[COVER PAGE]
Duty Free International
Leader in The Duty Free and Travel Retailing Industry
Annual Report Year Ended January 1996
[THREE PICTURES OF MERCHANDISE SOLD BY THE COMPANY (WATCH, MEN'S FRAGRANCE,
GOURMET FOOD)
<PAGE>
<TABLE>
<CAPTION>
Duty Free International, Inc. and Subsidiaries
Selected Consolidated Financial Data- 10 Years
(Dollars in thousands, except per share amounts and percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal year ended January 1996 1995 (1) 1994 1993 (2) 1992 (3) 1991 1990 1989 1988(4) 1987(4)
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Earnings Statement Data:
Net Sales $515,058 $501,761 $376,436 $361,823 $346,635 $262,962 $258,944 $229,687 $141,978 $29,925
Net sales increase percent 2.7% 33.3 % 4.0 % 4.4% 31.8% 1.6% 12.7% 61.8% N/A N/A
Gross profit 218,885 200,374 147,740 146,425 138,749 93,820 83,512 62,788 39,706 14,146
Gross profit - percent
of net sales 42.5% 39.9 % 39.2 % 40.5% 40.0% 35.7% 32.3% 27.3% 28.0 47.3%
Selling, general and
administrative expenses 192,913 177,895 113,365 101,401 95,406 67,194 59,985 45,121 31,492 11,053
Selling, general and
administrative
expenses - percent
of net sales 37.5% 35.5 % 30.1 % 28.0% 27.5% 25.6% 23.2% 19.6% 22.2% 36.9%
Restructuring expenses 7,571 - - - - - - - - -
Revaluation of intangible
assets 42,002 - - - - - - - - -
Operating income (loss) 30,346 (26,722) 39,535 49,647 47,577 29,715 26,221 19,984 9,528 3,748
Operating income (loss) -
percent of net sales 5.9% (5.3)% 10.5 % 13.7% 13.7% 11.3% 10.1% 8.7% 6.7% 12.5%
Operating income (loss) -
percent change N/A N/A (20.4)% 4.4% 60.1% 13.3% 31.2% 109.7% N/A N/A
Earnings (loss) before income
taxes 25,389 (31,149) 43,082 49,786 48,765 32,542 26,200 19,301 8,815 3,362
Effective income tax rate 37.0% (20.4)% 36.4 % 39.0% 35.7% 31.6% 33.3% 32.1% 43.3% 47.6%
Net earnings (loss) 15,996 (24,802) 27,393 30,373 31,364 22,268 17,483 13,101 5,001 1,762
Net earnings (loss) -
percent of net sales 3.1% (4.9)% 7.3 % 8.4% 9.0% 8.5% 6.8% 5.7% 3.5% 5.9%
Earnings (loss) per share $0.59 $(0.91) $1.01 $1.08 $1.19 $0.85 $0.78 $0.71 $0.30 $0.17
Weighted average number
of shares outstanding 27,251 27,224 27,204 28,142 26,462 26,314 22,385 18,562 16,556 10,126
Dividends per common share $0.20 $ 0.20 $0.20 $0.15 - - - $0.025 - -
Return on stockholders' equity 7.7% (11.5)% 12.5 % 14.3% 17.7% 17.6% 22.3% 37.5% 28.0% 31.4%
Fiscal year ended January 1996 1995 (1) 1994 1993 (2) 1992 (3) 1991 1990 1989 1988(4) 1987(4)
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Balance Sheet Data:
Working capital $121,291 $113,996 $204,118 $ 90,630 $119,353 $103,209 $ 98,844 $ 29,348 $ 21,121 $5,647
Current ratio 3.2 2.7 7.0 3.3 3.9 3.1 3.3 1.5 1.4 2.3
Total assets 390,708 387,142 387,600 255,819 269,911 200,557 173,153 103,867 83,689 21,616
Long-term obligations 122,238 118,891 121,821 9,629 11,797 14,054 14,253 8,379 7,257 10,443
Stockholders - equity 212,482 201,151 231,861 207,343 216,447 137,875 115,830 41,183 28,737 6,954
Number of shares
outstanding 27,270 27,244 27,238 27,122 28,429 26,269 26,262 18,512 18,512 12,000
Percent of total debt to
total capitalization 36.2% 37.1 % 34.2 % 4.1% 5.2% 13.7% 15.7% 23.8% 35.8% 57.0%
Book value per share $7.79 $7.38 $8.51 $7.64 $7.61 $5.25 $4.41 $2.22 $1.55 $0.58
(1) Inflight Sales Group Limited was purchased on May 1, 1994.
(2) Expenses incurred in effecting the merger of UETA, Inc. and Duty
Free International were $4,389,000, or $0.16 per share, which were
charged to the financial results in fiscal 1993.
(3) The Company acquired 16 duty free stores and related businesses
along the Western United States/Canada border on February 1, 1991.
(4) UETA was formed in May 1987. The financial information for fiscal
1988 includes partial year results for UETA and fiscal 1987 does not
include UETA.
</TABLE>
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<CAPTION>
Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
First Second Third Fourth Year
- ----------------------------------------------------------------------------------------
Fiscal 1996:
Net sales $109,348 $130,359 $145,181 $130,170 $515,058
Gross profit 46,161 56,341 62,098 54,285 218,885
Restructuring expenses - - - - 0
Revaluation of intangible assets - - - - 0
Net earnings 1,466 4,516 5,719 4,295 15,996
Earnings per share $0.05 $0.17 $0.21 $0.16 $0.59
Fiscal 1995:
Net sales $83,243 $137,241 $144,856 $136,421 $501,761
Gross profit 30,448 55,872 58,747 55,307 200,374
Restructuring expenses - - 7,571 - 7,571
Revaluation of intangible assets - - 46,002 - 46,002
Net earnings (loss) 2,170 4,053 (34,538) 3,513 (24,802)
Earnings (loss) per share $0.08 $0.15 $(1.27) $0.13 $(0.91)
</TABLE>
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. DFI is also the primary 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. Headquartered
in Ridgefield, Connecticut, Duty Free International employs more than
2,000 people and has been publicly-held since 1989.
Duty Free Locations
[PICTURE OF MAP OF UNITED STATES WITH DOTS REPRESENTING STORE LOCATIONS]
International Locations
Caribbean, Hong Kong, Puerto Rico, Singapore, United Kingdom
[PICTURE OF ALFRED CARFORA, PRESIDENT AND CHIEF EXECUTIVE OFFICER]
Letter to Shareholders:
Building on our successful performance last year, we are excited
about our prospects for increasing sales and profitability across our
Company. In keeping with our vision to become a billion dollar company,
we will pursue growth opportunities both internally and through
acquisitions.
The past fiscal year was one of great accomplishment for our
Company. Despite the challenges posed by external factors, such as the
devaluation of the Mexican peso, we remained focused on achieving sales
growth and exceeded earnings expectations. We continued to de-emphasize
the low gross margin sales in the Diplomatic and Wholesale Division in
order to provide greater distribution capabilities to our stores.
<PAGE>
Operating Results
For the fiscal year, sales increased 3% to $515,058,000 from
$501,761,000 in the prior fiscal year. Net earnings increased 13%, for
the fiscal year ended January 28, 1996, to $15,996,000, or $.59 per
share, as compared with $14,133,000, or $.52 per share, excluding the
after-tax effects of fiscal 1995's restructuring plan and intangible
asset revaluations.
For the fourth quarter ended January 28, 1996, net sales were
$130,170,000, a decrease from $136,421,000 in the fourth quarter a year
ago. This decrease was due primarily to the decline in Southern Border
sales resulting from the year-ago devaluation of the Mexican peso versus
the U.S. dollar. Net earnings for the quarter, however, increased 22% to
$4,295,000, or $.16 per share, from $3,513,000, or $.13 per share, for
the same period last year.
As of January 28, 1996, total assets were $390,708,000, working
capital totaled $121,291,000, and total stockholders' equity was
$212,482,000. Total debt to total capitalization at fiscal year-end was
36.2%.
The Year in Review
Our year of accomplishment began with many opportunities. The
Airport Division opened 16 new stores, the Northern Border Division
acquired two new locations, and our Inflight Division was awarded a new
concession contract. An extensive cost reduction program was initiated
in the Southern Border Division in addition to our continued redefining
of the Diplomatic and Wholesale Division. Also during the year, we
completed negotiations for a fully-committed $75,000,000 revolving line
of credit and letter of credit facility.
The year began with our Airport Division opening 12 new travel
retail stores at Denver's International Airport, as well as two new duty
free stores at Boston's Logan International Airport. In anticipation of
lower sales expectations resulting from the devalued peso, we thoroughly
reviewed our Southern Border operations and immediately enacted a cost
reduction program.
During the second quarter, Northern Border Division's comparable
store sales turned positive. We added two stores to our Northern Border
chain, one at the Blue Water Bridge in Port Huron and one at the
International Bridge in Sault St. Marie, both in Michigan. The Airport
Division opened an additional duty free shop at the San Juan
International Airport. The Company completed negotiations for a
fully-committed $75,000,000 revolving line of credit and letter of
credit facility to serve our domestic and international cash management
needs.
In the third quarter, Northern Border sales continued to improve,
our Airport Division opened its third store in Boston, and earnings
growth continued to accelerate.
The highlight of our fourth quarter came from our Inflight
Division, which was awarded the contract to operate Air Canada's
on-board duty free concession program. With this contract, beginning
March 1, 1996, we estimate initial on-board revenues of $11,000,000. In
addition, our Airport Division opened a temporary duty free shop in the
new Delta Flight Center at John F. Kennedy International Airport and
look forward to the opening of a 5,000 square foot permanent facility by
June 1996.
<PAGE>
In September, we promoted John Edmondson to the position of
Executive Vice President and Chief Operating Officer, further
strengthening Duty Free International's executive team. In his
management of Southern and Northern Border operations, John demonstrated
himself to be a very competent and creative executive, and I look
forward to his increased influence in the management of our Company.
Looking Ahead
Building on our successful performance last year, we are excited
about our prospects for increasing sales and profitability across our
Company.
We anticipate meaningful contribution from our new 5,000 square
foot duty free shop in the Delta Flight Center once it becomes fully
operational in fiscal 1997. In our Inflight Division, we will continue
to negotiate for additional onboard duty free concession programs.
We expect Northern and Southern Border sales to improve over the
course of the new year due to the economic and currency stability in the
Canadian and Mexican markets.
As sales from each of our divisions increase, our Company will
enjoy even greater growth in profit by continuing to leverage off of a
relatively fixed-cost base.
Confident in our future, the Board of Directors has increased the
Company's dividend by 20%.
In keeping with our vision to become a billion dollar company, we
will pursue growth opportunities both internally and through
acquisitions.
We remain steadfast in our commitment to increase shareholder
value, and are grateful to our shareholders, employees, customers and
vendors for their continued support.
Sincerely,
Alfred Carfora
President and Chief Executive Officer
March 22, 1996
[PICTURE OF WATCH]
At-A-Glance
HQ:, LOCATIONS:, MARKETS:
Airport Division:
Fenton Hill American Ltd.
British Airways Building John F. Kennedy International Airport New York,
New York - 100 duty free and retail stores
14 international airports in the United States and Caribbean
[GRAPH - PERCENT OF FISCAL 1996 CONSOLIDATED NET SALES]
Inflight Division:
Inflight Duty Free Shop, Inc.
Ridgefield, Connecticut
64 international airline fleets
<PAGE>
21 onboard duty free concessions; 60 wholesale accounts from 48
operations bases in Europe, the Pacific Rim, South America and the
United States; 39 amenity kit supplier accounts
[GRAPH - PERCENT OF FISCAL 1996 CONSOLIDATED NET SALES]
Border South Division:
UETA, Inc.
San Antonio, Texas
30 duty free stores
14 border crossings in Arizona, California and Texas
[GRAPH - PERCENT OF FISCAL 1996 CONSOLIDATED NET SALES]
Border North Division:
AMMEX Tax and Duty Free Shops
Ridgefield, Connecticut
36 duty free and retail stores
30 border crossings in Idaho, Maine, Michigan, Minnesota, Montana, New
York, North Dakota, Vermont and Washington
[GRAPH - PERCENT OF FISCAL 1996 CONSOLIDATED NET SALES]
Diplomatic and Wholesale Division:
Samuel Meisel & Company, Inc.,
Carisam International Corporation
Glen Burnie, Maryland
Two Company-wide distribution centers, four ports
Embassies and consulates through-out the United States, primarily in New
York and Washington, D.C. Merchant and cruise ship ports in Baltimore,
Miami, New York and Philadelphia
[GRAPH - PERCENT OF FISCAL 1996 CONSOLIDATED NET SALES]
[PICTURE OF PEN]
Leader in The Duty Free and Travel Retailing Industry
Our intention is to maintain and further our position in the travel
industry and 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.
Airport Division
Continuing its tradition of steady sales growth and expansion, the
Airport Division, which operates under the name Fenton Hill American
Limited, contributed handsomely to the past year's performance. Total
sales for the Division increased 10 percent over fiscal 1995 sales to
$102.5 million, which accounted for 20 percent of overall sales.
Fenton Hill's consistent performance is the direct result of our
portfolio approach to airport retailing. This approach, which combines a
variety of retailing concepts, is compelling for airport management and
customers alike. The Fenton Hill retail mix continues to include duty
<PAGE>
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 book stores.
By all standards, our equity partnerships and strategic alliances
at a number of international airports have been an unqualified success.
We have now been awarded 21 concessions through our joint venture
partnerships, and look forward to increasing this number in the future.
Inflight Division
Acquired in the second quarter of fiscal 1995, Inflight has
consistently delivered outstanding performance. This past year was no
exception. During fiscal 1996, sales increased 41 percent to $171.3
million, which accounted for fully 33 percent of consolidated sales.
The Division's stellar performance derives from its three distinct
business units. These are the manufacture and marketing of amenity kits
for international airline's first class and premium class passengers;
wholesale supply of merchandise for airlines' duty free programs on
international flights; and an on-board concession program through which
Inflight fully operates airline's on-board duty free concessions.
With warehouse and station locations throughout the United States, South
America, Europe and the Pacific Rim, Inflight has exclusive distribution
agreements with many of its vendors.
Going forward, we expect enhanced performance as we further
consolidate Inflight's operations into our own and expand the reach of
this high-performance division.
[NEW PAGE - PICTURE OF STORE, PERFUME, BOTTLE OF LIQUOR]
Our experience with UETA over the past year clearly demonstrates that we
have a strong and valuable franchise, even under difficult
circumstances. As we move past the peso devaluation, we look forward to
benefiting from this Division's full-strength contribution
to our overall business.
Border South Division
Impacted by the devaluation of the peso at the end of fiscal 1995,
Southern Border Division sales decreased to $103.3 million this year.
Largely as a result of cost reduction programs implemented early on, the
Division contributed significantly to Company-wide profits. UETA's sales
declines lessened steadily over the course of the year and the Division
generated 20 percent of fiscal 1996 consolidated sales.
Through a variety of duty free operations, UETA provides
Mexican/American border traffic with access to luxury items such as
premium watches, fragrances and cosmetics, top-quality liquor and
tobacco products, beer, wine, gourmet foods, designer jewelry and other
high quality gifts.
Our experience with UETA over the past year clearly demonstrates
that we have a strong and valuable franchise, even under difficult
circumstances. As we move past the peso devaluation, we look forward to
benefiting from this Division's full-strength contribution to our
overall business.
<PAGE>
Border North Division
Having turned positive in the second quarter, sales for our
Northern Border Division increased six percent to $77.7 million and
accounted for 15 percent of consolidated sales for fiscal 1996. Our
continued emphasis on suggestive selling techniques increased the
average transaction spend by 10 percent during the past year, despite a
leveling off of cross-border traffic.
We look forward to deriving meaningful contributions from our two
new shops in Michigan acquired in July 1995. As with our other AMMEX
duty free shops, these offer luxury items such as premium fragrances and
cosmetics, top-quality liquor and tobacco products, beer, wine, gourmet
foods, and high-quality gifts such as designer jewelry, scarves and
leather goods. Certain Northern Border retail locations also offer
groceries, snacks, souvenirs and affordable gift items. Currency
exchanges and gas stations are operated at several high-volume
crossings.
Diplomatic and Wholesale Division
Our continued de-emphasis of this Division's low gross margin
wholesale business resulted in a 12 percent decline in sales to $60.2
million, which represented 12 percent of fiscal 1996 consolidated sales.
Even with this concentrated refocusing, the Diplomatic and Wholesale
Division continues to be the leading domestic supplier of duty free
luxury items, including gifts, fragrances, cosmetics, designer jewelry,
premium brand liquor and tobacco and gourmet foods to U.S.-based foreign
diplomats and a major supplier to international merchant and passenger
ships.
Like its Northern and Southern Border counterparts, the Diplomatic
and Wholesale Division has benefited from rigorous cost reduction
efforts over the past year. These, combined with continued redirection
of the Division's resources to its higher profit operations, translate
into enhanced performance opportunities going forward.
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.
<PAGE>
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 28, 1996
and January 29, 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in
the three-year period ended January 28, 1996. 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 28, 1996
and January 29, 1995 and the results of their operations and their cash
flows for each of the years in the three-year period ended January 28,
1996, in conformity with generally accepted accounting principles.
As discussed in the accompanying notes to the consolidated
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 26, 1996
Results of Operations
Duty Free International, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<PAGE>
Fiscal 1996 Compared with 1995
Net earnings were $15,996,000, or $0.59 per share, for the year
ended January 28, 1996, an increase of $1,863,000, or 13.2%, from
$14,133,000, or $0.52 per share, for the year ended January 29, 1995
before restructuring and revaluation charges. 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. This charge included $7,571,000 for
restructuring expenses and a write-down of intangible asset value of
$46,002,000 resulting from a change to a fair value method of evaluating
the recoverability of intangible assets (a more detailed explanation of
both charges is provided below). The increase in net earnings from the
prior year, excluding the restructuring and revaluation charges in the
prior year, reflects the successful execution of the Company's cost
containment programs as well as sales increases by the Inflight, Airport
and Northern Border Divisions. The Inflight Division's net earnings
increased significantly for the year when compared to the prior year due
to sales increases resulting from increases in the number of travelers
on-board international flights served by the Company and an increase in
the average amount of duty free merchandise purchased from the Company
by travelers on-board international airlines. The Inflight Division's
gross profit percentage increased for the year when compared to the
prior year due primarily to a significant increase, in absolute dollars
and as a percentage of the Division's total sales, in duty free sales
made on-board international airlines, which generally have higher profit
margins than sales of amenity kits and wholesale sales to airlines. The
Inflight Division's financial results for the year ended January 29,
1995 included only three quarters, because Inflight was purchased on May
1, 1994. The Northern Border Division's net earnings for the year
increased significantly from the prior year due primarily to expense
reductions resulting from the restructuring plan implemented in fiscal
1995, a decrease in amortization expense resulting from the intangible
asset revaluation in fiscal 1995, and the Company's continued efforts to
increase the average amount of duty free merchandise purchased from the
Company by customers. The above was partially offset by the continued
negative trend in traffic across the United States/Canada border during
the current year. The Airport Division's net earnings increased
significantly due primarily to an increase in sales resulting from an
increase in foreign travelers shopping at the Company's airport
locations, new store openings, the closing of unprofitable locations
under the restructuring plan, and a decrease in amortization expense
resulting from the intangible asset revaluation. During the third and
fourth quarters, the Airport Division's sales and net earnings were
adversely impacted by the severe hurricanes on the Caribbean islands of
St. Thomas and St. Maarten. Management anticipates a return to normal
sales levels at these islands early in fiscal 1997. The Company believes
that the effects of the hurricanes will not be material to its financial
position and results of operations and that reserves charged to the
fiscal 1996 results of operations are adequate to cover any potential
losses.
The increases in net earnings for the Inflight, Northern Border and
Airport Divisions were partially offset by a substantial decrease in the
Southern Border Division's sales and net earnings resulting from the
significant devaluation of the Mexican peso versus the U.S. dollar in
December 1994. The drop in the value of the peso destabilized the
Mexican economy and increased the costs of the Company's products for
Mexican customers. The Southern Border Division reduced its selling,
general and administrative expenses by approximately $5,000,000 during
the current year when compared to the prior year. However, these expense
reductions were more than offset by a $41,319,000 decrease in the
Southern Border Division's net sales. The expense reductions related
primarily to lower employee and other operating expenses resulting from
<PAGE>
employee terminations, a decrease in the number of hours stores were
open, and reductions of advertising and promotional expenses. The
decrease in advertising and promotional expenses is not expected to
impact sales due to the significant reduction in the number of customers
in the Southern Border market resulting from the peso devaluation. The
Division's sales decline was 22% in the fourth quarter of fiscal 1996
versus declines of 37%, 34% and 23% in the first three quarters of 1996
versus the same periods in fiscal 1995. The Company expects the Southern
Border Division to achieve sales gains in the early part of fiscal 1997,
due to the anniversary of the peso devaluation which occurred in
December 1994, provided there is continued stabilization in the value of
the peso versus the U.S. dollar.
Below are explanations of significant variances from the prior year
by income statement line item.
Net Sales
The following table sets forth, for the fiscal periods indicated,
the net sales and the percentage of total net sales for each of the
Company's divisions and the period to period change in such sales (in
thousands, except for percentages):
<TABLE>
<S> <C> <C> <C> <C>
Fiscal Year Ended Increase/(Decrease)
Divisional ------------------------------------ Fiscal
Net Sales January 28, 1996 January 29, 1995 1996 vs. 1995
- ----------------------------------------------------------------------
Border:
Southern $103,283 20.0% $144,602 28.8% $(41,319) (28.6)%
Northern 77,710 15.1 73,631 14.7 4,079 5.5 %
Inflight 171,268 33.3 121,890 24.3 49,378 40.5%
Airport 102,548 19.9 92,887 18.5 9,661 10.4%
Diplomatic and
Wholesale 60,249 11.7 68,751 13.7 (8,502) (12.4)
- ---------------------------------------------------------------
$515,058 100.0% $501,761 100.0% $ 13,297 2.7%
- ---------------------------------------------------------------
</TABLE>
The significant decrease in the Southern Border Division's sales
was due to the devaluation of the Mexican peso versus the U.S. dollar in
December 1994 which destabilized the Mexican economy and increased the
costs of the Company's products for Mexican customers. The Inflight
Division's sales increased by 9.5% during the last three quarters of
fiscal 1996 when compared to the same period in the prior year (Inflight
was purchased at the beginning of the second quarter in fiscal 1995).
This increase was due primarily to an increase in the number of foreign
travelers on-board international flights served by the Company and an
increase in the average amount of duty free merchandise purchased from
the Company by travelers on-board international airlines during the
current fiscal year. The Northern Border Division's comparable store
sales (excluding sales of stores closed under the restructuring plan and
two stores purchased in July 1995) increased by 2.4% for the current
year when compared to the prior year. The improvement in sales trends
for the Northern Border Division from fiscal 1995 (when there was a
22.1% decrease in sales from fiscal 1994) is due primarily to the
anniversary of the decrease in Canadian tobacco taxes which occurred in
the first quarter of fiscal 1995, and increases in average transaction
spend amounts by customers resulting from the Division's marketing and
promotion programs. The above was partially offset by the continued
negative trend in Canadian traffic across the United States/Canada
border during fiscal 1996. The Airport Division's sales increase was due
<PAGE>
primarily to an increase in the number of foreign travelers shopping at
the Company's airport locations during the current year, and store
openings at the new Denver International Airport, Boston's Logan
International Airport and San Juan International Airport in Puerto Rico
during fiscal 1996. The above was partially offset by sales decreases
due to store closings under the Company's restructuring plan and the
effects of the severe hurricanes at the Company's St. Thomas and St.
Maarten locations. The Diplomatic and Wholesale Division's sales,
excluding locations sold in fiscal 1996 as part of the Company's
restructuring plan and a business purchased in the latter part of fiscal
1995, decreased by 23.3% during fiscal 1996 when compared to fiscal 1995
due primarily to the Company continuing to deemphasize what would have
been relatively low gross margin sales in this Division. Net sales of
all the stores and businesses closed or sold under the restructuring
plan were $4,757,000 and $13,931,000 for fiscal 1996 and fiscal 1995,
respectively.
Cost of Sales and Gross Profit
Gross profit, as a percentage of net sales, increased to 42.5%
during fiscal 1996 from 39.9% during fiscal 1995. The increase was due
primarily to increases in the Inflight, Airport and Northern Border
Divisions' net sales and gross profit margins, and significant decreases
in the Southern Border and Diplomatic and Wholesale Divisions' net
sales. The Inflight, Airport and Northern Border Divisions have
significantly higher gross profit margins than the Southern Border and
Diplomatic and Wholesale Divisions. The Inflight Division's gross profit
percentage increased during the current year when compared to the prior
year due primarily to a significant increase, in absolute dollars and as
percentage of the Division's total sales, in duty free sales made
on-board international airlines, which generally have higher gross
profit margins than amenity kit and wholesale sales to airlines.
The restructuring plan, implemented in fiscal 1995, did not and
will not have a material effect on the Company's gross profit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of
net sales, increased to 37.5% in fiscal 1996 from 35.5% in fiscal 1995.
The increase was due primarily to the following factors:
* A significant increase in the Inflight Division's net sales in the
current year, as a percentage of the Company's total sales, when
compared to the prior year (Inflight was purchased May 1, 1994).
The Inflight Division has selling, general and administrative
expenses, as a percentage of net sales, higher than the Company
average due primarily to commission expenses paid to airlines.
* An increase in the Airport Division's net sales in the current
year, as a percentage of the Company's total sales, when compared
to the prior year. The Airport Division's operating expenses, as a
percentage of net sales, are higher than the Company's other
divisions due to rents based on sales and other variable expenses.
* Significant decreases in the Southern Border Division's net sales
in the current year versus the prior year. The Southern Border
Division has selling, general and administrative expenses, as a
percentage of net sales, significantly lower than the Company
average. The Company reduced the Southern Border Division's
selling, general and administrative expenses by approximately
$5,000,000 during fiscal 1996 when compared to the prior year.
However, these expense reductions were more than offset by
a $41,319,000 decrease in the Division's net sales during fiscal
<PAGE>
1996 when compared to fiscal 1995. The expense reductions related
primarily to lower employee and other operating expenses resulting
from employee terminations, a reduction in the number of hours
stores are open, and reductions of advertising and promotion
expenses. The decrease in advertising and promotion expenses is
not expected to impact sales in view of the significant reduction
in the number of customers in the Southern Border market.
The restructuring plan and the revaluation of intangible assets in
the third quarter of fiscal 1995 reduced the Company's selling, general
and administrative expenses by approximately $10,400,000 during fiscal
1996 when compared to fiscal 1995.
Interest Income
Interest income decreased by $960,000 during fiscal 1996 when
compared to fiscal 1995. The decrease was due primarily to a decrease in
funds available for investment during the first part of the current year
when compared to the prior year resulting from the purchase of Inflight
in fiscal 1995 for approximately $73,300,000, and more of the Company's
investment portfolio being in tax-exempt municipal bonds during the
current year which have lower pre-tax yields than taxable bonds.
Income Taxes
Income taxes, as a percentage of earnings before income taxes, were
37.0% for both fiscal 1996 and fiscal 1995 when the charges and tax
benefits from the intangible revaluation and restructuring are excluded
from the results for fiscal 1995.
Restructuring Expenses
During the third quarter of fiscal 1995, management undertook a
restructuring plan which included the closing or sale of 23 stores and
business locations, and the consolidation of administrative and
warehouse operations. As of January 28, 1996, all of the stores and
business locations have been closed or sold. The Company closed 14
unprofitable or marginally profitable stores at secondary crossings
along the United States/Canada border in fiscal 1995. 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
1994's important summer 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
were closed in fiscal 1996, which included 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 were
closed due to projected sales levels not being sufficient to cover fixed
operating costs. Two wholesale operations in Seattle, Washington and
Carson, California were sold in fiscal 1996 due to the Company
deemphasizing wholesale sales, and the Company's ability to service
wholesale customers from other locations. The Company also eliminated
regional manager positions in the Northern Border Division, and
consolidated other warehouse and administrative operations into the
Company's new 140,000 square foot distribution and administrative center
in Miami, Florida. The restructuring plan reduced the Company's store
and administrative workforce by approximately 210 people.
<PAGE>
A pre-tax charge to earnings of $7,571,000 was taken during fiscal
1995 as a result of the restructuring. There were no material
adjustments to restructuring expenses during fiscal 1996. Restructuring
costs included 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
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 January 29, 1995 U.S. dollar/Canadian dollar
exchange rate. These operations were 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
the restructuring. Approximately $2,144,000 of the restructuring costs
related to non-cash write-offs of recorded assets. The Company has paid
approximately $3,117,000 during fiscal 1996 and fiscal 1995 relating to
restructuring obligations which consisted of $2,024,000 for employee
severance and other arrangements, $870,000 to terminate property leases
and rent for closed stores, and $223,000 for other miscellaneous
expenses. As of January 28, 1996, remaining payments of approximately
$2,310,000 are expected to be paid for obligations incurred pursuant to
the restructuring plan.
<PAGE>
Net sales of the stores closed and businesses sold under the
restructuring plan were $4,757,000, $13,931,000 and $15,233,000 for
fiscal 1996, 1995 and 1994, respectively. Operating losses of the
stores closed and businesses sold under the restructuring plan were
$137,000, $2,508,000 and $1,022,000 for fiscal 1996, 1995 and 1994,
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. During
the third quarter of fiscal 1995, management determined that cash flow
from certain acquired businesses would 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 was inseparable from the change in estimate, it
was 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.Below is a more detailed explanation of the material
asset revaluation write-downs during fiscal 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 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 determined that travel across the United States/Canada
border would not increase substantially from current levels, due
primarily to the fact that travel across the border did not increase as
the Canadian economy improved in fiscal 1995, and reduced Canadian
tobacco prices and taxes would 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, the
Company reduced the carrying amount of its Northern Border intangible
assets by $30,839,000 during fiscal 1995.
<PAGE>
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 would 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, the Company reduced the
carrying amount of its Bared Jewelers intangible assets by $7,813,000
during fiscal 1995.
The remaining $7,350,000 write-down of intangible assets during
fiscal 1995 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, 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 during fiscal 1995 by
type of intangible asset and division is as follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Diplomatic
Northern and
Border Airport Wholesale
Division Division Division Total
- -----------------------------------------------------------------------
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 reduced amortization expense by approximately $3,500,000 in
fiscal 1996. The write-downs will not require any cash payments in the
future.
As part of its ongoing review, management reviewed the valuation
and amortization of all its intangible assets and determined there was
no impairment of intangible asset values as of January 28, 1996.
<PAGE>
Fiscal 1995 Compared with 1994
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.
Net Sales
The following tables set 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>
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended Increase/(Decrease)
Divisional ------------------------------------ Fiscal
Net Sales January 29, 1995 January 31, 1994 1995 vs. 1994
- -----------------------------------------------------------------------
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. 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. 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
<PAGE>
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 deemphasized 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.
Cost of Sales and Gross Profit
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.
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 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
proportionate decrease in relatively fixed operating costs.
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.
<PAGE>
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.
Regulation and Economic Factors Affecting
the Duty Free Industry
The Company's sales and gross profit margins are affected by
factors specifically related to the duty free industry. Most countries
have allowances on the import of duty free goods. Decreases in the duty
free allowances of foreign countries or stricter eligibility
requirements for duty free purchases, as well as decreases in tax and
duty rates imposed by foreign jurisdictions (particularly in Canada and
Mexico) could have a negative effect on the Company's sales and gross
profit margins. Conversely, increases could have a positive effect on
the Company's sales and gross profit.
The principal customers of the Company are residents of foreign
countries whose purchases of duty free merchandise may be affected by
trends in the economies of foreign countries and changes in the value of
the U.S. dollar relative to their own currencies. Any significant
increase in the value of the U.S. dollar relative to the currencies of
foreign countries, particularly Canada, Mexico and Japan, could have an
adverse impact on the number of travelers visiting the United States and
the dollar amount of duty free purchases made by them from the Company.
A significant increase in gasoline prices or a shortage of fuel may also
reduce the number of international travelers and thereby adversely
affect the Company's sales. In addition, the Company imports a
significant portion of its products from Western Europe and Canada at
prices negotiated either in U.S. dollars or foreign currencies. As a
result, the Company's costs are affected by fluctuations in the value of
the U.S. dollar in relation to major Western European and Canadian
currencies. A decrease in the purchasing power of the U.S. dollar
relative to other currencies causes a corresponding increase in the
purchase price of products. The Company enters into foreign exchange
forward contracts as a hedge against a portion of its exposure to
currency fluctuations on commitments to purchase merchandise.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after
December 15, 1995 and for transactions occurring after December 15,
1995. The Statement defines a fair value based method of accounting for
an employee stock option or similar equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period, which
is usually the vesting period. The Statement allows an entity to
continue to measure compensation costs for stock options or similar
equity instruments using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value based method, compensation costs
are the excess, if any, of the quoted market price of the stock at the
<PAGE>
grant date or other measurement date over the amount an employee must
pay to acquire the stock. Entities electing to continue with the
accounting in Opinion 25 must make pro forma disclosure of net income
and earnings per share as if the fair value based method of accounting
had been applied. The Company has elected to continue to measure
compensation costs for stock options or similar equity instruments using
the intrinsic value based method of accounting prescribed by APB Opinion
No. 25 with pro forma disclosure of net income and earnings per share as
if the fair value based method of accounting had been applied.
The Company will adopt the disclosure requirements of Statement No. 123
in fiscal 1997.
Liquidity and Capital Resources
On May 26, 1995, the Company signed a fully committed $75,000,000
revolving line of credit and letter of credit facility expiring in May
1998. Borrowings under the agreement bear interest at a rate selected by
the Company based on the prime rate, federal funds rate or the London
Interbank Offered Rate. The credit facility contains covenants which
require, among other things, maintenance of minimum tangible net worth,
as defined, and certain financial ratios. There were no borrowings under
the facility as of January 28, 1996. Currently, the Company has no plans
to make any borrowings under the facility.
In March 1995, Standard and Poor's downgraded its rating of the
Company's $115,000,000 senior notes from BBB to BBB-, and in July 1995,
Moody's Investor Services downgraded its rating of the Company's
$115,000,000 senior notes from Ba1 to Ba2, primarily in response to the
devaluation of the Mexican peso. The downgrades will not affect the
Company's current borrowing costs under the senior notes, and the
Company's senior notes remain investment grade according to Standard and
Poor's. However, the downgrades will increase the costs of any
borrowings pursuant to the provisions of the $75,000,000 revolving line
of credit and letter of credit facility.
The Company's primary liquidity and capital requirements for fiscal
1997 will be working capital needs, primarily inventory and receivables,
purchases of property and equipment, dividend payments and debt
payments. During fiscal 1997, the Company expects to spend approximately
$10,000,000 on capital expenditures, make approximately $6,600,000 of
dividend payments and make approximately $2,000,000 of debt payments.
The restructuring plan and the intangible asset revaluations did not
have a material effect on the Company's liquidity and capital resources
during fiscal 1996 and are not expected to have a material effect in the
future. Working capital was $121,291,000 as of January 28, 1996, an
increase of $7,295,000 from $113,996,000 as of January 29, 1995. The
Company believes its existing funds, cash provided by operations and
available borrowings will be sufficient to meet its current liquidity
and capital requirements.
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 362 as of February
28, 1996.
<PAGE>
The following table sets forth the high and low reported sales
prices for the common stock as reported by the New York Stock Exchange:
<TABLE>
<S> <C> <C>
High Low
- ------------------------------------------------------------------------
Fiscal 1996:
First quarter $ 8-7/8 $ 7
Second quarter 10-5/8 7-3/8
Third quarter 15-3/4 9
Fourth quarter 16-3/4 13-1/8
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
</TABLE>
Cash dividends declared were approximately $5,450,000, or $0.20 per
share, and $5,445,000, or $0.20 per share, for the years ended January
28, 1996 and January 29, 1995. Cash dividends were paid quarterly at
$0.05 per share during fiscal 1996 and 1995. During the fourth quarter
of fiscal 1996, the Company's Board of Directors increased the Company's
quarterly dividend by 20% to $0.06 per share, beginning with the
quarterly dividend to be paid in May 1996 for the first quarter of
fiscal 1997.
<TABLE><CAPTION>
Duty Free International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
<S> <C> <C> <C>
January 28, January 29, January 31,
Fiscal year ended 1996 1995 1994
- -------------------------------------------------------------------------------------
Net sales $515,058 $501,761 $376,436
Cost of sales 296,173 301,387 228,696
- -------------------------------------------------------------------------------------
Gross profit 218,885 200,374 147,740
Advertising, storage and other operating income 4,374 4,372 5,160
- -------------------------------------------------------------------------------------
223,259 204,746 152,900
Selling, general and administrative expenses 192,913 177,895 113,365
Restructuring expenses (note 2) - 7,571 -
Revaluation of intangible assets (note 3) - 46,002 -
- -------------------------------------------------------------------------------------
Operating income (loss) 30,346 (26,722) 39,535
- -------------------------------------------------------------------------------------
Other income (expense):
Interest income 2,659 3,619 2,481
Interest expense (8,658) (8,878) (1,495)
Gain (loss) on foreign currency transactions (487) (556) 654
Other, net 1,529 1,388 1,907
- -------------------------------------------------------------------------------------
(4,957) (4,427) 3,547
- -------------------------------------------------------------------------------------
Earnings (loss) before income taxes 25,389 (31,149) 43,082
Income tax expense (benefit) (note 8) 9,393 (6,347) 15,689
- -------------------------------------------------------------------------------------
Net earnings (loss) $ 15,996 $(24,802) $ 27,393
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Earnings (loss) per share $0.59 $(0.91) $1.01
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
/TABLE
<PAGE>
<TABLE><CAPTION>
Duty Free International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<S> <C> <C>
January 28, January 29,
1996 1995
- -----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 34,252 $ 31,353
Short-term investments, at cost (note 15) 12,747 13,086
Receivables:
Trade receivables, less allowance for doubtful
accounts of $735 in 1996 and $795 in 1995 20,106 20,183
Other 9,877 11,400
- -----------------------------------------------------------------------------------------------------
29,983 31,583
- -----------------------------------------------------------------------------------------------------
Merchandise inventories 90,472 95,112
Prepaid expenses and other current assets 9,825 9,962
- -----------------------------------------------------------------------------------------------------
Total current assets 177,279 181,096
Long-term investments, at cost (note 15) 10,550 9,653
Property and equipment, net (note 6) 92,413 82,533
Excess of cost over net assets of subsidiaries acquired, less accumulated
amortization of $4,442 in 1996 and $2,178 in 1995 (notes 3 and 5) 65,731 64,682
Other intangible assets, less accumulated amortization
of $8,538 in 1996 and $5,999 in 1995 (note 3) 24,246 25,571
Other assets, net 20,489 23,607
- -----------------------------------------------------------------------------------------------------
$390,708 $387,142
- -----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (note 7) $ 2,053 $ 2,611
Accounts payable 25,193 30,964
Accrued restructuring expenses (note 2) 1,539 3,941
Other current liabilities (note 11) 27,203 29,584
- -----------------------------------------------------------------------------------------------------
Total current liabilities 55,988 67,100
Long-term debt, excluding current maturities (note 7) 118,418 115,798
Other liabilities 3,820 3,093
- -----------------------------------------------------------------------------------------------------
Total liabilities 178,226 185,991
- -----------------------------------------------------------------------------------------------------
Stockholders' equity (notes 13 and 17):
Common stock, par value $.01 per share.
Authorized 75,000,000 shares; 27,270,124 issued and outstanding
shares in 1996 and 27,243,550 shares in 1995 273 272
Additional paid-in capital 80,302 80,121
Foreign currency translation adjustments - (603)
Retained earnings 131,907 121,361
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 212,482 201,151
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 4, 10, 14 and 18)
- -----------------------------------------------------------------------------------------------------
$390,708 $387,142
- -----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE><CAPTION>
Duty Free International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Foreign
Common stock Additional currency Total
--------------- paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
- ----------------------------------------------------------------------------------------------------
Balance at January 31, 1993 27,122 $271 $77,744 $(306) $129,634 $207,343
Acquisition of Bared Jewelers 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
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
Dividends ($0.20 per share) - - - - (5,450) (5,450)
Exercise of common stock options 26 1 181 - - 182
Change in foreign currency
translation adjustments - - - 603 - 603
Net earnings - - - - 15,996 15,996
- ---------------------------------------------------------------------------------------------------
Balance at January 28, 1996 27,270 $273 $80,302 $ - $131,907 $212,482
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE><CAPTION>
Duty Free International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
<S> <C> <C> <C>
January 28, January 29, January 31,
Fiscal year ended 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 15,996 $(24,802) $ 27,393
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 8,236 6,642 5,003
Other amortization 5,741 8,008 5,447
Provision for (benefit of) deferred income taxes 2,892 (13,222) 331
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 1,203 4,147 (1,555)
Notes receivable - - (1,000)
Merchandise inventories 5,967 10,015 (4,046)
Prepaid expenses and other current assets 254 991 (878)
Deposits (1,810) - -
Accounts payable (5,768) (3,012) (8,117)
Income taxes payable - (2,863) (3,049)
Accrued restructuring expenses (2,276) 4,586 -
Other current liabilities (1,390) 3,820 (1,796)
Other (135) (777) 120
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 28,910 41,938 17,853
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investments 34,470 50,103 23,418
Purchases of investments (35,152) (32,225) (23,125)
Additions to property and equipment (11,710) (31,230) (13,352)
Acquisitions of businesses, accounted for by
the purchase method, net of cash acquired (5,050) (74,991) (21,898)
Investments in and advances to affiliates (420) (3,363) (1,254)
Other 188 1,819 (2,701)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,674) (89,887) (38,912)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings and notes payable - - 115,118
Payment of long-term borrowings and notes payable (3,760) (14,464) (5,655)
Dividends paid (5,450) (5,445) (5,435)
Purchase of common stock - (436) -
Other 873 (22) 952
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (8,337) (20,367) 104,980
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,899 (68,316) 83,921
Cash and cash equivalents at beginning of year 31,353 99,669 15,748
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 34,252 $ 31,353 $ 99,669
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
Duty Free International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 28,1996, January 29, 1995 and January 31, 1994
(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, its wholly-owned subsidiaries
and affiliates in which the Company has a majority interest or
control. All significant intercompany balances and transactions have
been eliminated in consolidation.
Fiscal Year - During the year ended 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 28, 1996,
January 29, 1995 and January 31, 1994 are referred to hereafter as
1996, 1995 and 1994, 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 - The Company's
investments in debt and equity securities, except for investments
accounted for under the equity method and investments in
consolidated subsidiaries, are classified in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Upon purchase,
management considers the maturity and other characteristics of each
investment and its asset-liability management policies and
classifies each investment appropriately; such classifications are
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, approximates 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
<PAGE>
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 (5 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 28, 1996 and January 29,
1995. Advertising expense was approximately $3,000,000, $4,000,000
and $3,500,000 during fiscal 1996, 1995 and 1994, 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 was
the local currency. The translation of the foreign currencies into
U.S. dollars was 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 were
included as a separate component of stockholders' equity.
Income taxes - Income taxes are accounted for under the asset and
liability method. 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
27,251,000, 27,224,000 and 27,204,000 for fiscal 1996, 1995 and
1994, respectively. Common shares issuable upon exercise of stock
options are excluded from the computation because their effect is
not material.
Foreign Exchange Forward Contracts - The value of foreign exchange
forward contracts, taken as 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
<PAGE>
carrying amounts. Gains and losses related to qualifying hedges of
firm commitments or anticipated transactions are deferred and are
recognized in income or as adjustments of carrying amounts when the
hedged transactions occur.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
Reclassifications - Certain amounts for fiscal 1995 and 1994 have
been reclassified to conform to the presentation for fiscal 1996.
(2) Restructuring Expenses
During the third quarter of fiscal 1995, management undertook a
restructuring plan which included the closing or sale of 23 stores and
business locations, and the consolidation of administrative and
warehouse operations. As of January 28, 1996, all of the stores and
business locations have been closed or sold. The Company closed 14
unprofitable or marginally profitable stores at secondary crossings
along the United States/Canada border in fiscal 1995. 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
1994's important summer 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 were closed
in fiscal 1996, which included 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 were closed due to
projected sales levels not being sufficient to cover fixed operating
costs. Two wholesale operations in Seattle, Washington and Carson,
California were sold in fiscal 1996 due to the Company deemphasizing
wholesale sales, and the Company's ability to service wholesale
customers from other locations. The Company also eliminated regional
manager positions in the Northern Border Division, and consolidated
other warehouse and administrative operations into the Company's new
140,000 square foot distribution and administrative center in Miami,
Florida. The restructuring plan reduced the Company's store and
administrative workforce by approximately 210 people.
<PAGE>
A pre-tax charge to earnings of $7,571,000 was taken during fiscal
1995 as a result of the restructuring. There were no material
adjustments to restructuring expenses during fiscal 1996. Restructuring
costs included 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 were 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
the restructuring. Approximately $2,144,000 of the restructuring costs
related to non-cash write-offs of recorded assets. The Company has paid
approximately $3,117,000 during fiscal 1996 and fiscal 1995 relating to
restructuring obligations which consisted of $2,024,000 for employee
severance and other arrangements, $870,000 to terminate property leases
and rent for closed stores, and $223,000 for other miscellaneous
expenses. As of January 28, 1996, remaining payments of approximately
$2,310,000 are expected to be paid for obligations incurred pursuant to
the restructuring plan.
<PAGE>
Net sales of the stores closed and businesses sold under the
restructuring plan were $4,757,000, $13,931,000 and $15,233,000 for
fiscal 1996, 1995 and 1994, respectively. Operating losses of the
stores closed and businesses sold under the restructuring plan were
$137,000, $2,508,000 and $1,022,000 for fiscal 1996, 1995 and 1994,
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. During
the third quarter of fiscal 1995, management determined that cash flow
from certain acquired businesses would 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 was inseparable from the change in estimate, it
was 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. Below is a more detailed explanation of the material
asset revaluation write-downs during fiscal 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 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 determined that travel across the United States/Canada
border would not increase substantially from current levels, due
primarily to the fact that travel across the border did not increase as
the Canadian economy improved in fiscal 1995, and reduced Canadian
tobacco prices and taxes would 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, the
Company reduced the carrying amount of its Northern Border Division's
intangible assets by $30,839,000 during fiscal 1995.
<PAGE>
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 would 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, the Company reduced the
carrying amount of its Bared Jewelers intangible assets by $7,813,000
during fiscal 1995.
The remaining $7,350,000 write-down of intangible assets during
fiscal 1995 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, 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 during fiscal 1995 by
type of intangible asset and division is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Diplomatic
Northern and
Border Airport Wholesale
Division Division Division Total
- -----------------------------------------------------------------------
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 reduced amortization expense by approximately $3,500,000 in
fiscal 1996. The write-downs will not require any cash payments in the
future.
<PAGE>
As part of its ongoing review, management reviewed the valuation
and amortization of all its intangible assets and determined there was
no impairment of intangible asset values as of January 28, 1996.
(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 foreign 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 $23,523,000 of
outstanding foreign exchange forward contracts outstanding at January
28, 1996 to purchase British pounds, French francs, Swiss francs and
Deutsche marks. The contracts outstanding at January 28, 1996 mature at
various dates in fiscal 1997. The fair values of these contracts were
$23,127,000 at January 28, 1996. Fair values were estimated by obtaining
quotes from banks assuming all contracts were purchased on January 28,
1996.
(5) Acquisitions
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 acquisition was accounted for by using the
purchase method and, accordingly, the purchase price has been allocated
to the related acquired assets and assumed liabilities based on their
respective fair values. The consolidated statement of earnings for the
year ended January 29, 1995 includes the results of operations of
Inflight from its acquisition date.
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 consolidated operations for the year ended
January 31, 1994 assuming the Inflight acquisition had occurred on
February 1, 1993 (in thousands).
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
Fiscal year ended January 31, 1994
- ------------------------------------------------------------------------
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>
<S> <C> <C> <C>
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
Fair value of assets acquired $ 9,833 $117,236 $ 32,150
Common stock issued - - (2,520)
Cash paid (5,050) (74,991) (21,898)
- ------------------------------------------------------------------------
Liabilities assumed $ 4,783 $ 42,245 $ 7,732
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
(6) Property and Equipment
Property and equipment are summarized as follows
(in thousands):
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
Land $ 19,234 $ 18,117
Buildings 49,491 42,978
Leasehold improvements 20,217 17,721
Furniture and fixtures 16,409 15,315
Equipment and vehicles 27,766 23,265
- ------------------------------------------------------------------------
133,117 117,396
Less accumulated depreciation
and amortization 40,704 34,863
- ------------------------------------------------------------------------
Net property and equipment $ 92,413 $ 82,533
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
(7) Long-Term Debt
Long-term debt consists of the following (in thousands, except for
percentage amounts):
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
7% senior bonds payable, 7.06% effective rate,
due January 15, 2004, $115,000 face amount,
less unamortized discount of $366 and $412 $114,634 $114,588
Other 5,837 3,821
- ------------------------------------------------------------------------
120,471 118,409
Less current maturities 2,053 2,611
- ------------------------------------------------------------------------
Long-term debt, excluding current maturities $118,418 $115,798
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
The approximate annual maturities of long-term debt are as
follows (in thousands):
<S> <C>
- ------------------------------------------------------------------------
1997 $ 2,053
1998 1,000
1999 1,000
2000 1,000
2001 784
2004 114,634
- ------------------------------------------------------------------------
$120,471
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
The fair value of long-term debt, including current maturities, was
$115,650,000 and $107,321,000 as of January 28, 1996 and January 29,
1995, respectively. The fair value of long-term debt, including current
maturities, was estimated based on quoted market values.
The Company paid interest on short-term and long-term borrowings of
approximately $8,658,000, $9,277,000 and $1,457,000 during fiscal 1996,
1995 and 1994, respectively.
<PAGE>
(8) Income Taxes
Income tax expense (benefit) consists of the following (in
thousands):
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------
Current Deferred Total
- ------------------------------------------------------------------------
1996:
Federal $ 4,280 $ 2,568 $ 6,848
State 815 489 1,304
Foreign 1,406 (165) 1,241
- ------------------------------------------------------------------------
$ 6,501 $ 2,892 $ 9,393
- ------------------------------------------------------------------------
1995:
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
- ------------------------------------------------------------------------
</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>
<S> <C> <C> <C>
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
Income tax (benefit) at
statutory rates $ 8,886 $ (10,902) $ 15,079
Revaluation of intangible assets - 6,144 -
State income taxes, net of
federal tax benefit 848 (660) 1,152
Tax exempt income (384) (450) (296)
Other, net 43 (479) (246)
- ------------------------------------------------------------------------
$9,393 $ (6,347) $ 15,689
- ------------------------------------------------------------------------
</TABLE>
The consolidated earnings before income taxes, by domestic and
foreign sources, was $16,425,000 and $8,964,000, respectively, for
fiscal 1996. The consolidated earnings (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 material to the Company.
<PAGE>
At January 28, 1996, the net current and net non-current deferred
income tax assets were $3,129,000 and $8,609,000, respectively. At
January 29, 1995, the net current and net non-current deferred income
tax assets were $4,800,000 and $9,830,000, respectively. Such amounts
are included in "prepaid expenses and other current assets" and "other
assets, net", respectively, on the consolidated balance sheets as of
January 28, 1996 and January 29, 1995. There was no valuation allowance
relating to deferred income tax assets at January 28, 1996 and January
29, 1995. 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 28, 1996, the Company had net operating loss
carryforwards of approximately $2,000,000, 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.
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><S> <C> <C>
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
Deferred tax assets:
Restructure liability $ 1,908 $ 2,524
Intangible amortization 8,500 8,103
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 1,473 1,746
Net operating loss carryforwards 750 2,475
Other 1,701 2,222
- -----------------------------------------------------------------------
Gross deferred tax assets 14,332 17,070
- ----------------------------------------------------------------------
Deferred tax liabilities:
Inventories, to conform UETA's accounting
method from LIFO to FIFO (1,168) (1,168)
Depreciation and capitalized interest (98) (190)
Other (1,328) (1,082)
- -----------------------------------------------------------------------
Gross deferred tax liabilities (2,594) (2,440)
- -----------------------------------------------------------------------
Net deferred tax asset $11,738 $ 14,630
- -----------------------------------------------------------------------
</TABLE>
The Company paid income taxes of approximately $5,120,000,
$9,370,000 and $18,405,000 during fiscal 1996, 1995 and 1994,
respectively.
(9) Retirement Savings Plan
The Company has a retirement savings 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 retirement savings 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
<PAGE>
contributions to the plan based on a percentage of employee
contributions to the 401(k) deferred compensation plan. Retirement
savings plan costs amounted to approximately $976,000, $945,000 and
$865,000 for fiscal 1996, 1995 and 1994, 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 non-cancellable operating
leases, with initial or remaining terms of one year or more are as
follows (in thousands):
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
1997 $14,601
1998 13,452
1999 12,790
2000 10,916
2001 6,098
Thereafter 7,807
- ------------------------------------------------------------------------
$65,664
- ------------------------------------------------------------------------
</TABLE>
Rental expense consists of the following (in thousands):
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
Minimum rentals $15,044 $14,961 $13,652
Additional rentals based on sales 13,575 10,755 10,176
Other 155 144 142
- ------------------------------------------------------------------------
$28,774 $25,860 $23,970
- ------------------------------------------------------------------------
</TABLE>
(11) Other Current Liabilities
Other current liabilities consist of the following (in thousands):
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
Airline and other commissions $ 2,844 $ 4,855
Incentive compensation plan 3,000 2,650
Other 21,359 22,079
- ------------------------------------------------------------------------
$ 27,203 $ 29,584
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
(12) 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>
<S> <C> <C> <C>
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
Total revenue:
Retail operations $454,467 $430,182 $312,738
Wholesale operations 60,591 71,579 63,698
- ------------------------------------------------------------------------
$515,058 $501,761 $376,436
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Operating income:
Retail operations $ 26,949 $ 22,988 $ 32,565
Wholesale operations 3,397 3,863 6,970
Restructuring expenses - (7,571) -
Revaluation of intangible assets - (46,002) -
Other income (expense) (4,957) (4,427) 3,547
- ------------------------------------------------------------------------
Earnings (loss) before income taxes $ 25,389 $(31,149) $ 43,082
- ------------------------------------------------------------------------
</TABLE>
(13) Stock Option Plan
An aggregate of 4,640,000 shares of common stock were reserved for
issuance pursuant to nonqualified stock options. Approximately 2,314,000
shares were available for grant at January 28, 1996. At January 28,
1996, 1,200,185 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>
<S> <C> <C> <C>
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
Balance at beginning of year 2,204,521 935,765 795,524
Granted
($9.875 - $27.375 per share) 37,000 1,376,050 174,500
Canceled
($8.75 - $52.75 per share) (122,486) (73,728) (30,707)
Exercised
($6.875 - $22.875 per share) (26,574) (33,566) (3,552)
- ------------------------------------------------------------------------
Balance at end of year 2,092,461 2,204,521 935,765
- ------------------------------------------------------------------------
/TABLE
<PAGE>
(14) Legal Proceedings
Several former stockholders of UETA, Inc. have commenced actions
against the Company and certain of its officers and directors alleging,
among other things, that the defendants made misleading statements and
omissions about the Company's business in connection with its
acquisition of UETA, Inc. The relief sought includes an unspecified
amount of damages. 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.
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, the Company believes that
the final outcomes should not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
(15) Investment in Debt Securities
Management reviewed the classification of its security portfolio as
of January 28, 1996 and January 29, 1995 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>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
January 28, Gross Gross January 28,
1996 Unrealized Unrealized 1996
Carrying Holding Holding Fair
Amount Gains (Losses) Value
- ------------------------------------------------------------------------------------------
Securities maturing
within one year:
Corporate debt securities $ 5,705 $33 $(31) $ 5,707
Debt securities issued by
states of the United States
and political subdivisions
of the states 6,662 59 (22) 6,699
Debt securities issued by
the U.S. Treasury and
other U.S. government
corporations and agencies 380 - (2) 378
- ------------------------------------------------------------------------------------------
Total short-term investments 12,747 92 (55) 12,784
- -----------------------------------------------------------------------------------------
Securities maturing after
one through four years:
Debt securities issued by
states of the United States
and political subdivisions
of the states 10,550 - (20) 10,530
- -----------------------------------------------------------------------------------------
Total investments $23,297 $92 $(75) $23,314
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE><S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
January 29, Gross Gross January 29,
1995 Unrealized Unrealized 1995
Carrying Holding Holding Fair
Amount Gains (Losses) Value
- ------------------------------------------------------------------------------------------
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>
Fair values were based on quoted market prices. The Company did not
sell any investment securities during fiscal 1996 and 1995.
(16) Accounting for Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation,"which is effective for fiscal years beginning after
December 15, 1995 and for transactions occurring after December 15,
1995. The Statement defines a fair value based method of accounting for
an employee stock option or similar equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period, which
is usually the vesting period. The Statement allows an entity to
continue to measure compensation costs for stock options or similar
equity instruments using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees. "Under the intrinsic value based method, compensation costs
are the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount an employee must
pay to acquire the stock. Entities electing to continue with the
accounting in Opinion 25 must make pro forma disclosure of net income
and earnings per share as if the fair value based method of accounting
had been applied. The Company has elected to continue to measure
compensation costs for stock options or similar equity instruments using
<PAGE>
the intrinsic value based method of accounting prescribed by APB Opinion
No. 25 with pro forma disclosure of net income and earnings per share as
if the fair value based method of accounting had been applied. The
Company will adopt the disclosure requirements of Statement No. 123 in
fiscal 1997.
(17) Dividends
During the fourth quarter of fiscal 1996, the Company's Board of
Directors increased the Company's quarterly dividend by 20% to $0.06 per
share, beginning with the quarterly dividend to be paid in May 1996 for
the first quarter of fiscal 1997.
(18) Line of Credit and Letter of Credit Facility
On May 26, 1995, the Company signed a fully committed $75,000,000
revolving line of credit and letter of credit facility expiring in May
1998. Borrowings under the agreement bear interest at a rate selected by
the Company based on the prime rate, federal funds rate or the London
Interbank Offered Rate. The credit facility contains covenants which
require, among other things, maintenance of minimum tangible net worth,
as defined, and certain financial ratios. There were no borrowings under
the facility as of January 28, 1996. Currently, the Company has no plans
to make any borrowings under the facility.
Jack Africk (1)(2)(3)(4)
David H. Bernstein (1)(2)
Chairman of the Executive Committee
Former Chairman of the Board
Alfred Carfora (1)(2)
President and Chief Executive Officer
John A. Couri (1)(2) (5)
Consultant,
Former Chairman of the Board
Heribert Diehl (1)(3)(4)
Managing Director,
Gebr. Heinemann
John Edmondson
Executive Vice President and
Chief Operating Officer
Gerald F. Egan
Vice President Finance,
Chief Financial Officer,
Treasurer and Secretary
Carl Reimerdes (1)(2)(5)
Vice President
Susan H. Stackhouse (1)(4)
President,
Fenton Hill Florida, Inc.
(1) Member of Board of Directors
(2) Member of Executive Committee
(3) Member of Audit Committee
(4) Member of Compensation Committee
(5) Member of Nominating Committee
<PAGE>
Corporate Data
Corporate Headquarters
63 Copps Hill Road
Ridgefield, Connecticut 06877
Tel. no. (203) 431-6057
Fax no. (203) 438-1356
Principal Subsidiaries
AMMEX Tax and
Duty Free Shops, Inc.
Executive Vice President:
Steven D. Zurcher
63 Copps Hill Road
Ridgefield, Connecticut 06877
Fenton Hill American, Limited
President: Carl Reimerdes
Building 59
JFK International Airport
Jamaica, New York 11430
Tel. no. (718) 656-3000
Samuel Meisel and Company, Inc.
President: Robert T. Weitz
6691 Baymeadow Drive
Glen Burnie, Maryland 21060
Tel. no. (410) 787-1414
UETA, Inc.
President: Ramon Bosquez
3407 N.E. Parkway
San Antonio, Texas 78212
Tel. no. (210) 828-8382
Inflight Duty Free Shop, Inc.
President: Peter Cathey
63 Copps Hill Road
Ridgefield, Connecticut 06877
Tel. no. (203) 894-2050
Annual Meeting
Shareholders are cordially invited to attend the Company's Annual
Meeting which will be held at 10:00 a.m., May 23, 1996, at the Hyatt
Regency Hotel, 300 Light Street, Baltimore, Maryland.
Form 10-K
Shareholders may obtain a copy of the Company's annual report filed with
the Securities and Exchange Commission (Form 10-K) free of charge by
writing to:
Dyan C. Cutro
Vice President Investor Relations
645 Madison Avenue, 6th Floor
New York, New York 10022
Tel. no. (212) 754-5900
<PAGE>
Stock Exchange Listing
New York Stock Exchange
Ticker Symbol: DFI
Shareholder Inquiries
Questions involving financial information about the Company should be
addressed to:
Dyan C. Cutro
Vice President Investor Relations
645 Madison Avenue, 6th Floor
New York, New York 10022
Tel. no. (212) 754-5900
Transfer Agent and Registrar
Chemical Mellon Shareholder Services
450 West 33rd Street - 15th Floor
New York, New York 10001
Legal Counsel
Morgan, Lewis and Bockius
101 Park Avenue
New York, New York 10178
Independent Auditors
KPMG Peat Marwick LLP
111 South Calvert Street
Baltimore, Maryland 21202
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