ANNUAL REPORT 97
Duty Free International, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA -- 10 YEARS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal year ended January 1997 1996 1995(1) 1994 1993(2) 1992(3) 1991 1990 1989 1988(4)
- ------------------------- ---- ---- ------- ---- ------- ------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Statement Data:
Net Sales $570,895 $515,058 $501,761 $376,436 $361,823 $346,635 $262,962 $258,944 $229,687 $141,978
Net sales increase percent 10.8% 2.7% 33.3% 4.0% 4.4% 31.8% 1.6% 12.7% 61.8% N/A
Gross profit 249,162 218,885 200,374 147,740 146,425 138,749 93,820 83,512 62,788 39,706
Gross profit -- percent
of net sales 43.6% 42.5% 39.9% 39.2% 40.5% 40.0% 35.7% 32.3% 27.3% 28.0%
Selling, general and
administrative expenses 214,032 192,913 177,895 113,365 101,401 95,406 67,194 59,985 45,121 31,492
Selling, general and
administrative expenses --
percent of net sales 37.5% 37.5% 35.5% 30.1% 28.0% 27.5% 25.6% 23.2% 19.6% 22.2%
Restructuring expenses -- -- 7,571 -- -- -- -- -- -- --
Revaluation of intangible
assets -- -- 46,002 -- -- -- -- -- -- --
Operating income (loss) 39,653 30,346 (26,722) 39,535 49,647 47,577 29,715 26,221 19,984 9,528
Operating income (loss) --
percent of net sales 6.9% 5.9% (5.3%) 10.5% 13.7% 13.7% 11.3% 10.1% 8.7% 6.7%
Operating income (loss)--
percentage change 30.7% N/A N/A (20.4%) 4.4% 60.1% 13.3% 31.2% 109.7% N/A
Earnings (loss) before
income taxes 34,080 25,389 (31,149) 43,082 49,786 48,765 32,542 26,200 19,301 8,815
Effective income tax rate 37.0% 37.0% (20.4%) 36.4% 39.0% 35.7% 31.6% 33.3% 32.1% 43.3%
Net earnings (loss) 21,470 15,996 (24,802) 27,393 30,373 31,364 22,268 17,483 13,101 5,001
Net earnings (loss) --
percent of net sales 3.8% 3.1% (4.9%) 7.3% 8.4% 9.0% 8.5% 6.8% 5.7% 3.5%
Earnings (loss) per share $0.79 $0.59 $(0.91) $1.01 $1.08 $1.19 $0.85 $0.78 $0.71 $0.30
Weighted average number
of shares outstanding
(000's) 27,282 27,251 27,224 27,204 28,142 26,462 26,314 22,385 18,562 16,556
Dividends per common share $0.24 $0.20 $0.20 $0.20 $0.15 -- -- -- $0.025 --
Return on stockholders'
equity 9.8% 7.7% (11.5%) 12.5% 14.3% 17.7% 17.6% 22.3% 37.5% 28.0%
<PAGE>
January 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $142,117 $121,291 $113,996 $204,118 $ 90,630 $119,353 $103,209 $ 98,844 $ 29,348 $ 21,121
Current ratio 3.2 3.2 2.7 7.0 3.3 3.9 3.1 3.3 1.5 1.4
Total asset 415,348 390,708 387,142 387,600 255,819 269,911 200,557 173,153 103,867 83,689
Long-term obligations 123,604 122,238 118,891 121,821 9,629 11,797 14,054 14,253 8,379 7,257
Stockholders' equity 227,715 212,482 201,151 231,861 207,343 216,447 137,875 115,830 41,183 28,737
Number of shares
outstanding (000's) 27,303 27,270 27,244 27,238 27,122 28,429 26,269 26,262 18,512 18,512
Percent of total debt to
total capitalization 34.3% 36.2% 37.1% 34.2% 4.1% 5.2% 13.7% 15.7% 23.8% 35.8%
Book value per share $8.34 $7.79 $7.38 $8.51 $7.64 $7.61 $5.25 $4.41 $2.22 $1.55
</TABLE>
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(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.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
First Second Third Fourth Year
----- ------ ----- ------ ----
Fiscal 1997:
Net sales $117,979 $140,754 $158,662 $153,500 $570,895
Gross profit 50,801 62,976 71,205 64,180 249,162
Net earnings 2,182 6,009 7,539 5,740 21,470
Earnings per share $0.08 $0.22 $0.28 $0.21 $0.79
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
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
<PAGE>
COMPANY PROFILE
Duty Free International, Inc. operates one of the world's largest
chains of travel-related stores. Founded in 1983 and publicly held since 1989,
DFI has become a diversified retailer through both acquisitions and internal
expansion. The Company now operates approximately 176 stores and employs more
than 2,000 people. Headquartered in Ridgefield, Connecticut, DFI is divided into
four operating divisions: Airport, Border (AMMEX and UETA), Inflight and
Diplomatic/Wholesale.
AMMEX operates 36 duty free locations on the United States border with
Canada, while UETA operates 31 stores at crossings between the United States and
Mexico. DFI serves 14 international airports throughout the United States,
including New York's John F. Kennedy and La Guardia, Chicago's O'Hare, Boston's
Logan, and Denver, as well as several in the Caribbean islands. DFI is also a
major supplier of duty free merchandise to foreign diplomats in New York and
Washington, D.C., as well as to ships engaged in international travel and trade
in the ports of the northeastern United States and Miami.
With its vast product assortment, the Company reaches millions of
travelers from around the world every day. The duty free stores sell
high-quality, brand-name merchandise, such as liquor, tobacco products,
fragrances and luxury gifts, free of all duties as well as sales and excise
taxes. Duty Free specializes in the sale of premium products and typically
offers savings of 20% to 60%, depending on the shopper's home market.
DUTY FREE LOCATIONS
INTERNATIONAL LOCATIONS
Caribbean, Hong Kong, Puerto Rico
Singapore, United Kingdom
<PAGE>
LETTER TO SHAREHOLDERS:
Fiscal 1997 was another year of solid progress for our Company. Not
only did sales and earnings exceed fiscal 1996 results by a considerable margin,
but also quarterly numbers moved on an uninterrupted upward path. These
gratifying results were achieved through a selective expansion of our retail
locations, a significantly extended product line and continued firm control over
costs.
Operating Results
On a year-to-year sales gain of 10.8%, net income increased 34.2% in
fiscal 1997. Revenues rose from $515,058,000 a year earlier to $570,895,000, due
in large part to stellar results at the Airport Division. Thanks to the leverage
provided by our relatively fixed-cost base, net income jumped from $15,996,000
to $21,470,000, and earnings per share rose to $0.79 versus $0.59 in the prior
year.
At fiscal year-end, assets totaled $415,348,000, working capital was
$142,117,000, stockholders' equity equaled $227,715,000, and the ratio of total
debt to total capitalization was 34.3%.
The Year in Review
Fiscal 1997 began on a positive note, with all Divisions showing higher
rates of growth, except Diplomatic/Wholesale, where a shift in emphasis to the
more profitable diplomatic business has dampened sales. These encouraging trends
continued throughout the year, with the Airport and Inflight Divisions standout
performers and a noteworthy turnaround in the Southern Border operation.
Quarterly highlights include the Airport Division's addition of seven
new stores at Chicago's O'Hare International Airport in the first three months
of the fiscal year, the opening of the 5,000-square-foot Delta Flight Center
shop at John F. Kennedy International Airport in New York in the second quarter,
and an increase to seven stores in the San Juan International Airport in the
fourth quarter. As well, in the final three months of the fiscal year, the
Company introduced two new brand-name concepts: Sony Signature Shop and Coach
Leather. At the same time, comparable-store sales gains continued to increase.
Contributing to the Inflight Division's strong results were two new
duty free airline concessions that became effective in the first and second
quarters. Here, too, comparable-store sales exceeded our expectations. In
October, the Inflight Division, together with its airline partner, United
Airlines, was the proud recipient of the prestigious Frontier Duty Free Award
for Inflight Operator of the Year.
The final three months of fiscal 1997 showed the strongest revenue gain
of the year -- almost 18% -- with increases of 20% or more recorded by Airport,
Inflight and the Southern Border. The latter enjoyed the dual benefits of higher
volume and relative stability of the Mexican peso against the U.S. dollar.
<PAGE>
Other developments of note during the year include the promotion of
Steven D. Zurcher to the position of President of the AMMEX Tax and Duty Free
Shops, Inc. during the first quarter. Steve was formerly Executive Vice
President of AMMEX and has been with the Company since 1989. We believe his
leadership will strengthen the Northern Border operations.
We are also delighted to announce the election to the Company's Board
of Directors of former Connecticut Governor Lowell P. Weicker, Jr., in the
fourth quarter. Governor Weicker's experience in the private and public sectors,
including the U.S. Congress in both the House and the Senate, will be of great
value to Duty Free International in the years ahead.
Looking Ahead
Results for fiscal 1997 demonstrate convincingly that our strategy of
prudent expansion of retail locations, combined with streamlined operations, is
bearing fruit and has set the stage for long-term growth in sales and
profitability.
The expansion of our Airport Division facilities coincided with an
increase in international travel. We believe the attractive value of the U.S.
dollar versus European currencies is partly responsible and will continue to
benefit this Division. At the same time, DFI is offering a much broader product
line and new branded shops. We expect an extension of the strong gains in this
Division and will diligently pursue further profitable airport concessions and
high-quality merchandise lines.
Building on our well-established on-board duty free concession business
in the Americas and our global supply infrastructure, we continue to pursue
appropriate prospects for inflight programs worldwide. Air carriers are
increasingly finding it profitable to outsource such services, and Inflight has
no equal in this area.
<PAGE>
The Border Division should maintain the improvement in sales shown in
fiscal 1997, leading to more profitable operations both short- and long-term.
The decline in gasoline and convenience store sales that has hampered AMMEX
(Northern Border) should flatten out by the end of the first quarter of fiscal
1998. And, with a benign macroeconomic environment in Canada, comparable-store
sales for the core duty free business should pick up. At UETA, we plan further
expansion and will soon open our first store on the Mexican side of the Southern
Border.
We believe the managing-down of the wholesale aspects of the
Diplomatic/Wholesale Division is complete and that this operation is now at a
sustainable level. Diplomatic sales remain satisfactory and profitable.
We intend to remain the foremost duty free and travel-related retailer
in the industry by seeking promising avenues of growth, increasing efficiency,
and offering a widening selection of high-quality products at attractive prices.
Our strategy remains to increase average spending per customer, maintain a
low-cost structure, and pursue acquisitions. In this way, we expect to achieve
our goal of a billion dollars in sales by the end of this decade and to reward
the loyalty of our shareholders, our employees, our customers and our vendors.
We thank all of you for your continued support.
Sincerely,
Alfred Carfora
President and Chief Executive Officer
March 24, 1997
<PAGE>
Results for fiscal 1997 demonstrate convincingly that our strategy of
prudent expansion of retail locations, combined with streamlined
operations, is bearing fruit and has set the stage for
long-term growth in sales and profitability.
LEADING THE DUTY FREE AND TRAVEL RETAILING INDUSTRY
WE INTEND to remain the foremost duty free and travel-related retailer
in the industry by seeking promising avenues of growth, increasing efficiency,
and offering a widening selection of high-quality products at attractive prices.
OUR STRATEGY remains to increase average spending per customer,
maintain a low-cost structure, and pursue acquisitions. In this way, we expect
to achieve our goal of a billion dollars in sales by the end of this decade.
AIRPORT DIVISION
DFI's excellent fiscal 1997 performance was spearheaded by the Airport
Division, which operates as Fenton Hill American Limited and accounts for about
22% of total corporate revenues. Following the addition of 16 new stores in
fiscal 1996 in the international airports of Denver, Boston and San Juan, in
fiscal 1997 the Division obtained a further seven stores in Terminal 1 and
Terminal 3 at Chicago's O'Hare International Airport. It also opened a
5,000-square-foot duty free store at the new Delta Flight Center at the John F.
Kennedy International Airport in New York. As well, we now have seven duty free
shops in the San Juan International Airport. These additional facilities
combined with an expanded product line led to an impressive 22% gain in sales
for the year, from $102,548,000 in fiscal 1996 to $125,530,000.
Fenton Hill's success stems from a diversified portfolio of retail
outlets, which we continually upgrade while increasing our mix of concepts --
Coach Leather and Sony Signature Shop boutiques are the latest to be added. Our
duty free shops sell high-quality, brand-name merchandise, such as liquor,
tobacco products, fragrances and luxury gifts. Other retailing businesses
include standard news and gift shops, as well as bookstores. Among our specialty
outlets are shops concentrating on American-made items, regional sports-theme
shops (The Sports Section), natural personal-care boutiques (Bodyography), and
branded athletic footwear shops (the Athlete's Foot). We also offer gourmet food
and confectionery outlets.
<PAGE>
BORDER DIVISION
The Border Division should maintain the improvement in sales shown in
fiscal 1997, leading to more profitable operations both short- and long-term.
Border North
Duty free sales at AMMEX were quite satisfactory in fiscal 1997. An
emphasis on selling techniques continued to raise the average transaction spend,
overcoming flat traffic trends, and same-store duty free sales were up. While
these encouraging results were offset to some extent by a decline in the
lower-margin gas and convenience store sales, overall the Northern Border showed
a 3.3% gain in annual revenues, from $77,710,000 to $80,284,000. AMMEX's
performance this year is reflective of the much more stable economic conditions
that currently prevail in Canada. Continuation or improvement of these economic
conditions will positively impact future results of this Division.
AMMEX's focus this coming year will be to continue improving its
capture rate and increasing its average transaction spend. Expanded assortments
of merchandise, coupled with a keen pricing strategy, will attract many new
customers.
Border South
The restructuring of UETA operations over the past couple of years, as
well as store upgrades, contributed to a sharp turnaround in the Southern
Border, with an especially strong 25% gain in the fourth quarter. Revenues were
up 17% for the full year, from $103,283,000 to $120,802,000 -- 21% of overall
corporate sales. Since the Company's costs are relatively fixed in the Southern
Border, higher volume sharply benefits operating margins. Two new locations were
added in Texas during the year, and we plan further expansion in fiscal 1998,
including our first duty free store in Mexico.
UETA sells luxury items, such as premium watches, fragrances,
cosmetics, select liquor and tobacco products, beer, wine, gourmet foods,
designer jewelry and other high-quality gifts, along the United States/Mexican
border.
<PAGE>
DIPLOMATIC/WHOLESALE DIVISION
Diplomatic/Wholesale Division
To maximize returns on our assets, we have been refocusing the
Diplomatic/Wholesale Division for some time now. As a result, the operation
accounts for approximately 10% of the Company's sales. Revenues for fiscal 1997
were $54,826,000 compared with $60,249,000 a year ago. Sales to the diplomatic
community continue to do well, and this accent on higher margin business is
improving profitability. By managing down the low profit margin business in this
Division, we have increased our capacity to distribute merchandise to our
ever-expanding chain of stores.
The Division remains the foremost supplier of duty free luxury items to
U.S.-based foreign diplomats and a major supplier to international merchant and
passenger ships.
INFLIGHT DIVISION
Acquired only two years ago, the Division now accounts for
approximately one-third of total revenues. Inflight is a principal operator of
on-board, duty-free merchandise programs for international airlines. In
testimony to its leadership and the excellence of its service, Inflight, along
with its airline partner, United Airlines, was named Inflight Retailer of the
Year in fiscal 1997. Inflight is a full service duty free concessionaire for the
world's leading airlines, offering high-quality luxury merchandise to their
passengers. The Company also supplies wholesale merchandise to airline-run duty
free programs and manufactures and markets amenity kits for international air
carriers' first- and premium-class passengers.
As air travel and airline competition increase and as carriers
recognize the benefits of a risk-free outsourcing arrangement, Inflight
concession programs will account for a greater percentage of the Company's
corporate sales.
Two new airline concessions were implemented this year. Air Canada in
March was followed by a second contract with Canadian International Airlines in
July, lifting the Division's rate of sales growth to 20% in the fourth quarter.
For the full year, the gain was 10.6%, from $171,268,000 to $189,453,000. Our
distribution warehouses and station locations throughout the United States,
South America, Europe and the Pacific Rim provide the infrastructure to pursue
opportunities to provide full on-board, duty free programs throughout the world.
Within the new year, DFI plans to establish a marketing presence in Europe to
manage accounts in that area and better penetrate the European market.
<PAGE>
REPORT OF MANAGEMENT
To Our Shareholders:
The management of Duty Free International, Inc. has prepared the
financial statements and related information contained in this Annual Report.
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles and using estimates, where appropriate,
based on the judgments of management. Management is responsible for the
integrity and objectivity of the financial statements and other financial
information included in this report. To meet this responsibility, management
maintains a system of internal accounting procedures and controls to provide
reasonable assurance that assets are safeguarded and that transactions are
properly executed and recorded by qualified personnel. The system of procedures
and controls is regularly reviewed by officers, key employees of the Company and
the Company's Internal Audit department.
The Audit Committee of the Board of Directors is composed solely of
outside directors. The Committee meets periodically and, when appropriate,
separately, with representatives of the independent auditors, personnel from the
Company's Internal Audit department and officers of the Company to review their
activities. The independent auditors have full and free access to the Audit
Committee and meet with it to discuss auditing, financial reporting and other
matters.
The Audit Committee recommends, and the Board of Directors appoints,
the independent auditors.
Alfred Carfora Gerald F. Egan
President and Vice President Finance and
Chief Executive Officer Chief Financial Officer
<PAGE>
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 26, 1997 and January 28,
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended January 26,
1997. 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 26, 1997 and January 28, 1996
and the results of their operations and their cash flows for each of the years
in the three-year period ended January 26, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
February 28, 1997
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 Compared with 1996
Net earnings were $21,470,000, or $0.79 per share, for the year ended
January 26, 1997, an increase of $5,474,000, or 34.2%, from $15,996,000, or
$0.59 per share, for the year ended January 28, 1996. The 34% increase in net
earnings was due primarily to increased operating earnings by the Company's
Southern Border and Airport Divisions. The increase in the Southern Border
Division's operating earnings was due primarily to a 17% increase in sales,
resulting primarily from the stabilization of the Mexican economy, while
selling, general and administrative expenses increased by only 3.4%. The Airport
Division's operating earnings increased significantly due to a 22.4% increase in
net sales, primarily from new airport locations in New York, Chicago,
Philadelphia and Puerto Rico, and improved operating margins resulting primarily
from a decrease in payroll and related expenses as a percent of sales.
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>
<CAPTION>
Fiscal Year Ended Increase/(Decrease)
----------------------------------------- Fiscal
Divisional Net Sales January 26, 1997 January 28, 1996 1997 vs. 1996
- -------------------- ---------------- ---------------- -----------------
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Border:
Southern $120,802 21.2% $103,283 20.0% $17,519 17.0%
Northern 80,284 14.1 77,710 15.1 2,574 3.3%
Inflight 189,453 33.2 171,268 33.3 18,185 10.6%
Airport 125,530 22.0 102,548 19.9 22,982 22.4%
Diplomatic and Wholesale 54,826 9.5 60,249 11.7 (5,423) (9.0%)
-------- ---- -------- ---- -------
$570,895 100.0% $515,058 100.0% $55,837 10.8%
======== ===== ======== ===== =======
</TABLE>
<PAGE>
The 17.0% increase in the Southern Border Division sales was due
primarily to the improvement of the Mexican peso/U.S. dollar exchange rate and
the Mexican economy stabilizing during fiscal 1997. The Southern Border
Division's operating results in fiscal 1996 suffered from the significant
negative effects on the Mexican economy of the peso devaluation in December
1994. The Northern Border Division's sales increased by 3.3% due primarily to an
8.8% increase in duty free sales resulting from the purchase of two duty free
stores in July 1995, and an increase in the average amount spent per transaction
by customers, which the Company attributes to the division's sales training
programs and other marketing efforts. The net sales increase was achieved in
spite of a 22.9% decrease in lower margin retail and gas sales as a result of
the Northern Border Division discontinuing a policy of giving customers a higher
exchange rate than the prevailing market rate for Canadian dollars when they
were exchanged for U.S. dollars. The intention of this program was to increase
higher margin duty free sales, which did not occur sufficiently, thus this
program was discontinued early in fiscal 1997. The Inflight Division's sales
increased by 10.6% due primarily to sales from the new airline concession
contracts with Air Canadian and Canadian International and an increase in sales
from the division's South American airline concessions. The sales to concession
customers were partially offset by a decrease in wholesale sales to airlines,
including Air Canada and Canadian International which were wholesale customers
of the Inflight Division before Inflight was awarded their concession contracts.
The Airport Division's sales increased by 22.4% due primarily to new store
openings in fiscal 1996 and 1997. Diplomatic and Wholesale Division sales,
excluding sales of the two locations sold in fiscal 1996 as part of the
restructuring plan, were comparable with the prior year. The Diplomatic and
Wholesale Division continued its program of decreasing low margin wholesale
sales; however, the wholesale sales decrease was offset by an increase in sales
to cruise ships.
Cost of Sales and Gross Profit
Gross profit, as a percentage of net sales, increased to 43.6% during
fiscal 1997 from 42.5% during fiscal 1996. The increase was due primarily to
increases in the Inflight, Airport and Northern Border Division's duty free
sales, all of which have gross profit margins higher than the Company's average
gross profit margin, and a decrease in lower margin, wholesale, gas and Northern
Border retail sales, all of which have gross profit margins lower than the
Company's average gross profit margin. The above was partially offset by an
increase in the Southern Border Division's sales as a percentage of the
Company's total sales. The Southern Border Division has gross profit margins
that are lower than the Company's average gross profit margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net
sales, were 37.5% for both fiscal 1997 and 1996. A decrease in payroll and
related expenses, as a percentage of net sales, during the current year was
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 due to store openings in fiscal 1996 and 1997.
Gain (Loss) on Foreign Currency Transactions
The Company's gain on foreign currency transactions was $342,000 for
fiscal 1997 versus a loss of $487,000 for fiscal 1996. The increase in income
from foreign currency transactions was due primarily to the Northern Border
Division discontinuing its policy of giving customers a higher exchange rate
than the prevailing market rate for Canadian dollars when they were exchanged
for U.S. dollars, and the Company increasing the percentage of foreign currency
denominated purchases covered by foreign exchange forward contracts during
fiscal 1997 when compared to fiscal 1996.
<PAGE>
Other Non-Operating Income
Other non-operating income decreased by $1,231,000 from $1,529,000
during fiscal 1996 to $298,000 during fiscal 1997. The decrease was due
primarily to an increase in minority partners' interest in consolidated
partnership's income during fiscal 1997 when compared to fiscal 1996. The
Company entered into new partnership agreements at various new airport locations
during fiscal 1996 and 1997.
Income Taxes
Income taxes, as a percentage of earnings before income taxes, was
37.0% for both fiscal 1997 and 1996.
<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 is provided in notes 16 and 17 to the consolidated financial
statements). 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
operating earnings increased significantly for fiscal 1996 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 fiscal 1996 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 operating earnings
for fiscal 1996 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 fiscal 1996. The Airport Division's
operating 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 of
fiscal 1996, the Airport Division's sales and operating earnings were adversely
impacted by the severe hurricanes on the Caribbean islands of St. Thomas and St.
Maarten.
The increases in operating earnings for the Inflight, Northern Border
and Airport Divisions were partially offset by a substantial decrease in the
Southern Border Division's sales and operating 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 fiscal 1996 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 employee terminations, a decrease in the number of hours stores
were open, and reductions of advertising and promotional expenses. 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.
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>
<CAPTION>
Fiscal Year Ended Increase/(Decrease)
----------------------------------------- Fiscal
Divisional Net Sales January 28, 1996 January 29, 1995 1996 vs. 1995
- -------------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
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>
<PAGE>
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 fiscal 1996. 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 fiscal 1996 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) was 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
primarily to an increase in the number of foreign travelers shopping at the
Company's airport locations during fiscal 1996, and store openings at 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 de-emphasize 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 fiscal 1996 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 gross profit margins than
amenity kit and wholesale sales to airlines.
<PAGE>
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:
o A significant increase in the Inflight Division's net sales in fiscal 1996,
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.
o An increase in the Airport Division's net sales in fiscal 1996, 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.
o Significant decreases in the Southern Border Division's net sales in fiscal
1996 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 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 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 fiscal 1996 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 fiscal 1996 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
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. All
of the stores and business locations were closed or sold during fiscal 1995 and
fiscal 1996. 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 or 1997. See note 16 to the
consolidated financial statements for further detail.
<PAGE>
Revaluation of Intangible Assets
In the third quarter of fiscal 1995, the Company changed its method of
evaluating the recoverability of intangible assets. In fiscal 1995, fair values
of intangible assets were determined based on the estimated discounted future
operating cash flows of the related acquired operations over the life of each
intangible asset. Prior to fiscal 1995, impairment was measured using
undiscounted cash flows. The projected financial results of each operation were
based on management's best estimate of expected future operating cash flows.
Discount rates reflected the risk associated with each operation, based on the
type of business, geographic location and other matters, in relation to risk
free investments. 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,
the Company reduced the carrying amount of its intangible assets by $46,002,000.
See note 17 to the consolidated financial statements for further detail.
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
and Mexico, 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.
Liquidity and Capital Resources
The Company has a $75,000,000 revolving line of credit and letter of
credit facility with various banks 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. As of
January 26, 1997, the Company had issued letters of credit for $10,844,000 and
had available borrowings of $50,000,000. There were no borrowings under the
facility during the years ended January 26, 1997 and January 28, 1996.
Currently, the Company has no plans to make any borrowings under the facility.
The Company's primary liquidity and capital requirements for fiscal
1998 will be working capital needs, primarily inventory and receivables,
purchases of property and equipment and dividend payments. During fiscal 1998,
the Company expects to spend approximately $12,500,000 on capital expenditures,
make approximately $6,600,000 of dividend payments and make approximately
$1,093,000 of debt payments. Working capital was $142,117,000 as of January 26,
1997, an increase of $20,826,000 from $121,291,000 as of January 28, 1996. The
Company believes its existing funds, cash provided by operations and available
borrowings will be sufficient to meet its current liquidity and capital
requirements.
<PAGE>
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 294 as of March 3, 1997.
The following table sets fourth the high and low reported sales prices
for the common stock as reported by the New York Stock Exchange:
High Low
---- ---
Fiscal 1997:
First quarter $15-1/8 $11-3/4
Second quarter 17-1/4 13-1/4
Third quarter 16 13-1/8
Fourth quarter 17-7/8 13-1/8
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
Cash dividends declared were approximately $6,536,000, or $0.24 per
share, and $5,450,000, or $0.20 per share, for the years ended January 26, 1997
and January 28, 1996. The Company intends to pay quarterly dividends of $0.06
per share during fiscal 1998.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
January 26, January 28, January 29,
Fiscal year ended 1997 1996 1995
- ----------------- ---- ---- ----
Net sales $570,895 $515,058 $501,761
Cost of sales 321,733 296,173 301,387
-------- -------- --------
Gross profit 249,162 218,885 200,374
Advertising, storage and other
operating income 4,523 4,374 4,372
-------- -------- --------
253,685 223,259 204,746
Selling, general and
administrative expenses 214,032 192,913 177,895
Restructuring expenses (note 16) -- -- 7,571
Revaluation of intangible assets
(note 17) -- -- 46,002
-------- -------- --------
Operating income (loss) 39,653 30,346 (26,722)
-------- -------- --------
Other income (expense):
Interest income 2,231 2,659 3,619
Interest expense (8,444) (8,658) (8,878)
Gain (loss) on foreign
currency transactions 342 (487) (556)
Other, net 298 1,529 1,388
-------- -------- --------
(5,573) (4,957) (4,427)
-------- -------- --------
Earnings (loss) before
income taxes 34,080 25,389 (31,149)
Income tax expense (benefit)
(note 5) 12,610 9,393 (6,347)
-------- -------- --------
Net earnings (loss) $ 21,470 $ 15,996 $(24,802)
======== ======== ========
Earnings (loss) per share $0.79 $0.59 $(0.91)
======== ======== ========
See accompanying notes to the consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 26, January 28,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 36,483 $ 36,228
Short-term investments, at cost (note 3) 12,331 12,747
Receivables:
Trade receivables, less allowance for
doubtful accounts of $636 in 1997 and
$735 in 1996 21,872 19,254
Other 16,407 8,753
-------- --------
38,279 28,007
-------- --------
Merchandise inventories 108,724 90,472
Prepaid expenses and other current assets
(note 5) 10,329 9,825
-------- --------
Total current assets 206,146 177,279
Long-term investments, at cost (note 3) 8,930 10,550
Property and equipment, net (note 4) 96,718 92,413
Goodwill less accumulated amortization of
$6,788 in 1997 and $4,442 in 1996
(notes 2 and 17) 64,134 65,731
Other intangible assets less accumulated
amortization of $11,405 in 1997 and
$8,538 in 1996 (note 17) 21,412 24,246
Other assets, net (note 5) 18,008 20,489
-------- --------
$415,348 $390,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 7) $ 1,093 $ 2,053
Accounts payable 28,024 25,193
Other current liabilities (note 6) 34,912 28,742
------ ------
Total current liabilities 64,029 55,988
Long-term debt, excluding current maturities
(note 7) 117,742 118,418
Other liabilities 5,862 3,820
----- -----
Total liabilities 187,633 178,226
======= =======
Stockholders' equity (notes 8 and 9):
Common stock, par value $.01 per share.
Authorized 75,000,000 shares; 27,303,044
issued and outstanding shares in 1997
and 27,270,124 shares in 1996 273 273
Additional paid-in capital 80,515 80,302
Foreign currency translation adjustments 86 --
Retained earnings 146,841 131,907
------- -------
Total stockholders' equity 227,715 212,482
======= =======
Commitments and contingencies
(notes 12, 13, 14 and 15) ------- -------
$415,348 $390,708
======== ========
See accompanying notes to the consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Foreign
Additional currency Total
Common Stock paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
------ ------ ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1994 27,238 $272 $80,321 $(340) $151,608 $231,861
Dividends ($0.20 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
Dividends ($0.24 per share) -- -- -- -- (6,536) (6,536)
Exercise of common stock options 37 -- 373 -- -- 373
Change in foreign currency translation adjustments -- -- -- 86 -- 86
Other (4) -- (160) -- -- (160)
Net earnings -- -- -- -- 21,470 21,470
------ ---- ------ --- ------- -------
Balance at January 26, 1997 27,303 $273 $ 80,515 $86 $146,841 $227,715
====== ==== ======== === ======== ========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
January 26, January 28, January 29,
Fiscal year ended 1997 1996 1995
- ----------------- ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 21,470 $ 15,996 $(24,802)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment 8,790 8,236 6,642
Other amortization 5,858 5,741 8,008
Provision for (benefit of) deferred income taxes (465) 2,892 (13,222)
Revaluation and write-off of assets -- -- 48,405
Minority partners' interest in
consolidated partnerships' income 2,509 935 813
Changes in operating assets and liabilities, net of effects
of acquisitions accounted for by the purchase method:
Accounts receivable (10,722) 134 4,727
Merchandise inventories (16,443) 5,967 10,015
Prepaid expenses and other current assets (18) 254 991
Deposits -- (1,810) --
Accounts payable 2,831 (5,768) (3,012)
Income taxes payable 4,468 -- (2,863)
Accrued restructuring expenses (970) (2,276) 4,586
Other current liabilities 3,036 (1,390) 3,820
Other (760) (135) (777)
------ ------ ------
Net cash provided by operating activities 19,584 28,776 43,331
------ ------ ------
Cash flows from investing activities:
Proceeds from maturities of investments 10,644 34,470 50,103
Purchases of investments (8,608) (35,152) (32,225)
Additions to property and equipment (12,859) (11,710) (31,230)
Acquisitions of businesses, accounted for by the
purchase method, net of cash acquired -- (5,050) (72,526)
Investments in and advances to affiliates (429) (420) (3,363)
Other (237) 188 1,819
------- ------- -------
Net cash used in investing activities (11,489) (17,674) (87,422)
------- ------- -------
Cash flows from financing activities:
Payment of long-term borrowings and notes payable (2,342) (3,760) (14,464)
Dividends paid (6,273) (5,450) (5,445)
Other 775 (62) (1,271)
------ -------- --------
Net cash used in financing activities (7,840) (9,272) (21,180)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 255 1,830 (65,271)
Cash and cash equivalents at beginning of year 36,228 34,398 99,669
-------- -------- --------
Cash and cash equivalents at end of year $ 36,483 $ 36,228 $ 34,398
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 26, 1997, January 28,1996 and January 29, 1995
(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 -- The Company is on a 4-5-4 week fiscal calendar with its
fiscal year ending on the last Sunday of January. The fiscal years ended January
26, 1997, January 28, 1996 and January 29, 1995 are referred to hereafter as
fiscal 1997, fiscal 1996 and fiscal 1995, 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 (SFAS) 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
investments in debt securities, long-term debt and foreign exchange forward
contracts is set forth in notes 3, 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.
Goodwill -- Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a straight-line basis over 30
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through discounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the risk associated with each operation, based on the type of
business, geographic location and other matters in relation to risk free
investments. The assessment of the recoverability of goodwill will be impacted
if estimated future operating cash flows are not achieved.
<PAGE>
Other intangible assets -- Other intangible assets consist principally of
operating rights and non-competition agreements. The operating rights are being
amortized over 2 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.
Impairment of long-lived assets and long-lived assets to be disposed of --
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 29, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net undiscounted
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on the Company's financial position, results of operations, or
liquidity.
Prior to the adoption of SFAS No. 121, recoverability of assets to be held
and used was measured by comparing the carrying amount of an asset to the future
net discounted cash flows expected to be generated by the asset. This method was
used regarding the revaluation of intangible assets during fiscal 1995 (see note
17). The change in fiscal 1997 to the method required by the adoption of SFAS
No. 121 did not have any impact on the Company's financial position, results of
operations, or liquidity.
Advertising expense -- The Company expenses advertising costs the first time
advertising takes place. Advertising expense was approximately $4,500,000,
$3,000,000 and $4,000,000 during fiscal 1997, 1996 and 1995, 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 operations is
the local currency. The translation of the foreign currencies into U.S. dollars
is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using average
rates of exchange prevailing during the year. Adjustments resulting from such
translation are included as a separate component of stockholders' equity.
Income taxes -- 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.
<PAGE>
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 27,282,000, 27,251,000 and 27,224,000 for
fiscal 1997, 1996 and 1995, respectively. Common shares issuable upon exercise
of stock options are excluded from the computation because their effect is not
material.
Accounting for stock based compensation -- The Company has elected to
measure compensation costs for stock options 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 prescribed by SFAS No. 123 had been applied.
Foreign Exchange Forward Contracts -- The value of foreign exchange forward
contracts, taken as hedges of existing assets or liabilities, are included in
the carrying amount of those assets or liabilities and are ultimately recognized
in income as part of those carrying amounts. Gains and losses related to
qualifying hedges of firm commitments are deferred and are recognized in income
or 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 1996 and 1995 have been
reclassified to conform to the presentation for fiscal 1997.
<PAGE>
(2) 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
$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.
Supplemental cash flow information regarding acquisitions is as follows (in
thousands):
1996 1995
---- ----
Fair value of assets acquired $ 9,833 $114,771
Cash paid (5,050) (72,526)
------ -------
Liabilities assumed $ 4,783 $ 42,245
======== ========
(3) Investment in Debt Securities
Management reviewed the classification of its security portfolio as of
January 26, 1997 and January 28, 1996 and determined that all securities are
"held-to-maturity securities." The fair values of the Company's investments in
debt securities are as follows (in thousands):
<TABLE>
<CAPTION>
January 26, Gross Gross January 26,
1997 Unrealized Unrealized 1997
Carrying Holding Holding Fair
Amount Gains Losses Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Securities maturing within one year:
Corporate debt securities $ 3,185 $100 $ (15) $ 3,270
Debt securities issued by
states of the United States
and political subdivisions
of the states 9,146 40 (16) 9,170
------ --- --- ------
Total short-term investments 12,331 140 (31) 12,440
------ --- --- ------
Securities maturing after one
through three years:
Debt securities issued by
states of the United
States and political
subdivisions of the states 8,930 20 (168) 8,782
------- ---- ----- -------
Total investments $21,261 $160 $(199) $21,222
======= ==== ===== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
January 28, Gross Gross January 28,
1996 Unrealized Unrealized 1996
Carrying Holding Holding Fair
Amount Gains Losses Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
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>
The Company did not sell any investment securities during fiscal 1997 and 1996.
(4) Property and Equipment
Property and equipment are summarized as follows (in thousands):
1997 1996
---- ----
Land $ 19,496 $ 19,234
Buildings 50,201 49,491
Leasehold improvements 26,967 20,217
Furniture and fixtures 18,251 16,409
Equipment and vehicles 30,163 27,766
-------- -------
145,078 133,117
Less accumulated depreciation and amortization 48,360 40,704
-------- --------
Net property and equipment $ 96,718 $ 92,413
======== ========
(5) Income Taxes
Income tax expense (benefit) consists of the following (in thousands):
Current Deferred Total
------- -------- -----
1997:
Federal $10,987 $ (462) $10,525
State 1,116 (44) 1,072
Foreign 972 41 1,013
------- -------- -------
$13,075 $ (465) $12,610
======= ======== =======
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)
======== ======== =======
<PAGE>
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):
1997 1996 1995
---- ---- ----
Income tax (benefit) at statutory
rate of 35% $11,928 $8,886 $(10,902)
State income taxes, net of
federal tax benefit 697 848 (660)
Tax exempt income (422) (384) (450)
Revaluation of intangible assets -- -- 6,144
Other, net 407 43 (479)
------- ------ --------
$12,610 $9,393 $ (6,347)
======= ====== ========
The consolidated earnings before income taxes, by domestic and foreign
sources, was $22,846,000 and $11,234,000, respectively, for fiscal 1997. 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.
At January 26, 1997, the net current and net non-current deferred income tax
assets were $5,555,000 and $6,648,000, respectively. At January 28, 1996, the
net current and net non-current deferred income tax assets were $3,129,000 and
$8,609,000, 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 26, 1997 and January 28, 1996. 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 and,
accordingly, no valuation allowance has been established as of January 26, 1997.
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):
1997 1996
------ --------
Deferred tax assets:
Intangible amortization $ 6,511 $ 8,500
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 1,718 1,473
Restructure liability 1,371 1,908
Depreciation and capitalized interest 284 --
Net operating loss carryforwards 413 750
Other 3,407 1,701
------- -------
Gross deferred tax assets 13,704 14,332
------- -------
Deferred tax liabilities:
Inventories, to conform UETA's accounting
method from LIFO to FIFO (365) (1,168)
Depreciation and capitalized interest -- (98)
Other (1,136) (1,328)
------- -------
Gross deferred tax liabilities (1,501) (2,594)
------- -------
Net deferred tax asset $12,203 $11,738
======= =======
<PAGE>
The Company paid income taxes of approximately $7,256,000, $5,120,000 and
$9,370,000 during fiscal 1997, 1996 and 1995, respectively.
(6) Other Current Liabilities
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Airline and other commissions $ 5,997 $ 2,844
Incentive compensation plan 2,897 3,000
Income tax payable 4,468 --
Other 21,550 22,898
------- -------
$34,912 $28,742
======= =======
</TABLE>
(7) Long-Term Debt
Long-term debt consists of the following (in thousands, except for percentage
amounts):
1997 1996
---- ----
7% senior bonds, 7.06% effective rate, due
January 15, 2004, $115,000 face amount,
less unamortized discount of $320 and $366 $114,680 $114,634
Other 4,155 5,837
-------- --------
118,835 120,471
Less current maturities 1,093 2,053
-------- --------
Long-term debt, excluding current maturities $117,742 $118,418
======== ========
The approximate annual maturities of long-term debt are as follows
(in thousands):
1998 $1,093
1999 1,093
2000 1,093
2001 876
2004 114,680
--------
$118,835
========
The fair value of long-term debt, including current maturities, was
$116,280,000 and $115,650,000 as of January 26, 1997 and January 28, 1996,
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 $8,483,000, $8,658,000 and $9,277,000 during fiscal 1997, 1996 and
1995, respectively.
(8) 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.
(9) Stock Option Plans
An aggregate of 4,640,000 shares of common stock were reserved for issuance
pursuant to nonqualified stock options. Approximately 2,080,000 shares were
available for grant at January 26, 1997. Options are exercisable from the grant
date to ten years from the date of grant.
<PAGE>
The Company applies APB Opinion No. 25 and related interpretations when
accounting for stock options. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
stock option plans been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except for earnings per share amounts):
1997 1996
---- ----
Net income:
As reported $21,470 $15,996
Pro forma $21,334 $15,978
Earnings per share:
As reported $0.79 $0.59
Pro forma $0.78 $0.59
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 1997 and 1996: dividend yield of 1.75%;
expected volatility of 40%; risk-free interest rate of 6.5%; and expected lives
of 6 years. The weighted average fair value of options granted during fiscal
1997 and 1996 was $6.02 and $4.05, respectively.
Pro forma net income reflects only options granted in fiscal 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 for fiscal 1996 and 1997 is not reflected in the pro forma
net income amounts presented above, because compensation cost is reflected over
the options' vesting period of three years and compensation cost for options
granted prior to January 30, 1995 are not considered.
A summary of the status of the Company's stock option plans as of January
26, 1997, January 28, 1996 and January 29, 1995, and changes during the years
ended on those dates is presented below:
Number Weighted Average
of Shares Exercise Price
--------- --------------
January 31, 1994 935,765 $20.06
Granted 1,376,050 $12.53
Exercised (33,566) $ 7.07
Forfeited (73,728) $18.88
---------
January 29, 1995 2,204,521 $15.53
Granted 37,000 $ 9.99
Exercised (26,574) $ 8.72
Forfeited (122,486) $16.87
---------
January 28, 1996 2,092,461 $15.46
Granted 271,500 $14.36
Exercised (37,381) $10.00
Forfeited (37,262) $13.06
---------
January 26, 1997 2,289,318 $15.45
=========
Options exercisable
January 29, 1995 871,127 $18.40
January 28, 1996 1,200,185 $16.88
January 26, 1997 1,646,421 $16.35
<PAGE>
The following table summarizes information about stock options outstanding
at January 26, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Avg.
Range of Remaining Weighted Avg. Weighted Avg.
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------ ----------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 6.875-$ 9.875 86,364 4.1 years $ 8.18 69,365 $ 7.79
$ 10.75 -$16.125 1,523,404 8.0 years $12.87 897,506 $12.62
$ 20.875-$27.375 679,550 5.2 years $22.16 679,550 $22.16
--------- ---------
$ 6.875-$27.375 2,289,318 7.0 years $15.45 1,646,421 $16.35
========= =========
</TABLE>
(10) 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 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 $928,000, $919,000 and $1,245,000 for fiscal
1997, 1996 and 1995, respectively.
(11) 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):
1997 1996 1995
---- ---- ----
Total revenue:
Retail operations $518,323 $454,467 $430,182
Wholesale operations 52,572 60,591 71,579
-------- -------- --------
$570,895 $515,058 $501,761
-------- -------- --------
Operating income:
Retail operations $ 36,658 $ 26,949 $ 22,988
Wholesale operations 2,995 3,397 3,863
Restructuring expenses -- -- (7,571)
Revaluation of intangible assets -- -- (46,002)
Other income (expense) (5,573) (4,957) (4,427)
-------- -------- --------
Earnings (loss) before income taxes $ 34,080 $ 25,389 $(31,149)
======== ======== ========
Management continues to de-emphasize high volume, lower margin sales
transactions. Revenues from wholesale operations relate principally to such
transactions from the Company's Diplomatic and Inflight Divisions.
<PAGE>
(12) Operating Leases
The Company and its subsidiaries are obligated under noncancellable
operating leases for warehouse, store and office facilities at various
locations. Certain of the leases provide for renewals for various periods and
most leases require the Company to pay all operating expenses and additional
rent based upon sales. Leases at several airport locations are terminable by the
lessor upon thirty days notice.
Approximate future minimum rentals, under noncancellable operating
leases, with initial or remaining terms of one year or more are as follows (in
thousands):
1998 $ 24,219
1999 23,338
2000 20,758
2001 15,493
2002 13,784
Thereafter 43,771
--------
$141,363
========
<PAGE>
Rental expense consists of the following (in thousands):
1997 1996 1995
---- ---- ----
Minimum rentals $18,172 $15,044 $14,961
Additional rentals based on sales 17,578 13,575 10,755
Other 38 155 144
------- ------- -------
$35,788 $28,774 $25,860
------- ------- -------
(13) 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.
(14) Line of Credit and Letter of Credit Facility
The Company has a $75,000,000 revolving line of credit and letter of
credit facility with various banks 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. As of
January 26, 1997, the Company had issued letters of credit for approximately
$10,844,000 under the facility and had available borrowings of $50,000,000.
There were no borrowings under the facility during the years ended January 26,
1997 and January 28, 1996. Currently, the Company has no plans to make any
borrowings under the facility.
(15) 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 unfilled purchase
orders for, and anticipated levels of, merchandise required to support expected
sales levels. Currency rates are monitored against a corporate target rate which
is 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 $20,772,000 of foreign exchange forward
contracts outstanding at January 26, 1997 to purchase British pounds, French
francs, Swiss francs and Deutsche marks. The contracts outstanding at January
26, 1997 mature at various dates in fiscal 1998. The fair value of these
contracts was approximately $20,088,000 at January 26, 1997. Fair values were
estimated by obtaining quotes from banks assuming all contracts were purchased
on January 26, 1997.
<PAGE>
(16) 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 26, 1997, 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 of further significant reductions in sales
during 1994's important summer sales season, following the Canadian government's
substantial 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 de-emphasizing 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 warehouse
and administrative operations of other divisions into the Company's 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.
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 or 1997. Restructuring costs included
the following (in thousands):
Termination of property leases $1,262
Abandonment of leasehold improvements
and other fixed assets 1,026
Severance and other related payments 3,559
Cumulative currency translation adjustments
related to foreign operations closed 615
Write-down of inventory below cost 503
Other 606
------
$7,571
======
The following methods were used to calculate the restructuring charges:
o Termination of property leases -- based on amounts due under terminated lease
agreements.
o 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.
o 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.
o Cumulative currency translation adjustments related to foreign operations
closed -- relates to the Company's Toronto airport operations, and is based
on the January 29, 1995 U.S. dollar/Canadian dollar exchange rate. These
operations were closed in February 1995. o Write-down of inventory below cost
-- estimate of expected sales below cost for close-out sales.
The Company expected to 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 $4,087,000 during fiscal 1997, 1996 and 1995 relating to res-
tructuring obligations which consisted of $2,913,000 for employee severance and
other arrangements, $922,000 to terminate property leases and rent for closed
stores, and $252,000 for other miscellaneous expenses. As of January 26, 1997,
remaining payments of approximately $1,340,000 are expected to be made for
obligations incurred pursuant to the restructuring plan.
Net sales of the stores closed and businesses sold under the
restructuring plan were $4,757,000 and $13,931,000 for fiscal 1996 and 1995,
respectively. Operating losses of the stores closed and businesses sold under
the restructuring plan were $137,000 and $2,508,000 for fiscal 1996 and 1995,
respectively.
<PAGE>
(17) Revaluation of Intangible Assets
In the third quarter of fiscal 1995, the Company changed its method of
evaluating the recoverability of intangible assets. In fiscal 1995, fair values
of intangible assets were determined based on the estimated discounted future
operating cash flows of the related acquired operations over the life of each
intangible asset. Prior to fiscal 1995, impairment was measured using
undiscounted cash flows. The projected financial results of each operation were
based on management's best estimate of expected future operating cash flows.
Discount rates reflected the risk associated with each operation, based on the
type of business, geographic location, and other matters, in relation to risk
free investments. 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,
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 fiscal 1995 levels, due primarily to the fact
that travel across the border did not increase as the Canadian economy improved
in fiscal 1995, and that reduced Canadian tobacco prices and taxes would
continue to have a negative effect on duty free operations along the border. The
projected financial results of 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 and 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
determined that the number of cruise ship travelers to St. Thomas would not
increase significantly from fiscal 1995 levels, because of an increase in the
number of ports at other Caribbean locations 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 using the discounted cash flow
method for evaluating the recoverability of intangible assets during fiscal
1995, the Company revising cash flow projections for these businesses due to the
Company de-emphasizing 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 was as follows (in thousands):
Diplomatic
Northern and
Border Airport Wholesale
Division Division Division Total
-------- -------- -------- -----
Goodwill $ 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
======= ======= ====== =======
DIRECTORS AND EXECUTIVE OFFICERS
Jack Africk (1)(2)(3)(4)
Chairman,
Evolution Consulting Group, Inc.
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
<PAGE>
Carl Reimerdes (1)(2)(5)
Vice President
Susan H. Stackhouse (1)
President,
Fenton Hill Florida, Inc.
Stephen M. Waters (1)(3)(4)
Managing Partner,
Compass Partners International, L.L.C.
Lowell P. Weicker, Jr. (1)
Former U.S. Senator 1970-1988
Former Governor of
State of Connecticut 1991-1995
Visiting Professor, University of Virginia
___________________
(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
CORPORATE DATE
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.
President: Steven D. Zurcher
63 Copps Hill Road
Ridgefield, Connecticut 06877
Fenton Hill American, Limited
President: Carl Reimerdes
B-3 East
Airport Industrial Office Park
145 Hook Creek Boulevard
Valley Stream, New York 11581
Tel. no. (516) 256-3000
Inflight Duty Free Shop, Inc.
President: Peter Cathey
63 Copps Hill Road
Ridgefield, Connecticut 06877
Samuel Meisel and Company, Inc.
President: Robert T. Weitz
6691 Baymeadow Drive
Glen Burnie, Maryland 21060
Tel. no. (410) 787-1414
<PAGE>
UETA, Inc.
President: Ramon Bosquez
3407 N.E. Parkway
San Antonio, Texas 78212
Tel. no. (210) 828-8382
General Counsel
Lawrence Caputo, Esquire
63 Copps Hill Road
Ridgefield, Connecticut 06877
Annual Meeting
Shareholders are cordially invited to attend the Company's Annual Meeting which
will be held at 10:00 a.m., May 22, 1997, at the:
Renaissance Harborplace Hotel
202 East Pratt 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
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
Chase Mellon Shareholder Services
450 West 33rd Street, 15th Floor
New York, New York 10178
Outside 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 2120
Duty Free International, Inc.
63 Copps Hill Road
Ridgefield, Connecticut 06877
