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 28, 1996 Commission File No. 1-10952
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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
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(Address of principal executive offices)
06877
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(Zip Code)
Registrant's telephone number, including area code: 203-431-6057
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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 August 23, 1996, 27,282,298 shares of $.01 par value common stock of
the registrant were outstanding.
DUTY FREE INTERNATIONAL, INC.
July 28, 1996
INDEX
Part I. Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
July 28, 1996 (unaudited) and
January 28, 1996
Consolidated Statements of Earnings 4
(unaudited) for the three and six months
ended July 28, 1996 and July 30, 1995
Consolidated Statement of Stockholders' 5
Equity (unaudited) for the six months
ended July 28, 1996
Consolidated Statements of Cash Flows 6
(unaudited) for the six months
ended July 28, 1996 and July 30, 1995
Notes to Consolidated Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis 8 - 11
of Financial Condition and Results of
Operations
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote 12
of Security Holders
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
July 28, January 28,
1996 1996
----------- -----------
(unaudited) (note 1)
Assets
------
Current assets:
Cash and cash equivalents $ 36,474 $ 34,252
Short-term investments (fair value of
$9,298 and $12,784, respectively) 9,234 12,747
Receivables:
Trade receivables, less allowance
for doubtful accounts of $743 and
$735, respectively 21,389 20,106
Other 13,767 9,877
--------- ---------
35,156 29,983
--------- ---------
Merchandise inventories 114,385 90,472
Prepaid expenses and other current assets 8,123 9,825
--------- ---------
Total current assets 203,372 177,279
Long-term investments (fair value of
$13,842 and $10,530, respectively) 13,910 10,550
Property and equipment, net 94,791 92,413
Excess of cost over net assets of
subsidiaries acquired, net 65,288 65,731
Other intangible assets, net 22,891 24,246
Other assets, net 19,418 20,489
--------- ---------
$ 419,670 $ 390,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 1,095 $ 2,053
Accounts payable 47,111 25,193
Other current liabilities 32,376 28,742
--------- ---------
Total current liabilities 80,582 55,988
Long-term debt, excluding current
maturities 117,765 118,418
Other liabilities 3,934 3,820
--------- ---------
Total liabilities 202,281 178,226
--------- ---------
Stockholders' equity:
Common stock, par value $.01 per
share. Authorized 75,000,000
shares; issued and outstanding
27,280,098 shares and 27,270,124
shares, respectively 273 273
Additional paid-in capital 80,268 80,302
Foreign currency translation adjustments 11 ---
Retained earnings 136,837 131,907
--------- ---------
Total stockholders' equity 217,389 212,482
--------- ---------
$ 419,670 $ 390,708
========= =========
See accompanying notes to the consolidated financial statements.
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Six Months Ended
----------------------- -----------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(in thousands, except earnings per share)
Net Sales $ 140,754 $ 130,359 $ 258,733 $ 239,707
Cost of sales 77,778 74,018 144,956 137,205
---------- ---------- ---------- ----------
Gross profit 62,976 56,341 113,777 102,502
Advertising, storage and
other operating income 982 1,141 1,951 2,401
---------- ---------- ---------- ----------
63,958 57,482 115,728 104,903
Selling, general and
administrative expenses 53,178 48,925 100,059 92,650
---------- ---------- ---------- ----------
Operating income 10,780 8,557 15,669 12,253
Other income (expense):
Interest income 541 590 1,199 1,242
Interest expense (2,115) (2,167) (4,242) (4,351)
Other, net 333 189 377 351
---------- ---------- ---------- ----------
(1,241) (1,388) (2,666) (2,758)
---------- ---------- ---------- ----------
Earnings before
income taxes 9,539 7,169 13,003 9,495
Income taxes 3,530 2,653 4,812 3,513
---------- ---------- ---------- ----------
Net earnings $ 6,009 $ 4,516 $ 8,191 $ 5,982
========== ========== ========== ==========
Earnings per share $ 0.22 $ 0.17 $ 0.30 $ 0.22
========== ========== ========== ==========
Weighted average number
of shares outstanding 27,275 27,244 27,272 27,244
========== ========== ========== ==========
See accompanying notes to the consolidated financial statements.
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended July 28, 1996
(in thousands, unaudited)
Foreign
Common Stock Additional currency Total
--------------- paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
------ ------ ---------- ----------- -------- -------------
Balance at
January 28, 1996 27,270 $273 $80,302 $ -- $131,907 $212,482
Dividends
($0.12 per share) -- -- -- -- (3,261) (3,261)
Change in foreign
currency translation
adjustments -- -- -- 11 -- 11
Other (4) -- (160) -- -- (160)
Exercise of common
stock options 14 -- 126 -- -- 126
Net earnings -- -- -- -- 8,191 8,191
------ ---- ------- -------- -------- --------
Balance at
July 28, 1996 27,280 $273 $80,268 $ 11 $136,837 $217,389
====== ==== ======= ======== ======== ========
See accompanying notes to the consolidated financial statements.
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
----------------------
July 28, July 30,
1996 1995
--------- ---------
(in thousands)
Cash flows from operating activities:
Net earnings $ 8,191 $ 5,982
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment 4,204 3,993
Other amortization 3,070 2,836
Provision for deferred income taxes 550 1,550
Changes in operating assets and
liabilities:
Accounts receivable (5,624) (2,695)
Merchandise inventories (22,103) (6,451)
Prepaid expenses and other current
assets (208) (899)
Accrued restructuring expenses (867) (1,624)
Accounts payable 21,918 8,429
Other current liabilities 4,380 (280)
Other (580) (35)
--------- ---------
Net cash provided by operating
activities 12,931 10,806
--------- ---------
Cash flows from investing activities:
Purchases of investments (8,608) (4,700)
Maturities of investments 8,761 17,375
Additions to property and equipment (6,678) (6,449)
Acquisitions of businesses,
net of cash acquired --- (5,050)
Other 23 (1,230)
--------- ---------
Net cash used in investing
activities (6,502) (54)
--------- ---------
Cash flows from financing activities:
Payment of borrowings (2,241) (2,407)
Dividends paid (2,999) (2,722)
Other 1,033 401
--------- ---------
Net cash used in financing
activities (4,207) (4,728)
--------- ---------
Net increase in cash and
cash equivalents 2,222 6,024
Cash and cash equivalents at beginning
of period 34,252 31,353
--------- ---------
Cash and cash equivalents at end of
period $ 36,474 $ 37,377
========= =========
See accompanying notes to the consolidated financial statements.
/TABLE
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements included herein do not
include all information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles. For further information, such as the significant
accounting policies followed by the Company, refer to the notes to
consolidated financial statements set forth in the Company's annual
report for the year ended January 28, 1996.
In the opinion of management, the consolidated financial statements
include all necessary adjustments (consisting of normal recurring
accruals) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented.
The results of operations for the periods ended July 28, 1996 are
not necessarily indicative of the operating results to be expected for
the full year.
The balance sheet at January 28, 1996 has been derived from the
audited financial statements of the Company at that date.
(2) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Long-term investments in
affiliates in which the Company does not have a majority interest or
control are accounted for by the equity method of accounting. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(3) Earnings Per Share
Earnings per share are based on the weighted average number of
shares of common stock outstanding during each period.
(4) Foreign Exchange Forward Contracts
The only financial derivatives used by the Company are foreign
exchange forward contracts. The Company had approximately $15,414,000
of foreign exchange forward contracts outstanding at July 28, 1996 to
purchase British pounds and Swiss francs. The contracts outstanding at
July 28, 1996 mature at various dates in fiscal 1997. The fair values
of these contracts were $15,621,000 as of July 28, 1996. Fair values
were estimated by obtaining quotes from banks assuming all contracts
were purchased on July 28, 1996.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
- ---------------------
Net earnings for the three months ended July 28, 1996 were
$6,009,000, or $0.22 per share, an increase of $1,493,000 or 33% from
$4,516,000, or $0.17 per share, for the three months ended July 30,
1995. Net earnings for the six months ended July 28, 1996 were
$8,191,000, or $0.30 per share, an increase of $2,209,000 or 37% from
$5,982,000, or $0.22 per share, for the six months ended July 30, 1995.
The increases for both periods were due to the following:
* The Southern Border Division's net earnings increased significantly
for both periods due to sales increases of 12.7% and 13.8% for the three
and six months ended July 28, 1996, respectively, and an increase in
gross profit margins for both periods. The net sales and gross profit
margin increases were in comparison to the Division's fiscal 1996 first
half results which were significantly affected by the Mexican peso
devaluation in December 1994. The Division's selling, general and
administrative expenses remained basically the same as the prior year
for both periods.
* The Northern Border Division's net earnings increased for both
periods due primarily to an increase in sales of higher margin duty free
merchandise. The duty free sales increases were due primarily to the
Company purchasing two duty free stores in July 1995, and an increase in
the average amount of duty free merchandise purchased from the Division
as a result of the Division's sales training programs and other
marketing efforts. The above was partially offset by the continued
decrease in Canadian traffic across the United States/Canada border when
compared to the prior year and a decrease in lower margin retail and gas
sales.
* The Airport Division's net earnings increased for both periods due
primarily to a significant decrease in payroll and related expenses, as
a percent of sales, and new airport locations in Chicago, Philadelphia,
Boston and New York.
* The Diplomatic and Wholesale Division's net earnings also increased
for both periods due primarily to a decrease in selling, general and
administrative expenses, as a percentage of sales, resulting from a
decrease in payroll and related expenses and the closing of the
Company's Seattle, Washington location in fiscal 1996.
Below are explanations of significant variances by income statement line
item.
Net Sales
- ---------
The following table sets forth, for the periods indicated, the net
sales and the percentage of total net sales for each of the Company's
divisions and the period to period change in such sales:
Three Months Ended
-------------------------------------- Increase/(Decrease)
(in thousands, except for percentages) Three Months Ended
Divisional July 28, 1996 vs.
Net Sales July 28, 1996 July 30, 1995 July 30, 1995
- ------------- ---------------- ---------------- --------------------
Border:
Southern $ 25,584 18.2% $ 22,707 17.4% $ 2,877 12.7 %
Northern 23,792 16.9 22,560 17.3 1,232 5.5 %
Inflight 47,923 34.0 44,924 34.5 2,999 6.7 %
Airport 30,594 21.7 26,307 20.2 4,287 16.3 %
Diplomatic
and Wholesale 12,861 9.2 13,861 10.6 (1,000) (7.2)%
-------- ------ -------- ------ ---------
$140,754 100.0% $130,359 100.0% $ 10,395 8.0 %
======== ====== ======== ====== =========
Six Months Ended
-------------------------------------- Increase/(Decrease)
(in thousands, except for percentages) Six Months Ended
Divisional July 28, 1996 vs.
Net Sales July 28, 1996 July 30, 1995 July 30, 1995
- ------------- ---------------- ---------------- --------------------
Border:
Southern $ 48,918 18.9% $ 42,976 17.9% $ 5,942 13.8 %
Northern 39,934 15.4 36,984 15.4 2,950 8.0 %
Inflight 87,778 33.9 82,739 34.6 5,039 6.1 %
Airport 56,812 22.0 49,590 20.7 7,222 14.6 %
Diplomatic
and Wholesale 25,291 9.8 27,418 11.4 (2,127) (7.8)%
-------- ------ -------- ------ ---------
$258,733 100.0% $239,707 100.0% $ 19,026 7.9 %
======== ====== ======== ====== =========
The SOUTHERN BORDER DIVISION'S net sales increased by 12.7% and 13.8%
for the three and six months ended July 28, 1996, respectively, when
compared to the same periods in the prior year. The increases were due
primarily to the significant negative affects of the peso devaluation in
December 1994 on the Division's fiscal 1996 results. The NORTHERN
BORDER DIVISION'S net sales increased by 5.5% and 8.0% for the three and
six months ended July 28, 1996 respectively. The increases were due
primarily to the purchase of two stores in July 1995, and an increase in
the average amount spent per transaction by customers in the current
year resulting from the Division's sales training programs and other
marketing efforts. The above was partially offset by the continued
decrease in Canadian traffic across the United States/Canada border and
a decrease in retail and gas sales. The INFLIGHT DIVISION'S net sales
increased by 6.7% and 6.1% for the three and six months ended July 28,
1996, respectively, due primarily to sales from new airline concession
contracts (Air Canada, Canadian International). The above was partially
offset by a decrease in wholesale sales to airlines, including Air
Canada and Canadian International, and a decrease in amenity kit sales.
Air Canada and Canadian International were wholesale customers of the
Inflight Division before Inflight was awarded their concession
contracts. The AIRPORT DIVISION'S net sales increased by 16.3% and
14.6% for the three and six months ended July 28, 1996, respectively,
due primarily to new store openings in fiscal 1996 and 1997. DIPLOMATIC
AND WHOLESALE DIVISION net sales, excluding net sales of the two
locations sold in fiscal 1996 as part of the restructuring plan,
increased by 6.2% and 3.7% for the three and six months ended July 28,
1996, respectively. The increases were due primarily to an increase in
sales to cruise ships partially offset by decreases in low margin
wholesale sales.
Cost of Sales and Gross Profit
- ------------------------------
Gross profit, as a percentage of net sales, increased to 44.7% for
the three months ended July 28, 1996 from 43.2% for the same period in
the prior year. Gross profit, as a percentage of net sales, increased
to 44.0% for the six months ended July 28, 1996 from 42.8% for the same
period in the prior year. The increases for both periods were due
primarily to an increase in the Airport, Inflight 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, retail and amenity kit 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.
Advertising, Storage and Other Operating Income
- -----------------------------------------------
Advertising, storage and other operating income decreased by
$159,000 and $450,000 for the three and six months ended July 28, 1996,
respectively, when compared to the same periods in the prior year. The
decreases were due primarily to a reduction in certain vendor
advertising programs, and a decrease in storage income as a result of
the Company reducing the warehouse space allocated to storing the
merchandise of certain suppliers to the duty free industry.
Selling, General, and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses, as a percentage of
net sales, increased to 37.8% for the three months ended July 28, 1996
from 37.5% for the same period in the prior year. Selling, general and
administrative expenses, as a percentage of net sales, was 38.7% for
both the six months ended July 28, 1996 and the six months ended July
30, 1995. 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 resulting from increases in the Airport and
Northern Border Division's net sales and from new store openings in
these two divisions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $12,931,000 for the
six months ended July 28, 1996. The Company had $59,618,000 of cash and
short-and long-term investments as of July 28, 1996. Working capital
was $122,790,000 as of July 28, 1996. There were no borrowings under
the Company's $75,000,000 revolving line of credit and letter of credit
facility as of July 28, 1996. The Company believes its existing funds,
cash provided by operating activities and available borrowings will be
sufficient to meet its current liquidity and capital requirements.
REGULATION AND ECONOMIC FACTORS AFFECTING THE DUTY FREE INDUSTRY
- ----------------------------------------------------------------
The Company's sales and gross profit margins are affected by
factors specifically related to the duty free industry. Most countries
have allowances on the import of duty free goods. Decreases in the duty
free allowances of foreign countries or stricter eligibility
requirements for duty free purchases, as well as decreases in tax and
duty rates imposed by foreign jurisdictions could have a negative effect
on the Company's sales and gross profit margins (particularly Canada and
Mexico). Conversely, increases could have a positive effect on the
Company's sales and gross profit.
The principal customers of the Company are residents of foreign
countries whose purchases of duty free merchandise may be affected by
trends in the economies of foreign countries and changes in the value of
the U.S. dollar relative to their own currencies. Any significant
increase in the value of the U.S. dollar relative to the currencies of
foreign countries, particularly Canada, Mexico and Japan, could have an
adverse impact on the number of travelers visiting the United States and
the dollar amount of duty free purchases made by them from the Company.
A significant increase in gasoline prices or a shortage of fuel may also
reduce the number of international travelers and thereby adversely
affect the Company's sales. In addition, the Company imports a
significant portion of its products from Western Europe and Canada at
prices negotiated either in U.S. dollars or foreign currencies. As a
result, the Company's costs are affected by fluctuations in the value of
the U.S. dollar in relation to major Western European and Canadian
currencies. A decrease in the purchasing power of the U.S. dollar
relative to other currencies causes a corresponding increase in the
purchase price of products. The Company enters into foreign exchange
forward contracts as a hedge against a portion of its exposure to
currency fluctuations on commitments to purchase merchandise.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The United States Customs Service was investigating the
operations of a subsidiary's bonded warehouse in Seattle, Washington.
Without any admission of wrongdoing by the Company's subsidiary, this
matter has been settled upon the payment of $135,298 to the United
States Customs Service.
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 23, 1996:
NO. OF SHARES
-----------------------
ELECTION OF CLASS A DIRECTORS FOR WITHHELD
- ----------------------------- ---------- --------
David H. Bernstein 22,938,171 157,272
John A. Couri 22,937,890 157,553
Heribert Diehl 22,938,291 157,152
NO. OF SHARES
-----------------------
ELECTION OF CLASS C DIRECTOR FOR WITHHELD
- ---------------------------- ---------- --------
Stephen M. Waters 22,935,001 160,442
RATIFICATION OF APPOINTMENT NO. OF SHARES
OF KPMG PEAT MARWICK LLP AS ------------------------------
THE REGISTRANTS'S INDEPENDENT FOR AGAINST ABSTAIN
AUDITORS ---------- ------- -------
23,035,274 35,279 24,890
NO. OF SHARES
STOCKHOLDER PROPOSAL TO --------------------------------
ELIMINATE ELECTION OF FOR AGAINST ABSTAIN
DIRECTORS BY CLASS --------- ---------- -------
7,110,217 12,951,731 83,731
STOCKHOLDER PROPOSAL NO. OF SHARES
THAT THE BOARD BE COMPRISED --------------------------------
OF A MAJORITY OF FOR AGAINST ABSTAIN
INDEPENDENT DIRECTORS --------- ---------- -------
3,444,937 16,449,611 245,931
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) The Company did not file a Current Report on Form 8-K during
the three months ended July 28, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUTY FREE INTERNATIONAL, INC.
Date: September 6, 1996 /s/ Gerald F. Egan
-------------------- -----------------------------
Gerald F. Egan
Vice President-Finance and
Chief Financial Officer