,000 square foot warehouse and distribution
facility in Florida, store expansions and renovations, and the continuing
upgrade of the Company's management information systems.
The Company expects to spend approximately $12,500,000 on capital
expenditures during fiscal 1996. Significant capital expenditures will include
the continued upgrade of the Company's management information systems, adding
50,000 square feet to the Company's warehouse and distribution center in
Florida, and additional store expansions and renovations.
Net Cash Used in Financing Activities
The Company will make approximately $3,750,000 of scheduled debt payments
and $5,500,000 of dividend payments in fiscal 1996.
Working Capital
Working capital was $113,996,000 as of January 29, 1995, a decrease of
$90,122,000 from $204,118,000 as of January 31, 1994. The decrease was due
primarily to the acquisition of Inflight on May 1, 1994 and investments in
property and equipment. Working capital on January 31, 1994 included the cash
received from the issuance of the $115,000,000 senior notes in January 1994.
EXCHANGE RATES
The majority of the Company's customers are not United States residents.
Thus, the value of the U.S. dollar relative to foreign currencies affects
travelers' relative purchasing power, thereby affecting the Company's sales.
The Northern Border and Southern Border Division's sales are significantly
affected by the value of the Canadian dollar and Mexican peso, respectively,
relative to the United States dollar. The declines in the value of the Canadian
dollar, and, more recently, the Mexican peso have resulted in diminished sales
in the Company's Northern Border and Southern Border Divisions.
The Company imports a significant portion of its products 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 foreign currencies. 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. The use of foreign
exchange forward contracts for merchandise purchases lessens the uncertainty in
impact of exchange rate fluctuations on the Company's gross profit margins. The
Company does not engage in foreign currency speculation. At January 29, 1995,
the Company had outstanding foreign exchange forward contracts, maturing at
various dates in fiscal 1996, to purchase approximately $12,495,000 of foreign
currencies. The fair value of these contracts at January 29, 1995 of
approximately $12,703,000 was estimated by obtaining quotes from a bank
assuming all contracts were purchased on January 29, 1995.
STOCK PRICES AND DIVIDENDS
The Company's common stock trades on the New York Stock Exchange under the
ticker symbol "DFI." The approximate number of holders of record of shares of
common stock, excluding the number of beneficial owners whose securities are
held in street name, was 446 as of March 3, 1995.
The following table sets forth the high and low last reported sale prices
for the common stock as reported by the New York Stock Exchange:
<TABLE>
<CAPTION>
High Low
- - -----------------------------------------------------
<S> <C> <C>
FISCAL 1995:
First quarter $18-3/8 $13-5/8
Second quarter 15-1/2 9
Third quarter 13-1/2 9-1/4
Fourth quarter 13-1/2 8-1/4
Fiscal 1994:
First quarter $28-5/8 $20-3/4
Second quarter 28-1/4 17-5/8
Third quarter 19-1/4 14-1/4
Fourth quarter 19-7/8 15-5/8
</TABLE>
Cash dividends declared were approximately $5,445,000, or $0.20 per share,
and $5,419,000, or $0.20 per share, for the years ended January 29, 1995 and
January 31, 1994. Cash dividends were paid quarterly at $0.05 per share during
fiscal 1995 and 1994. The Company plans to continue declaring quarterly cash
dividends of $0.05 per share during fiscal 1996.
14
<PAGE>
Duty Free International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
JANUARY 29, January 31, January 31,
Year ended 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $501,761 $376,436 $361,823
Cost of sales 301,387 228,696 215,398
- - -----------------------------------------------------------------------------------------------------
Gross profit 200,374 147,740 146,425
Advertising, storage and other operating income 4,372 5,160 4,623
- - -----------------------------------------------------------------------------------------------------
204,746 152,900 151,048
Selling, general and administrative expenses 177,895 113,365 101,401
RESTRUCTURING EXPENSES (note 2) 7,571 -- --
REVALUATION OF INTANGIBLE ASSETS (note 3) 46,002 -- --
- - -----------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (26,722) 39,535 49,647
- - -----------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 3,619 2,481 3,843
Interest expense (8,878) (1,495) (1,044)
Gain (loss) on foreign currency transactions (556) 654 1,005
Other, net 1,388 1,907 724
- - -----------------------------------------------------------------------------------------------------
(4,427) 3,547 4,528
- - -----------------------------------------------------------------------------------------------------
Merger-related expenses -- -- 4,389
- - -----------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (31,149) 43,082 49,786
Income tax expense (benefit) (note 8) (6,347) 15,689 19,413
- - -----------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $(24,802) $ 27,393 $ 30,373
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $(0.91) $1.01 $1.08
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
Duty Free International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JANUARY 29, January 31,
1995 1994
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,353 $ 99,669
Short-term investments, at cost (note 15) 13,086 32,315
Receivables:
Trade receivables, less allowance for doubtful
accounts of $795 in 1995 and $740 in 1994 20,183 13,537
Other 11,400 8,127
- - ----------------------------------------------------------------------------------------------------------------------
31,583 21,664
- - ----------------------------------------------------------------------------------------------------------------------
Merchandise inventories 95,112 78,257
Prepaid expenses and other current assets 9,962 6,131
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 181,096 238,036
Long-term investments, at cost (note 15) 9,653 8,560
Property and equipment, net (note 6) 82,533 58,967
Excess of cost over net assets of subsidiaries acquired, less accumulated
amortization of $2,178 in 1995 and $2,478 in 1994 (notes 3 and 5) 64,682 20,319
Other intangible assets, less accumulated amortization
of $5,999 in 1995 and $11,424 in 1994 (notes 3, 5 and 11) 25,571 51,083
Other assets, net 23,607 10,635
- - ----------------------------------------------------------------------------------------------------------------------
$387,142 $387,600
- - ----------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (note 7) $ 2,611 $ 2,559
Accounts payable, trade 30,964 17,739
Accrued restructuring expenses (note 2) 3,941 --
Other current liabilities (note 12) 29,584 13,620
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 67,100 33,918
Long-term debt, excluding current maturities (note 7) 115,798 118,211
Other liabilities 3,093 3,610
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 185,991 155,739
- - ----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (note 14):
Common stock, par value $.01 per share.
Authorized 75,000,000 shares; 27,243,550 issued and outstanding
shares in 1995 and 27,238,146 shares in 1994 272 272
Additional paid-in capital 80,121 80,321
Foreign currency translation adjustments (603) (340)
Retained earnings 121,361 151,608
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 201,151 231,861
Commitments and contingencies (notes 4, 10 and 16)
- - ----------------------------------------------------------------------------------------------------------------------
$387,142 $387,600
- - ----------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
Duty Free International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Foreign
Common stock Additional currency Total
---------------- paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1992 28,429 $284 $112,806 $ (48) $103,405 $216,447
Transactions of pooled company (360) (4) (14,467) -- -- (14,471)
IDF Services merger (62) -- 523 -- -- 523
Dividends ($0.15 per share) -- -- -- -- (4,144) (4,144)
Common stock purchased and retired (951) (10) (22,182) -- -- (22,192)
Exercise of common stock options 66 1 495 -- -- 496
Tax benefit from exercise of
common stock options -- -- 569 -- -- 569
Change in foreign currency
translation adjustments -- -- -- (258) -- (258)
Net earnings -- -- -- -- 30,373 30,373
- - ---------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1993 27,122 271 77,744 (306) 129,634 207,343
Acquisition of Bared Jewelers
(notes 3 and 5) 112 1 2,519 -- -- 2,520
Dividends ($0.20 per share) -- -- -- -- (5,419) (5,419)
Exercise of common stock options 4 -- 37 -- -- 37
Other -- -- 21 -- -- 21
Change in foreign currency
translation adjustments -- -- -- (34) -- (34)
Net earnings -- -- -- -- 27,393 27,393
- - ---------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1994 27,238 272 80,321 (340) 151,608 231,861
Dividends ($0.20 per share) -- -- -- -- (5,445) (5,445)
Exercise of common stock options 34 -- 236 -- -- 236
Common stock purchased and retired (28) -- (436) -- -- (436)
Change in foreign currency
translation adjustments -- -- -- (263) -- (263)
Net loss -- -- -- -- (24,802) (24,802)
- - ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 29, 1995 27,244 $272 $ 80,121 $(603) $121,361 $201,151
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
Duty Free International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
JANUARY 29, January 31, January 31,
Year ended 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(24,802) $ 27,393 $ 30,373
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 6,642 5,003 4,088
Other amortization 8,008 5,447 4,450
Provision for (benefit of) deferred income taxes (13,222) 331 194
Revaluation and write-off of assets 48,405 -- --
Changes in operating assets and liabilities, net of effects
of acquisitions accounted for by the purchase method:
Accounts receivable 4,147 (1,555) (5,640)
Notes receivable -- (1,000) (1,498)
Merchandise inventories 10,015 (4,046) 995
Prepaid expenses and other current assets 991 (878) (624)
Accounts payable, trade (3,012) (8,117) (3,804)
Income taxes payable (2,863) (3,049) 871
Accrued restructuring expenses 4,586 -- --
Other current liabilities 3,820 (1,796) (942)
Other (777) 120 992
- - ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 41,938 17,853 29,455
- - ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investments 50,103 23,418 30,096
Purchases of investments (32,225) (23,125) (22,298)
Additions to property and equipment (31,230) (13,352) (20,268)
Acquisitions of businesses, accounted for by
the purchase method, net of cash acquired (74,991) (21,898) (10,945)
Investments in and advances to affiliates (3,363) (1,254) --
Other 1,819 (2,701) (2,297)
- - ------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (89,887) (38,912) (25,712)
- - ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings and notes payable -- 115,118 3,238
Payment of long-term borrowings and notes payable (14,464) (5,655) (6,381)
Dividends paid (5,445) (5,435) (2,770)
Purchase of common stock (436) -- (22,192)
Other (22) 952 248
- - ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (20,367) 104,980 (27,857)
- - ------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (68,316) 83,921 (24,114)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 99,669 15,748 39,862
- - ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,353 $ 99,669 $ 15,748
- - ------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
18
<PAGE>
Duty Free International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 29, 1995, January 31, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND OTHER MATTERS
Business -- Duty Free International, Inc. and its subsidiaries (the
Company) are engaged principally in the sale of tax and duty free merchandise,
such as spirits, tobacco, perfume and gift items.
Principles of consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned and majority-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.
Fiscal Year -- As of January 29, 1995, the Company adopted a 4-5-4 week
fiscal calendar with its fiscal year ending on the last Sunday of January. The
fiscal years ended January 29, 1995, January 31, 1994 and January 31, 1993 are
referred to hereafter as 1995, 1994 and 1993, respectively.
Cash equivalents -- For purposes of the statements of cash flows, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Investments in debt and equity securities -- Effective February 1, 1994,
the Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 requires that debt and equity securities, except for investments accounted
for under the equity method and investments in consolidated subsidiaries, be
classified into three categories. "Held-to-maturity securities" are debt
securities that the enterprise has the positive intent and ability to hold to
maturity. These securities are reported at amortized cost. "Trading securities"
are debt and equity securities that are bought and held principally for the
purpose of selling them in the near term and are reported at fair value, with
unrealized gains and losses included in earnings. "Available-for-sale
securities" are debt and equity securities that are not classified as either
"held-to-maturity securities" or "trading securities" and are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of stockholders' equity. Fair values are based on quoted
market prices. Upon purchase, management considers the maturity and other
characteristics of each investment and its asset-liability management policies
and designates each investment into one of the three categories noted above.
The appropriateness of the classification is reassessed at each reporting date.
Fair values of financial instruments -- Information regarding fair values
of foreign exchange forward contracts, long-term debt, and investments in debt
securities is set forth in notes 4, 7 and 15 to the financial statements. Fair
values of other financial instruments, such as receivables and payables,
approximate carrying values.
Merchandise inventories -- Merchandise inventories are stated at the lower
of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
Property and equipment -- Property and equipment are stated at cost.
Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of the related assets. Leasehold improvements
are amortized over the shorter of the lease terms or estimated useful lives of
the assets. Maintenance and repairs are charged to expense as incurred.
Intangible assets -- The Company accounts for intangible assets at the
lower of amortized cost or fair value. The Company changed its method of
evaluating the recoverability of intangible assets during fiscal 1995. Under
the new method, fair value of intangible assets is determined based on the
estimated discounted future operating cash flows of the related acquired
operations over the life of each intangible asset. Previously, impairment was
measured using undiscounted cash flows. The new method results in a more
appropriate balance sheet valuation of intangible assets. Because the change in
accounting principle is inseparable from the change in estimate, it has been
accounted for as a change in estimate. The projected financial results of each
operation are based on management's best estimate of expected future operating
results. Discount rates take into account the risk associated with each
operation, based on the type of business, geographic location and other
matters. Management reviews the valuation and amortization of its intangible
assets on an ongoing basis. See note 3 regarding the revaluation of intangible
assets during fiscal 1995.
The excess of cost over net assets of subsidiaries acquired is amortized
over 30 years using the straight-line method. Other intangible assets consist
principally of operating rights and non-competition agreements. The operating
rights are being amortized over 3 to 25 years; the non-competition agreements
are being amortized over the terms of such agreements (3 to 15 years) and other
intangible assets are being amortized over the estimated useful lives of the
related assets (5 to 30 years) using the straight-line method.
Advertising expense -- The Company expenses advertising costs the first
time advertising takes place. The Company did not have any deferred advertising
costs as of January 29, 1995 and January 31, 1994. Advertising expense was
$4,000,000, $3,500,000 and $2,000,000 during fiscal 1995, 1994 and 1993,
respectively.
Foreign currency transactions -- Exchange gains and losses from
transactions of domestic operations in foreign currencies and commissions
earned from the Company's currency exchange activities are included in other
income.
The functional currency for certain of the Company's foreign retail
operations is the local currency. The translation of the foreign currencies
into U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using average rates of exchange prevailing during the year.
Adjustments resulting from such translation are included as a separate
component of stockholders' equity.
Income taxes -- Effective February 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes," and
has reported the cumulative effect of that change in the method of accounting
for income taxes in the fiscal 1994 consolidated statement of operations. Under
Statement 109, deferred tax assets and liabilities are recognized based on the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Earnings per share -- Earnings per share are based on the weighted average
number of shares of common stock outstanding during each year. The numbers of
shares used in the computations were 27,224,000, 27,204,000 and 28,142,000 for
fiscal 1995, 1994 and 1993, respectively. Common shares issuable upon exercise
of stock options are excluded from the computation because their effect is not
material.
Foreign Exchange Forward Contracts -- Gains and losses on hedges of
existing assets or liabilities are included in the carrying amounts of those
assets or liabilities and are ultimately recognized in income as part of those
carrying amounts. Gains and losses related to qualifying hedges of transactions
also are deferred and are recognized in income or as adjustments of carrying
amounts when the hedged transactions occur.
Reclassifications -- Certain amounts for fiscal 1994 and 1993 have been
reclassified to conform to the presentation for fiscal 1995.
(2) RESTRUCTURING EXPENSES
During the third quarter of fiscal 1995, management undertook a
restructuring plan which will include the closing of 23 stores and business
locations, and the consolidation of administrative and warehouse operations.
The Company closed 14 unprofitable or
19
<PAGE>
marginally profitable stores at secondary crossings
along the United States/Canada border. The closings were prompted by the
Company's experience with declining sales on the Northern Border during the
summer of 1994. Initially, the Company had believed that its Northern Border
Division sales had been adversely affected in fiscal 1993 and 1994 by cyclical
factors such as unusually inclement weather and the Canadian economic
recession, as well as the reduced purchasing power of the Canadian dollar. Its
experience during last summer's important sales season with further significant
reductions in sales, following the Canadian government's precipitous and
dramatic reduction in tobacco taxes in February 1994, led it to conclude that
the changes in sales on the Northern Border were to be of a more long-term
nature. Seven unprofitable Airport Division retail locations are scheduled to
be closed, which include all five of the Company's stores in Toronto, Canada
and two other smaller specialty stores at airports in Bangor, Maine and
Burlington, Vermont. These stores are scheduled to be closed due to current
and projected sales levels not being high enough to cover fixed operating
costs. Two unprofitable wholesale operations are scheduled to be closed in
Seattle, Washington and Carson, California due to the Company deemphasizing
wholesale sales during fiscal 1995, and the Company's ability to service
wholesale customers from other locations. As part of the restructuring plan,
the Company also eliminated regional manager positions in the Northern Border
Division, and will consolidate warehouse and administrative operations into the
Company's new 100,000 square foot distribution and administrative center in
Miami, Florida. The Northern Border Division stores closed in September 1994.
The remaining stores and business locations are scheduled to be closed in the
spring of 1995.
When fully implemented, the restructuring plan is expected to reduce the
Company's annual sales by approximately $14,500,000, reduce gross profit by
approximately $3,700,000 per year, reduce direct operating costs by
approximately $7,400,000 per year, and increase earnings before taxes by
approximately $3,700,000 a year. The restructuring plan will also reduce the
Company's store and administrative workforce by approximately 210 people.
A pre-tax charge to earnings of $7,571,000 was taken during fiscal 1995 as
a result of the restructuring. Restructuring costs include the following (in
thousands):
<TABLE>
- - -------------------------------------------------------
<S> <C>
Termination of property leases $1,262
Abandonment of leasehold improvements
and other fixed assets 1,026
Severance and other related payments 3,559
Cumulative currency translation adjustments
related to foreign operations closed 615
Write-down of inventory below cost 503
Other 606
- - -------------------------------------------------------
$7,571
- - -------------------------------------------------------
- - -------------------------------------------------------
</TABLE>
The following methods were used to calculate the restructuring charges:
* Termination of property leases -- based on amounts due under terminated
lease agreements and agreements with lessors.
* Abandonment of leasehold improvements and other fixed assets -- net book
value of leasehold improvements and other fixed assets that cannot be
transferred to other stores/locations or sold. The Company does not expect to
receive any material proceeds from sales of the leasehold improvements and
other fixed assets.
* Severance and other related payments -- based on severance and other
agreements with employees. Severance amounts were based on years of service and
paid over the number of pay weeks owed the employees. Severance payments also
include health insurance costs for terminated employees, which were based on
the number of employees terminated and the average cost per employee for health
insurance coverage for one year, less premiums to be paid by terminated
employees.
* Cumulative currency translation adjustments related to foreign operations
closed -- relates to the Company's Toronto airport operations. Based on January
29, 1995 U.S. dollar/Canadian dollar exchange rate. These operations will be
closed in February 1995.
* Write-down of inventory below cost -- estimate of expected sales below cost
for close-out sales.
The Company will pay approximately $5,427,000 in cash relating to
restructuring costs. Approximately $2,144,000 of the restructuring costs relate
to non-cash write-offs of recorded assets. As of January 29, 1995, the Company
has closed 14 of its Northern Border stores and eliminated certain
administrative functions relating to the Northern Border Division. The Company
has paid approximately $734,000 for employee severance and other arrangements,
and $107,000 for rent and miscellaneous other expenses relating to closed
stores as of January 29, 1995. As of January 29, 1995, 130 store and
administrative employees have been terminated. The Airport and Diplomatic and
Wholesale locations are scheduled to be closed in the spring of 1995.
Net sales of the stores and business locations which will be closed under
the restructuring plan were $13,931,000, $15,233,000 and $17,460,000 for fiscal
1995, 1994 and 1993, respectively. Operating income (losses) of the stores and
businesses to be closed under the restructuring plan were $(2,508,000),
$(1,022,000) and $789,000 for fiscal 1995, 1994 and 1993, respectively.
(3) REVALUATION OF INTANGIBLE ASSETS
In the third quarter of fiscal 1995, the Company changed its method of
evaluating the recoverability of intangible assets. Under the new method, fair
values of intangible assets are determined based on the estimated discounted
future operating cash flows of the related acquired operations over the life of
each intangible asset. Previously, impairment was measured using undiscounted
cash flows. The new method is preferable in the circumstances, because it
results in a more appropriate balance sheet valuation of intangible assets. The
projected financial results of each operation are based on management's best
estimate of expected future operating cash flows. Discount rates take into
account the risk associated with each operation, based on the type of business,
geographic location, and other matters, in relation to risk free investments.
Discount rates are reviewed on a periodic basis by the Company's independent
auditors, as part of their annual audit, to determine their appropriateness.
Management reviews the valuation and amortization of all its intangible assets
on an ongoing basis, including the intangible assets related to the purchase of
Inflight on May 1, 1994. As part of this ongoing review, management determined
that cash flow from certain acquired businesses will be below the expectations
set by management when the business acquisitions were completed. Accordingly,
under its new policy, the Company reduced the carrying amount of its
intangible assets by $46,002,000 during fiscal 1995. Because the change in
accounting principle is inseparable from the change in estimate, it has been
accounted for as a change in estimate. Had the previous method remained in
effect, there would have been no significant impairment at January 29, 1995.
The Company acquired various duty free and related businesses along the
United States/Canada border from November 1990 through June 1993, which
included the purchase of 16 duty free stores and related businesses on February
1, 1991 and other smaller acquisitions. Subsequent to the acquisitions, the
financial results of these operations, and the Northern Border Division as a
whole, have been significantly below the expectations set by management when
the acquisitions were completed due primarily to reduced travel across the
United States/Canada border, and substantial price reductions on tobacco
products in the Canadian domestic market as a result of a decrease in Canadian
taxes on tobacco products in fiscal 1995. Management has determined that travel
across the United States/Canada border will not increase substantially from
current levels, due primarily to the fact that travel across the border has not
increased as the Canadian economy has improved in fiscal 1995, and reduced
Canadian tobacco prices and
20
<PAGE>
taxes will continue to have a negative effect on
duty free operations along the border. The projected results for the businesses
acquired along the United States/Canada border based on a five percent
long-term growth rate from fiscal 1995 financial results over 30 years, using a
20% discount rate (the same discount rate used by the Company and its
appraisers when acquiring the businesses), resulted in a significant decrease
in the fair value and carrying amount of intangible assets related to these
acquisitions. Accordingly, under its new policy, the Company reduced the
carrying amount of its Northern Border intangible assets by $30,839,000.
On May 7, 1993, the Company acquired a 75 percent interest in Bared Jewelers
of the Virgin Islands ("Bared Jewelers"). Bared Jewelers operates three stores
in the primary shopping area of St. Thomas, U.S.V.I. Since the acquisition,
the operations of Bared Jewelers have not achieved the sales and earnings
projections prepared at the time of the acquisition due primarily to a decrease
in the number of cruise ship travelers to St. Thomas. Management has determined
that the number of cruise ship travelers to St. Thomas will not increase
significantly from current levels, because of an increase in the number of
ports in the Caribbean and throughout the world serviced by the cruise ship
industry. The projected results for the operations acquired in the Bared
Jewelers acquisition based on a five percent long-term growth rate from fiscal
1995 financial results over the length of the related leases, using a 15%
discount rate (the same discount rate used by the Company and its appraisers
when acquiring Bared Jewelers), resulted in a significant decrease in the fair
value and carrying amount of intangible assets related to this acquisition.
Accordingly, under its new policy, the Company reduced the carrying amount of
its Bared Jewelers intangible assets by $7,813,000.
The remaining $7,350,000 write-down of intangible assets related to five
Airport and Diplomatic and Wholesale Division acquisitions. These write-downs
were a result of the Company adopting the discounted cash flow method for
evaluating the recoverability of intangible assets, and the Company revising
cash flow projections for these businesses due to the Company deemphasizing
wholesale sales in fiscal 1995, and projected results for smaller Airport
Division acquisitions being below the expectations set by management when the
acquisitions were completed. The discount rates used were between 15% and 20%,
and were the same rates used by the Company and its appraisers when acquiring
the businesses.
The intangible asset revaluation write-down by type of intangible asset and
division is as follows (in thousands):
<TABLE>
<CAPTION>
Diplomatic
Northern and
Border Airport Wholesale
Division Division Division Total
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Excess of cost over
net assets of
subsidiaries acquired $ 7,880 $ 3,734 $3,229 $14,843
Non-competition
agreements 13,201 835 -- 14,036
Purchase options 2,238 1,200 -- 3,438
Operating rights/leaseholds 7,354 4,939 -- 12,293
Other 166 1,226 -- 1,392
- - ----------------------------------------------------------------------------------------------
$30,839 $11,934 $3,229 $46,002
- - ----------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------
</TABLE>
The $46,002,000 reduction of the carrying amount of intangible assets will
reduce amortization expense by approximately $3,500,000 in fiscal 1996. The
write-downs will not require any cash payments in the future.
(4) FOREIGN EXCHANGE FORWARD CONTRACTS
The only financial derivatives used by the Company are foreign exchange
forward contracts. The Company enters into foreign exchange forward contracts
to minimize the currency exchange risk associated with purchasing merchandise
in currencies other than the United States dollar. The amount of foreign
currency purchased by foreign exchange forward contracts is based on
anticipated levels of merchandise required to support expected sales levels.
Currency rates are monitored against a corporate target which has been used by
management in developing business plans. All currency techniques employed by
the Company must be approved by the Company's Board of Directors and
management. The Company's forward exchange forward contracts are held for
purposes other than trading. The Company does not engage in foreign currency
speculation.
Merchandise purchases hedged by foreign exchange forward contracts are
valued by using the exchange rate of the applicable foreign exchange forward
contract and recognized as part of cost of goods sold when the merchandise is
sold. The Company had approximately $12,495,000 of foreign exchange forward
contracts outstanding at January 29, 1995 to purchase British pounds, French
francs, and Swiss francs. The contracts outstanding at January 29, 1995 mature
at various dates in fiscal 1996. The fair value of these contracts was
$12,703,000 at January 29, 1995. Fair values were estimated by obtaining quotes
from banks assuming all contracts were purchased on January 29, 1995.
(5) ACQUISITIONS
On May 7, 1993, the Company acquired a 75 percent interest in Bared
Jewelers of the Virgin Islands, Inc. ("Bared Jewelers") and entered into a
five-year non-competition agreement with the seller. The purchase price of this
acquisition was approximately $12,385,000, comprised of $9,865,000 in cash and
112,450 shares of the Company's common stock with a fair value of approximately
$2,520,000. In fiscal 1995, the Company reduced the carrying amount of its
Bared Jewelers intangible assets by $7,813,000. See note 3 for a more detailed
explanation of the revaluation.
On May 1, 1994, the Company purchased Inflight Sales Group Limited
(Inflight), and certain non-competition rights, for approximately $73,300,000.
The purchase price exceeded the fair value of the net assets acquired by
approximately $65,000,000. Inflight is the leading concessionaire and supplier
of on-board duty free merchandise to international airlines.
The acquisitions described above were accounted for by using the purchase
method and, accordingly, the purchase price of each acquisition has been
allocated to the related acquired assets and assumed liabilities based on their
respective fair values. The consolidated statements of operations for the years
ended January 29, 1995 and January 31, 1994 include the results of operations
of the acquired businesses from their respective acquisition dates.
Pro forma results of operations for the years ended January 31, 1994 and
1993, as if the Bared Jewelers acquisition had occurred at the beginning of the
respective periods, are not presented because such results would not have been
materially different from the actual results for those years. The pro forma
results of operations for the year ended January 29, 1995, as if the Inflight
acquisition had occurred on February 1, 1994, are not presented because the
results would not be materially different from the actual results for the year.
The pro forma results of operations that follow summarize, on an unaudited pro
forma basis, results of the Company's
21
<PAGE>
consolidated operations for the year ended January 31, 1994 assuming the
Inflight acquisition had occurred on February 1, 1993 (in thousands).
<TABLE>
<CAPTION>
Year ended January 31, 1994
- - --------------------------------------------------------------------
<S> <C>
Net sales $481,244,000
Operating income 39,184,000
Earnings before income taxes 37,004,000
Net earnings 22,986,000
Earnings per share $0.84
- - --------------------------------------------------------------------
</TABLE>
Supplemental information regarding acquisitions required for the statements
of cash flows is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- - --------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of
assets acquired $117,236 $ 32,150 $ 10,945
Common stock issued -- (2,520) --
Cash paid (74,991) (21,898) (10,945)
- - --------------------------------------------------------------------
Liabilities assumed $ 42,245 $ 7,732 $ --
- - --------------------------------------------------------------------
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------
<S> <C> <C>
Land $ 18,117 $11,156
Buildings 42,978 27,547
Leasehold improvements 17,721 17,459
Furniture and fixtures 15,315 12,826
Equipment and vehicles 23,265 15,067
- - --------------------------------------------------------------------
117,396 84,055
Less accumulated depreciation
and amortization 34,863 25,088
- - --------------------------------------------------------------------
Net property and equipment $ 82,533 $58,967
- - --------------------------------------------------------------------
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following (in thousands, except for
percentage amounts):
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------
<S> <C> <C>
7% senior bonds payable, 7.06% effective rate,
due January 15, 2004, $115,000 face amount,
less unamortized discount of $412 and $458 $114,588 $114,542
Other 3,821 6,228
- - --------------------------------------------------------------------
118,409 120,770
Less current maturities 2,611 2,559
- - --------------------------------------------------------------------
Long-term debt, excluding
current maturities $115,798 $118,211
- - --------------------------------------------------------------------
</TABLE>
The approximate annual maturities of long-term debt are as follows (in
thousands):
<TABLE>
- - --------------------------------------------------------------------
<S> <C>
1996 $ 2,611
1997 1,210
2004 114,588
- - --------------------------------------------------------------------
$118,409
- - --------------------------------------------------------------------
</TABLE>
The fair value of long-term debt, including current maturities, was
$107,321,000 and $121,219,000 as of January 29, 1995 and January 31, 1994,
respectively. The fair value of long-term debt, including current maturities,
was based on quoted market values.
The Company paid interest on short-term and long-term borrowings of
approximately $9,277,000, $1,457,000 and $1,246,000 during fiscal 1995, 1994
and 1993, respectively.
(8) INCOME TAXES
Income tax expense (benefit) consists of the following
(in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
- - --------------------------------------------------------------------
1995:
<S> <C> <C> <C>
Federal $ 5,065 $(10,083) $(5,018)
State 1,100 (2,116) (1,016)
Foreign 710 (1,023) (313)
- - --------------------------------------------------------------------
$ 6,875 $(13,222) $(6,347)
- - --------------------------------------------------------------------
1994:
Federal $13,598 $ 319 $13,917
State 1,760 12 1,772
- - --------------------------------------------------------------------
$15,358 $ 331 $15,689
- - --------------------------------------------------------------------
1993:
Federal $16,344 $ 130 $16,474
State 2,875 64 2,939
- - --------------------------------------------------------------------
$19,219 $ 194 $19,413
- - --------------------------------------------------------------------
</TABLE>
The income tax expense (benefit) is reconciled to the amount computed by
applying the Federal corporate tax rates to earnings (loss) before income taxes
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax (benefit) at statutory rates $(10,902) $15,079 $16,927
Revaluation of intangible assets 6,144 -- --
State income taxes, net of
federal tax benefit (660) 1,152 1,940
Merger-related expenses -- -- 1,711
Tax exempt income (450) (296) (644)
Other, net (479) (246) (521)
- - ------------------------------------------------------------------------
$ (6,347) $15,689 $19,413
- - ------------------------------------------------------------------------
</TABLE>
The consolidated income (loss) before income taxes, by domestic and foreign
sources was a loss of $38,583,000 and income of $7,434,000, respectively, for
fiscal 1995. Prior to fiscal 1995, foreign source income was not significant to
the Company.
At January 29, 1995, the net current and net non-current deferred tax
assets of $4,800,000 and $9,830,000, respectively, were classified as "prepaid
expenses and other current assets" and "other assets, net", respectively, in
the consolidated balance sheet. At January 31, 1994, the net current deferred
income tax asset and net non-current deferred income tax liability were
$1,757,000 and $1,928,000, respectively. Such amounts are included in "prepaid
expenses and other current assets" and "other liabilities," respectively, in
the consolidated balance sheet. There was no valuation allowance relating to
deferred income tax assets at January 29, 1995 and January 31, 1994. Management
has determined, based on the Company's history of prior operating earnings and
its expectations for the future, that taxable income of the Company will more
likely than not be sufficient to fully recognize these deferred tax assets.
At January 29, 1995, the Company had net operating loss carryforwards of
$6,602,000, expiring in 2010, to offset future taxable income of a subsidiary.
Management has determined, based on projected earnings of the subsidiary, that
the taxable income of the subsidiary will more likely than not be sufficient to
fully utilize these net operating loss carryforwards.
22
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Restructure liability $ 2,524 $ --
Intangible assets revaluation 8,103 --
Inventories, principally due to additional
costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 1,746 1,086
Net operating loss carryforwards 2,475 --
Other 2,222 905
- - --------------------------------------------------------------------
Gross deferred tax assets 17,070 1,991
- - --------------------------------------------------------------------
Deferred tax liabilities:
Inventories, to conform UETA's accounting
method from LIFO to FIFO (1,168) (1,101)
Depreciation and capitalized interest (190) (712)
Other (1,082) (349)
- - --------------------------------------------------------------------
Gross deferred tax liabilities (2,440) (2,162)
- - --------------------------------------------------------------------
Net deferred tax assets (liabilities) $14,630 $ (171)
- - --------------------------------------------------------------------
</TABLE>
The Company paid income taxes of approximately $9,370,000, $18,405,000 and
$18,240,000 during fiscal 1995, 1994 and 1993, respectively.
(9) PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all nonunion
employees meeting minimum service requirements set forth in the plan. Annual
contributions made to the plan by the Company are at the discretion of the
Board of Directors, subject to certain limitations, as defined in the plan.
The profit sharing plan includes a 401(k) deferred compensation plan covering
substantially all nonunion employees. Employees are permitted within
limitations imposed by tax law to make pre-tax contributions to the plan
pursuant to salary reduction agreements. The Company is required to make
matching contributions to the plan based on a percentage of employee
contributions to the 401(k) deferred compensation plan. Profit Sharing and
401(k) costs amounted to approximately $1,245,000, $865,000 and $1,190,000 for
fiscal 1995, 1994 and 1993, respectively.
(10) OPERATING LEASES
The Company and its subsidiaries are obligated under noncancellable
operating leases for warehouse, store and office facilities at various
locations. Certain of the leases provide for renewals for various periods and
most leases require the Company to pay all operating expenses and additional
rent based upon sales. Leases at several airport locations are terminable by
the lessor upon thirty days notice.
Approximate future minimum rentals, under noncancellable operating leases
with initial or remaining terms of one year or more are as follows (in
thousands):
<TABLE>
<CAPTION>
Related
parties Others Total
- - --------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 573 $12,152 $12,725
1997 413 10,983 11,396
1998 156 10,045 10,201
1999 49 9,558 9,607
2000 2 7,134 7,136
Thereafter -- 9,488 9,488
- - --------------------------------------------------------------------
$1,193 $59,360 $60,553
- - --------------------------------------------------------------------
</TABLE>
Total rental expense, including approximately $1,273,000, $2,228,000 and
$2,099,000 in fiscal 1995, 1994 and 1993, respectively, paid to related
parties, consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- - --------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $14,961 $13,652 $10,365
Additional rentals
based on sales 10,755 10,176 12,871
Other 144 142 289
- - --------------------------------------------------------------------
$25,860 $23,970 $23,525
- - --------------------------------------------------------------------
</TABLE>
(11) OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------
<S> <C> <C>
Non-competition agreements $ 9,770 $28,910
Leaseholds 3,532 10,999
Operating rights 13,435 18,173
Other 4,833 4,425
- - --------------------------------------------------------------------
31,570 62,507
Less accumulated amortization 5,999 11,424
- - --------------------------------------------------------------------
$25,571 $51,083
- - --------------------------------------------------------------------
</TABLE>
See note 3 regarding the revaluation of intangible assets during fiscal
1995.
(12) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------
<S> <C> <C>
Airline and other commissions $ 4,855 $ --
Incentive compensation plans 2,650 1,758
Other 22,079 11,862
- - --------------------------------------------------------------------
$29,584 $13,620
- - --------------------------------------------------------------------
</TABLE>
(13) BUSINESS SEGMENTS
The Company's principal business is the retail sale of tax and duty free
merchandise, such as spirits, tobacco, perfume and gift items. The Company also
wholesales these products. In the financial information by business segment
shown below, operating income represents net sales less cost of sales and an
allocation of certain selling, general and administrative expenses as
determined by management. There are no identifiable assets used exclusively in
the wholesale operation and the amounts allocable thereto would not be
significant. Accordingly, segment information for identifiable assets,
depreciation and capital expenditures is not presented.
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- - --------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue:
Retail operations $430,182 $312,738 $299,234
Wholesale operations 71,579 63,698 62,589
- - --------------------------------------------------------------------
$501,761 $376,436 $361,823
- - --------------------------------------------------------------------
Operating income:
Retail operations $ 22,988 $ 32,565 $ 42,131
Wholesale operations 3,863 6,970 7,516
Merger-related expenses -- -- (4,389)
Restructuring expenses (7,571) -- --
Revaluation of
intangible assets (46,002) -- --
Other income (expense) (4,427) 3,547 4,528
- - --------------------------------------------------------------------
Earnings (loss) before
income taxes $(31,149) $ 43,082 $ 49,786
- - --------------------------------------------------------------------
</TABLE>
23
<PAGE>
(14) STOCK OPTION PLANS
An aggregate of 4,640,000 shares of common stock were reserved for issuance
pursuant to nonqualified stock options. Approximately 2,228,835 unoptioned
shares were available for grant at January 29, 1995. At January 29, 1995,
871,127 options were exercisable under the plans. Options are exercisable, in
increments from the grant date, for ten years from the date of the grant.
A summary of changes in outstanding stock options is
as follows:
<TABLE>
<CAPTION>
JANUARY 29, January 31, January 31,
Years ended 1995 1994 1993
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year 935,765 795,524 588,681
Granted
($11.00 -- $52.75 per share) 1,376,050 174,500 275,750
Canceled
($8.75 -- $52.75 per share) (73,728) (30,707) (2,866)
Exercised
($6.875 -- $22.875 per share) (33,566) (3,552) (66,041)
- - ---------------------------------------------------------------------
Balance at end of year 2,204,521 935,765 795,524
- - ---------------------------------------------------------------------
</TABLE>
(15) INVESTMENT IN DEBT SECURITIES
Management reviewed the classification of its security portfolio as of
January 29, 1995 and January 31, 1994 and determined that all securities are
"held-to-maturity securities." The fair values of the Company's investments in
debt securities are as follows (in thousands):
<TABLE>
<CAPTION>
January 29, Gross Gross January 29,
1995 Unrealized Unrealized 1995
Carrying Holding Holding Fair
Amount Gains (Losses) Value
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities maturing
within one year:
Corporate debt securities $ 3,861 $ 3 $ (60) $ 3,804
Debt securities issued by
states of the United States
and political subdivisions
of the states 8,659 26 (42) 8,643
Debt securities issued
by the U.S. Treasury
and other U.S.
government corporations 566 -- (3) 563
- - --------------------------------------------------------------------------------------
Total short-term investments 13,086 29 (105) 13,010
- - --------------------------------------------------------------------------------------
Securities maturing after
one through five years:
Corporate debt securities 5,655 -- (79) 5,576
Debt securities issued by
states of the United States
and political subdivisions
of the states 3,618 -- (56) 3,562
Debt securities issued by
the U.S. Treasury and
other U.S. government
corporations and agencies 380 -- (18) 362
- - --------------------------------------------------------------------------------------
Total long-term
investments 9,653 -- (153) 9,500
- - --------------------------------------------------------------------------------------
Total investments $22,739 $29 $(258) $22,510
- - --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
January 31, Gross Gross January 31,
1994 Unrealized Unrealized 1994
Carrying Holding Holding Fair
Amount Gains (Losses) Value
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities maturing
within one year:
Corporate debt securities $ 6,259 $ 38 $ (33) $ 6,264
Debt securities issued by
states of the United States
and political subdivisions
of the states 15,146 117 (1) 15,262
Debt securities issued by
the U.S. Treasury and
other U.S. government
corporations and agencies 10,910 44 -- 10,954
- - --------------------------------------------------------------------------------------
Total short-term investments 32,315 199 (34) 32,480
- - --------------------------------------------------------------------------------------
Securities maturing after
one through five years:
Corporate debt securities 7,480 15 (134) 7,361
Debt securities issued by
states of the United States
and political subdivisions
of the states 625 1 (4) 622
Debt securities issued by
the U.S. Treasury and
other U.S. government
corporations and agencies 455 3 (3) 455
- - --------------------------------------------------------------------------------------
Total long-term
investments 8,560 19 (141) 8,438
- - --------------------------------------------------------------------------------------
Total investments $40,875 $218 $(175) $40,918
- - --------------------------------------------------------------------------------------
</TABLE>
The Company did not sell any investment securities during fiscal 1995. The
Company did not have any material realized gains or losses from sales of
investment securities during fiscal 1994 and 1993.D
(16) LEGAL PROCEEDINGS
During fiscal 1995, two actions were commenced against the Company, and in
one instance, certain of its officers and directors, by several former
shareholders of UETA, Inc. The complaints allege, among other things, that the
defendants made misleading statements and omissions about the Company's
business in connection with the acquisition of UETA, Inc. The relief sought
includes an unspecified amount of damages and rescission. The Company and its
officers and directors believe they have meritorious defenses to the
allegations made against them and intend to defend the suits vigorously.
Accordingly, the Company has not recorded any provision related to this matter.
The Company is a party to several other unrelated pending legal proceedings
and claims. Although the outcome of such proceedings and claims cannot be
determined with certainty, management believes that the final outcome should
not have a material adverse effect on the Company's consolidated financial
position.
24
