================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended July 27, 1997 Commission File No. 1-10952
DUTY FREE INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 52-1292246
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Copps Hill Road, Ridgefield, Connecticut
-------------------------------------------
(Address of principal executive offices)
06877
----------
(Zip Code)
Registrant's telephone number, including area code: 203-431-6057
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
At July 25, 1997, 27,431,692 shares of $.01 par value common stock of the
registrant were outstanding.
================================================================================
<PAGE>
FORM 10-Q
Page 2 of 12
DUTY FREE INTERNATIONAL, INC. and SUBSIDIARIES
July 27, 1997
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
July 27, 1997 and January 26, 1997
Consolidated Statements of Earnings 4
Three and Six Months Ended July 27, 1997 and July 28, 1996
Consolidated Statement of Stockholders' Equity 5
Six Months Ended July 27, 1997
Consolidated Statements of Cash Flows 6
Six Months Ended July 27, 1997 and July 28, 1996
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 8 - 10
of Financial Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
<PAGE>
FORM 10-Q
Page 3 of 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, unaudited)
July 27, January 26,
Assets 1997 1997
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 39,887 $ 36,483
Short-term investments 9,708 12,331
Receivables:
Trade receivables, less allowance
for doubtful accounts of $518
and $636, respectively 24,292 21,872
Other 18,159 16,407
---------- ----------
42,451 38,279
Merchandise inventories 115,385 108,724
Prepaid expenses and other current assets 11,939 10,329
---------- ----------
Total current assets 219,370 206,146
Long-term investments 13,341 8,930
Property and equipment, net 96,003 96,718
Goodwill, net 63,613 64,134
Other intangible assets, net 19,750 21,412
Other assets, net 17,148 18,008
---------- ----------
$ 429,225 $ 415,348
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 1,093 $ 1,093
Accounts payable 39,337 28,024
Other current liabilities 32,865 34,912
---------- ----------
Total current liabilities 73,295 64,029
Long-term debt, excluding current maturities 116,718 117,742
Other liabilities 6,038 5,862
---------- ----------
Total liabilities 196,051 187,633
Stockholders' equity:
Common stock, par value $.01 per share.
Authorized 75,000,000 shares; issued and
outstanding 27,431,692 shares and
27,303,044 shares, respectively 274 273
Additional paid-in capital 81,548 80,515
Foreign currency translation adjustments 95 86
Retained earnings 151,257 146,841
---------- ----------
Total stockholders' equity 233,174 227,715
---------- ----------
$ 429,225 $ 415,348
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
FORM 10-Q
Page 4 of 12
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except net earnings per share)
(unaudited)
Three Months Ended Six Months Ended
-------------------- ------------------
July 27, July 28, July 27, July 28,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $148,842 $140,754 $281,889 $258,733
Cost of sales 82,729 77,778 158,785 144,956
------ ------ ------- -------
Gross profit 66,113 62,976 123,104 113,777
Advertising, storage and
other operating income 934 982 2,001 1,951
------ ------ ------- -------
67,047 63,958 125,105 115,728
Selling, general and
administrative expenses 57,056 53,178 109,455 100,059
------ ------ ------- -------
Operating income 9,991 10,780 15,650 15,669
Other income (expense):
Interest income 552 541 1,198 1,199
Interest expense (2,115) (2,115) (4,213) (4,242)
Other, net (354) 333 (435) 377
------ ------ ------ ------
(1,917) (1,241) (3,450) (2,666)
------ ------ ------ ------
Earnings before income taxes 8,074 9,539 12,200 13,003
Income taxes 2,983 3,530 4,510 4,812
------ ------ ------ ------
Net earnings $5,091 $6,009 $7,690 $8,191
====== ====== ====== ======
Net earnings per share $ 0.19 $ 0.22 $ 0.28 $ 0.30
====== ====== ====== ======
Weighted average number
of shares outstanding 27,364 27,275 27,337 27,272
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
<PAGE>
FORM 10-Q
Page 5 of 12
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended July 27, 1997
(in thousands, unaudited)
<TABLE>
<CAPTION>
Foreign
Common Stock Additional currency Total
----------------- paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
------ ------- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 26, 1997 27,303 $273 $80,515 $86 $146,841 $227,715
Dividends
($0.12 per share) - - - - (3,274) (3,274)
Change in foreign
currency translation
adjustments - - - 9 - 9
Exercise of common
stock options 128 1 1,033 - - 1,034
Net earnings - - - - 7,690 7,690
------ ---- ------- --- -------- --------
Balance at
July 27, 1997 27,431 $274 $81,548 $95 $151,257 $233,174
====== ==== ======= === ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FORM 10-Q
Page 6 of 12
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands, unaudited)
Six Months Ended
--------------------
July 27, July 28,
1997 1996
----- ----
Cash flows from operating activities:
Net earnings $ 7,690 $ 8,191
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization of property
and equipment 4,660 4,204
Other amortization 3,075 3,070
Minority partners' interest in consolidated
partnerships' income 1,369 1,170
Provision for deferred income taxes 225 550
Changes in operating assets and liabilities:
Accounts receivable (4,172) (5,624)
Merchandise inventories (6,661) (22,103)
Prepaid expenses and other assets (1,706) (208)
Accounts payable 11,313 21,918
Other liabilities (3,243) 3,513
Other - (580)
------ ------
Net cash provided by operating activities 12,550 14,101
------ ------
Cash flows from investing activities:
Purchases of investments (5,890) (8,608)
Maturities of investments 4,102 8,761
Additions to property and equipment (4,443) (6,678)
Other 397 23
------ ------
Net cash used in investing activities (5,834) (6,502)
------ ------
Cash flows from financing activities:
Payments on long-term debt (1,081) (2,241)
Dividends paid (3,274) (2,999)
Other 1,043 (137)
----- ------
Net cash used in financing activities (3,312) (5,377)
------- ------
Net increase in cash and cash equivalents 3,404 2,222
Cash and cash equivalents at beginning of period 36,483 34,252
------ ------
Cash and cash equivalents at end of period $39,887 $36,474
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
FORM 10-Q
Page 7 of 12
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation
The consolidated financial statements of Duty Free International, Inc. and
subsidiaries (the "Company") as of July 27, 1997 and for the three and six month
periods ended July 27, 1997 and July 28, 1996, are unaudited but include all
adjustments (consisting of normal recurring accruals) which the Company's
management believes to be necessary for the fair presentation of the financial
position, results of operations and cash flows of the Company at and for the
interim periods presented. Interim results are not necessarily indicative of
results to be expected for the full year.
The balance sheet at January 26, 1997 has been derived from the audited
consolidated financial statements of the Company at that date.
Certain amounts for the period ended July 28, 1996 have been reclassified to
conform to the presentation for the period ended July 27, 1997.
Note 2 Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Long-term investments in affiliates in which the
Company does not have a majority interest or control are accounted for by the
equity method of accounting. All significant inter-company balances and
transactions have been eliminated in consolidation.
Note 3 Net Earnings Per Share
Net earnings per share are based on the weighted average number of common shares
outstanding during each period.
Note 4 Foreign Exchange Forward Contracts
The only financial derivatives used by the Company are foreign exchange forward
contracts. The Company had approximately $14,926,000 of foreign exchange forward
contracts outstanding at July 27, 1997 to purchase British Pounds, Swiss Francs,
German Marks, and French Francs. The contracts outstanding at July 27, 1997
mature at various dates in fiscal 1998. The contracts' fair values, based on
quoted market prices, were approximately $14,432,000 as of July 27, 1997.
Note 5 Contingencies
From time to time, the Company is involved in litigation and proceedings arising
out of the ordinary course of business. Although the outcome of such proceedings
can not 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.
Note 6 Subsequent Event
On August 5, 1997, the Company was acquired by BAA plc. Under the terms of the
acquistion, BAA plc paid $24.00 for each share of the Company's outstanding
common stock.
<PAGE>
FORM 10-Q
Page 8 of 12
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Net earnings for the three month and six month periods ended July 27, 1997 were
$5,091,000 or $0.19 per share, and $7,690,000 or $0.28 per share, respectively,
a decrease of approximately 15% and 6%, respectively, from $6,009,000 or $0.22
per share and $8,191,000 or $0.30 per share, for the three and six month periods
ended July 28, 1996.
Net Sales
The following table sets forth, for the periods indicated, the net sales and the
percentage of total net sales for each of the Company's divisions and the period
to period change:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------- Increase/(Decrease)
(in thousands, except for percentages) Three Months Ended
Divisional July 27, 1997 vs.
Net Sales July 27, 1997 July 28, 1996 July 28, 1996
- --------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Border:
Southern $ 30,650 20.5% $ 25,584 18.2% $ 5,066 19.8%
Northern 22,937 15.5 23,792 16.9 (855) (3.6)
Inflight 48,788 32.7 47,923 34.0 865 1.8
Airport 34,119 23.0 30,594 21.7 3,525 11.6
Diplomatic
and Wholesale 12,348 8.3 12,861 9.2 (513) (4.0)
------ --- -------- ---- --------
$ 148,842 100.0% $ 140,754 100.0% $ 8,088 5.7%
========= ====== ========= ===== ========
<CAPTION>
Six Months Ended
--------------------------------------------- Increase/(Decrease)
(in thousands, except for percentages) Six Months Ended
Divisional July 27, 1997 vs.
Net Sales July 27, 1997 July 28, 1996 July 28, 1996
- --------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Border:
Southern $ 58,723 20.9% $ 48,918 18.9% $ 9,805 20.1%
Northern 38,534 13.7 39,934 15.4 (1,400) (3.5)
Inflight 92,157 32.6 87,778 33.9 4,379 5.0
Airport 65,904 23.4 56,812 22.0 9,092 16.0
Diplomatic
and Wholesale 26,571 9.4 25,291 9.8 1,280 5.1
------ --- -------- ---- --------
$ 281,889 100% $258,733 100.0% $23,156 9.0%
========= ====== ========= ===== ========
</TABLE>
<PAGE>
FORM 10-Q
Page 9 of 12
The Company's net sales increased approximately $8 million or 6% and $23 million
or 9% for the three month and six month periods ended July 27, 1997 when
compared with the three month and six month periods ended July 28, 1996.
Divisional results that primarily contributed to the Company's net sales growth
were:
o The Southern Border's sales growth for the three month and six month
periods ended July 27, 1997 was approximately 20%, which was attributed
to the continued stabilization of the Mexican economy.
o Inflight's approximate 2% and 5% respective sales increases, for the
three and six months ended July 27, 1997, were directly related to the
duty free concession programs with Air Canada and Canadian
International Airlines. These programs commenced operations on March 1,
1996 and July 1, 1996, respectively.
o The Airport division realized net sales growth of approximately 12% and
16%, respectively, for the three and six months ended July 27, 1997,
primarily because of new store openings at the Chicago O'Hare and John
F. Kennedy International Airports, as well as an enhanced product line.
Cost of Sales and Gross Profit
Gross profit, as a percentage of net sales, decreased to 44.4% for the three
months ended July 27, 1997 from 44.7% for the same period in the prior year.
Gross profit, as a percentage of net sales, decreased to 43.7% for the six
months ended July 27, 1997 from 44.0% for the same period in the prior year. The
fluctuations were attributable to the change in sales mix as a percentage of
total.
Advertising, Storage and Other Operating Income
Advertising, storage and other operating income decreased approximately $48,000
for the three months ended July 27, 1997 but increased $50,000 for the six
months ended July 27, 1997, when compared to the same periods in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales,
increased to 38.3% for the three months ended July 27, 1997 from 37.8% for the
same period in the prior year. Selling, general and administrative expenses, as
a percentage of net sales, was approximately 39% for the six months ended July
27, 1997 and the six months ended July 28,1996. The fluctuation was attributable
to an increase in operating costs without a corresponding increase in sales.
Operating Income
Operating income as a percentage of net sales decreased from 7.7% for the three
months ended July 28, 1996 to 6.7% for the three months ended July 27, 1997.
Operating income as a percentage of net sales decreased from 6.1% for the six
months ended July 28, 1996 to 5.6% for the six months ended July 27, 1997. The
fluctuations were attributable to the decrease in gross profit as a percent of
net sales and the increase in selling, general and administrative expenses as a
percent of net sales.
Income Taxes
The Company's effective tax rate was 37.0% for the three and six month periods
ended July 27, 1997 and July 28, 1996.
<PAGE>
FORM 10-Q
Page 10 of 12
LIQUIDITY AND CAPITAL RESOURCES
As of July 27, 1997, net cash provided by operations was $12,550,000, working
capital was $146,075,000 and the Company had $62,936,000 of cash and
investments.
As of and for the quarter ended July 27, 1997, there were no outstanding
borrowings under the Company's $75,000,000 revolving line of credit facility.
The Company believes that the combination of the cash flow generated by its
operations, current cash balances and its available credit facility will be
sufficient to finance its growth and meet its projected capital expenditures and
other liquidity requirements.
REGULATION AND ECONOMIC FACTORS AFFECTING THE DUTY FREE INDUSTRY
The Company's sales and gross profit margins are affected by factors
specifically related to the duty free industry. Most countries have allowances
on the import of duty free goods. Decreases in the duty free allowances of
foreign countries or stricter eligibility requirements for duty free purchases,
as well as decreases in tax and duty rates imposed by foreign jurisdictions
could have a negative effect on the Company's sales and gross profit margins
(particularly Canada and Mexico). Conversely, increases could have a positive
effect on the Company's sales and gross profit.
The principal customers of the Company are residents of foreign countries whose
purchases of duty free merchandise may be affected by trends in the economies of
foreign countries and changes in the value of the US dollar relative to their
own currencies. Any significant increase in the value of the US dollar relative
to the currencies of foreign countries, particularly Canada, Mexico and Japan,
could have an adverse impact on the number of travelers visiting the United
States and the dollar amount of duty free purchases made by them from the
Company. A significant increase in gasoline prices or a shortage of fuel may
also reduce the number of international travelers and thereby adversely affect
the Company's sales. In addition, the Company imports a significant portion of
its products from Western Europe and Canada at prices negotiated either in US
dollars or foreign currencies. As a result, the Company's costs are affected by
fluctuations in the value of the US dollar in relation to certain major Western
European currencies and the Canadian dollar. A decrease in the purchasing power
of the US dollar relative to other currencies causes a corresponding increase in
the purchase price of products. The Company enters into foreign exchange forward
contracts as a hedge against a portion of its exposure to currency fluctuations
on commitments to purchase merchandise.
<PAGE>
FORM 10-Q
Page 11 of 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following are the results of the balloting at the Registrant's Annual
Meeting of Stockholders held on May 22, 1997:
NO. OF SHARES
------------------------------------
ELECTION OF CLASS B DIRECTORS FOR WITHHELD
- ----------------------------- ---------- ---------
Jack Africk 25,152,684 224,655
Carl Reimerdes 25,154,196 223,143
Lowell P. Weicker, Jr. 25,151,944 225,395
RATIFICATION OF APPOINTMENT
OF KPMG PEAT MARWICK LLP AS NO. OF SHARES
THE REGISTRANT'S INDEPENDENT ------------------------------------
AUDITORS FOR AGAINST ABSTAIN
---------- ------- --------
25,320,658 31,813 24,868
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) The Company filed a Current Report on Form 8-K on July 2, 1997
which reported changes in control of Registrant. Financial
statements and exhibits included were: Agreement and Plan of
Merger as of July 2, 1997 among BAA plc, W & G Acquisition
Corporation and Duty Free International, Inc.; Stock Option
Agreement dated as of July 2, 1997 by and between BAA plc and
Duty Free International, Inc.; Shareholders Agreement dated as
of July 2, 1997 and Press Release of the Registrant dated July 3,
1997.
<PAGE>
FORM 10-Q
Page 12 of 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUTY FREE INTERNATIONAL, INC.
and Subsidiaries
Date: September 10, 1997 /s/ Gerald F. Egan
------------------ ----------------------------
Gerald F. Egan
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000820756
<NAME> Duty Free International, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1998
<PERIOD-START> JAN-27-1997
<PERIOD-END> JUL-27-1997
<EXCHANGE-RATE> 1
<CASH> 39,887
<SECURITIES> 23,049
<RECEIVABLES> 24,810
<ALLOWANCES> 518
<INVENTORY> 115,385
<CURRENT-ASSETS> 219,370
<PP&E> 149,342
<DEPRECIATION> 53,339
<TOTAL-ASSETS> 429,225
<CURRENT-LIABILITIES> 73,295
<BONDS> 116,718
0
0
<COMMON> 274
<OTHER-SE> 232,900
<TOTAL-LIABILITY-AND-EQUITY> 429,225
<SALES> 281,889
<TOTAL-REVENUES> 283,890
<CGS> 158,785
<TOTAL-COSTS> 158,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 151
<INTEREST-EXPENSE> 4,213
<INCOME-PRETAX> 12,200
<INCOME-TAX> 4,510
<INCOME-CONTINUING> 7,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
