UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A No. 1
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended October 31, 1994 Commission File No. 1-10952
DUTY FREE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Maryland 52-1292246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)
Identification No.)
63 Copps Hill Road, Ridgefield, Connecticut
(Address of principal executive offices)
06877
(Zip Code)
Registrant's telephone number, including area code: 203-431-6057
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
At November 30, 1994, 27,213,016 shares of $.01 par value common stock of
the registrant were outstanding.
Page 1 of 23
Exhibit Index is on Page 24
Form 10-Q
Page 2
DUTY FREE INTERNATIONAL, INC.
October 31, 1994
INDEX
Part I. Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
October 31, 1994 (unaudited) and
January 31, 1994
Consolidated Statements of Earnings 4
(unaudited) for the three and nine months
ended October 31, 1994 and 1993
Consolidated Statement of Stockholders' 5
Equity (unaudited) for the nine months
ended October 31, 1994
Consolidated Statements of Cash Flows 6
(unaudited) for the nine months
ended October 31, 1994 and 1993
Notes to Consolidated Financial 7-12
Statements (unaudited)
Item 2. Management's Discussion and Analysis 13-21
of Financial Condition and Results of
Operations
Part II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
October 31, January 31
1994 1994
(unaudited) (note 1)
Assets
Current assets:
Cash and cash equivalents $ 27,306 $ 99,669
Short-term investments (note 4) 24,066 32,315
Receivables:
Trade receivables, less allowance for
doubtful accounts of $965 and $740 25,107 13,537
Other 12,067 8,127
37,174 21,664
Merchandise inventories 111,799 78,257
Prepaid expenses and other current assets 11,366 6,131
Total current assets 211,711 238,036
Long-term investments (note 4) 9,748 8,560
Property and equipment, net 80,512 58,967
Excess of cost over net assets of subsidiaries
acquired, net (notes 6 and 8) 58,277 20,319
Other intangible assets, net (notes 6 and 8) 26,292 51,083
Other assets, net 23,920 10,635
$ 410,460 $ 387,600
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 7,559 $ 2,559
Accounts payable, trade 45,876 17,739
Accrued restructuring expenses (note 7) 4,299 --
Other current liabiities 28,564 13,620
Total current liabilities 86,298 33,918
Long-term debt, excluding current maturities 121,175 118,211
Other liabilities 4,208 3,610
Total liabilities 211,681 155,739
Stockholders' equity:
Common stock, par value $.01 per share.
Authorized 75,000,000 shares; issued and
outstanding 27,213,016 shares and 27,238,146
shares, respectively 272 272
Additional paid-in capital 79,911 80,321
Foreign currency translation adjustments (614) (340)
Retained earnings 119,210 151,608
Total stockholders' equity 198,779 231,861
$ 410,460 $ 387,600
See accompanying notes to the consolidated financial statements.
FORM 10-Q
Page 4
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
1994 1993 1994 1993
(in thousands, except earnings per share)
<S> <C> <C> <C> <C>
Net sales $ 144,856 $ 104,605 $ 365,340 $ 281,771
Cost of sales 86,109 63,037 220,273 169,906
Gross profit 58,747 41,568 145,067 111,865
Advertising, storage and other
operating income 1,088 1,499 3,488 3,919
59,835 43,067 148,555 115,784
Selling, general and
administrative expense 51,276 30,854 128,427 84,588
Restructuring expenses
(note 7) 7,571 -- 7,571 --
Revaluation of intangible
assets (note 8) 46,002 -- 46,002 --
Operating income (loss) (45,014) 12,213 (33,445) 31,196
Other income (expense):
Interest income 692 548 2,664 1,888
Interest expense (2,375) (326) (6,755) (935)
Other, net 93 462 809 1,445
(1,590) 684 (3,282) 2,398
Earnings (loss)
before taxes (46,604) 12,897 (36,727) 33,594
Income tax expense
(benefit) (12,066) 4,802 (8,412) 12,462
Net earnings (loss)$ (34,538) $ 8,095 $ (28,315) $ 21,132
Earnings (loss) per share$ (1.27) $ 0.30 $ (1.04) $ 0.78
Weighted average number
of shares outstanding 27,213 27,237 27,221 27,196
See accompanying notes to the consolidated financial statements.
</TABLE>
Form 10-Q
Page 5
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended October 31, 1994
(in thousands, unaudited)
<C> <C> <C> <C> <C> <C>
Foreign
Additional currency Total
Common stock paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1994 27,238 $272 $80,321 ($340) $151,608 $231,861
Dividends ($0.15 per share) -- -- -- -- (4,083) (4,083)
Exercise of common stock options 3 -- 26 -- -- 26
Common stock purchased and retired (28) -- (436) -- -- (436)
Change in foreign currency
translation adjustments -- -- -- ($274) -- (274)
Net loss -- -- -- -- (28,315)(28,315)
Balance at October 31, 1994 27,213 $272 $79,911 ($614) $119,210 $198,779
</TABLE>
See accompanying notes to the consolidated financial statements.
FORM 10-Q
Page 6
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
October 31,
1994 1993
(in thousands)
Cash flows from operating activities:
Net earnings (loss) $ (28,315) $ 21,132
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Revaluation and write-off of assets 47,790 --
Provision for deferred income taxes (14,639) --
Depreciation and amortization of property
and equipment 4,778 3,702
Other amortization 6,249 3,974
Changes in operating assets and liabilities,
net of effects of acquisitions accounted for
by the purchase method:
Accounts receivable (1,444) (8,664)
Merchandise inventories (8,093) (19,577)
Prepaid expenses and other current
assets 785 (1,741)
Accounts payable, trade 11,900 7,535
Accrued restructuring expenses 5,577 --
Other current liabilities 5,436 (984)
Other (854) 51
Net cash provided by operating
activities 29,170 5,428
Cash flows from investing activities:
PROCEEDS FROM MATURITIES OF INVESTMENTS 37,931 20,238
PURCHASES OF INVESTMENTS (31,067) (3,301)
Additions to property and equipment (27,308) (9,000)
Investments in and advances to affiliates (3,439) (1,254)
Acquisitions of businesses accounted for by
the purchase method, net of cash acquired (60,598) (18,462)
Other 1,694 (2,524)
Net cash used in investing
activities (82,787) (14,303)
Cash flows from financing activities:
Proceeds from borrowings -- 21,727
Dividends paid (4,083) (4,074)
Payment of borrowings (14,127) (5,368)
Other (536) 480
Net cash provided by (used in) financing
activities (18,746) 12,765
Net increase (decrease) in cash
and cash equivalents (72,363) 3,890
Cash and cash equivalents at beginning
of period 99,669 15,748
Cash and cash equivalents at end of period $ 27,306 $ 19,638
See accompanying notes to the consolidated financial statements.
PAGE
<PAGE>
Form 10-Q
Page 7
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Consolidated Financial Statements and Change in Accounting Principle
The consolidated financial statements included herein do not include
all information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. For further information, such as the significant accounting
policies followed by the Company, refer to the notes to the consolidated
financial statements set forth in the Company's annual report for the year
ended January 31, 1994.
During the third quarter of fiscal year 1995, as more fully explained
in note 8 herein, the Company changed its method of determining the fair
value of intangible assets from an undiscounted approach to a discounted
approach. 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 opinion of management, the consolidated financial statements
include all necessary adjustments (consisting of normal recurring
accruals) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented.
The results of operations for the periods ended October 31, 1994 are
not necessarily indicative of the operating results to be expected for the
full year.
The balance sheet at January 31, 1994 has been derived from the
audited financial statements of the Company at that date.
(2) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Long-term investments in
affiliates in which the Company does not have a majority interest or
control are accounted for by the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(3) Earnings Per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period.
(4) Accounting for Certain 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.
<PAGE>
Form 10-Q
Page 8
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. Management has reviewed the classification of its
security portfolio as of October 31, 1994 and determined that all
securities are "held-to-maturity securities".
If a decline in value of an individual security is judged to be other
than temporary, the cost basis of that security is reduced to its fair
value and the amount of the write-down is included in earnings. For
purposes of computing realized gains or losses on the sales of
investments, cost is determined using the specific identification method.
(5) Foreign Exchange Forward Contracts
Currently, 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 and selling 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 $20,521,000 of
outstanding foreign exchange forward contracts outstanding at October 31,
1994 to purchase British pounds, French francs, Deutchemarks, and Swiss
francs. The contracts outstanding at October 31, 1994 mature at various
dates through February, 1995. The fair values of these contracts were
$22,580,000 at October 31, 1994. Fair values were estimated by obtaining
quotes from banks assuming all contracts were purchased on October 31,
1994.
(6) Acquisitions
On May 1, 1994, the Company purchased Inflight Sales Group Limited
("Inflight"), and certain non-competition rights, for approximately
$70,600,000. The purchase price exceeded the fair value of the net assets
acquired by approximately $58,000,000. The Company has agreed to pay the
sellers additional consideration contingent upon Inflight generating
predetermined earnings before taxes from fiscal 1995 through fiscal 1998.
The acquisition was accounted for using the purchase method, and,
accordingly, the purchase price has been allocated to the related assets
and assumed liabilities based on their respective fair values. The
consolidated statements of earnings for the three and nine months ended
October 31, 1994 include the results of Inflight's operations from its
acquisition date.
If the acquisition had taken place as of February 1, 1993,
consolidated net sales and net earnings would have been $481,244,000 and
$22,986,000($0.84 per share), respectively, for the year ended January 31,
1994. These pro forma results are based upon historical results of
operations adjusted for estimated amortization and depreciation of
purchase price allocations and interest expense, net of income tax effect.
In management's opinion, these results are not indicative of the results
that would have occurred if the acquisition had taken place on February 1,
1993, since, among other reasons, operating efficiencies expected by the
merger are not reflected.
<PAGE>
Form 10-Q
Page 9
Supplemental information regarding acquisitions required for the
statements of cash flows is as follows (in thousands):
<TABLE>
<S> <C> <C>
Nine months ended October 31, 1994 1993
<C> <C>
Fair value of assets acquired$ 108,673 $ 28,994
Note payable issued (10,000) --
Common stock issued -- (2,800)
Cash paid, net of cash acquired(60,598) (18,462)
Liabilities assumed $ 38,075 $ 7,732
</TABLE>
(7) 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 LAST YEAR. INITIALLY, THE
COMPANY HAD BELIEVED THAT ITS NORTHERN BORDER 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 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.
<PAGE>
Form 10-Q
Page 10
A pre-tax charge to earnings of $7,571,000 was taken in the quarter
ended October 31, 1994 as a result of the restructuring. Restructuring
costs include the following (in thousands):
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
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
EMPLOYEE. 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 OCTOBER 31, 1994 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 $5,426,000 IN CASH RELATING TO
RESTRUCTURING COSTS. APPROXIMATELY $2,145,000 OF THE RESTRUCTURING COSTS
RELATE TO NON-CASH WRITE-OFFS OF RECORDED ASSETS. AS OF OCTOBER 31, 1994,
THE COMPANY HAS CLOSED ALL FOURTEEN OF ITS NORTHERN BORDER STORES AND
ELIMINATED CERTAIN ADMINISTRATIVE FUNCTIONS RELATING TO THE NORTHERN
BORDER DIVISION. THE COMPANY HAS PAID APPROXIMATELY $465,000 FOR EMPLOYEE
SEVERANCE AND OTHER ARRANGEMENTS, RENT AND MISCELLANEOUS OTHER EXPENSES
RELATING TO THE CLOSED NORTHERN BORDER STORES AS OF OCTOBER 31,1994. AS
OF OCTOBER 31, 1994, 125 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 other business locations to be closed
under the restructuring plan were $3,628,000 and $11,001,910 for the
quarter and nine months ended October 31, 1994, respectively. Net sales
were $4,054,000 and $12,149,000 for the quarter and nine months ended
October 31, 1993, respectively. Operating losses of the stores and other
business locations to be closed under the restructuring plan were
$770,000 and $1,995,000 for the quarter and nine months ended October 31,
1994, respectively. Operating losses were $192,000 and $399,000 for the
quarter and nine months ended October 31, 1993, respectively.
<PAGE>
Form 10-Q
Page 11
(8) 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. 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 policy remained
in effect, there would have been no significant impairment at October 31,
1994. 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 RELATING 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 at October 31,
1994.
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
ALONG THE UNITED STATES/CANADA BORDER 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 estimated 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. There would have been no significant impairment at
October 31, 1994 under the old policy.
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 estimated fiscal
1995 financial results over the length of the related leases, USING A 15%
<PAGE>
FORM 10-Q
Page 12
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. There would have been no significant impairment at
October 31, 1994 under the old policy.
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.
THERE WOULD HAVE BEEN NO SIGNIFICANT IMPAIRMENT AT OCTOBER 31, 1994 UNDER
THE OLD POLICY.
THE INTANGIBLE ASSET REVALUATION WRITE-DOWN BY TYPE OF INTANGIBLE
ASSET AND DIVISION AND THE CARRYING AMOUNTS OF INTANGIBLE ASSETS AT
OCTOBER 31, 1994 ARE AS FOLLOWS (IN THOUSANDS):
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C>
NORTHERN DIPLOMATIC/
BORDER AIRPORT WHOLESALE TOTAL OCTOBER 31, 1994
DIVISION DIVISION DIVISION WRITE-DOWN CARRYING AMOUNT
<C> <C> <C> <C> <C>
EXCESS OF COST OVER
NET ASSETS OF
SUBSIDIARIES
ACQUIRED $ 7,880$ 3,734 $ 3,229 $14,843 $ 58,277
NON-COMPETITION
AGREEMENTS 13,201 835 - 14,036 7,437
PURCHASE OPTIONS 2,238 1,200 - 3,438 -
OPERATING RIGHTS/
LEASEHOLDS 7,354 4,939 - 12,293 14,453
OTHER 166 1,226 - 1,392 4,402
$30,839 $11,934$ 3,229 $46,002 $84,569
</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.
PAGE
<PAGE>
Form 10-Q
Page 13
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ACQUISITIONS
On May 1, 1994, the Company purchased Inflight Sales Group Limited
("Inflight"), and certain non-competition rights, for approximately
$70,275,000. The Company has agreed to pay the sellers additional
consideration contingent upon Inflight generating predetermined earnings
before taxes from fiscal 1995 through fiscal 1998.
Inflight, with sales of approximately $105,000,000 during 1993, is
the leading concessionaire and supplier of on board duty free merchandise
to international airlines. In addition, Inflight is a leading supplier to
international airlines of amenity kits 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 are 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 the third quarter and nine months ended October 31,
1994.
RESULTS OF OPERATIONS
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 LAST YEAR. INITIALLY, THE
COMPANY HAD BELIEVED THAT ITS NORTHERN BORDER 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
<PAGE>
Form 10-Q
Page 14
WAREHOUSE AND ADMINISTRATIVE OPERATIONS INTO THE COMPANY'S NEW 100,000
SQUARE FOOT DISTRIBUTION AND ADMINISTRATIVE CENTER IN MIAMI, FLORIDA. THE
NORTHERN BORDER 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 in the quarter
ended October 31, 1994 as a result of the restructuring. Restructuring
costs include the following (in thousands):
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
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
EMPLOYEE. 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 OCTOBER 31, 1994 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 $5,426,000 IN CASH RELATING TO
RESTRUCTURING COSTS. APPROXIMATELY $2,145,000 OF THE RESTRUCTURING COSTS
RELATE TO NON-CASH WRITE-OFFS OF RECORDED ASSETS. AS OF OCTOBER 31, 1994,
THE COMPANY HAS CLOSED ALL FOURTEEN OF ITS NORTHERN BORDER STORES AND
ELIMINATED CERTAIN ADMINISTRATIVE FUNCTIONS RELATING TO THE NORTHERN
BORDER DIVISION. THE COMPANY HAS PAID APPROXIMATELY $465,000 FOR EMPLOYEE
<PAGE>
Form 10-Q
Page 15
SEVERANCE AND OTHER ARRANGEMENTS, RENT AND MISCELLANEOUS OTHER EXPENSES
RELATING TO THE CLOSED NORTHERN BORDER STORES AS OF OCTOBER 31,1994. AS
OF OCTOBER 31, 1994, 125 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 other business locations to be closed
under the restructuring plan were $3,628,000 and $11,001,910 for the
quarter and nine months ended October 31, 1994, respectively. Net sales
were $4,054,000 and $12,149,000 for the quarter and nine months ended
October 31, 1993, respectively. Operating losses of the stores and other
business locations to be closed under the restructuring plan were
$770,000 and $1,995,000 for the quarter and nine months ended October 31,
1994, respectively. Operating losses were $192,000 and $399,000 for the
quarter and nine months ended October 31, 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. 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 policy remained
in effect, there would have been no significant impairment at October 31,
1994. 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 RELATING 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 at October 31,
1994.
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
ALONG THE UNITED STATES/CANADA BORDER 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
<PAGE>
Form 10-Q
Page 16
from estimated 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. There would have been no significant impairment at
October 31, 1994 under the old policy.
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 estimated 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. There would have been no significant impairment at
October 31, 1994 under the old policy.
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.
THERE WOULD HAVE BEEN NO SIGNIFICANT IMPAIRMENT AT OCTOBER 31, 1994 UNDER
THE OLD POLICY.
The intangible asset revaluation write-down by type of intangible
asset and division AND THE CARRYING AMOUNTS OF INTANGIBLE ASSETS AT
OCTOBER 31, 1994 ARE as follows (in thousands):
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C>
NORTHERN Diplomatic/
Border Airport Wholesale Total October 31, 1994
Division Division Division Write-down Carrying Amount
<S> <C> <C> <C> <C> <C>
Excess of cost over
net assets of
subsidiaries
acquired $ 7,880 $ 3,734 $ 3,229 $14,843 $ 58,277
Non-competition
agreements 13,201 835 - 14,036 7,437
Purchase options 2,238 1,200 - 3,438 -
Operating rights/
leaseholds 7,354 4,939 - 12,293 14,453
Other 166 1,226 - 1,392 4,402
$30,839$11,934 $ 3,229 $46,002 $84,569
</TABLE>
<PAGE>
Form 10-Q
Page 17
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 Sales
The following tables set forth, for the periods 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:
<TABLE>
<CAPTION>
Three Months Ended October 31,
(in thousands, except for percentages)
<S> <C> <C> <C>
Increase/(Decrease)
Divisional Three Months Ended
Net Sales 1994 1993 October 31, 1994 vs. 1993
<C> <C> <C> <C> <C> <C>
Border:
Southern $ 36,517 25.2% $ 32,569 31.1%$ 3,948 12.1 %
Northern 23,627 16.3 30,565 29.2 (6,938) (22.7)%
Airport 24,216 16.7 20,774 19.8 3,519 17.0 %
Diplomatic
and Wholesale 18,326 12.7 20,697 19.9 (2,448)(11.8)%
Inflight 42,170 29.1 0 N/A 42,170 N/A
$144,856 100.0% $104,605 100.0% $ 40,251 38.5 %
Nine Months Ended October 31,
(in thousands, except for percentages)
Increase/(Decrease)
Divisional Nine Months Ended
Net Sales 1994 1993 October 31, 1994 vs. 1993
Border:
Southern $103,366 28.3% $ 87,461 31.0%$ 15,905 18.2 %
Northern 60,601 16.6 79,794 28.3 (19,193) (24.1)%
Airport 68,295 18.7 55,149 19.6 13,146 23.8 %
Diplomatic
and Wholesale 50,925 13.9% 59,367 21.1 (8,442)(14.2)%
Inflight 82,153 22.5% 0 N/A 82,153 N/A
$365,340 100.0% $281,771 100.0% $ 83,569 29.7 %
</TABLE>
The Company's net sales were $144,856,000 in the third quarter of
fiscal 1995, an increase of $40,251,000 or 38.5%, from $104,605,000 in the
third quarter of fiscal 1994. The Company's net sales, excluding Inflight
Division's net sales, were $102,686,000 for the quarter ended October 31,
1994, a decrease of $1,919,000 or 1.8% from the comparable period in the
prior year. For the nine months ended October 31, 1994, net sales
increased 29.7% to $365,340,000 from $281,771,000 for the nine months
ended October 31, 1993. The Company's net sales, excluding Inflight
Division's net sales, were $283,187,000 for the nine months ended
<PAGE>
Form 10-Q
Page 18
October 31, 1994, an increase of $1,416,000 or 1.0% from the comparable
period in the prior year. Southern Border Division net sales increased
by 12.1% and 18.2% for the three and nine months ended October 31, 1994,
respectively. The increases were due primarily to the continued expansion
of the Mexican economy, 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. Northern Border Division net sales decreased by
22.7% and 24.1% for the three and nine months ended October 31, 1994,
respectively. Management believes the decreases were 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 has determined that travel will not increase
substantially from current levels in the foreseeable future, due primarily
to the fact that travel across the United States/Canada border has not
increased as the Canadian economy has improved in fiscal 1995, and reduced
Canadian tobacco taxes will continue to have a negative effect on duty
free operations along the United States/Canada border in the foreseeable
future. Airport Division net sales increased by 17.0% and 23.8% for the
three and nine months ended October 31, 1994, respectively. The increases
were 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
were not open last year, and the Bared Jewelers acquisition on May 7,
1993. Diplomatic/Wholesale Division net sales decreased by 11.8% and
14.2% for the three and nine months ended October 31, 1994, respectively.
As management continues 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.
Management expects this process to adversely affect sales of the
Diplomatic and Wholesale Division during the remainder of fiscal 1995.
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, increased to 40.6% for the quarter ended
October 31, 1994 from 39.7% for the quarter ended October 31, 1993. The
increase was due primarily to the Inflight Division having gross profit
margins higher than the Company's average gross profit margins, and a
decrease in the Diplomatic Wholesale Division's low gross margin wholesale
sales. The above was partially offset by a significant decrease in the
Northern Border Division's sales which generally has gross profit margins
higher than the Company's average gross profit margin.
Gross profit, as a percentage of net sales, was virtually unchanged
for the nine months ended October 31, 1994 when compared to the prior
year. An increase in gross profit margins due to the Inflight Division
having higher gross profit margins than the Company's average gross profit
margin, and a decrease in the Diplomatic Wholesale Division's low gross
margin wholesale sales, was offset by a decrease in tobacco gross profit
margins as a result of the Northern Border Division reducing tobacco
prices and an increase in the Southern Border Division's sales of tobacco
products, which generally have gross profit margins lower than the
Company's average gross profit, and a significant decrease in the Northern
Border Division's sales.
<PAGE>
Form 10-Q
Page 19
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 $411,000
and $431,000 for the three and nine months ended October 31, 1994,
respectively, when compared to the prior year. The decreases were due
primarily to the businesses purchased in the Bared Jewelers acquisitions
having one-time advertising programs with vendors during the prior year.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net
sales, increased to 35.4% in the third quarter of fiscal 1995 from 29.5%
in the third quarter of fiscal 1994. For the nine months ended October
31, 1994, selling, general and administrative expenses increased to
35.2% from 30.0% for the nine months ended October 31, 1993. The
increases were 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 to commission expenses paid to airlines.
- - -An increase in Airport Division sales 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
corresponding 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 $2,274,000 and $5,680,000 for the three and
nine months ended October 31, 1994 when compared to the prior year. The
decreases were 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 $60,000,000 of the proceeds from the issuance of
the senior notes was used to purchase Inflight on May 1, 1994.
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 for the three and
nine months ended October 31, 1994 when compared to the same periods in
the prior year.
Net Earnings
A total pre-tax charge to earnings of $53,573,000, $38,935,000 after
tax, was taken in the quarter ended October 31, 1994, encompassing all
costs associated with both the restructuring plan and the intangible asset
revaluations described above. Net earnings for the quarter ended October
31, 1994, excluding the after tax affects of the restructuring plan and
the intangible asset revaluations, were $4,397,000, or $.16 per share, a
decrease of $3,698,000 or 45.7% from net earnings of $8,095,000, or $.30
per share, for the quarter ended October 31, 1993. For the nine months
<PAGE>
Form 10-Q
Page 20
ended October 31, 1994, net earnings, excluding the after tax effects of
the restructuring plan and the intangible asset revaluations, were
$10,620,000, or $.39 per share, a $10,599,000 or 49.7% decrease from net
earnings of $21,132,000, or $.78 per share, for the nine months ended
October 31, 1993. The decreases were due primarily to significant
decreases 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.
The Southern Border Division's net sales and earnings for the three
and nine months ended October 31, 1994 increased significantly from the
prior year. The Inflight Division, including amortization of intangible
assets relating to the purchase, had an accretive effect on the Company's
net income during the three and nine months ended October 31, 1994.
The Company estimates that the restructuring plan and the intangible
asset revaluations would have increased estimated 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.
Management believes travel across the United States/Canada border will not
increase significantly from current levels, and reduced Canadian tobacco
taxes and prices will continue to adversely affect the Northern Border
Division in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Providing by Operating Activities
Net cash provided by operating activities was $29,170,000 for the
nine months ended October 31, 1994, an increase of $23,742,000 from
$5,428,000 for the nine months ended October 31, 1993. The increase was
due primarily to the following factors:
- - -A significant decrease in accounts receivable, excluding Inflight,
from October 31, 1993 as a result of a decrease in low gross margin
wholesale sales in fiscal 1995.
- - -A significant decrease in inventory, excluding Inflight, from October 31,
1993 due to the inventory reduction program instituted by the Company in
the second half of fiscal 1994.
- - -An increase in accrued interest expense from the $115,000,000 senior
notes. The next interest payment of $4,025,000 will be made on January
15, 1995.
The above was partially offset by a significant decrease in net
earnings, excluding the non-cash expenses of the intangible asset
revaluations and restructuring expenses, during the nine months ended
October 31, 1994 when compared to the same period in the prior year.
THE RESTRUCTURING PLAN WILL RESULT IN PAYMENTS OF APPROXIMATELY
$5,426,000, MOST OF WHICH WILL OCCUR DURING THE REMAINDER OF FISCAL 1995
AND EARLY FISCAL 1996.
Net Cash Used in Investing Activities
Net cash used in investing activities was $82,787,000 for the nine
months ended October 31, 1994. On May 1, 1994, the Company purchased
Inflight for approximately $58,600,000 in cash, net of cash acquired, and
a $10,000,000 note due to the former owners of Inflight. The Company
spent approximately $27,308,000 on capital expenditures (excluding
acquisitions of businesses) during the nine months ended October 31,
1994, consisting primarily of the purchase of leased and other property on
<PAGE>
Form 10-Q
Page 21
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.
Net Cash Used in Financing Activities
The Company paid off approximately $11,000,000 of debt assumed in the
Inflight acquisition in fiscal 1995.
Working Capital
Working capital was $125,413,000 as of October 31, 1994, a decrease
of $78,705,000 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.
PAGE
<PAGE>
Form 10-Q
Page 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Washington State Liquor Control Board and the Washington State
Department of Revenue have concluded their investigations (described in
Item 3 of Part I of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1994) of the operations of a subsidiary's
bonded warehouse in Seattle, Washington. All violations alleged by those
state agencies, as a result of their investigations, have been resolved
and settled. The United States Customs Service is continuing its
investigation and has thus far issued 16 notices of liquidated damages IN
THE AGGREGATE AMOUNT OF $712,000 relating to alleged violations of customs
rules governing the handling and sale of bonded merchandise. If these
alleged violations cannot be resolved at an early stage, the subsidiary
intends to contest them vigorously.
The action (described in Item 1 of Part II of the Company's Quarterly
Report on Form 10-Q for the fiscal period ended April 30, 1994), which was
commenced in the Superior Court of the State of Arizona, Pima County,
against the Company, certain of its subsidiaries and certain of its
officers and directors (as well as another defendant) has been dismissed
by stipulation of the plaintiffs and the defendants, without prejudice to
the commencement by the plaintiffs of a new action in the courts in the
State of Delaware. An order dismissing the action without prejudice to
the plaintiffs' right to assert their claims in an action filed within 30
days in a court of competent jurisdiction in the State of Delaware
was signed by a Judge of the Superior Court on November 17, 1994. THE
COMPLAINT FILED IN THIS ACTION HAD SOUGHT AN UNSPECIFIED AMOUNT OF ACTUAL
AND PUNITIVE DAMAGES, AND IN THE ALTERNATIVE, RESCISSION OR AN UNSPECIFIED
AMOUNT OF RESCISSIONARY DAMAGES.
The action (described in Item 1 of Part II of the Company's Quarterly
Report on Form 10-Q for the fiscal period ended July 31, 1994), which was
commenced against the Company and another unaffiliated defendant in the
District Court, 285 Judicial District, Bexar County, Texas, was abated by
the District Court at the conclusion of a hearing, held on November 17,
1994, on the motions to dismiss the action made by the Company and the
other defendant. In staying the action pending the resolution in the
State of Delaware of any litigation or other disputes between the parties,
the District Court ruled that the plaintiffs were not entitled to
maintain an action against the Company in the State of Texas. THE
COMPLAINT FILED IN THIS ACTION SEEKS AN UNSPECIFIED AMOUNT OF ACTUAL
DAMAGES AS WELL AS TREBLE DAMAGES, AND IN THE ALTERNATIVE, RESCISSION.
THE LEGAL PROCEEDINGS DESCRIBED ABOVE CURRENTLY ARE NOT EXPECTED TO
HAVE A MATERIAL EFFECT ON THE COMPANY AND FINANCIAL CONDITION RESULTS OF
OPERATIONS OR LIQUIDITY OR CASH FLOWS.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
18.1 Preferability letter regarding change in accounting
principle. *
(b) (i) The Company was not required to file a report on Form 8-
K for the three months ended October 31, 1994.
* PREVIOUSLY FILED.
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<PAGE>
Form 10-Q
Page 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUTY FREE INTERNATIONAL, INC.
Date: April 13, 1995 \s\ Gerald F. Egan
Gerald F. Egan
Vice President-Finance and
Chief Financial Officer
<PAGE>
<PAGE>
Form 10-Q
Page 24
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NO.
18.1 PREFERABILITY LETTER REGARDING CHANGE IN
ACCOUNTING PRINCIPLE (PREVIOUSLY FILED AS
AN EXHIBIT TO THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q FOR THE PERIOD ENDED
OCTOBER 31, 1994).
