UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended April 28, 1996 Commission File No. 1-10952
-------------- -------
DUTY FREE INTERNATIONAL, INC.
- - -----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 52-1292246
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Copps Hill Road, Ridgefield, Connecticut
-------------------------------------------
(Address of principal executive offices)
06877
----------
(Zip Code)
Registrant's telephone number, including area code: 203-431-6057
------------
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
------- -------
At April 26, 1996, 27,269,598 shares of $.01 par value common stock of
the registrant were outstanding.
<PAGE>
DUTY FREE INTERNATIONAL, INC.
April 28, 1996
INDEX
Part I. Financial Information Page
- - ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
April 28, 1996 (unaudited) and
January 28, 1996
Consolidated Statements of Earnings 4
(unaudited) for the quarters
ended April 28, 1996 and April 30, 1995
Consolidated Statement of Stockholders' 5
Equity (unaudited) for the quarter
ended April 28, 1996
Consolidated Statements of Cash Flows 6
(unaudited) for the quarters
ended April 28, 1996 and April 30, 1995
Notes to Consolidated Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis 8-10
of Financial Condition and Results of
Operations
Part II. Other Information
- - ---------------------------
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C> <C>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
April 28, January 28,
1996 1996
----------- -----------
(unaudited) (note 1)
ASSETS
------
Current assets:
Cash and cash equivalents $ 41,810 $ 34,252
Short-term investments (fair value of
$8,630 and $12,784, respectively) 8,692 12,747
Receivables:
Trade receivables, less allowance
for doubtful accounts of $840 and
$735, respectively 20,330 20,106
Other 9,785 9,877
--------- ---------
30,115 29,983
--------- ---------
Merchandise inventories 96,876 90,472
Prepaid expenses and other current assets 8,310 9,825
--------- ---------
Total current assets 185,803 177,279
Long-term investments (fair value of
$12,931 and $10,530, respectively) 13,065 10,550
Property and equipment, net 93,552 92,413
Excess of cost over net assets of
subsidiaries acquired, net 65,877 65,731
Other intangible assets, net 23,652 24,246
Other assets, net 19,531 20,489
--------- ---------
$ 401,480 $ 390,708
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 1,167 $ 2,053
Accounts payable 33,123 25,193
Other current liabilities 32,061 28,742
--------- ---------
Total current liabilities 66,351 55,988
Long-term debt, excluding current
maturities 118,716 118,418
Other liabilities 3,501 3,820
--------- ---------
Total liabilities 188,568 178,226
--------- ---------
<PAGE>
Stockholders' equity:
Common stock, par value $.01 per
share. Authorized 75,000,000
shares; issued and outstanding
27,269,598 shares and 27,270,124
shares, respectively 273 273
Additional paid-in capital 80,186 80,302
Retained earnings 132,453 131,907
--------- ---------
Total stockholders' equity 212,912 212,482
--------- ---------
$ 401,480 $ 390,708
--------- ---------
--------- ---------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Quarter Ended
------------------------
April 28, April 30,
1996 1995
---------- ----------
(in thousands, except
earnings per share)
Net Sales $ 117,979 $ 109,348
Cost of sales 67,178 63,187
---------- ----------
Gross profit 50,801 46,161
Advertising, storage and other
operating income 969 1,260
---------- ----------
51,770 47,421
Selling, general and
administrative expenses 46,881 43,725
---------- ----------
Operating income 4,889 3,696
Other income (expense):
Interest income 658 652
Interest expense (2,127) (2,184)
Other, net 44 162
---------- ----------
(1,425) (1,370)
---------- ----------
Earnings before income taxes 3,464 2,326
Income taxes 1,282 860
---------- ----------
Net earnings $ 2,182 $ 1,466
---------- ----------
---------- ----------
Earnings per share $ 0.08 $ 0.05
---------- ----------
---------- ----------
Weighted average number
of shares outstanding 27,269 27,244
---------- ----------
---------- ----------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Quarter Ended April 28, 1996
(in thousands, unaudited)
Common stock Additional Total
--------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
------- ------ ---------- --------- -------------
Balance at January 28, 1996 27,270 $273 $80,302 $131,907 $212,482
Dividends ($0.06 per share) -- -- -- (1,636) (1,636)
Other (4) -- (160) -- (160)
Exercise of
common stock options 4 -- 44 -- 44
Net earnings -- -- -- 2,182 2,182
------- ------ ---------- --------- -------------
Balance at April 28, 1996 27,270 $273 $80,186 $132,453 $212,912
------- ------ ---------- --------- -------------
------- ------ ---------- --------- -------------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended
----------------------
April 28, April 30,
1996 1995
--------- ---------
(in thousands)
Cash flows from operating activities:
Net earnings $ 2,182 $ 1,466
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment 2,107 1,970
Other amortization 1,554 1,422
Provision for deferred income taxes 275 1,169
Changes in operating assets and
liabilities:
Accounts receivable (582) 76
Merchandise inventories (4,594) (1,926)
Prepaid expenses and other current
assets (347) (1,581)
Accrued restructuring expenses (810) (1,266)
Accounts payable 7,930 5,523
Other current liabilities 3,777 (1,095)
Other (287) (10)
--------- ---------
Net cash provided by operating
activities 11,205 5,748
--------- ---------
Cash flows from investing activities:
Purchases of investments (3,263) (3,750)
Maturities of investments 4,730 1,554
Additions to property and equipment (3,334) (2,800)
Other 235 (951)
--------- ---------
Net cash used in investing
activities (1,632) (5,947)
--------- ---------
Cash flows from financing activities:
Payment of borrowings (1,145) (1,138)
Dividends paid (1,363) (1,362)
Other 493 334
--------- ---------
Net cash used in financing
activities (2,015) (2,166)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 7,558 (2,365)
Cash and cash equivalents at beginning
of period 34,252 31,353
--------- ---------
Cash and cash equivalents at end of
period $ 41,810 $ 28,988
--------- ---------
--------- ---------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements included herein do not
include all information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles. For further information, such as the significant
accounting policies followed by the Company, refer to the notes to
consolidated financial statements set forth in the Company's annual
report for the year ended January 28, 1996.
In the opinion of management, the consolidated financial statements
include all necessary adjustments (consisting of normal recurring
accruals) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented.
The results of operations for the quarter ended April 28, 1996 are
not necessarily indicative of the operating results to be expected for
the full year.
The balance sheet at January 28, 1996 has been derived from the
audited financial statements of the Company at that date.
(2) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Long-term investments in
affiliates in which the Company does not have a majority interest or
control are accounted for by the equity method of accounting. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(3) Earnings Per Share
Earnings per share are based on the weighted average number of
shares of common stock outstanding during each period.
(4) Foreign Exchange Forward Contracts
The only financial derivatives used by the Company are foreign
exchange forward contracts. The Company had approximately $17,530,000
of foreign exchange forward contracts outstanding at April 28, 1996 to
purchase British pounds, French francs, Deutsche marks and Swiss francs.
The contracts outstanding at April 28, 1996 mature at various dates in
fiscal 1997. The fair values of these contracts were $17,085,000 as of
April 28, 1996. Fair values were estimated by obtaining quotes from
banks assuming all contracts were purchased on April 28, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
- - ---------------------
Net earnings for the quarter ended April 28, 1996 were $2,182,000,
or $0.08 per share, an increase of $716,000 or 49% from $1,466,000, or
$0.05 per share, for the quarter ended April 30, 1995. The increase was
due primarily to a significant increase in the Southern and Northern
Border Division's net earnings. The Southern Border Division's net
earnings increased significantly from the prior year due to a 15.1%
increase in net sales and an increase in gross profit margins while
selling, general and administrative expenses were relatively the same as
the prior year. The net sales and gross profit margin increases were in
comparison to the Division's fiscal 1996 first quarter results which
were significantly affected by the Mexican peso devaluation in December
1994. The Northern Border Division's net earnings also increased
significantly from the prior year due primarily to a 9.1% increase in
comparable sales of duty free merchandise (excluding sales from two
stores purchased in July 1995), which have significantly higher gross
profit margins than retail and gas sales, while selling, general and
administrative expenses decreased by approximately $100,000 from the
prior year when the selling, general and administrative expenses of the
stores purchased in July 1995 are excluded from the current year. The
comparable duty free sales increase was due primarily to an increase in
the average amount of duty free merchandise purchased from the Division
as a result of the Division's employee sales training programs and other
marketing efforts. The above was partially offset by the continued
decrease in Canadian traffic across the United States/Canada border when
compared to the prior year and a decrease in retail and gas sales.
Below are significant variances by income statement line item.
Net Sales
- - ---------
The following table sets forth, for the periods indicated, the net
sales and the percentage of total net sales for each of the Company's
divisions and the period to period change in such sales:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended
-------------------------------------- Increase/(Decrease)
(in thousands, except for percentages) Quarter Ended
Divisional April 28, 1996 vs.
Net Sales April 28, 1996 April 30, 1995 April 30, 1995
- - ------------- ---------------- ---------------- --------------------
Border:
Southern $ 23,334 19.8% $ 20,269 18.5% $ 3,065 15.1 %
Northern 16,142 13.7 14,424 13.2 1,718 11.9 %
Inflight 39,855 33.8 37,815 34.6 2,040 5.4 %
Airport 26,218 22.2 23,283 21.3 2,935 12.6 %
Diplomatic
and Wholesale 12,430 10.5 13,557 12.4 (1,127) (8.3)%
-------- ------ -------- ------ ---------
$117,979 100.0% $109,348 100.0% $ 8,631 7.9 %
-------- ------ -------- ------ ---------
-------- ------ -------- ------ ---------
</TABLE>
<PAGE>
The SOUTHERN BORDER DIVISION'S net sales increased by 15.1% due
primarily to the Division's fiscal 1996 first quarter net sales being
significantly affected by the Mexican peso devaluation in December 1994.
The NORTHERN BORDER DIVISION'S net sales increased by 11.9% due
primarily to the purchase of two stores in July 1995, and a 9.1%
increase in comparable sales of duty free merchandise resulting from the
Division's employee sales training programs and other marketing efforts.
The above was partially offset by the continued decrease in Canadian
traffic across the United States/Canada border and a decrease in retail
and gas sales. The INFLIGHT DIVISION'S net sales increased by 5.4% due
primarily to an increase in airline concession sales, including the new
concession contract with Air Canada, partially offset by a decrease in
wholesale sales to airlines including Air Canada. Air Canada was a
wholesale customer of the Inflight Division before Inflight was awarded
their concession contract. The Airport Division's net sales increased
by 12.6% due primarily to new store openings in fiscal 1996 and 1997.
DIPLOMATIC AND WHOLESALE DIVISION net sales, excluding net sales of the
two locations sold in fiscal 1996 as part of the restructuring plan,
increased by 1.2%
Cost of Sales and Gross Profit
- - ------------------------------
Gross profit, as a percentage of net sales, increased to 43.1% in
the first quarter of fiscal 1997 from 42.2% for the same period in the
prior year. The increase was due primarily to an increase in the
Southern and Northern Border Division's gross profit margins in the
current year when compared to the prior year. The increase in the
Southern Border Division's gross profit margins was due primarily to the
Division reducing prices in the first quarter of the prior year due to
the peso devaluation in December 1994. Sales prices and gross profit
margins increased to more normal levels in the second quarter of fiscal
1996. The Northern Border Division's gross profit margins increased
from the prior year due to a significant increase in duty free sales and
a decrease in retail and gas sales. Duty free sales have significantly
higher gross profit margins than retail and gas sales.
Advertising, Storage and Other Operating Income
- - -----------------------------------------------
Advertising, storage and other operating income decreased by
$291,000 due primarily to a reduction in certain vendor advertising
programs, and a decrease in storage income as a result of the Company
reducing the warehouse space allocated to storing the merchandise of
other companies.
Selling, General, and Administrative Expenses
- - ---------------------------------------------
Selling, general and administrative expenses, as a percentage of
net sales, decreased to 39.7% in the first quarter of fiscal 1997 from
40.0% in the first quarter of fiscal 1996. The decrease was due
primarily to an increase in net sales without a corresponding percentage
increase in payroll and related expenses. The above was partially
offset by an increase in commission expenses paid to airlines resulting
from an increase in the Inflight Division's concession sales, and an
increase in base rent and rent based on sales resulting from an increase
in the Airport and Northern Border Division's net sales and store
openings.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Net cash provided by operating activities was $11,205,000 for the
quarter ended April 28, 1996. Working capital was $119,452,000 as of
April 28, 1996. The Company believes its existing funds, cash provided
by operating activities and available borrowings will be sufficient to
meet its current liquidity and capital requirements.
REGULATION AND ECONOMIC FACTORS AFFECTING THE DUTY FREE INDUSTRY
- - ----------------------------------------------------------------
The Company's sales and gross profit margins are affected by
factors specifically related to the duty free industry. Most countries
have allowances on the import of duty free goods. Decreases in the duty
free allowances of foreign countries or stricter eligibility
requirements for duty free purchases, as well as decreases in tax and
duty rates imposed by foreign jurisdictions could have a negative effect
on the Company's sales and gross profit margins (particularly Canada and
Mexico). Conversely, increases could have a positive effect on the
Company's sales and gross profit.
The principal customers of the Company are residents of foreign
countries whose purchases of duty free merchandise may be affected by
trends in the economies of foreign countries and changes in the value of
the U.S. dollar relative to their own currencies. Any significant
increase in the value of the U.S. dollar relative to the currencies of
foreign countries, particularly Canada, Mexico and Japan, could have an
adverse impact on the number of travelers visiting the United States and
the dollar amount of duty free purchases made by them from the Company.
A significant increase in gasoline prices or a shortage of fuel may also
reduce the number of international travelers and thereby adversely
affect the Company's sales. In addition, the Company imports a
significant portion of its products from Western Europe and Canada at
prices negotiated either in U.S. dollars or foreign currencies. As a
result, the Company's costs are affected by fluctuations in the value of
the U.S. dollar in relation to major Western European and Canadian
currencies. A decrease in the purchasing power of the U.S. dollar
relative to other currencies causes a corresponding increase in the
purchase price of products. The Company enters into foreign exchange
forward contracts as a hedge against a portion of its exposure to
currency fluctuations on commitments to purchase merchandise.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In GUERRA, ET AL. V. DUTY FREE INTERNATIONAL, INC., AND GOLDMAN,
SACHS & CO. (285th Judicial District, Bexar County, Texas), the
District Court, after a hearing on the plaintiffs' motion to reconsider
the November 17, 1994 order abating and staying the plaintiffs' action,
dismissed the action in an order dated May 7, 1996. The Plaintiffs have
since filed a notice of appeal from this order.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) The Company did not file a Current Report on Form 8-K during
the quarter ended April 28, 1996.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUTY FREE INTERNATIONAL, INC.
Date: June 6, 1996 /s/ Gerald F. Egan
-------------- -----------------------------
Gerald F. Egan
Vice President-Finance and
Chief Financial Officer
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000820756
<NAME> DUTY FREE INTERNATIONAL, INC.
[DESCRIPTION] ART.5 FDS FOR 1ST QUARTER 10-Q
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-26-1997
<PERIOD-END> APR-28-1996
<CASH> 41,810
<SECURITIES> 8,692
<RECEIVABLES> 21,170
<ALLOWANCES> 840
<INVENTORY> 96,876
<CURRENT-ASSETS> 185,803
<PP&E> 135,654
<DEPRECIATION> 42,102
<TOTAL-ASSETS> 401,480
<CURRENT-LIABILITIES> 66,351
<BONDS> 118,716
0
0
<COMMON> 273
<OTHER-SE> 212,639
<TOTAL-LIABILITY-AND-EQUITY> 401,480
<SALES> 117,979
<TOTAL-REVENUES> 118,948
<CGS> 67,178
<TOTAL-COSTS> 67,178
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 106
<INTEREST-EXPENSE> 2,127
<INCOME-PRETAX> 3,464
<INCOME-TAX> 1,282
<INCOME-CONTINUING> 2,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,182
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
