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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
NATIONAL INTERGROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 25-1425889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1220 SENLAC DRIVE, CARROLLTON, TEXAS 75006
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 214-446-4800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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<S> <C>
Common Stock, par value $5 per share New York Stock Exchange
$5 Cumulative Convertible Preferred Stock New York Stock Exchange
$4.20 Cumulative Exchangeable Series A Preferred Stock New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark 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 and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. /X/
On June 17, 1994, the aggregate value of voting stock held by
non-affiliates of the registrant was approximately $160,812,000.
On June 17, 1994, there were 12,836,803 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
The registrant is a holding company principally involved in (i) health care
services, including the distribution of a full line of pharmaceutical products
and health and beauty aids, as well as providing managed care services, through
its 80.5%-owned subsidiary FoxMeyer Corporation ("FoxMeyer"), and (ii) the
franchising of general variety stores and the franchising and operation of
crafts stores, together with the wholesale distribution of products to those
stores, through its 67.2%-owned subsidiary, Ben Franklin Retail Stores, Inc.
("Ben Franklin").
The registrant was incorporated in Delaware on September 27, 1982, for the
purpose of effecting a corporate restructuring of National Steel Corporation
("NSC") and its subsidiaries in which NSC assets pertaining to the steel
industry were separated from its non-steel assets. Pursuant to the
restructuring, on September 13, 1983, NSC was merged with a subsidiary of the
registrant and the stockholders of NSC became stockholders of the registrant.
For the past several years, the registrant has engaged in a major corporate
realignment, the purpose of which has been to divest cyclical and low-return
businesses and to use the proceeds to acquire distribution and other businesses
which are not capital or labor intensive. The registrant made progress toward
this goal with the acquisitions of FoxMeyer and Ben Franklin in March 1986, and
FoxMeyer has acquired several regional wholesale pharmaceutical distribution
firms in subsequent years. In September 1991, FoxMeyer sold 10,350,000 new
shares of common stock in an initial public offering, thereby reducing the
registrant's ownership in FoxMeyer to 67%. Subsequently, the registrant and
FoxMeyer have purchased shares of FoxMeyer in open market transactions and a
tender offer resulting in the registrant's ownership in FoxMeyer increasing to
80.5%.
On November 4, 1993, the registrant reacquired 6,833,505 shares of its
common stock in exchange for 3,416,753 shares of newly issued $4.20 Cumulative
Exchangeable Series A Preferred Stock, par value $5 per share, with a
liquidation preference of $40 (the "Series A Preferred Stock"). Dividends on the
Series A Preferred Stock are payable quarterly. The registrant is required to
redeem the Series A Preferred Stock on November 30, 2003.
On March 1, 1994, the registrant proposed to FoxMeyer's Board of Directors
a business combination in which a newly created subsidiary of the registrant
would be merged with and into FoxMeyer, making FoxMeyer a wholly-owned
subsidiary of the registrant. The proposal is still pending, awaiting a decision
by a special committee of the Board of Directors of FoxMeyer, as of the date of
this report.
(b) Financial Information About Industry Segments
The registrant operates, after the realignment discussed above, in two
segments, the health care services segment through FoxMeyer and the wholesale
and retail distribution of crafts and variety goods by Ben Franklin. Financial
information about industry segments is incorporated herein by reference to Note
R of Notes to Consolidated Financial Statements contained herein in Item 8.
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(c) Description of the Business
The following is a description of the registrant's operating subsidiaries:
FOXMEYER CORPORATION
GENERAL
FoxMeyer is the fourth largest wholesale drug distributor in the United
States. Through its 18 distribution centers, FoxMeyer sells a broad line of
pharmaceutical products and health and beauty aids. FoxMeyer's geographic
coverage extends to the entire continental United States.
FoxMeyer's customers include independent drug stores ("Independents");
chain drug stores, mass merchandisers and food stores with more than five store
locations ("Chains"); and hospitals and alternate care facilities ("Hospitals
and Alternate Care"). FoxMeyer complements its distribution activities by
offering a broad range of merchandising and marketing programs and
computer-based services, including merchandising assistance, training, product
selection and shelf allocation, advertising and promotional support, store
layout, inventory tracking and management reports. Through FoxMeyer's
proprietary Health Mart(R) franchise program, FoxMeyer offers its 797
franchisees (as of March 31, 1994) services and benefits normally associated
with a drug store chain.
In addition, FoxMeyer has developed programs designed to attract customers
in growing specialty market niches, such as prescription benefits management
programs, home health care, long-term care and institutional pharmacies.
FoxMeyer has established itself in markets geared toward meeting the needs of
oncology, dialysis and ambulatory clinics. FoxMeyer is also developing new
on-line services and inaugurating a network for independent pharmacies.
WHOLESALE DRUG DISTRIBUTION INDUSTRY
FoxMeyer believes that the wholesale drug distribution industry will
continue to grow due to increases in the average age of the United States
population, continued dependence by manufacturers of pharmaceuticals on
wholesale drug distributors, growth in the rate of introduction of new
pharmaceuticals, and additional shifts toward the use of efficient drug
therapies to replace more expensive hospital and surgical procedures. FoxMeyer
believes that the industry has been consolidating and that this consolidation
has resulted in large part from the inability of smaller distributors to achieve
economies of scale in their businesses and from the increasing cost to maintain
competitive parity in information technology. FoxMeyer believes this trend
toward consolidation will continue.
Federal and state governments are exploring ways to control health care
costs. Cost containment measures are being implemented or considered by
legislative bodies, governmental agencies, and other customers of health care
products. Large customers such as managed-care groups, buying groups and
hospitals are expected to account for an increasing portion of pharmaceutical
purchases. In addition, programs such as "best pricing" employed by Medicaid,
which require manufacturers to rebate to state Medicaid agencies the difference
between a company's average manufacturer's price and the best price at which the
product is sold to any customer, and "generic substitution laws," which permit,
and in some cases require, the dispensing pharmacist to substitute a generic
equivalent drug for the brand name product prescribed, are likely to be imitated
and expanded. In response to this attention, many pharmaceutical manufacturers
have indicated that they will keep their price increases in line with
anticipated levels of general consumer price inflation. FoxMeyer believes that
cost containment pressures will continue and are likely to increase in the
future and, as a result, impose additional limitations on FoxMeyer's gross
margin. Specifically, benefits derived from FoxMeyer's inventory investment
buying, and its holding of substantial inventory quantities, are diminished with
lower and less frequent price increases. FoxMeyer's principal long-term
strategies to address this changing business environment are to reduce
investment inventory levels, to continue to identify and implement programs
which lower operating expenses as a percentage of sales, to strengthen its sales
and marketing efforts aimed at new customers and to expand the availability of
value-added services to its customers. Specifically, as part of its effort to
offset the decrease in gross margin, FoxMeyer is shifting its sales mix to
higher margin over-the-counter products, health and beauty aids and general
merchandise. FoxMeyer
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is also expanding its private label, generic brand and specialty distribution
programs and diversifying into certain related health care businesses including
various managed care activities.
Inventory. FoxMeyer maintains an active inventory of over 35,000 stock
keeping units consisting principally of a full line of prescription
pharmaceutical products, health and beauty aids (including over-the-counter
medications) and, to a lesser extent, general merchandise typically found in
drug stores. At March 31, 1994 approximately 79% of FoxMeyer's inventory was
attributable to pharmaceutical products. FoxMeyer maintains a computer-based
perpetual inventory and closely monitors inventory turnover to assist its buyers
in their decisions.
Suppliers. FoxMeyer purchases pharmaceutical and other products from a
number of manufacturers. Manufacturers generally offer products to all wholesale
drug distributors on substantially similar terms. Thus, although a number of
pharmaceuticals are only available from one manufacturer (the loss of any one of
which might materially affect FoxMeyer's business), FoxMeyer does not anticipate
that it will be unable to purchase these pharmaceutical products. FoxMeyer has
agreements with many of its suppliers that generally require FoxMeyer to
maintain a certain quantity of the supplier's products in inventory. Contracts
with suppliers typically are terminable upon 30 days' notice by either party.
FoxMeyer believes that its relationships with its suppliers are good.
Management Information Systems. FoxMeyer's distribution centers are linked
to one of FoxMeyer's three data processing centers in Wichita, Kansas; Dallas,
Texas and Eagan, Minnesota. Management information systems serve several
important functions in FoxMeyer's business. Due to the large volume of
transactions processed, the quality and reliability of the management
information systems and the accuracy and timeliness of the financial controls
they provide are important for maximizing profitability. FoxMeyer's management
information systems also provide for, among other things, electronic order entry
by customers, invoice preparation and purchasing and inventory tracking. In
addition, FoxMeyer's management information systems form the bases for a number
of the value-added services that FoxMeyer provides to its customers, including
marketing data, inventory replenishment, single-source billing, computer price
updating and price labels.
FoxMeyer believes that its management information systems, which are
constantly being modified to meet new customer demands, are adequate; however,
it believes that it will be able to operate more effectively by redirecting the
underlying technology to provide more flexibility and by integrating the
multiple processing systems that have resulted from acquisitions. In pursuit of
this objective, FoxMeyer has begun a migration of various core business systems
during the past two years. This effort will likely extend over an additional two
year period and require a substantial commitment of funds, which are estimated
at $60 million. During fiscal 1995, FoxMeyer estimates expenditures to
approximate $30 million. FoxMeyer believes that by re-engineering its key
business processes and applying information technology appropriately, it can
enhance the value provided to customers and improve business performance.
Order Processing and Distribution. Orders are transmitted directly from
FoxMeyer's customers by electronic order entry equipment to one of FoxMeyer's
data processing centers. Orders are relayed on the same day to the appropriate
distribution center and are generally filled and delivered within 12 to 24 hours
using a combination of FoxMeyer's own trucks and third-party contract carriers.
Upon receipt of a customer's order, an order selection document is produced
which identifies the products ordered, unit prices and the method of shipment.
Orders are principally filled by manual selection and packaging. FoxMeyer has a
quality assurance program under which random orders are selected for review to
test order-fill accuracy. Under FoxMeyer's warehouse automation program,
FoxMeyer has installed automatic order selection systems for its highest volume
product lines in its larger distribution centers to supplement manual order
selection. Management believes this will result in improved turnaround time,
improved accuracy and cost reductions. FoxMeyer estimates that the total
expenditures in fiscal 1995 for warehouse and other improvements will be
approximately $15 million.
FoxMeyer has built its distribution network on the principle of maximizing
the geographic area served and the sales generated by each distribution center.
In fiscal 1994, FoxMeyer's average net sales per distribution center were $274.3
million and average net sales per square foot were $2,042. FoxMeyer believes
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that its existing distribution centers are generally sufficient to accommodate
anticipated growth in the regions currently served. During fiscal 1994, FoxMeyer
closed a distribution center in Lakeland, Florida and opened one in Richmond,
Virginia. For fiscal 1995, FoxMeyer is reviewing other distribution
restructuring possibilities that will reduce costs and, at the same time,
provide better service to FoxMeyer's customers.
Business and Marketing Strategy. The key elements of FoxMeyer's strategy to
improve profitability, to attract and retain customers and to expand nationwide
include: (i) Focus on Quality -- Delivering products quickly and in good
condition and providing consistently high quality service through a
comprehensive computerized order entry system, inventory availability, accurate
order completion procedures and efficient transportation methods; (ii) Cost
Efficient Operations -- Controlling operating expenses and improving asset
utilization by establishing large distribution centers that service broad
geographic areas and supply these operations with state of the art delivery
networks, management information systems and warehouse automation; (iii)
Innovative Services -- Providing value-added services such as merchandise and
marketing programs, computer based services, the Health Mart(R) franchise
program described below, health care and long-term care programs, alternate care
pharmacy programs and prescription benefits management programs; (iv) Local
Responsiveness -- Responding quickly to customer needs and problems through a
decentralized approach to operations and (v) National Coverage -- Providing
national distribution for large chains and for hospital and alternate care
purchasing groups.
MANAGED CARE
FoxMeyer has taken steps to diversify into managed care programs.
FoxMeyer's subsidiary Health Care Pharmacy Providers, Inc. ("HCPP") provides
prescription benefits management programs that offer health care providers, such
as health maintenance organizations and self-insured employers, a network of
approved pharmacies to fill the prescriptions of plan participants. HCPP
processes prescription claims filled through those pharmacies on behalf of the
provider in exchange for management fees. In April 1994, FoxMeyer acquired Scrip
Card Enterprises, Inc. ("Scrip Card"), a prescription benefits management
company located in Salt Lake City, which will focus on the small to medium size
business market. HCPP has also launched DecisionQuestSM and QuestDurSM, two
on-line information services that allow access to benefit plan, membership
eligibility, drug utilization and therapeutic data. FoxMeyer has also
inaugurated FoxCare(TM) Network, a managed care pharmacy network that has as its
primary purpose increased involvement of independent pharmacies and local chain
stores in managed care programs. In fiscal 1995, FoxMeyer will focus on
providing services to pharmacists that position them as caregivers more than as
dispensers of drugs with the help of outcomes research and on-line electronic
tools that enable pharmacists to document the cognitive services they provide to
patients in managing their drug therapy. Through these initiatives, FoxMeyer is
positioning itself to efficiently gather and report therapy information
generated by all participants in the national health care system.
CUSTOMERS
FoxMeyer sells its products to a wide range of customers including
Independents, Chains and Hospitals and Alternate Care. The following table sets
forth a summary of FoxMeyer's net sales by type of customer and the percentage
of net sales represented thereby (in thousands of dollars).
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YEARS ENDED MARCH 31,
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1994 1993 1992
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TYPE OF CUSTOMER NET SALES % NET SALES % NET SALES %
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<S> <C> <C> <C> <C> <C> <C>
Independents.......................... $1,751,592 34% $1,470,623 33% $1,064,150 35%
Chains(1)............................. 1,650,990 33 1,551,574 34 1,041,981 34
Hospitals & Alternate Care............ 1,163,370 23 996,248 22 607,177 20
Other Activities(2)................... 505,494 10 486,989 11 364,387 11
---------- --- ---------- --- ---------- ---
Total....................... $5,071,446 100% $4,505,434 100% $3,077,695 100%
========== === ========== === ========== ===
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(1) As discussed below, sales to Chains have been negatively impacted by the
bankruptcy of Phar-Mor, Inc. ("Phar-Mor").
(2) Includes bulk sales, sales by FoxMeyer's subsidiaries, Merchandising
Coordinator Services Corporation and Health Mart, Inc. and sales by the
managed care businesses. See "Other Activities" below.
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During fiscal 1994, total purchases by FoxMeyer's ten largest customers
were approximately $1.8 billion or 35% of net sales. On August 17, 1992,
Phar-Mor, FoxMeyer's largest customer at that time accounting for $579.0 million
or approximately 12.9% of FoxMeyer's net sales for the 1993 fiscal year, filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. FoxMeyer's records
reflect that on the filing date it had receivables due from Phar-Mor of
approximately $68.8 million, including $18.7 million for which FoxMeyer has
filed a reclamation claim in Phar-Mor's bankruptcy proceedings. In fiscal 1993,
net sales to Giant Eagle, an affiliate of Phar-Mor, were $160.4 million or
approximately 3.6% of net sales. Phar-Mor has closed over 140 stores as it
attempts to reorganize and emerge from bankruptcy. As a result of these store
closings, sales to Phar-Mor in 1994 were $395.2 million or 7.8% of net sales.
Sales to Giant Eagle were $216.8 million or 4.3% of net sales. FoxMeyer has been
able to offset the decrease in sales as a result of the Phar-Mor store closures
with new business from several new supply agreements entered into during fiscal
1993.
INDEPENDENTS
FoxMeyer has traditionally placed a strong emphasis on building long-term
relationships with Independents, offering them a broad range of value-added
management support services, including in-store consulting on merchandising,
training, product selection and shelf allocation, design and production of
advertising and promotional programs and store layout. FoxMeyer's merchandising
assistance program also offers Independents information on market conditions,
updates on new products and management reporting.
CHAINS
Sales to Chains include sales to national and regional chain drug stores,
mass merchandisers and food stores with more than five locations. FoxMeyer
believes that small regional Chain customers are similar to Independents in
their need for value-added merchandising and marketing services. In contrast,
larger regional Chains and national Chains are principally interested in product
pricing and effective geographic coverage.
HOSPITALS AND ALTERNATE CARE
Sales to Hospitals and Alternate Care include sales to hospitals, long-term
care facilities, rehabilitation hospitals and providers of home health care
services. These customers, either individually or through group purchasing
organizations, typically negotiate pricing arrangements directly with
pharmaceutical manufacturers who agree to supply these customers through
FoxMeyer. FoxMeyer, in turn, agrees to sell at these negotiated prices and to
provide contract administration.
OTHER ACTIVITIES
Bulk Sales. Bulk sales represent large volume orders, usually by Chains and
Hospitals and Alternate Care, which are serviced from the on-hand inventory
stock of FoxMeyer.
Merchandise Coordinator Services Corporation ("MCSC"). MCSC, which operates
as "FoxMeyer Trading Company," purchases pharmaceutical products, health and
beauty aids and salon and fragrance products in large quantities for short-term
resale.
Health Mart(R) Drug Store Franchise Program. The Health Mart drug store
franchise program offers Independents who meet certain criteria (i) the right to
use the Health Mart franchise in a given geographical territory, (ii)
standardized store layout and decor, (iii) the right to purchase from FoxMeyer
the Health Mart private label product line and (iv) a specialized Health Mart
merchandising and advertising program that includes circular and television
advertising. FoxMeyer's Health Mart franchise agreements generally provide for a
five-year term, are terminable upon 90 days notice by the franchisee and do not
require the payment of a franchise fee. Franchisees are required to carry a
representative assortment of Health Mart private label products but are not
otherwise required to purchase products from FoxMeyer.
Managed Care. See the description of these businesses under the heading
"Managed Care" above.
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COMPETITION
The wholesale drug distribution business is highly competitive, with many
distributors competing primarily on the basis of price and service. Principally,
FoxMeyer competes with national drug wholesalers, the three largest of which are
McKesson Corporation, Bergen Brunswig Corporation and Cardinal Health, Inc.
FoxMeyer also competes with numerous local and regional drug wholesalers,
manufacturers, and mail-order and specialty distributors. In its managed care
programs, FoxMeyer also competes with several large providers. Certain of
FoxMeyer's current and potential competitors have or may obtain significantly
greater financial and marketing resources than FoxMeyer. Although FoxMeyer
believes that it currently competes favorably with other wholesale drug
distributors in terms of price and service, there can be no assurance that
FoxMeyer will not encounter increased competition in the future or will not lose
business from major customers who decide to internalize their distribution
operations, each of which could limit FoxMeyer's ability to maintain or increase
its market share and adversely affect FoxMeyer's business. FoxMeyer believes
there is no present trend in the industry of customers internalizing their
distribution operations.
SERVICE MARKS
FoxMeyer owns or holds rights to all service marks that it considers to be
necessary in the conduct of its business, including FoxMeyer(R), the FoxMeyer
logo and Health Mart(R). FoxMeyer has entered into an agreement under which
another company has the right to use the Health Mart service mark in
Pennsylvania, West Virginia, Maryland, Virginia, New Jersey, Delaware and the
District of Columbia and prohibits FoxMeyer from using the Health Mart service
mark in these areas. FoxMeyer has limited rights to use the Health Mart service
mark in Virginia.
GOVERNMENT REGULATION
FoxMeyer's business is subject to regulation under the Federal Food, Drug,
and Cosmetic Act, the Prescription Drug Marketing Act, the Controlled Substances
Act and state laws applicable to the distribution of pharmaceutical products and
controlled substances.
The Federal Food, Drug, and Cosmetic Act generally regulates such matters
as the handling, packaging, storage and labeling of drugs and cosmetics shipped
in interstate commerce. The Prescription Drug Marketing Act, which amended the
Federal Food, Drug, and Cosmetic Act, establishes certain requirements
applicable to the wholesale distribution of prescription drugs, including the
requirement that wholesale drug distributors be licensed in accordance with
federally established guidelines on storage, handling and records maintenance by
each state in which they conduct business. In addition, because certain drugs
that FoxMeyer handles are regulated under the Controlled Substances Act (for
example, those containing narcotics such as codeine or certain stimulants or
depressant medications), FoxMeyer is also subject to the applicable provisions
of that act, including specific labeling, packaging and recordkeeping
requirements and the obligation to register with the federal government as a
distributor of controlled substances. Finally, FoxMeyer is required to maintain
licenses and permits for the distribution of pharmaceutical products and
controlled substances under the laws of each state in which it operates.
FoxMeyer is also subject to certain federal and state statutes and
regulations affecting franchising in connection with its Health Mart franchise
programs.
FoxMeyer believes it is in substantial compliance with all of the foregoing
federal and state laws and the regulations promulgated thereunder and possesses
all material permits and licenses required for the conduct of its business.
EMPLOYEES
As of March 31, 1994, FoxMeyer employed 2,847 persons. Approximately 705
employees of FoxMeyer are represented by unions. FoxMeyer believes that its
employee relations are good.
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PROPERTIES
FoxMeyer operates the following 18 distribution centers:
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DISTRIBUTION CENTER OWNED/LEASED SQUARE FOOTAGE
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Denver, CO............................................. Leased 51,270
Little Rock, AR........................................ Owned 52,000
Franklin, MA........................................... Leased 65,300
Slidell, LA............................................ Owned 76,948
Cincinnati, OH......................................... Leased 79,068
Atlanta, GA............................................ Leased 80,000
San Antonio, TX........................................ Leased 84,500
Oklahoma City, OK...................................... Owned 88,326
Richmond, VA........................................... Leased 90,000
LaCrosse, WI........................................... Owned 97,620
St. Louis, MO.......................................... Leased 106,760
Jacksonville, FL....................................... Owned 119,235
Solon, OH.............................................. Leased 190,188
Leetsdale, PA (2)...................................... Leased 267,500
Kansas City, MO........................................ Owned 275,175
Carol Stream, IL....................................... Leased 334,364
Eagan, MN.............................................. Owned 360,000
</TABLE>
Each distribution center is equipped with material-handling equipment used
for receiving, storing and distributing large quantities of a broad array of
products. FoxMeyer's existing distribution centers have sufficient capacity to
accommodate foreseeable growth in the areas currently served. During 1994,
FoxMeyer merged the Lakeland, Florida operation into the Jacksonville
distribution center. FoxMeyer also closed the Huntington, West Virginia
warehouse. A distribution center in Richmond, Virginia was opened in 1994 to
serve that region more effectively. FoxMeyer is reviewing other restructuring
possibilities including the combination of some distribution centers.
FoxMeyer leases its Carrollton, Texas executive offices and owns its
Wichita, Kansas data processing center. MCSC leases warehouses in Oklahoma City,
Oklahoma and on Long Island, New York. FoxMeyer leases a warehouse in Tulsa,
Oklahoma which is subleased by another party. In addition, HCPP leases a sales
office.
BEN FRANKLIN RETAIL STORES, INC.
GENERAL
Ben Franklin franchises retail variety and crafts stores under the names
Ben Franklin(R) and Ben Franklin Crafts(R) and sells variety and crafts
merchandise to its franchisees and independent selected retail outlets on a
wholesale basis. At March 31, 1994, there were 597 franchisee-owned variety
stores and 272 franchisee-owned crafts stores, including 48 franchisee-owned Ben
Franklin Crafts superstores, operating in 47 states. Ben Franklin also owns and
operates 14 Ben Franklin Crafts superstores. Ben Franklin stores have operated
for more than 70 years. Ben Franklin believes that it is the largest franchisor
in the United States of retail variety and crafts stores.
Ben Franklin's strategy is to rapidly expand the number of franchised and
company-owned and operated Ben Franklin Crafts superstores while maintaining its
revenue base of wholesale sales to existing variety and crafts stores. To date,
the primary source of Ben Franklin's revenues has been from wholesale sales of
merchandise, with only a small percentage of revenues attributable to franchise
fees, service fees and retail sales. All Ben Franklin Crafts superstores
franchised after December 1989 are required to pay a 2.5% royalty fee based upon
net store revenues, unlike variety stores and crafts stores predating the new
franchise program.
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Royalty fees have not been material to date but are expected to represent an
increasing source of revenues for Ben Franklin without a corresponding increase
in costs. In addition to generating royalty fee income, it is anticipated that
the opening of additional Ben Franklin Crafts superstores, which are larger than
variety stores, will increase wholesale merchandise sales by Ben Franklin.
In recent years, Ben Franklin's net sales have remained at approximately
the same level, which Ben Franklin believes reflects, in part, the closing of
franchisee-owned variety stores and the sluggish retail sales environment, which
have been partially offset by the opening of new larger crafts superstores. In
fiscal years 1994, 1993 and 1992, 51, 53 and 49 variety stores have closed and
24, 15 and 9 new crafts superstores have opened, respectively. In addition, Ben
Franklin has opened four, six, and four company-owned and operated crafts
superstores in fiscal year 1994, 1993 and 1992, respectively. The closing of
variety stores is the result of increased competition from national and regional
retail chain stores and, to a lesser extent, to the lack of continuity in
ownership of family-owned stores. Ben Franklin anticipates that approximately 40
to 45 additional variety stores will close in each of the next several years and
that the effect of such closings on Ben Franklin's wholesale sales will be
offset by the opening of crafts superstores.
Ben Franklin believes that the opening of new franchised and company-owned
Ben Franklin Crafts superstores, and Ben Franklin's ability to provide superior
services to franchisees and to distribute merchandise on time and at competitive
prices, have positioned Ben Franklin for future growth as a franchisor,
wholesaler and retailer.
WHOLESALE DISTRIBUTION
Ben Franklin supplies variety and crafts merchandise to franchised stores
and to selected independent retailers that have entered into merchandise supply
agreements with Ben Franklin. Sales of merchandise at the wholesale level
accounted for approximately 92% of Ben Franklin's net sales during fiscal 1994,
with sales to franchised stores accounting for approximately 91% of such sales.
No customer or affiliated group of customers accounted for as much as 5% of Ben
Franklin's net sales during fiscal 1994.
Merchandise. Ben Franklin maintains at its distribution centers
approximately 50,000 different items. These consist of staple, seasonal and
promotional merchandise that account, in the aggregate, for approximately 59% of
net wholesale sales. Staple merchandise consists of items inventoried by Ben
Franklin and for which it receives frequent orders. Ben Franklin also offers
more than 150,000 additional items to customers by shipment directly from
suppliers, including manufacturers, for which Ben Franklin receives a fee.
During each of the last three fiscal years, sales of crafts merchandise
represented more than 50% of net sales.
Ben Franklin purchases its merchandise from approximately 5,000 suppliers,
including manufacturers. Although certain suppliers, including manufacturers,
may provide a majority or all of Ben Franklin's requirements for a particular
product or product subcategory, no supplier accounted for more than 3% of Ben
Franklin's total purchases of merchandise during fiscal 1994. Ben Franklin
believes that the loss of any one or more of its suppliers would not have a
material adverse effect on Ben Franklin and that alternative sources of
merchandise are readily available at comparable prices in all product
categories. During fiscal 1994, approximately 5% of Ben Franklin's merchandise
was imported through an import service-company. Ben Franklin does not have any
long-term or exclusive contracts with suppliers except for the import service
company. Ben Franklin believes that this gives it the flexibility to adjust its
purchases to take advantage of price differentials and favorable payment terms
among competing suppliers.
Distribution. Ben Franklin distributes merchandise in 49 states and certain
Pacific islands and operates three distribution centers located in Seymour,
Indiana; New Hope, Minnesota and Ontario, California. Ben Franklin generally
ships merchandise from its distribution centers using trucking supplied by
third-party contract carriers, common carriers and its own fleet. In some
circumstances merchandise is distributed by direct shipment from suppliers.
Customers include franchisees and approximately 143 independent retail
outlets that have merchandise supply agreements with Ben Franklin. The
independent retailers purchase merchandise from Ben Franklin on the same terms
as franchisees but are not permitted to use the Ben Franklin(R) or Ben Franklin
Crafts(R) names.
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Independent retailers pay to Ben Franklin a $195 monthly fee, and Ben Franklin
makes available to them substantially the same services it offers to
franchisees. Merchandise supply agreements may be terminated by either party on
60 days notice.
Customers transmit orders directly by hand-held electronic order entry
equipment to Ben Franklin's central data processing center. The orders are
relayed electronically to a distribution center. Orders are filed by manual
selection and packaging. Ben Franklin has a quality assurance program under
which random orders are selected for review to test order-fill accuracy.
Ben Franklin's distribution centers are linked to Ben Franklin's central
data processing system which provides for order entry and confirmation, customer
billing and financial reporting systems and controls and generates warehouse
documents. Ben Franklin employs state-of-the-art warehousing and distribution
technology, including radio frequency scanning, bar coding and an automated
sortation system. In order to minimize the costs of shipping and to increase
productivity, Ben Franklin uses a computerized sequencing program to determine
truck routes and the order and number of delivery stops and to arrange backhaul
shipments from suppliers after deliveries are made to customers. In addition to
merchandise shipped from Ben Franklin's distribution centers, customers order
factory shipped merchandise directly from vendors at prices and terms negotiated
by Ben Franklin.
All franchised stores purchase some merchandise from Ben Franklin, although
they are not required to make purchases by the terms of their franchise
agreements.
FRANCHISING PROGRAMS
Franchised Stores. Ben Franklin's franchise program at March 31, 1994
consisted of 597 variety stores and 272 craft stores operating in 47 states. Of
the craft stores, there were 48 franchised crafts superstores open. Variety and
crafts stores operate under the Ben Franklin(R) and Ben Franklin Crafts(R)
names.
Variety stores sell a broad mix of merchandise including apparel,
housewares, hardware, paper products, health and beauty aids, toys, sporting
goods, stationery, party supplies, greeting cards and crafts-related products.
Variety stores generally are located in rural areas either in main-street
shopping districts or strip malls. Variety stores average approximately 7,600
square feet of selling space but may vary in size from 2,000 square feet to
40,000 square feet of selling space.
Crafts stores sell an extensive line of crafts products, including floral
products, wearable art, custom framing and framing supplies, hobby products and
models, art supplies, yarns and sewing products. Crafts stores generally are
located in larger towns, small cities and in the suburbs of large metropolitan
centers. Crafts stores vary in size from 4,000 square feet to 25,000 square feet
of selling space with most stores ranging from 10,000 to 18,000 square feet. Ben
Franklin believes demand for crafts is growing rapidly and that many potential
markets for crafts stores have not been developed.
Crafts stores opened under the Ben Franklin Crafts franchise program
introduced in 1989 are large crafts superstores with ample and convenient
parking. Crafts superstores are designed to be anchor stores of large strip
centers located in a metropolitan or suburban area and to generate their own
traffic rather than relying on traffic created by neighboring stores. Ben
Franklin Crafts superstores typically contain 12 departments: fabrics, floral
products, framing, artist supply, soft crafts, home accents, hard crafts, party
goods, craft jewelry, hobbies and models, sewing notions, and seasonal and
promotion items. Ben Franklin Crafts superstores average approximately 15,000
square feet of selling space.
Ben Franklin Crafts superstores provide customers with a wide range of
customer services, including in-store crafts classes, a knowledgeable sales
staff and a fast, efficient and courteous customer checkout process. Signs and
displays are designed to be attractive, simple and effective. Finished crafts
projects are displayed throughout the store, providing customers with crafts
ideas and assisting customers in merchandise selection.
Services. Ben Franklin provides to its franchisees a broad range of
services. Ben Franklin offers training, merchandising, advertising, management,
marketing, insurance and accounting services and assistance in site selection,
lease negotiation and in obtaining bank financing. Ben Franklin charges its
franchisees a nominal fee
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for certain services. Ben Franklin believes that new franchisees are attracted
by its depth of support services and turnkey approach. Ben Franklin uses a
computer generated store layout and design program to provide its franchisees
with a graphic floor plan for a particular store, designating the location of
store fixtures, furnishings and equipment and the types of merchandise to be
located within specific areas of the store. Ben Franklin also uses planograms
(customized shelf plans) to assist in placement of merchandise on shelves. Ben
Franklin provides video training libraries, a customized retail pricing system,
a poster service, a quarterly merchandise activity report service, advertising
layouts and assistance in developing advertising campaigns. Ben Franklin also
helps store owners adapt to the changing retail environment through a new
program to update the fixtures and "look" of their stores.
Ben Franklin, through a subsidiary, operates an insurance agency that
obtains property and casualty, general liability, disability, life and health
insurance primarily for its franchisees.
Ben Franklin has introduced a Ben Franklin Crafts Magazine and the Ben
Franklin Preferred Customers Club. These initiatives are designed to build and
reward customer loyalty.
Area Development Agreements. Ben Franklin has granted exclusive territorial
rights to open crafts superstores in certain geographic areas delineated by Ben
Franklin, subject to the opening of a specified number of stores within the
territory in accordance with a development timetable. There are currently 23
area development agreements in effect. The number of stores required to be
opened under each agreement ranges from two to nine over a period of up to seven
years.
COMPANY-OWNED CRAFTS STORES
Ben Franklin owns and operates 14 Ben Franklin Crafts superstores located
in Chino, Corona, Highland and Victorville, California; Fort Wayne (2) and
Goshen, Indiana; Clay and Schenectady, New York; Hyannis, Seekonk and North
Dartmouth, Massachusetts; Warwick, Rhode Island and Wooster, Ohio.
Ben Franklin's growth strategy includes the opening of additional
company-owned crafts superstores. It is anticipated that 16 additional
company-owned superstores will be opened in fiscal 1995. Ben Franklin intends
that the additional stores will be added in existing markets to enhance
economies of scale associated with advertising and delivery expenses. In
addition, new stores will be opened in new markets which Ben Franklin believes
have favorable competitive conditions and other opportunities.
In addition to providing a source of revenues, company-owned stores are
used as a training ground to train managers and employees of franchisee-owned
stores and as a source of ideas to test new products and merchandising
techniques and develop in-store crafts classes and displays. All company-owned
stores are operated in accordance with Ben Franklin specifications for
franchised crafts stores and make contributions to Ben Franklin's advertising
cooperative fund on the same terms as franchised stores.
COMPETITION
Ben Franklin's markets and those of its franchisees are highly competitive.
Ben Franklin competes directly with other national and regional wholesalers,
direct selling manufacturers, mail-order houses and specialty distributors on
the basis of price, breadth of product lines, marketing programs and support
services. Ben Franklin's variety store franchisees compete with national and
regional retail chain stores, including Wal-Mart Stores, Inc. and Kmart
Corporation. Franchised and company-owned crafts stores compete with regional
retail chain crafts stores. Variety and crafts stores compete on the basis of
variety and availability of merchandise, convenience, location, price and
customer service. Competitors may have greater financial, marketing and other
resources than either Ben Franklin or Ben Franklin's franchisees.
TRADEMARKS AND SERVICE MARKS
Ben Franklin owns numerous trademarks and service marks. Many of these,
including the Ben Franklin(R) and Ben Franklin Crafts(R) service marks, are
registered with the United States Patent and Trademark Office. Two Ben Franklin
service mark registrations with the Trademark Office expire in October, 1994
(which Ben Franklin intends to renew) and 2001 and two Ben Franklin Crafts
service mark registrations with the Trademark Office expire in 2000 and 2001,
all of which are renewable. Ben Franklin believes that its service
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marks have significant value and are important to its marketing efforts. Ben
Franklin is not aware of any claims of infringement or other challenges to Ben
Franklin's right to use its marks in the United States.
GOVERNMENT REGULATION
Ben Franklin is subject to federal and state laws, rules and regulations
that govern the offer and sale of franchises. Ben Franklin is also subject to a
number of state laws that regulate substantive aspects of the
franchisor-franchisee relationship. The Federal Trade Commission's Trade
Regulation Rule on Franchising (the "FTC Rule") and certain state laws require
that Ben Franklin furnish prospective franchisees with a franchise offering
circular containing information prescribed by the FTC Rule.
Ben Franklin is required to update its offering disclosure documents to
reflect the occurrence of material events. The occurrence of any such events may
from time to time require Ben Franklin to stop offering and selling franchises
until the documents are so updated.
Further, state laws that regulate the franchisor-franchisee relationship
currently exist in a substantial number of states. Such laws regulate the
franchise relationship by, for example, requiring the franchisor to deal with
its franchisees in good faith, prohibiting interference with the right of free
association among franchisees, and regulating discrimination among franchisees
in charges, royalties or fees. These laws have not precluded Ben Franklin from
seeking franchisees in any given area. Such laws may restrict a franchisor in
the termination or non-renewal of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the termination or non-renewal,
advance notice to the franchisee of the termination, an opportunity to cure a
default and repurchase of inventory or other compensation. These provisions have
not had a significant effect on Ben Franklin's operations to date.
Ben Franklin believes it is in substantial compliance with all of the
foregoing federal and state laws and the regulations promulgated thereunder and
possesses all material permits and licenses required for the conduct of its
business.
Ben Franklin's subsidiary that acts as an insurance agent is generally
required to be licensed in each state in which it accepts insurance premiums.
Ben Franklin believes it is duly licensed in those states in which it is
required to be so licensed.
Ben Franklin's trucking operation is subject to regulation by the
Interstate Commerce Commission and the Department of Transportation with respect
to interstate transportation and by state regulatory agencies with respect to
intrastate transportation.
EMPLOYEES
As of March 31, 1994, Ben Franklin employed 1,250 persons, of which
approximately 1,080 were permanent and 170 were seasonal employees.
Approximately 142 employees of Ben Franklin are represented by two unions. Ben
Franklin believes that its employee relations are good.
PROPERTIES
Ben Franklin owns two of its distribution centers located in New Hope,
Minnesota (284,000 square feet) and Seymour, Indiana (600,000 square feet). Ben
Franklin leases one distribution center located in Ontario, California (225,000
square feet). Ben Franklin also leases its executive offices located in Carol
Stream, Illinois and its data processing center in Wichita, Kansas. Ben Franklin
believes that its existing distribution centers and headquarters have sufficient
capacity to accommodate Ben Franklin's foreseeable growth except for the Ontario
distribution center. Currently, Ben Franklin is reviewing potential sites in the
same area to insure sufficient room for future growth. The Ontario lease expires
October 30, 1996. Ben Franklin also leases sites for 14 company-owned crafts
superstores. Ben Franklin currently leases from landlords and subleases to
franchisees 50 stores. In addition, Ben Franklin is the lessee of four stores
formerly subleased to franchisees but which currently are not occupied. Ben
Franklin leases a warehouse in Hunt Valley, Maryland, that it subleases to the
Sherwin-Williams Company and has exercised its option to purchase the warehouse
upon the expiration of its lease on September 29, 1994.
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OTHER ACTIVITIES
The registrant has made certain investments in real estate and real estate
loans through limited partnerships. These limited partnerships are controlled by
two wholly-owned subsidiaries of the registrant one or the other of which holds
a 50% general partner's interest in these limited partnerships. The limited
partnerships are engaged in the buying, holding, operating and disposing of real
estate or real estate loans available through the Resolution Trust Corporation
or other financial institutions. These limited partnerships own three hotels,
four office buildings and a condominium complex which they have acquired from
the Resolution Trust Corporation and other financial institutions.
ENVIRONMENTAL REGULATION
The registrant, like many other enterprises, is subject to federal, state
and local laws and regulations governing environmental matters. Such laws and
regulations primarily affect the registrant's previously sold operations where
the registrant retained all or part of any environmental liabilities on
conditions existing at the date of sale.
It is anticipated that compliance with statutory requirements related to
environmental quality control will continue to necessitate cash outlays by the
registrant for certain former operations. The amounts of these liabilities are
difficult to estimate due to such factors as the unknown extent of the remedial
actions that may be required and, in the case of sites not owned by the
registrant, the unknown extent of the registrant's probable liability in
proportion to the probable liability of other parties. Moreover, the registrant
may have environmental liabilities that the registrant cannot in its judgment
estimate at this time and losses attributable to remediation costs may arise at
other sites. The registrant cannot now estimate the additional costs and
expenses it may incur for such environmental liabilities. While management of
the registrant does not believe the liabilities associated with such other sites
will have a material adverse effect on its financial condition or results of
operations, it recognizes that additional work may need to be performed to
ascertain the ultimate liability for such sites, and further information may
ultimately change management's current assessment. See Note P to the Notes to
Consolidated Financial Statements of the registrant contained herein in Item 8.
Also, see "Item 3. Legal Proceedings" below for a discussion of outstanding
environmental actions involving the registrant.
EMPLOYEES
The number of persons employed by the registrant and its consolidated
subsidiaries was approximately 4,111 at March 31, 1994.
ITEM 2. PROPERTIES
All information with respect to properties owned or leased by the
registrant has been included under the description of the registrant's
businesses, except for the following. The registrant leases office space in
Pittsburgh, Pennsylvania and Arlington, Texas, both of which are currently
subleased.
ITEM 3. LEGAL PROCEEDINGS
On March 1, 1994, the registrant and FoxMeyer announced that the registrant
has proposed a merger in which a wholly-owned subsidiary of the registrant would
be merged with and into FoxMeyer, making FoxMeyer a wholly owned subsidiary of
the registrant (the "Proposed Merger"). In the announcement, the registrant
initially proposed that the holders of each share of FoxMeyer's common stock
(other than the registrant) would receive $14.75 in principal amount of a new
issue of 8.75% senior notes due 2004 to be issued by a new holding company
created for the purpose of holding a majority of FoxMeyer's outstanding shares.
Since the announcement of the Proposed Merger, nine suits have been filed
in the Court of Chancery of the State of Delaware, each purporting to be
asserted on behalf of a class of FoxMeyer's stockholders against FoxMeyer, the
registrant and certain present directors and officers of one or both companies.
All of the cases
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seek to enjoin the Proposed Merger or, in the alternative, to rescind the
transaction if it takes place and request unspecified money damages, attorneys'
fees and costs.
The registrant, FoxMeyer and each of the directors of FoxMeyer are named as
defendants in the following six cases: (1) Freeberg v. Butler, et al.; (2)
Croyden Associates v. Butler, et al.; (3) Bogen v. Butler et al.; (4) Beech Hill
Partners, L.P. v. Butler et al.; (5) Miller v. Butler et al.; and (6) Margulies
v. FoxMeyer et al. The registrant, FoxMeyer and Abbey J. Butler, Melvyn J.
Estrin, Sheldon W. Fantle and Paul M. Finfer, directors of the registrant, are
named as defendants in R.S. Harmon & Co. v. National Intergroup, et al. The
registrant, FoxMeyer and Abbey J. Butler, Melvyn J. Estrin and Sheldon W.
Fantle, as well as three individuals who are former officers of the registrant,
are named in Hojnoski v. FoxMeyer et al. The registrant, FoxMeyer and each of
the directors of FoxMeyer, as well as Alfred H. Kingon and William G. Tull,
directors of the registrant, and Robert J. Slater, a former director of the
registrant, are named in Doris Oppenheim, et al. v. FoxMeyer Corporation, et al.
NATIONAL STEEL CORPORATION
In accordance with certain provisions of the Stock Purchase Agreement and
related documents dated August 22, 1984 (and as subsequently amended) (the
"Stock Purchase Agreement") between the registrant and Nippon Kokan K.K. ("NKK")
whereby the registrant sold 50% of the stock of National Steel Corporation
("NSC") to NKK, the registrant assumed primary responsibility for, is obligated
to provide funds to NSC for the payment and discharge of, and agreed to
indemnify NSC against, certain liabilities that existed at the time of the sale.
On February 3, 1993, the registrant, NII Capital Corporation, NKK Corporation,
NKK U.S.A. Corporation and NSC entered into an agreement (the "Definitive
Agreement") pursuant to which the registrant was required to pay all
liabilities, costs, expenses, attorneys' fees and disbursements incurred with
respect to environmental liabilities (collectively, "Environmental Liabilities")
for which the registrant had agreed to indemnify NSC. In accordance with the
requirements of the Definitive Agreement, the registrant deposited with NSC a
total of $10,000,000 ($1,323,818.16 on January 14, 1994 and $8,676,181.84 on
January 20, 1994) as a prepayment of its indemnification obligation. The
Definitive Agreement provides that after January 14, 1994, NSC will discharge
Environmental Liabilities as they become due and owing after January 14, 1994,
up to the $10,000,000 amount deposited by the registrant.
In accordance with the terms of the Definitive Agreement, NSC will
administer and discharge Environmental Liabilities incurred at the sites
described in paragraphs (a) through (h) below:
(a) A remedial cleanup was commenced by notice letters dated February
1, 1985, by Region 3 of the United States Environmental Protection Agency
(the "EPA") to a number of companies, including NSC, encouraging them to
undertake an immediate voluntary action with respect to the cleanup of a
certain scrap metal yard in Swissvale, Pennsylvania. The EPA's notices
allege that the scrap yard is contaminated with certain hazardous
substances, including polychlorinated biphenyls ("PCBs"), and that a small
process building on-site is contaminated with dust containing elevated
levels of polychlorinated dibenzo-s-dioxins and dibenzofurans. On or about
October 12, 1989, the United States filed a complaint in the United States
District Court for the Western District of Pennsylvania entitled United
States v. Consolidation Coal Company, et al., seeking reimbursement of the
EPA's response costs as well as a declaratory judgment as to liability for
future response costs. Neither NSC nor the registrant was named a defendant
in this litigation, but the four named defendants filed a third-party
complaint for contribution against 18 third-party defendants, including
"National Intergroup, Inc. f/k/a National Steel Corp." The registrant filed
a response to the third-party complaint denying any and all liability
associated with the site. In addition, the defendants, the registrant and
NSC have filed a Joint Stipulation for the Substitution of National Steel
Corporation for National Intergroup, Inc. as Named Third-Party Defendant.
By Order, dated May 15, 1992, the court stayed discovery only with respect
to the third-party defendants, including NSC, and ordered the government to
sample the dioxin wastes currently stored in containers at the site in
Swissvale, Pennsylvania and to determine whether a waste management company
would accept the dioxin wastes for landfilling. By Order, dated January 21,
1993, the court approved a Stipulation of Dismissal pursuant to which the
government dismissed one of the four named defendants, USX Corporation,
from the lawsuit. On February 26, 1993, third-party defendant Noralco
Corporation
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filed a fourth-party complaint against the Estate of Ben Kalik and Frances
Kalik, individually and Ben Kalik t/d/b/a Swissvale Auto Surplus Parts
Company. Mr. Kalik and his company owned and operated the subject scrap
metal yard in Swissvale, Pennsylvania. Trial of the government's case
against the three remaining defendants was scheduled to begin on December
6, 1993, but on December 2, 1993 the defendants reached a tentative
settlement with the government in the aggregate amount of $1.5 million
(the government's latest claim was approximately $4.5 million). The
settlement is subject to the negotiation of a consent decree acceptable to
all parties and the court's approval of the consent decree following a
30-day public comment period. By letter, dated January 5, 1994, the
defendants stated that they are prepared to settle the third-party action
for an aggregate amount of $375,000 from the 18 third-party defendants,
including NSC.
(b) The EPA has notified NSC that it is one of a number of parties
potentially responsible for wastes present at the Buckeye dumpsite near St.
Clairsville, Ohio, and has requested NSC's voluntary participation in
certain remedial actions. The EPA's proposed remedial activities with
respect to the site are estimated to cost approximately $35 million. On or
about September 20, 1991, NSC and approximately 32 other potentially
responsible parties ("PRPs") received a Special Notice Letter from the EPA.
The Special Notice Letter notified the PRPs of their potential liability
with respect to the site and specifically encouraged the PRPs to perform or
finance the remedial design of the remedial action to be conducted at the
site. The Special Notice Letter also demands that the PRPs reimburse the
EPA for its past costs with respect to the site, which the EPA estimates to
be approximately $925,000. In response to the special notice letter, NSC
has joined a PRP group with approximately 13 other PRPs to perform
collectively the remedial design pursuant to an Administrative Order by
Consent between the PRP group and the EPA which took effect on February 10,
1992. NSC's allocated share for the remedial design stage is 4.63%. Total
costs projected for the remedial design phase are approximately $3 million.
On March 28, 1994 NSC was served with a copy of a complaint filed by
Consolidation Coal Company v. the United States Department of Interior, The
United States Department of Environmental Protection Agency and various
other defendants, including NSC. The complaint involves claims regarding
the alleged release of hazardous substances from the Buckeye Reclamation
Landfill Site, and was filed in the United States District Court for the
Southern District of Ohio. Among other things Consolidation Coal Company
seeks a determination of the allocation for the remedial action costs
(projected to be approximately $35 million) among the municipal and
industrial defendants. NSC and eight other industrial defendants intend to
hire common local counsel, file an answer to the complaint and vigorously
defend the action.
(c) In March 1988, the EPA notified NSC that the EPA considers NSC to
be among the PRPs for the dumping of wastes at the Municipal and Industrial
Disposal Company Site near Elizabeth, Pennsylvania and has requested NSC's
voluntary participation in certain remedial actions. Because NSC's records
do not indicate any involvement with this site by its former Weirton Steel
Division, NSC has declined to participate voluntarily in such remedial
actions.
(d) In September 1989, the EPA notified NSC that it considers NSC to
be one of the PRPs for the presence of wastes at the Tex Tin Site in Texas
City, Texas. By Special Notice letter dated November 27, 1989, the EPA
requested the PRPs' voluntary participation in performing or financing a
Remedial Investigation and Feasibility Study ("RI/FS") at the site. Because
NSC does not believe that it sent any hazardous substances to the site for
disposal, NSC has declined to participate voluntarily in the RI/FS.
(e) By letter dated March 1, 1991, the EPA notified NSC that the EPA
considered NSC to be a PRP with respect to the presence of approximately 40
deteriorating drums which may have contained hazardous substances, which
drums were discovered on property formerly owned by NSC's Weirton Steel
Division in Weirton, West Virginia. The EPA also offered NSC an opportunity
to participate in future negotiations as to the removal and remedial
activities at the site. On May 2, 1991, the EPA issued an order to NSC and
Weirton Steel Corporation requiring the submission of a work plan for the
completion of removal response activities at the site. By letter dated May
6, 1991, NSC advised the EPA that it intended to comply with the terms of
the order. Weirton Steel Corporation also advised the EPA that it intended
to comply with the order. On or about October 22, 1991, the EPA approved
for implementation, the work plan for the completion of removal response
activities which was jointly submitted to the EPA
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by NSC and Weirton Steel Corporation. The registrant reimbursed Weirton
Steel Corporation for approximately $790,000 expended on the site
cleanup. The first round of confirmation sampling to establish the
effectiveness of the response activities was completed in February 1992
and the results of that sampling have been forwarded to the EPA with a
recommendation that no further remediation efforts at the site are
necessary. In June 1992, the EPA tentatively accepted the findings subject
to reevaluation upon submission of a final report by NSC and Weirton Steel
Corporation.
(f) In January 1993, NSC was notified that the West Virginia Division
of Environmental Projection ("WVDEP") had conducted an investigation on
Brown's Island, Weirton, West Virginia which was formerly owned by NSC's
Weirton Steel Division and is currently owned by Weirton Steel Corporation.
The WVDEP alleged that samples taken from four groundwater monitoring wells
located at this site contained elevated levels of contamination. WVDEP
informed Weirton Steel Corporation that additional investigation, possible
groundwater and soil remediation, and on-site housecleaning was required at
the site. Weirton Steel Corporation has spent approximately $210,000 to
date on remediation of an emergency wastewater lagoon located on Brown's
Island and has been seeking reimbursement of that amount and any additional
remediation costs involving the lagoon from NSC.
(g) In accordance with certain provisions of the Stock Purchase
Agreement, the registrant has agreed to reimburse NSC, subject to
limitations, for certain liabilities arising under environmental laws in
relation to NSC's 50% interest (through NSC's wholly owned subsidiary, The
Hanna Furnace Corporation) in the Donner-Hanna Coke Joint Venture
("Donner-Hanna"). The matter set forth in the paragraph immediately
following may be considered one of those liabilities.
The EPA notified Donner-Hanna in June 1989 that it is one of the PRPs
for wastes present at the Hi-View Terrace Site in West Seneca, New York,
and requested information with respect to this site. The EPA has been
advised that Donner-Hanna's records do not indicate any involvement with
the site.
(h) NSC, Earth Sciences, Inc. ("ESI") and Southwire Company
("Southwire") were general partners in the Alumet Partnership ("Alumet"),
which has been identified by the EPA as one of hundreds of PRPs at the
Lowry Landfill Site in Aurora, Colorado. Alumet has presented information
to the EPA in support of its position that the neutralized slurry it sent
to the Lowry Landfill Site should not be considered hazardous but, to date,
the EPA has rejected this argument. The EPA has estimated that the overall
cost for remediation activities may be in excess of $500 million. The
volume of the waste attributed to Alumet is estimated to be 3.8% of the EPA
Waste In List. In December 1991, the City and County of Denver filed a
complaint in the United States District Court for the District of Colorado
entitled The City and County of Denver v. Adolph Coors Company, et al.
against 40 companies, including ESI, seeking reimbursement for costs
incurred by and to be incurred by the City and County of Denver with
respect to the Lowry Landfill Site. ESI and the plaintiffs reached a
confidential settlement agreement and the plaintiffs moved to add Alumet as
a defendant but were unsuccessful. Monies collected from settlement of the
litigation were placed in a trust to fund the remediation of the Lowry
Landfill Site. In June 1993, Alumet received a settlement demand from the
City and County of Denver and Waste Management of Colorado, Inc. with
regard to Alumet's waste stream volume unaccounted for in the initial
litigation. The amount and terms of the settlement demand are confidential.
Alumet made a counter-offer to the City and County of Denver and Waste
Management of Colorado, Inc. which was rejected. NSC has made demand upon
the insurance carriers for NSC and Alumet for participation in the defense
of this claim and indemnification. The insurance carriers have acknowledged
receipt of notice from NSC under a reservation of rights and have offered
to meet with NSC to discuss their possible participation in the defense of
Alumet at the site. On November 15, 1993, counsel for Alumet received a
CERCLA 107(a) demand letter directed to Alumet from the EPA demanding
$15,302,543, plus interest from the date of the demand. The demand
represents costs incurred to date at the Lowry Landfill Site by the EPA and
NSC believes the same demand was made on all PRPs who sent over 300,000
gallons of waste to the site. Alumet has acknowledged receipt of the demand
and contested its liability. On May 2, 1994, Alumet received notice that a
complaint had been filed by the City and County of Denver; Waste Management
of Colorado, Inc., and Chemical Waste Management, Inc. against multiple
companies, including Alumet, the registrant, NSC and Southwire. The Alumet
partners are studying the allegations
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of the complaint, which seeks to recover costs relating to the cleanup of
the Lowry Landfill. The complaint has not yet been served on Alumet, the
registrant, NSC or Southwire.
NATIONAL ALUMINUM CORPORATION
During the fiscal year ended March 31, 1990, the registrant disposed of the
operating assets of its subsidiary, National Aluminum Corporation ("NAC"). In
connection with the disposition of such assets, the registrant retained
responsibility for certain environmental matters, as follows:
(a) NAC received notification in June 1988 that NAC is considered to
be one of several hundred PRPs for the clean-up of a site known as the Diaz
Refinery in Diaz, Arkansas. On or about September 25, 1989, a complaint was
filed in the Chancery Court of Jackson County, Arkansas captioned Grantors
to the Diaz Refinery PRP Committee Site Trust, et al. v. Rheem
Manufacturing Company, et al., that included NAC as a named defendant. This
private litigation by a steering committee of PRPs purports to be an action
for a declaratory judgment as to liability for the costs of cleaning the
site as well as for recovery of the costs of the clean-up. On January 24,
1990, an Order of Dismissal was entered dismissing with prejudice NAC as a
defendant and realigning NAC as a plaintiff. NAC has joined the steering
committee of PRPs who have instituted the action and is participating in
site remediation activities. NAC's share of the remediation costs at this
site should not exceed $100,000.
(b) In the fourth quarter of 1985, the EPA notified NAC that the EPA
considered NAC to be one of a number of PRPs for the disposal of wastes at
a site in Massachusetts, known as the Charles George Land Reclamation Trust
Landfill, and requested NAC to furnish certain information. No documents
have been discovered by NAC that indicate that any hazardous wastes or
hazardous substances were transported to or treated, stored or disposed of
at this site by NAC. In June 1989, NAC was named as one of approximately 24
additional defendants in a cost recovery action instituted by the United
States and the Commonwealth of Massachusetts in the United States District
Court for the District of Massachusetts, entitled U.S. v. Charles George
Trucking Company, Inc., et al. The new defendants, including NAC,
instituted an action in the litigation against approximately 23 third-party
defendants. The total cost of remediation at the site has been estimated by
the EPA to be approximately $55 million to $65 million. In addition, the
Commonwealth of Massachusetts is seeking natural resource damages.
Discovery has been completed. The parties have negotiated a comprehensive
settlement which is embodied in a consent decree. The private parties have
executed the consent decree which is subject to public notice procedures
prior to execution by the government plaintiffs. It is anticipated that the
settlement will ultimately be approved and entered by the court although
the George family has objected to the settlement. The monetary terms of the
settlement embodied in the consent decree are subject to certain
confidentiality provisions.
(c) In December 1988, NAC received correspondence from the EPA
notifying NAC that the EPA considers it to be one of a number of PRPs for
wastes present at the Fisher-Calo Chemical and Solvent Recovery Site in
Kingsbury, Indiana. The EPA has ordered 23 of the parties (including NAC)
to undertake and complete emergency removal activities at the site. The
removal work has been substantially completed. In October 1990, the EPA
sent a Special Notice Letter to approximately 350 PRPs, including NAC,
requesting the PRPs' voluntary participation in performing or financing the
remedial design/remedial action at the site, the cost of which is estimated
by the EPA to be approximately $31 million. The Special Notice Letter also
demanded payment of the EPA's past costs at the site. The PRPs estimate
that the total cost associated with the cleanup will amount to $47 million.
In August 1991, NAC was one of approximately 52 PRPs who executed a Consent
Decree to perform the remedial design/remedial action which was lodged with
the federal district court on December 30, 1991. Pursuant to the terms of
the Consent Decree and Cost Sharing Agreement among the PRPs, NAC has paid
in full its allocated share of approximately $890,000.
(d) On October 16, 1989, the United States filed a complaint in the
United States District court for the District of New Jersey entitled United
States v. Helen Kramer, et al. seeking reimbursement of the EPA's response
costs as well as a declaratory judgment as to liability for future response
costs with
16
<PAGE> 18
respect to the Helen Kramer Landfill Site in Mantua Township, New Jersey.
Neither NAC nor the registrant was named as a defendant in the
litigation, but 13 of the 26 named defendants have filed a third-party
complaint for contribution against 264 third-party defendants, including
Denny Corporation. NAC was served with the third-party complaint as
successor to Denny Corporation on January 17, 1991. On July 8, 1991, the
court issued an order granting the third-party defendants' motion to
separate the trial of the third-party claims from the trial of the primary
claims but denying the third-party defendants' motion to stay discovery as
to the third-party claims. NAC has opted into a court-approved Settlement
Process Protocol and has prepared responses to an informal discovery
questionnaire which will form the basis of an allocation scheme among the
third-party defendants. NAC continues to participate in the settlement
process and is awaiting the completion of a draft allocation scheme, which
is being prepared by an independent third party.
(e) In March 1991, the EPA notified NAC that the EPA considers the
former Hastings Aluminum Products Division of NAC to be one of a number of
PRPs for the presence of wastes at the Organic Chemical Site near
Grandville, Michigan and has requested NAC's voluntary participation in
certain remedial actions. In January 1992, NAC and approximately 150 other
PRPs received an Administrative Order from the EPA requiring the recipients
to perform the first phase of the remediation at the site. NAC has joined a
PRP group with several other PRPs to perform collectively the first phase
of the site remediation, which is estimated by the EPA to cost
approximately $6 million. The PRPs, including NAC, have informed the EPA
that they intend to comply with the terms of the Administrative Order.
(f) In May 1991, the EPA contacted NAC and requested information
regarding NAC's disposal of allegedly hazardous substances at the Green
River Disposal Site located in Davies County, Kentucky. NAC responded to
the EPA's request, indicating that NAC had disposed of materials at the
Green River Disposal Site, but asserting that the materials sent to the
site were not hazardous. In January 1992, the EPA notified NAC that the EPA
considers NAC to be one of a number of PRPs for contamination at the site.
The EPA proposed that NAC enter into negotiations with the Green River
Coordinating Committee, a group of PRPs performing a RI/FS pursuant to an
administrative order. In March 1992, the Green River Coordinating Committee
proposed an allocation formula for funding the RI/FS, to which NAC and
numerous other parties have objected. Many of the objecting parties,
including NAC, formed the Green River Review Committee which entered into
negotiations with the Coordinating Committee to develop a more equitable
allocation scheme. In February 1993, the Review Committee entered into a
settlement agreement with the Coordinating Committee, pursuant to which the
Review Committee's 18 members agreed to pay 21% of the costs associated
with the RI/FS, which are estimated to be $4.7 million. As part of the
settlement, NAC paid $40,739.00, although NAC will be required to pay
additional sums if the cost of the RI/FS exceeds the current estimate.
While NAC settled the RI/FS portion of the remediation, the Review
Committee and the Coordinating Committee have initiated preliminary
discussions regarding future obligations. The registrant will investigate
these issues as they develop.
(g) Following the sale of all of the issued and outstanding capital
stock of National Luxembourg Aluminum Company S.A., a Luxembourg
corporation ("NLAC"), to AB Electrolux, a Swedish corporation ("AB"),
pursuant to an agreement dated January 5, 1989 among NAC, the registrant
and AB (the "Purchase Agreement"), certain disputes arose among the parties
with respect to the accounting standards used prior to the sale. The
disputes were submitted for final resolution to the accounting firm of
Price Waterhouse, which agreed with the position asserted by the registrant
and NAC. In the fall of 1990, AB and its representatives contacted NAC and
the registrant, claiming that AB was entitled to a price reduction of
approximately $7 million due to certain alleged failures of the financial
statements of NLAC to conform with the provisions of the Purchase
Agreement. In light of the threat of litigation, and with reference to the
earlier decision by Price Waterhouse, NAC and the registrant instituted
National Aluminum Corporation and National Intergroup, Inc. v. AB
Electrolux, Civil Action No. 90-1749, in the United States District Court
for the Western District of Pennsylvania, which was essentially a Petition
for Order Confirming Foreign Arbitration Award based on the International
Convention of the Recognition and Enforcement of Foreign Arbitral Orders.
17
<PAGE> 19
Subsequent to the filing of the above-referenced suit by NAC and the
registrant, AB commenced AB Electrolux v. National Aluminum Corporation and
National Intergroup, Inc., in the District Court of Luxembourg, Second Section,
alleging that the annual financial statements of NLAC as of December 31, 1988,
March 31, 1988 and March 31, 1987 were not prepared in accordance with the
Accounting Standards (as defined in the Purchase Agreement) with respect to
capitalization of interest relating to the financing of certain fixed assets,
depreciation of certain tangible fixed assets and capitalization of certain
maintenance expenses. Both NAC and the registrant have responded to the suit by
AB by denying all liability and have filed suit, in the form of claim against
KPMG Peat Marwick, the former independent certified accounting firm of NLAC.
Following a hearing before a three judge panel of a Luxembourg court, the
parties were officially advised by the court clerk in March 1994 that the claims
of AB Electrolux against the registrant and NAC had been dismissed. The court
also dismissed the counterclaim of the registrant and NAC. The registrant and
NAC have received notice that AB has filed an appeal of the judgment.
OTHER
The registrant also is a party to various other lawsuits arising in the
ordinary course of business. The registrant, however, does not believe that the
outcome of these lawsuits, individually or in the aggregate, will have a
material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's common stock is listed for trading on the New York Stock
Exchange. At June 1, 1994, the registrant had 7,574 stockholders of record.
Information concerning the high and low market prices on the New York Stock
Exchange of the registrant's common and preferred stocks and dividends declared
on such stocks for each quarter in the last two fiscal years are shown below:
<TABLE>
<CAPTION>
MARKET PRICE RANGE
--------------------------------------------------------
DIVIDENDS DECLARED
FISCAL 1994 FISCAL 1993 PER SHARE
----------- ----------- --------------------------
HIGH LOW HIGH LOW FISCAL 1994 FISCAL 1993
---- ---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Common Stock (Symbol: NII)
1st Quarter.......................... $14 7/8 $12 3/8 $ 14 $12 5/8 $ 0 $ 0
2nd Quarter.......................... 13 7/8 12 1/4 14 1/4 11 1/8 0 0
3rd Quarter.......................... 15 7/8 12 3/4 14 11 1/2 0 0
4th Quarter.......................... 17 5/8 13 1/4 14 3/8 12 1/2 0 0
- - - -------------------------------------------------------------------------------------------------
Convertible Preferred Stock (Symbol: NIIPr)
1st Quarter.......................... 51 1/2 49 3/4 51 1/2 48 1/2 1.25 1.25
2nd Quarter.......................... 51 1/2 49 3/4 51 48 1/2 1.25 1.25
3rd Quarter.......................... 50 3/4 49 1/4 51 49 1/4 1.25 1.25
4th Quarter.......................... 51 3/4 50 52 49 7/8 1.25 1.25
- - - -------------------------------------------------------------------------------------------------
Series A Preferred Stock (Symbol: NIIA)
1st Quarter.......................... * * * * * *
2nd Quarter.......................... * * * * * *
3rd Quarter.......................... 33 1/4 30 3/4 * * .82** *
4th Quarter.......................... 38 30 1/4 * * 1.05** *
- - - -------------------------------------------------------------------------------------------------
</TABLE>
* Not publicly traded. Issued in November 1993.
** Paid in additional shares of Series A Preferred Stock.
Information with respect to restrictions on the payment of cash dividends
on its common stock and its Series A Preferred Stock is incorporated herein by
reference to Note J of Notes to Consolidated Financial Statements contained
herein in Item 8.
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the Consolidated
Financial Statements contained herein.
FIVE-YEAR FINANCIAL SUMMARY AND RELATED DATA
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales.................................... $5,409.4 $4,851.6 $3,411.3 $3,207.5 $2,736.1
Operating costs.............................. 5,358.1 4,841.5 3,373.5 3,227.1 2,734.4
Operating income (loss) from continuing
operations................................ 51.3 10.1 37.8 (19.6) 1.7
Financing costs, net......................... 22.9 14.4 17.2 30.1 54.6
Income tax provision (benefit)............... (1.2) (25.2) 8.0 (3.2) (27.1)
National Steel Corporation................... 5.3 (15.1) 7.5 (12.5) 34.6
Minority interest in results of operations of
consolidated subsidiaries................. 5.4 5.2 9.5 -- --
Income (loss) from continuing operations
before extraordinary items and cumulative
effect of
change in accounting principle............ 29.5 .6 10.6 (59.0) 8.8
Discontinued operations...................... -- -- 25.6 (220.0) 33.9
Income (loss) before extraordinary items and
cumulative effect of change in accounting
principle................................. 29.5 .6 36.2 (279.0) 42.7
Extraordinary items.......................... -- -- (5.8) -- 13.0
Cumulative effect of change in accounting
principle -- -- -- (15.6) --
Net income (loss)............................ $ 29.5 $ .6 $ 30.4 $ (294.6) $ 55.7
- - - -----------------------------------------------------------------------------------------------------
COMMON SHARE DATA
Earnings (loss) per share:
Continuing operations..................... $ 1.10 $ (.24) $ .24 $ (2.97) $ .15
Discontinued operations................... -- -- 1.19 (10.11) 1.56
Extraordinary items....................... -- -- (.27) -- .60
Cumulative effect of change in accounting
principle............................... -- -- -- (.71) --
Earnings (loss)........................... $ 1.10 $ (.24) $ 1.16 $ (13.79) $ 2.31
Cash dividends per share..................... -- -- -- -- --
Average number of common shares outstanding
(in thousands)............................ 16,931 19,967 21,444 21,763 21,754
- - - -----------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
Working capital.............................. $ 375.0 $ 373.2 $ 307.8 $ 321.5 $ 239.5
Total assets................................. 1,525.5 1,562.1 1,137.4 1,065.2 1,576.5
Capital expenditures......................... 56.3 20.1 20.2 8.5 7.3
Long-term debt............................... 310.9 256.6 29.6 208.4 180.0
Redeemable preferred stock................... 164.8 50.6 55.0 55.0 55.0
Stockholders' equity......................... 224.8 360.1 377.6 416.1 694.5
- - - -----------------------------------------------------------------------------------------------------
KEY FINANCIAL RATIOS
Current ratio................................ 1.59:1 1.52:1 1.71:1 1.97:1 1.59:1
Long-term debt as a percent of total
capitalization............................ 44.4% 38.5% 6.4% 30.7% 19.4%
Return on average common stockholders'
equity.................................... 10.1% 0.2% 7.7% (53.1)% 8.2%
Return on net sales.......................... 0.5% 0.0% 0.9% (9.2)% 2.0%
- - - -----------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 22
FIVE-YEAR FINANCIAL SUMMARY AND RELATED DATA -- (CONTINUED)
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
The comparability of the information presented above is affected by
acquisitions, dispositions and other transactions which are described in the
accompanying footnotes to the consolidated financial statements, which should be
read in conjunction with this five-year financial summary. Comparability has
also been affected by the cumulative effect of a change in accounting principle
in fiscal 1991 related to the adoption of Statement of Financial Accounting
Standards No. 106 "Employers' Accounting For Postretirement Benefits Other Than
Pensions." Securities and Exchange Commission regulations require that
capitalization ratios also be shown with redeemable preferred stock included in
debt. On this basis, long-term debt as a percent of total capitalization would
be 67.9%, 46.0%, 18.3%, 38.8% and 25.3%, respectively, for each of the five
years ended March 31, 1994.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
National Intergroup, Inc. and its subsidiaries (the "Corporation") reported
significantly improved results for the year ended March 31, 1994 as compared to
the prior fiscal year. Earnings applicable to common stockholders increased to
$1.10 per share of common stock in fiscal 1994 from a loss of $.24 per share in
fiscal 1993. The results primarily reflect improved performance at the
Corporation's 80.5%-owned subsidiary, FoxMeyer Corporation ("FoxMeyer"), and the
effects of a November 1993 exchange offer whereby approximately 6.8 million
shares of the Corporation's common stock were exchanged for 3.4 million shares
of a new series of preferred stock.
The Corporation conducts its business principally through two operating
units, FoxMeyer and Ben Franklin Retail Stores, Inc. ("Ben Franklin"), a
67.2%-owned subsidiary. FoxMeyer is engaged primarily in the distribution of a
full line of pharmaceutical and health and beauty aid products to independent
drug stores, hospitals, alternate care facilities and chain stores. FoxMeyer
also provides managed care prescription benefit services to health care
sponsors. Ben Franklin is engaged in the franchising of general variety stores
and the franchising and operation of craft stores, together with the wholesale
distribution of products to those stores. An overview of the results of the
Corporation's operating subsidiaries follows.
FoxMeyer
Record sales of $5.1 billion reinforced the position of FoxMeyer as a
significant participant in the nation's health care system. Despite continued
cost containment measures by FoxMeyer's customers and intense competition,
growth occurred across all customer segments. Operating income increased to
$64.2 million from $13.9 million in the prior fiscal year when FoxMeyer recorded
a $41.0 million pre-tax charge to reflect a provision for possible loss on
amounts due from Phar-Mor, Inc. ("Phar-Mor") as a result of Phar-Mor's August
1992 bankruptcy filing.
FoxMeyer responded to price competition and reduced inventory investment
buying opportunities, which were attributable to a reduction in manufacturer
price increases, with the implementation of new private label, generic product
and every day low pricing programs. Expanded sales of higher margin
over-the-counter products and general merchandise also partially offset these
margin pressures.
In fiscal 1994, FoxMeyer continued its efforts to streamline its business
nationwide and to make the organization more responsive and cost effective.
FoxMeyer has put in place many initiatives in recent years which included the
realignment of distribution centers, reductions in work force, outsourcing of
certain services, implementation of warehouse automation and quality programs
and centralization of certain functions. Further realignment of distribution
centers is planned for fiscal 1995.
FoxMeyer took advantage of favorable financial markets to strengthen its
capital structure by renegotiating virtually all of its debt obligations.
Enhanced liquidity and lower financing costs resulted from extended maturities
and expanded limits on FoxMeyer's revolving credit facilities. In addition, a
$125 million term loan and a portion of FoxMeyer's borrowings under its
revolving credit lines, which were subject to floating interest rates, were
rolled into a $198 million private placement of 7.09% senior notes (the "Senior
Notes") due in 2005.
Recently, FoxMeyer's Board of Directors formally approved an investment of
up to $60 million in new information systems, emphasizing FoxMeyer's commitment
to further improvements in operating efficiency, cost reductions, asset
performance and customer service. The full impact of this program should be
realized beginning in fiscal 1996.
To capitalize on the changes in the nation's health care system, FoxMeyer
took steps to diversify outside its core distribution business and expanded
programs related thereto. Specifically, FoxMeyer established itself in new
specialty business markets geared toward meeting the needs of oncology, dialysis
and ambulatory clinics. FoxMeyer has launched DecisionQuest(SM) and
QuestDur(SM), two on-line information services that allow access to benefit
plan, membership eligibility, drug utilization and therapeutic data, through
its wholly-owned prescription benefits management subsidiary, Health Care
Pharmacy Providers, Inc. FoxMeyer also continued development of related
managed care opportunities by inaugurating FoxCare(TM) Network, a program
aimed at
22
<PAGE> 24
providing independent retail pharmacy customers greater access to managed care
plans, and by acquiring, in April 1994, Scrip Card Enterprises, Inc. ("Scrip
Card"), a prescription benefits management company based in Salt Lake City.
Through these initiatives FoxMeyer is positioning itself to efficiently gather
and report therapy information generated by all participants in the national
health care system.
By transforming itself from a pure distribution company, management
believes FoxMeyer is responding appropriately to a health care industry which is
undergoing dramatic changes. The initiatives outlined above have been developed
and implemented as part of a new strategic plan aimed at improving FoxMeyer's
value, extending FoxMeyer's position of leadership in health care markets and
improving profitability by enhancing margins and reducing costs.
Ben Franklin
Net sales declined $8.2 million to $338.0 million in fiscal 1994 reflecting
a decrease in Ben Franklin's warehouse sales attributable to the loss of 51
variety store franchises and a sluggish retail sales environment. Operating
income declined from $4.6 million in fiscal 1993 to a loss of $2.1 million in
fiscal 1994 principally due to a $5.3 million charge relating to Ben Franklin's
restructuring plans for its wholesale operations.
Ben Franklin expects to lose additional franchisee-owned variety stores due
to increasing competition from national and regional chain stores. While
recognizing the continued importance of its core warehouse distribution
business, the management of Ben Franklin is aggressively pursuing the expansion
of company-owned and franchised crafts superstores.
Ben Franklin has 597 franchisee-owned variety stores, 224 franchisee-owned
crafts stores and 48 franchisee-owned crafts superstores open as of March 31,
1994, and expects 20 new franchisee-owned crafts superstores to open during
1995. In addition, Ben Franklin owned and operated 14 craft superstores at March
31, 1994, and plans to open 16 new company-owned and operated crafts superstores
in fiscal 1995. Ben Franklin's strategy is to establish company-owned stores in
clusters to enhance economies of scale associated with advertising and delivery
expenses. These new stores will be added to existing markets and to new markets
where management believes multi-store opportunities exist.
To fund the expansion of the planned company-owned crafts superstores and
to take advantage of favorable financial markets, Ben Franklin issued $28.8
million of 7.5% convertible subordinated notes (the "Ben Franklin Notes") due in
2003.
Other
The Corporation continued to liquidate assets and settle obligations
associated with previously owned businesses. To this end, in January 1994, the
Corporation sold substantially all of its 3.4 million shares of National Steel
Corporation ("NSC") Class B common stock and transferred $10.0 million of the
proceeds to NSC as a prepayment on potential environmental liabilities for which
the Corporation had previously agreed to indemnify NSC. In addition, in May
1993, NSC redeemed 10,000 shares of NSC preferred stock owned by the
Corporation. The proceeds of $67.8 million were immediately deposited in a
pension trust to satisfy liabilities associated with the previously owned
Weirton Steel Division.
The Corporation has made certain investments in limited partnerships
engaged in the buying, holding, operating and disposing of real estate or real
estate loans available through the Resolution Trust Corporation or other
financial institutions. These limited partnerships are controlled by two
wholly-owned subsidiaries of the Corporation, one or the other of which holds a
50% general partner interest in these limited partnerships. Activities of the
limited partnerships have been consolidated in the accompanying financial
statements.
23
<PAGE> 25
RESULTS OF OPERATIONS
The following table identifies the net sales, gross profit and operating
income (loss) components attributable to the Corporation's two principal
operating units, FoxMeyer and Ben Franklin, and certain holding company,
corporate office and other miscellaneous activities (collectively, the "Holding
Company"), which includes the limited partnership activities described above (in
millions of dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
NET SALES
FoxMeyer....................................................... $5,071.4 $4,505.4 $3,077.7
Ben Franklin................................................... 338.0 346.2 340.6
Intercompany sales............................................. -- -- (7.0)
-------- -------- --------
$5,409.4 $4,851.6 $3,411.3
GROSS PROFIT
FoxMeyer....................................................... $ 285.2 $ 257.1 $ 198.3
Ben Franklin................................................... 59.8 58.9 56.1
Intercompany................................................... -- -- (7.0)
-------- -------- --------
$ 345.0 $ 316.0 $ 247.4
OPERATING INCOME (LOSS)
FoxMeyer....................................................... $ 64.2 $ 13.9 $ 50.7
Ben Franklin................................................... (2.1) 4.6 3.8
Holding company................................................ (10.8) (8.4) (16.7)
-------- -------- --------
$ 51.3 $ 10.1 $ 37.8
</TABLE>
YEAR ENDED MARCH 31, 1994 COMPARED TO YEAR ENDED MARCH 31, 1993
FoxMeyer
Net sales increased 12.6% or $566.0 million to $5,071.4 million for the
year ended March 31, 1994, as compared to $4,505.4 million for the year ended
March 31, 1993. Prior year net sales did not include the results of Harris
Wholesale Company ("Harris") until its acquisition on May 7, 1992. Had Harris
operations been included in the consolidated results of operations for the
entire 1993 fiscal year, net sales would have been approximately $84.4 million
higher. The remaining increase in net sales during fiscal 1994 of $481.6 million
related to every major customer group. The largest percentage increases were in
sales to independent drug stores, hospitals and alternate care facilities and in
FoxMeyer's bulk sales. Such increases were primarily attributable to new
accounts that were obtained during fiscal 1993, including Medicine Shoppe
International, Omnicare, Inc., and Perry Drug Stores, Inc. Chain store sales
increased slightly despite a decline of $183.8 million in sales to Phar-Mor when
compared to the prior year.
Gross margin for the current fiscal year was 5.6% as compared to 5.7% for
fiscal 1993. The decline in gross margin is the result of continuing price
competition in the industry and the decline in the frequency and magnitude of
price increases by pharmaceutical manufacturers which reduces the Corporation's
ability to generate profits from inventory investment buying.
Management of FoxMeyer anticipates further downward pressure on gross
margin in FoxMeyer's core pharmaceutical distribution business during fiscal
1995 due to continued price competition driven by large buying groups, reduced
opportunities for inventory investment buying and continued political pressures
on the health care industry.
For the year ended March 31, 1994, operating expenses and other income,
including a one-time gain of $3.9 million on the termination of certain
operating leases, were 4.4% of net sales. For the year ended March 31, 1993,
operating expenses and other income were 5.4% of net sales. In fiscal 1993,
FoxMeyer recorded a $42.8 million pre-tax charge primarily for a provision for
possible loss on amounts due from Phar-Mor. Excluding this charge, operating
income and expenses would have been 4.4% of net sales for fiscal 1993.
24
<PAGE> 26
Therefore, operating expenses and other income as a percentage of net sales were
approximately the same for both periods exclusive of this unusual item. While
increased sales to lower cost-to-serve customers (i.e., large buying groups and
chain stores) and cost containment and reduction programs reduced overall
operating costs as a percentage of net sales, additional expenses were incurred
related to the redirection of FoxMeyer's product mix, the realignment of
distribution facilities and the expansion of complementary business programs.
As discussed, FoxMeyer expects that the downward pressure on gross margin
will continue. To offset this trend, FoxMeyer is shifting its sales mix to
higher margin over-the-counter products, health and beauty aids and general
merchandise; expanding its private label, generic brand and specialty
distribution programs; and offering additional value-added services to its
customers. FoxMeyer is also expanding its benefits management and other health
care related businesses outside the core pharmaceutical distribution business.
FoxMeyer's management believes these efforts, together with the benefits of
improved information systems, continued emphasis on cost containment and
reduction programs and enhanced asset utilization should lead to future
improvements in FoxMeyer's performance.
Operating income increased $50.3 million for the year ended March 31, 1994,
as compared to the prior fiscal year. As a percentage of net sales, operating
income was 1.2% of net sales as compared to .3% of net sales in fiscal 1993. The
increase was primarily attributable to the one-time Phar-Mor charge in fiscal
1993 described above.
Ben Franklin
Net sales decreased $8.2 million or 2.4% to $338.0 million for the year
ended March 31, 1994, as compared to $346.2 million for the year ended March 31,
1993. Net sales at company-owned and operated retail crafts superstores
increased $3.8 million in fiscal 1994 to $18.4 million primarily due to having
the six stores opened in fiscal 1993 operating all year and to the opening of
four additional stores in fiscal 1994. Royalty income increased $.5 million over
the prior fiscal year to $1.6 million as a result of the increase in
franchisee-owned crafts superstores to 48 at March 31, 1994, from 24 at March
31, 1993. Net warehouse sales declined $12.5 million as compared to the prior
year to $318.0 million. The decline is the result of the loss of 51
franchisee-owned variety stores during fiscal 1994 and a generally sluggish
retail sales environment. Ben Franklin expects competition from national and
regional chain stores to result in the closing of 40 to 45 franchisee-owned
variety stores in each of the next several years.
Gross profit increased $.9 million for fiscal 1994 compared to fiscal 1993.
Gross profit from company-owned crafts superstores increased $1.2 million
primarily due to increased sales. Royalty income from franchisees increased $.5
million in fiscal 1994. The gross profit from warehouse sales decreased $.8
million as a result of the decrease in sales.
Operating expenses net of other income increased $7.6 million. The primary
cause of the increase was a $5.3 million charge for restructuring its wholesale
distribution operations. Exclusive of this one-time charge, operating expenses
for wholesale operations were $.8 million lower than in the prior fiscal year.
Operating expenses related to franchising and company-owned crafts superstores
rose $3.1 million primarily due to having the six stores opened in fiscal 1993
operating all year and the addition of four new stores in fiscal 1994.
Of the $5.3 million in restructuring charges, approximately $.8 million
represented a non-cash write-down of variety store inventories. The remaining
charges relate to the costs associated with workforce reductions and relocating
facilities, of which $.8 million was spent in the current fiscal year.
Expenditures to complete the restructuring are expected to continue over the
next two fiscal years. As the restructuring is completed, Ben Franklin's
management anticipates that $1.5 million a year in benefits will be derived from
improved productivity and lower amounts of capital invested in slow-moving
inventory.
Ben Franklin's operating income decreased $6.7 million in fiscal 1994 as
compared to fiscal 1993. The decrease was primarily the result of the one-time
restructuring charge. Excluding the one-time charge, operating income from
wholesale operations was at break-even. Operating results from crafts superstore
royalty income and company-owned and operated stores were $1.4 million less than
the prior fiscal year. While
25
<PAGE> 27
sales and gross profit increased for this portion of the business, expenses rose
faster thereby reducing operating income.
The Holding Company
The Holding Company's operating loss for the year ended March 31, 1994 was
$10.8 million as compared to an operating loss of $8.4 million for the year
ended March 31, 1993. The operating loss in each period represents the general
and administrative costs incurred by the Holding Company.
National Steel Corporation Results
The Corporation's investment in NSC reflects income of $5.3 million for the
current fiscal year compared to a $15.1 million loss for the prior fiscal year.
The loss in the prior fiscal year was the result of a $22.4 million write-down
of the Corporation's investment in NSC common stock to its market value at March
31, 1993. In the current fiscal year, the Corporation sold substantially all of
its investment in NSC common stock at an additional loss of $2.4 million. Net
preferred dividend income was approximately the same for both fiscal years.
Net Financing Costs
Net financing costs increased 58.7% to $22.9 million for the year ended
March 31, 1994, from $14.4 million for the year ended March 31, 1993. Interest
income increased $2.0 million in fiscal 1994 over fiscal 1993. The increase was
principally due to the interest earned on real estate loan investments made
during fiscal 1994. Interest expense increased $10.5 million as compared to the
prior year. Average borrowings increased from approximately $201.6 million
during fiscal 1993 to $333.5 million during fiscal 1994. The increase in average
borrowings was primarily the result of the issuance of the Senior Notes and the
Ben Franklin Notes, the proceeds of which were used as described below (see
Liquidity and Capital Resources). In addition, average borrowings under the
Corporation's various revolving credit facilities were $23.9 million higher than
in the prior year and borrowings related to real estate investments were $17.7
million at March 31, 1994. The average interest rate paid on these borrowings
also rose during the year primarily as a result of the higher fixed rates paid
on the Senior Notes and Ben Franklin Notes. The average borrowings for fiscal
1994 would have been higher if FoxMeyer had not entered into a $125 million
accounts receivable financing arrangement in October 1993. Under this
arrangement, FoxMeyer sold $125 million of its accounts receivable using the
proceeds to reduce borrowings under its revolving credit facilities. The costs
associated with the sale of accounts receivable is charged against operating
income.
Income Taxes
The Corporation recorded an income tax benefit of $1.2 million for the year
ended March 31, 1994. The difference between the actual fiscal 1994 tax benefit
and the expected tax provision based on statutory income tax rates was
principally due to a $6.5 million reduction in the deferred tax asset valuation
allowance.
Similarly, the income tax benefit of $25.2 million for the year ended March
31, 1993 differed from the expected income tax provision based on statutory
income tax rates due principally to the $12.5 million reduction in the deferred
tax asset valuation allowance and certain other adjustments described in Note N
to the consolidated financial statements.
Minority Interest in Results of Operations of Consolidated Subsidiaries
In fiscal 1994, the minority interest in results of operations of
consolidated subsidiaries represented a 19.5% share of the net income of
FoxMeyer, a 32.8% share of the net loss of Ben Franklin and a 50% share of the
net income of the Corporation's investment in real estate limited partnerships.
In fiscal 1993, the minority interest in results of operations of consolidated
subsidiaries represented a 33% share of FoxMeyer's net income, declining to
19.5% in November 1992, and a 32.7% share of Ben Franklin's net income since May
1992. In addition to these changes in the number of shares of common stock held
by FoxMeyer's and Ben Franklin's public stockholders, respectively, the increase
of minority interest in results of operations of
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<PAGE> 28
consolidated subsidiaries was also attributable to the minority stockholders'
share of the increase in FoxMeyer's net income which was partially offset by the
minority stockholders' share of the decrease in Ben Franklin's results of
operations.
Preferred Stock Dividends
Preferred stock dividends were $10.8 million for the year ended March 31,
1994, as compared to $5.4 million for the year ended March 31, 1993. During
November 1993, the Corporation exchanged approximately 6.8 million shares of
common stock for 3.4 million shares of a new series of preferred stock. The
additional dividends represent the dividends declared on the new series of
preferred stock and the accretion of the discount recorded on this series. See
Note J to the consolidated financial statements.
YEAR ENDED MARCH 31, 1993 COMPARED TO YEAR ENDED MARCH 31, 1992
FoxMeyer
Net sales increased 46.4% or $1,427.7 million to $4,505.4 million for the
year ended March 31, 1993, as compared to $3,077.7 million in the year ended
March 31, 1992. The addition of Harris' results of operations since its
acquisition on May 7, 1992, accounted for $766.1 million of the increase over
the prior fiscal year. Net sales, which were up 21.5% without including sales
for Harris, increased for all major customer groups. The largest percentage
increases were in sales to chain stores, hospitals and alternate care
facilities. These increases were primarily attributable to the addition of new
accounts and to increased sales to existing accounts through promotional
programs, value-added services and competitive pricing.
Gross margin declined to 5.7% of net sales for fiscal 1993 from 6.5% for
fiscal 1992. Approximately one-half of this decrease was the result of the
shutdown of FoxMeyer's third party trucking activities in fiscal 1992. Increased
sales to large volume, lower margin and lower cost-to-serve customers and
continuing price competition throughout the industry also contributed to this
decrease. The decrease was partially offset by the higher gross margins earned
on the new customer base acquired in connection with the purchase of Harris.
FoxMeyer's gross margin was also adversely affected by the decrease in the
frequency and magnitude of price increases by pharmaceutical manufacturers.
Operating expenses, net of other income, increased $95.5 million for fiscal
1993 as compared to fiscal 1992. The increase was partially the result of a
$42.8 million unusual charge in fiscal 1993. The charge included a $40.0 million
provision for possible loss on amounts due from Phar-Mor, a $1.0 million reserve
for anticipated legal and collection costs related to the Phar-Mor bankruptcy
and the write-off of $1.8 million of certain chain-store related software
development costs. Operating expenses, excluding the Phar-Mor charge, would have
increased by $52.7 million. A significant portion of the $52.7 million increase
was the result of the acquisition of Harris warehouse operations. As a
percentage of net sales, operating expenses without the unusual charge were 4.4%
in fiscal 1993 as compared to 4.9% in fiscal 1992. Most divisions continued to
experience lower operating expenses as a percentage of net sales. These results
were primarily attributable to increased sales to lower cost-to-serve customers,
cost containment and cost reduction programs which were partially offset by
relatively higher expenses associated with Harris.
Operating income decreased $36.8 million for fiscal 1993 as compared to
fiscal 1992. The decrease was principally the result of the unusual charge of
$42.8 million. Operating income, excluding the Phar-Mor charge, would have
increased by $6.1 million over the prior year. As a percentage of net sales,
operating income, excluding the Phar-Mor charge, was 1.3% for the current year
compared to 1.6% for the prior year. The decrease, exclusive of the effects of
the unusual charge, was the result of the decline in gross margin that was
partially offset by the decline in operating expenses, as a percentage of net
sales, discussed above.
Ben Franklin
Net sales increased approximately $5.6 million during the year ended March
31, 1993, as compared to the year ended March 31, 1992. Net sales at
company-owned and operated retail crafts superstores for the year ended March
31, 1993 increased by approximately $7.7 million over the prior fiscal year due
to the
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<PAGE> 29
opening of six additional stores. Royalty income was also up $.6 million over
the prior fiscal year due to the addition of several new franchisees. Net
warehouse sales declined $2.7 million between the two periods as a result of the
reduction in promotional offerings in fiscal 1993, as compared to fiscal 1992,
and a decline in customer traffic in the fourth quarter of fiscal 1993 due to
unfavorable weather conditions primarily in the eastern and southeastern United
States.
Gross profit increased from $56.1 million to $58.9 million for the year
ended March 31, 1993, as a result of an increase of $3.6 million in gross profit
attributable to additional company-owned stores and from royalty income which
were offset by a decrease of $.8 million in gross profit from warehouse sales.
Operating expenses, net of other income, increased $2.0 million for the
year ended March 31, 1993, as compared to the year ended March 31, 1992. The
increase was primarily the result of an increase of $4.0 million in expenses
attributable to the increased number of company-owned and operated crafts
superstores which was offset by a $2.0 million decrease in expenses associated
with warehouse sales primarily from decreased benefit costs.
Ben Franklin had operating income of $4.6 million for the year ended March
31, 1993, as compared to $3.8 million in the prior fiscal year. The improved
performance in the current fiscal year was primarily due to the $2.8 million
increase in gross profit which was offset by an increase of $2.0 million in
selling, general and administrative expenses, as described above.
The Holding Company
The Holding Company's operating loss for the year ended March 31, 1993, was
$8.4 million as compared to an operating loss of $16.7 million for the year
ended March 31, 1992. The prior period loss included an $11.5 million charge to
reflect a write-down of the Holding Company's investment in Ben Franklin.
Without the charge and a gain on the sale of investments of $5.8 million, the
operating loss for the year ended March 31, 1992, would have been $11.0 million.
The operating loss in each period represents the general and administrative
costs incurred by the Holding Company.
National Steel Corporation Results
The Corporation's investment in NSC reflects a loss of $15.1 million for
the year ended March 31, 1993, as compared to income of $7.5 million for the
year ended March 31, 1992. The decrease of $22.6 million was primarily the
result of a $22.4 million accounting charge in March 1993 in recognition of the
Corporation's intention to sell its NSC common stock investment. The carrying
value of the stock was reduced to reflect the market value of the NSC common
stock at March 31, 1993, less a selling allowance.
Net Financing Costs
Net financing costs decreased 16.2% to $14.4 million for the year ended
March 31, 1993, from $17.2 million for the year ended March 31, 1992. Interest
income decreased from $3.9 million to $2.5 million primarily as a result of the
Holding Company having fewer funds to invest during the current fiscal year and
lower market interest rates. In fiscal 1992, funds generated by the sale of The
Permian Corporation and FoxMeyer's initial public offering were temporarily
invested and not used until late in the third quarter of that fiscal year to
retire the Corporation's 11.2% subordinated notes.
Interest expense decreased from $21.2 million in fiscal 1992 to $17.0
million in fiscal 1993. The decrease reflects a combination of the effects of
(i) lower current year interest rates paid on the FoxMeyer and Ben Franklin
credit facilities, (ii) the redemption of all of the outstanding 11.2%
subordinated notes in fiscal 1992, (iii) borrowings by FoxMeyer under a term
loan to fund the acquisition of Harris on May 7, 1992, and (iv) an increase in
the average borrowings outstanding under the FoxMeyer and Ben Franklin credit
facilities of $37.0 million to finance the FoxMeyer stock repurchase program,
the joint tender offer by FoxMeyer and the Corporation for shares of FoxMeyer
common stock (the "Tender Offer") and the increase in the Phar-Mor receivables
as a result of the Phar-Mor bankruptcy and the Corporation's continuing
relationship with Phar-Mor.
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<PAGE> 30
Income Taxes
The Corporation recorded an income tax benefit of $25.2 million for the
year ended March 31, 1993 as compared to a tax provision of $8.0 million for the
year ended March 31, 1992. The difference between the actual fiscal 1993 tax
benefit and the expected tax benefit based on statutory income tax rates was
principally due to the $12.5 million reduction in the deferred tax asset
valuation allowance. Realization, and therefore recognition, of such deferred
tax asset was determined to be more likely than not only after the
reconsolidation, for federal income tax filing purposes, of FoxMeyer subsequent
to the Tender Offer in November 1992.
Neither Ben Franklin's operating results since its public offering in May
1992, nor FoxMeyer's operating results for the period from April 1, 1992,
through November 19, 1992 (the date of completion of the Tender Offer), may be
included in the Corporation's consolidated income tax filing. Therefore, for
that period, any net taxable income of these subsidiaries could not be offset by
losses of the remaining entities in the Corporation's consolidated federal
income tax group. The fiscal 1992 tax expense of $8.0 million primarily
represents the tax expense incurred by FoxMeyer after its initial public
offering.
Minority Interest in Results of Operations of Consolidated Subsidiaries
The minority interest in results of operations of consolidated subsidiaries
represents the 33% proportionate share of FoxMeyer's net income from April 1,
1992, declining to 19.5% in November 1992, and the 32.7% proportionate share of
Ben Franklin's net income since May 1992, which amount is attributed to those
shares of common stock held by FoxMeyer's and Ben Franklin's public
stockholders, respectively. The decrease of $4.3 million to $5.2 million for the
year ended March 31, 1993, as compared to the prior fiscal year is principally
due to the $38.6 million decline in FoxMeyer's net income in fiscal 1993.
Discontinued Operations
The Corporation's gain on disposal of discontinued operations in fiscal
1992 consisted of a $16.8 million gain on the sale of The Permian Corporation
and an $8.8 million gain from the reconsolidation of Ben Franklin.
Extraordinary Item
For the year ended March 31, 1992, the extraordinary item included the
Corporation's recognition of a $5.7 million loss on the early redemption of its
11.2% subordinated notes during December 1991.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Corporation's liquidity based on its major business
segments. Since both FoxMeyer and Ben Franklin are publicly traded and their
debt agreements restrict the funds that may be transferred to the Holding
Company, each of the business segments must, for the most part, fund its own
operations and capital needs with only dividend payments and tax sharing
payments, where applicable, being transferred between the business segments. The
following is a discussion of the liquidity and capital resources of each
business segment.
FoxMeyer
Net cash provided by operating activities was $52.0 million. Cash was
primarily generated by the sale of a percentage ownership interest in a defined
pool of trade accounts receivable (the "Receivables Financing") for $125
million. Generally, an undivided interest in new accounts receivable are sold
daily as existing accounts receivable are collected to maintain the
participation interest at $125 million. Excluding the effect of the Receivables
Financing, operating activities would have resulted in a $73.0 million use of
cash. Such use was primarily attributable to (i) an increase in the accounts
receivable balance at a rate slightly higher than the increase in sales activity
and (ii) a decline in the accounts payable balance resulting from liquidation,
in February and March, of inventory accumulated in earlier months without the
current need to replenish.
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<PAGE> 31
Cash used in investing activities was $34.4 million, resulting primarily
from purchases of property, plant and equipment of $26.5 million. A substantial
portion of these funds were for software and computer hardware purchases
relating to FoxMeyer's program to enhance its business by upgrading its
information systems and technology. FoxMeyer expects to spend an additional $30
million under this program in fiscal 1995. In addition, FoxMeyer expects to
spend approximately $15 million on distribution center improvements and an
undetermined additional amount for acquisitions of businesses that management
believes will strengthen FoxMeyer's future growth. As part of this program, in
April 1994, FoxMeyer purchased Scrip Card for approximately $10.0 million to
enhance its position in the prescription benefits management area.
Cash used in financing activities was $19.5 million. FoxMeyer restructured
a majority of its debt during fiscal 1994, thereby increasing liquidity and
converting some variable interest rate debt to fixed interest rate debt. As part
of this restructuring, the $198 million Senior Notes were issued in April 1993.
The proceeds from the Senior Notes were used to reduce outstanding balances
under FoxMeyer's credit facility (the "FoxMeyer Credit Facility") including the
retirement of the $125 million term loan facility used to finance the
acquisition of Harris in May 1992. Concurrently, the FoxMeyer Credit Facility
was amended and restated, resulting in an increase in the amount of the
revolving credit line to $210 million from $200 million, the extension of the
maturity to March 31, 1996, and the release of the collateral. In August 1993,
the FoxMeyer Credit Facility was supplemented with a $40 million seasonal
revolving credit line bringing FoxMeyer's total available revolving credit lines
to $250 million.
FoxMeyer's borrowings outstanding under its $250 million of revolving
credit facilities were $54.7 million at March 31, 1994. Restrictions imposed by
the revolving credit facilities require that on the last day of any fiscal
quarter, FoxMeyer's total indebtedness to capitalization ratio, as defined
therein, may not exceed .5 to 1.0. Under the requirements of this covenant,
FoxMeyer could have borrowed an additional $67.2 million at March 31, 1994.
FoxMeyer is also required to maintain certain levels of net worth, which may
restrict the amount of dividends FoxMeyer can pay to its stockholders. The
average and maximum amounts borrowed during fiscal 1994 under the revolving
credit facilities were $97.3 million and $215.5 million, respectively. The
maximum amount borrowed under the revolving credit facilities occurred prior to
obtaining the Receivables Financing.
During fiscal 1995 and in future years, FoxMeyer expects that cash flow
from operations and continued maintenance of its working capital facilities will
provide adequate cash to fund capital expenditures and seasonal increases in
inventories and receivables. FoxMeyer intends to fund its debt obligations as
they mature by issuing additional debt or through cash flow from operations.
Beyond that, FoxMeyer believes it has sufficient financial flexibility to
attract long-term capital on acceptable terms as may be needed to support its
growth objectives.
Ben Franklin
Net cash used in operating activities (which includes working capital
components) was $19.7 million. The increase was primarily the result of the
increase in accounts receivable, inventories and other current assets which was
partially offset by increases in accounts payable and accrued liabilities.
Inventories increased approximately $9.5 million, of which $4.3 million
represented increased inventories at company-owned crafts superstores. Four more
company-owned craft superstores were open at March 31, 1994, than at the prior
fiscal year end. The remainder of the increase in inventories and receivables
was in warehouse operations.
Net cash used in investing activities was $16.8 million, which was used to
purchase property, plant and equipment. Of the fiscal 1994 expenditures, $11.1
million was used to purchase a warehouse which Ben Franklin had previously
leased. The remaining capital expenditures related to warehouse improvements and
the opening of four new company-owned crafts superstores. Ben Franklin expects
capital expenditures for fiscal 1995 to be approximately $6.6 million. The
capital budget for 1995 includes opening 16 company-owned crafts superstores.
Operating and investing activities were funded by the $28.8 million Ben
Franklin Notes issued in June 1993 and a new facility mortgage in the amount of
$8.3 million. Due to the availability of funds provided
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<PAGE> 32
by the Ben Franklin Notes, borrowings under the Ben Franklin revolving credit
facility declined to an average of $2.3 million for fiscal 1994 compared to an
average of $6.0 million in fiscal 1993.
Ben Franklin has a $15 million revolving credit facility that was replaced
in June 1994 with a new $15 million facility that matures in August 1995. The
new facility is unsecured and requires that for at least 30 consecutive days
each year, there may be no borrowed funds. Additional covenants prohibit the
payment of dividends on common stock and require certain levels of net worth be
maintained.
Ben Franklin's management believes that cash on hand, cash generated by
operations, borrowings under the revolving credit facility, credit from its
vendors and customer financing programs will be sufficient to fund working
capital needs and to fund capital expenditures during fiscal 1995 and beyond.
Ben Franklin intends to fund its long-term obligations as they become due by
issuing additional debt or through cash flow from operations.
Holding Company
At March 31, 1994, the Holding Company had unrestricted cash and short-term
investments of approximately $15 million. In addition, the Holding Company had
$15 million available under a revolving credit facility (the "Credit Facility")
and $1.7 million available under a loan agreement with FoxMeyer (the "NII
Loan"). The Holding Company also had an additional $1.4 million in cash in the
real estate limited partnerships that it controls. The Holding Company's cash
requirements include the funding of monthly operating expenses, lease
commitments, benefit obligations, dividend payments on the Corporation's
redeemable preferred stock and mandatory sinking fund payments thereon, and cash
outlays attributable to environmental liabilities of previously owned
businesses, the amounts and timing of which are uncertain.
During fiscal 1994, NSC redeemed 10,000 shares of NSC preferred stock owned
by the Holding Company. Proceeds of $67.8 million were deposited in the Weirton
Pension Trust. In addition, the Holding Company sold substantially its entire
investment in NSC common stock for $42.8 million. After paying $10.0 million of
such proceeds to NSC for the purpose of prepaying potential environmental
liabilities for which the Corporation had previously agreed to indemnify NSC,
the remaining funds were added to the working capital of the Holding Company.
The $10.0 million transferred to NSC will reduce future environmental
expenditures that the Holding Company might have been required to fund. Any
excess funds transferred to NSC over the amount required to pay environmental
claims will be returned in 20 years. A portion of the sales proceeds received
were used to make certain investments including investments in real estate
limited partnerships and to retire all amounts then outstanding under the
Holding Company's Credit Facility.
The Holding Company's Credit Facility and the NII Loan are secured by
shares of common stock of FoxMeyer; they restrict payment of cash dividends on
the Corporation's common stock and its Series A Preferred Stock (see description
below); and they impose limits on the repurchase of shares of its common stock.
The Credit Facility and the NII Loan also place other limitations and
restrictions on the Corporation including limiting the type of investments it
may make. The Credit Facility expires on April 1, 1996. No balances were
outstanding under the Credit Facility at March 31, 1994. The average amount
borrowed during fiscal 1994 was $2.9 million. At March 31, 1994, $28.3 million
was outstanding under the NII Loan. The NII Loan matures on December 15, 1996.
In November 1993, the Corporation exchanged approximately 6.8 million
shares of its common stock for 3.4 million shares of a newly issued $4.20
Cumulative Exchangeable Series A Preferred Stock, par value $5 per share, with a
liquidation preference of $40 (the "Series A Preferred Stock"). Dividends on the
Series A Preferred Stock are payable quarterly. On and prior to October 15,
1996, the Corporation may, at its option, pay the dividends in additional Series
A Preferred Stock or in cash. At present, the Corporation intends to pay the
dividends in additional stock. After October 15, 1996, the dividends must be
paid in cash.
The Holding Company will rely on cash on hand, dividends received on shares
of FoxMeyer common stock, payments from FoxMeyer under its tax sharing
agreement, funds available under the Credit Facility or
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new credit agreement and its loan agreement with FoxMeyer to meet the cash
funding obligations described above for the foreseeable future.
OTHER MATTERS
The Corporation continues to monitor the Phar-Mor bankruptcy proceedings
closely. Phar-Mor has closed over 140 stores since its bankruptcy filing to
establish a core of profitable stores which will allow it to emerge from
bankruptcy. The Corporation believes the $40 million provision for possible loss
recorded in December 1992 remains a reasonable estimate of its probable loss.
The Corporation believes any future adjustments to this amount, if they should
be necessary, may be material to the net income for the period or periods in
which they are reported, but the adjustments, if any, would not have a material
affect on the Corporation's financial condition.
On March 1, 1994, the Corporation proposed to FoxMeyer's board of directors
a business combination in which a wholly-owned subsidiary of the Corporation
would be merged with FoxMeyer, making FoxMeyer a wholly-owned subsidiary of the
Corporation. Discussions among FoxMeyer, its advisors and the Corporation are in
progress. Actions have been brought against the Corporation and certain of its
officers and directors by plaintiffs purporting to represent the public
stockholders of FoxMeyer. Nine complaints have been filed in the Court of
Chancery of the State of Delaware, each purporting to be asserted on behalf of a
class of FoxMeyer's stockholders against the Corporation, FoxMeyer and certain
present directors and officers of one or both companies. All of the cases seek
to enjoin the proposed merger or, in the alternative, to rescind the transaction
if it takes place, and request unspecified money damages, attorneys' fees and
costs. Management believes these suits are without merit, and the Corporation
intends to defend itself vigorously. In the opinion of management, it is
premature to form a judgment as to the ultimate outcome of any of these cases at
this time.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of National Intergroup, Inc. is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
and other information included in this Annual Report. The financial statements
have been prepared in conformity with generally accepted accounting principles,
and include amounts based on management's best estimates and judgments, where
applicable.
The Corporation maintains internal accounting control systems and
procedures which provide reasonable assurance that assets are adequately
safeguarded, prescribed policies are followed and transactions are properly
recorded. Management continually monitors the internal accounting control
systems and procedures for compliance. The Corporation also maintains an
internal auditing function which evaluates and formally reports on the adequacy
and effectiveness of internal accounting controls, policies and procedures.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, has an oversight role in the area of financial reporting and internal
controls. This committee meets regularly with the independent auditors, the
internal auditors and financial management to monitor the proper discharge of
each of their respective responsibilities. Both the independent auditors and the
internal auditors have unrestricted access to the Audit Committee and
periodically meet with the Audit Committee without management present.
Peter B. McKee
Vice President and Chief Financial Officer
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors
National Intergroup, Inc.
Carrollton, Texas
We have audited the accompanying consolidated balance sheets of National
Intergroup, Inc. and subsidiaries as of March 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1994. Our audits also
included the financial statement schedules listed in the Index at Item 14. These
financial statements and financial statement schedules are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in
all material respects, the financial position of National Intergroup, Inc. and
subsidiaries at March 31, 1994 and 1993, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1994,
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE
Dallas, Texas
May 11, 1994
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NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
NET SALES.............................................. $5,409,379 $4,851,609 $3,411,291
OPERATING COSTS
Cost of goods sold................................... 5,064,396 4,535,639 3,163,892
Selling, general and administrative expenses......... 278,056 292,647 204,588
Depreciation and amortization........................ 21,987 18,860 14,716
---------- ---------- ----------
44,940 4,463 28,095
Other income........................................... 6,390 5,626 9,682
---------- ---------- ----------
Operating income from continuing operations............ 51,330 10,089 37,777
FINANCING COSTS
Interest income...................................... 4,511 2,544 3,919
Interest expense..................................... 27,436 16,986 21,155
---------- ---------- ----------
Financing costs, net................................... 22,925 14,442 17,236
---------- ---------- ----------
Income (loss) from continuing operations before income
tax provision (benefit), National Steel Corporation,
minority interest and extraordinary item............. 28,405 (4,353) 20,541
INCOME TAX PROVISION (BENEFIT)......................... (1,193) (25,248) 7,955
---------- ---------- ----------
Income from continuing operations before National Steel
Corporation, minority interest and extraordinary
item................................................. 29,598 20,895 12,586
NATIONAL STEEL CORPORATION
Loss on common stock investment...................... (2,350) (22,385) --
Net preferred dividend income........................ 7,655 7,265 7,543
---------- ---------- ----------
5,305 (15,120) 7,543
---------- ---------- ----------
Income from continuing operations before minority
interest and extraordinary item...................... 34,903 5,775 20,129
MINORITY INTEREST IN RESULTS OF OPERATIONS OF
CONSOLIDATED SUBSIDIARIES............................ 5,391 5,172 9,458
---------- ---------- ----------
Income from continuing operations before extraordinary
item................................................. 29,512 603 10,671
DISCONTINUED OPERATIONS
Gain on disposal of discontinued operations.......... -- -- 25,569
---------- ---------- ----------
Income before extraordinary item....................... 29,512 603 36,240
EXTRAORDINARY ITEM..................................... -- -- (5,837)
---------- ---------- ----------
NET INCOME............................................. 29,512 603 30,403
Preferred stock dividends.............................. 10,830 5,352 5,500
---------- ---------- ----------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS...... $ 18,682 $ (4,749) $ 24,903
========== ========== ==========
PER SHARE OF COMMON STOCK
Income (loss) from continuing operations before
extraordinary item................................ $ 1.10 $ (.24) $ .24
Discontinued operations.............................. -- -- 1.19
Extraordinary item................................... -- -- (.27)
---------- ---------- ----------
EARNINGS (LOSS) PER SHARE.............................. $ 1.10 $ (.24) $ 1.16
========== ========== ==========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............ 16,931 19,967 21,444
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 37
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
ASSETS 1994 1993
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments.............................................. $ 60,987 $ 54,504
Receivables, principally trade, less allowance for possible losses of $15,133
in
1994 and $18,841 in 1993................................................... 286,707 349,005
Inventories.................................................................. 624,574 620,143
Other current assets......................................................... 37,299 60,478
---------- ----------
TOTAL CURRENT ASSETS........................................................... 1,009,567 1,084,130
INVESTMENT IN NATIONAL STEEL CORPORATION....................................... 29,261 51,277
PROPERTY, PLANT AND EQUIPMENT.................................................. 204,504 148,712
Less allowance for depreciation and amortization............................. 71,060 57,009
---------- ----------
133,444 91,703
OTHER ASSETS
Goodwill, net of accumulated amortization of $40,381 in 1994 and $33,749 in
1993....................................................................... 228,141 232,119
Other intangible assets, net of accumulated amortization of $11,059 in
1994 and $9,469 in 1993.................................................... 12,786 14,207
Pre-bankruptcy receivable from Phar-Mor, Inc., net of $40,000 allowance for
possible loss.............................................................. 28,758 29,465
Deferred tax asset, net of valuation allowance............................... 47,342 38,524
Miscellaneous assets......................................................... 36,171 20,670
---------- ----------
TOTAL OTHER ASSETS............................................................. 353,198 334,985
---------- ----------
TOTAL ASSETS................................................................... $1,525,470 $1,562,095
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $ 532,170 $ 601,018
Other accrued liabilities.................................................... 48,977 52,199
Salaries, wages and employee benefits........................................ 19,793 19,077
Income taxes payable......................................................... 2,091 960
Deferred income taxes payable................................................ 29,360 24,222
Long-term debt due within one year........................................... 2,158 13,476
---------- ----------
TOTAL CURRENT LIABILITIES...................................................... 634,549 710,952
LONG-TERM DEBT................................................................. 310,920 256,644
RESERVES AND OTHER LIABILITIES................................................. 81,082 78,337
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES................................. 109,331 105,469
REDEEMABLE PREFERRED STOCK..................................................... 164,833 50,599
COMMITMENTS AND CONTINGENCIES.................................................. -- --
STOCKHOLDERS' EQUITY
Common stock $5.00 par value; authorized 50,000,000 shares; issued
23,995,744 shares in 1994 and 23,988,459 shares in 1993.................... 119,979 119,942
Capital in excess of par value............................................... 207,281 207,204
Minimum pension liability.................................................... (73,797) (33,891)
Net unrealized holding loss on marketable securities......................... (225) --
Retained earnings............................................................ 173,029 154,347
---------- ----------
426,267 447,602
Less: cost of common stock held in treasury -- 11,125,441 shares in 1994 and
4,291,936 shares in 1993................................................... 201,512 87,508
---------- ----------
TOTAL STOCKHOLDERS' EQUITY..................................................... 224,755 360,094
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $1,525,470 $1,562,095
========== ==========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 38
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE YEARS ENDED MARCH 31, 1994
-------------------------------------------------------------------
NET
UNREALIZED
CAPITAL HOLDING
IN MINIMUM LOSS ON
COMMON EXCESS OF PENSION MARKETABLE RETAINED TREASURY
STOCK PAR VALUE LIABILITY SECURITIES EARNINGS STOCK
-------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1991........................ $119,412 $ 220,806 $ (1,561) $ -- $134,193 $ (56,733)
Net income....................................... -- -- -- -- 30,403 --
Dividends declared -- Convertible
Preferred -- $5.00 per share................... -- -- -- -- (5,500) --
Sale of 33% common stock interest in FoxMeyer
Corporation.................................... -- (13,661) -- -- -- --
Issuance of shares under stock option plan....... 528 1,068 -- -- -- --
Recognition of unearned compensation under
restricted stock plan.......................... -- 100 -- -- -- --
Purchase of treasury stock....................... -- -- -- -- -- (19,521)
Recognition of additional minimum pension
liability...................................... -- -- (31,913) -- -- --
Cancellation of restricted stock................. -- (69) -- -- -- --
-------- --------- -------- -------- -------- ---------
BALANCE AT MARCH 31, 1992........................ 119,940 208,244 (33,474) -- 159,096 (76,254)
Net income....................................... -- -- -- -- 603 --
Dividends declared -- Convertible
Preferred -- $5.00 per share................... -- -- -- -- (5,352) --
Redemption of preferred share purchase rights.... -- (1,024) -- -- -- --
Purchase of treasury stock....................... -- -- -- -- -- (11,254)
Recognition of additional minimum pension
liability...................................... -- -- (417) -- -- --
Other............................................ 2 (16) -- -- -- --
-------- --------- -------- -------- -------- ---------
BALANCE AT MARCH 31, 1993........................ 119,942 207,204 (33,891) -- 154,347 (87,508)
Net income....................................... -- -- -- -- 29,512 --
Dividends declared -- Convertible
Preferred -- $5.00 per share................... -- -- -- -- (4,950) --
Dividends declared -- Series A Preferred -- paid
in additional stock............................ -- -- -- -- (5,389) --
Exchange of Series A Preferred for treasury
stock.......................................... -- -- -- -- -- (114,004)
Amortization of discount on Series A
Preferred...................................... -- -- -- -- (491) --
Net unrealized holding loss on marketable
securities..................................... -- -- -- (225) -- --
Recognition of additional minimum pension
liability...................................... -- -- (39,906) -- -- --
Other............................................ 37 77 -- -- -- --
-------- --------- -------- -------- -------- ---------
BALANCE AT MARCH 31, 1994........................ $119,979 $ 207,281 $(73,797) $ (225) $173,029 $(201,512)
======== ========= ======== ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 39
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------
1994 1993 1992
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 29,512 $ 603 $ 30,403
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Minority interest in results of operations of consolidated subsidiaries...... 5,391 5,172 9,458
Depreciation and amortization................................................ 21,987 18,860 14,716
Loss on common stock of National Steel Corporation........................... 2,350 22,385 --
Net preferred dividend income from National Steel Corporation................ (7,655) (7,265) (7,543)
Gain on disposal of discontinued operations.................................. -- -- (25,569)
Extraordinary loss on extinguishment of debt................................. -- -- 5,837
Gain from sale of investments................................................ (2,879) -- (3,266)
Gain on termination of operating leases...................................... (3,887) -- --
Provision for losses on accounts receivable.................................. 1,887 46,866 7,826
Provision for losses associated with corporate reorganization................ -- -- 11,475
Deferred income tax provision (benefit)...................................... (3,025) (29,813) 6,000
Cash provided (used) by working capital items, net of acquisitions
and dispositions:
Receivables.................................................................. (64,589) (52,418) (37,513)
Inventories.................................................................. (4,430) (128,567) (46,377)
Net realizable value of assets held for disposition.......................... -- -- (11,794)
Other assets................................................................. (10,867) 6,636 (5,713)
Accounts payable and accrued liabilities..................................... (67,177) 97,028 54,849
Proceeds from accounts receivable financing program............................ 125,000 -- --
Funds transferred to National Steel Corporation for potential environmental
liabilities.................................................................. (10,000) -- --
Other.......................................................................... 2,629 557 (57)
----------- ----------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............................... 14,247 (19,956) 2,732
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of discontinued operations............................ -- -- 69,650
Proceeds from the sale of investments........................................ 50,424 4,969 63,243
Purchase of property, plant and equipment.................................... (56,322) (20,076) (20,163)
Purchase of investments...................................................... (26,898) -- --
Proceeds from the sale of property, plant and equipment...................... 277 1,168 437
Acquisitions, net of cash acquired........................................... -- (134,591) (8,861)
Prepayment on long-term commitment........................................... (5,096) (7,500) --
Prepayment on notes receivable and return of investment...................... 4,556 7,300 --
----------- ----------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............................... (33,059) (148,730) 104,306
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock of subsidiaries, net of expense........... -- 7,850 139,329
Redemption of preferred share purchase rights................................ -- (1,024) --
Loan origination fees........................................................ (5,110) (864) (4,505)
Repurchase of the common stock of FoxMeyer Corporation....................... -- (64,007) --
Repurchase of the common stock of National Intergroup, Inc................... (1,251) (11,254) (19,521)
Mandatory redemption of preferred stock...................................... (4,399) (4,412) --
Proceeds from issuance of long-term debt..................................... 255,531 -- --
Debt repayments.............................................................. (3,773) (1,032) (6,517)
Net borrowings (repayments) under term loan.................................. (125,000) 125,000 --
Borrowings under revolving credit facilities................................. 1,794,450 1,293,900 687,100
Repayments under revolving credit facilities................................. (1,878,250) (1,178,400) (700,100)
Repurchase of 11.2% subordinated notes....................................... -- -- (164,303)
Dividends paid on redeemable preferred stock................................. (5,060) (5,462) (5,500)
Dividends paid to minority interests......................................... (1,843) (2,413) --
----------- ----------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................... 25,295 157,882 (74,017)
----------- ----------- ---------
Net increase (decrease) in cash and short-term investments..................... 6,483 (10,804) 33,021
Cash and short-term investments, beginning of year............................. 54,504 65,308 32,287
----------- ----------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR................................... $ 60,987 $ 54,504 $ 65,308
=========== =========== =========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE> 40
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1994
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
Principles of Consolidation: The consolidated financial statements include
the accounts of National Intergroup, Inc. and its subsidiaries (the
"Corporation"), including FoxMeyer Corporation ("FoxMeyer"), an 80.5%-owned
subsidiary, and Ben Franklin Retail Stores, Inc. ("Ben Franklin"), a 67.2%-owned
subsidiary. Two wholly-owned subsidiaries of the Corporation (collectively,
"Development") are controlling general partners in certain real estate limited
partnerships which have been consolidated in the accompanying financial
statements. All significant intercompany balances and transactions have been
eliminated.
Cash and Short-term Investments: Cash and short-term investments consist
principally of amounts held in demand deposit accounts and amounts invested in
liquid time deposit instruments having a maturity of three months or less at the
time of purchase and are recorded at cost. The Corporation had $5.6 million of
cash and short-term investments that were restricted at March 31, 1994,
primarily as collateral for letters of credit.
Inventories: Inventories, consisting solely of finished goods, are valued
at the lower of cost or market. Cost for a majority of inventory is determined
by the last-in, first-out ("LIFO") cost method. Cost for the remainder of the
inventory is determined by the first-in, first-out ("FIFO") cost method of
inventory accounting (see Note G).
Investments: The Corporation's investments in marketable equity securities
have been classified as available for sale and are included in the consolidated
balance sheets as "Other current assets" at their fair value of $16.0 million
and $46.1 million at March 31, 1994 and 1993, respectively. Gross unrealized
holding losses and gains at March 31, 1994 were $.7 million and $.3 million,
respectively. Proceeds of $44.1 million were received in 1994 from the sale of
marketable equity securities resulting in gross realized gains of $.3 million
and gross realized losses of $2.4 million. The cost of securities sold was
determined using the average cost method. For the year ended March 31, 1994, the
change in the net unrealized holding loss of $.2 million, after the elimination
of minority interest, was charged to stockholders' equity. Marketable equity
securities at March 31, 1993, were recorded at market value.
Minority Interest in Consolidated Subsidiaries: Minority interest in
consolidated subsidiaries, and minority interest in results of operations of
consolidated subsidiaries, represent the minority stockholders' or partners'
proportionate share of the equity and net income of FoxMeyer, Ben Franklin and
Development's real estate partnerships, respectively.
Property, Plant and Equipment: Properties are stated at cost. Differences
between amounts received and net carrying values of properties retired or
disposed of are included in operations. The cost of maintenance and repairs is
charged against results of operations as incurred. Depreciation of property and
equipment is provided on the straight-line method at rates designed to
distribute the cost of properties over estimated service lives, generally three
to 40 years. Amortization of assets under capital leases and of leasehold
improvements is included in depreciation and amortization and is calculated on
the lesser of the term of the lease or the estimated useful life. Depreciation
for income tax purposes is computed by using both the straight-line and
accelerated methods.
39
<PAGE> 41
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Property, plant and equipment consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Land........................................................... $ 8,039 $ 4,055
Buildings...................................................... 59,073 37,480
Leasehold improvements......................................... 24,330 22,406
Equipment and furniture........................................ 85,017 68,975
Software....................................................... 28,045 15,796
-------- --------
$204,504 $148,712
======== ========
</TABLE>
Intangible Assets: Customer lists and non-compete agreements resulting from
acquisitions are amortized by the straight-line method over the period of
benefit, but in no instance exceeding 20 years. Goodwill results principally
from the acquisition of FoxMeyer and FoxMeyer's subsequent acquisitions. Such
goodwill is being amortized by the straight-line method over 40 years.
The Corporation periodically reviews the appropriateness of the remaining
life of its intangible assets considering whether any events have occurred or
conditions have developed which indicate that the remaining life requires
adjustment. After reviewing the appropriateness of the remaining life of the
intangible asset, the Corporation then assesses the overall recoverability of
intangible assets by determining if amortization of such balances over their
remaining life can be recovered through undiscounted future operating cash
flows. Absent any unfavorable findings, the Corporation continues to amortize
its intangible assets based on the existing estimated life.
Sales: Generally, sales are recorded when goods are shipped and title
passes or when services are rendered. In addition, for large volume sales of
pharmaceuticals to major self-warehousing drug store chains, the Corporation,
through FoxMeyer, acts as an intermediary in the delivery of products from the
manufacturer directly to the customers' warehouses. These sales of $904.9
million, $888.3 million, and $307.8 million in 1994, 1993 and 1992,
respectively, are credited to the same account as their associated cost of sales
and reported on a net basis in the consolidated statements of operations.
Sale of Stock by a Subsidiary: The difference between the net offering
price of new common stock sold directly by a subsidiary and the Corporation's
basis in such stock after the offering is recognized as an adjustment to the
Corporation's capital in excess of par value.
Capitalization of Software Costs: The Corporation capitalizes software
purchased in connection with major system developments as well as expenditures
related to the implementation of these systems. In addition, software that is
developed or substantially modified internally by the Corporation is also
capitalized. The capitalization of these internal projects begins when
technological feasibility has been established and ends when testing on the
project is completed. Acquisition costs plus direct expenses are capitalized.
Interest incurred on borrowed funds used during the capitalization period of $.3
million, $.3 million and $.4 million in 1994, 1993 and 1992, respectively, was
also capitalized. Amortization of such capitalized costs is on a straight-line
basis over the estimated life of the software which is from three to seven
years. Routine upgrades, modifications and maintenance are expensed as incurred.
Self-Insurance Programs: The Corporation is self-insured for various levels
of general liability, automobile, workers' compensation and employee medical
coverage. Provisions for claims under the self-insurance programs are recorded
based on the Corporation's estimate of the aggregate liability for claims
incurred after consideration of excess loss insurance coverage limits.
40
<PAGE> 42
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Income Taxes: Deferred income taxes are provided for temporary differences
between financial statement carrying amounts and the taxable basis of assets and
liabilities using rates currently in effect.
Earnings (Loss) Per Share: Earnings (loss) per share of common stock is
based on earnings (loss) after preferred stock dividend requirements and the
weighted average number of shares of common stock outstanding during each year
after giving effect to stock options considered to be dilutive common stock
equivalents. Fully diluted earnings per share is not presented as it is
substantially the same as primary earnings per share or is anti-dilutive, as
applicable.
Reclassifications: Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
NOTE B -- TRANSACTIONS IN SUBSIDIARY COMMON STOCK
FoxMeyer Corporation
In September 1991, the Corporation's then wholly-owned subsidiary,
FoxMeyer, completed a public offering of 10,350,000 newly issued shares of its
common stock reducing the Corporation's ownership to 67.0%. The Corporation
received net offering proceeds of $141.4 million. FoxMeyer declared a dividend
to the Corporation equal to 75.0% of the net offering proceeds ($106.0 million).
In connection with this transaction, the Corporation recognized the $13.7
million difference resulting from the sale of FoxMeyer stock at a value less
than the Corporation's basis as an adjustment to capital in excess of par value.
In 1993, the Corporation and FoxMeyer purchased through a series of
transactions 4,840,000 shares of FoxMeyer common stock. Such purchases were
accounted for by the purchase accounting method with a corresponding adjustment
to the Corporation's goodwill in FoxMeyer. As a result of these transactions,
the Corporation's ownership in FoxMeyer increased to 80.5%. The increase in
ownership to over 80% has allowed the Corporation and FoxMeyer to file
consolidated federal income tax returns.
On March 1, 1994, the Corporation proposed to FoxMeyer's board of directors
a business combination in which a newly created subsidiary of the Corporation
would be merged with FoxMeyer, making FoxMeyer a wholly-owned subsidiary of the
Corporation. A special committee of FoxMeyer's board of directors not affiliated
with the Corporation was formed to evaluate the proposal and has retained Smith
Barney Shearson, Inc. to advise it on the proposal. Discussions among the
FoxMeyer special committee, its advisors and the Corporation are in progress.
Ben Franklin Retail Stores, Inc.
On May 5, 1992, Ben Franklin completed the sale to the public of 1,800,000
shares of its common stock which were owned by the Corporation. The Corporation
received net proceeds of $7.9 million. Under the terms of the underwriting
agreement, the underwriter received warrants to acquire an additional 180,000
shares of common stock of Ben Franklin at $6.50 per share. Approximately 450,000
options were granted to Ben Franklin employees at the public offering price of
$5.00. As a result of the offering and the subsequent exercise of stock options,
the Corporation's ownership percentage in Ben Franklin has been reduced to
67.2%.
The Corporation recorded an estimated $11.5 million loss on the anticipated
sale to the public of a portion of its interest in Ben Franklin in 1992. The
loss was attributable to the difference between the anticipated net proceeds
from the offering and the Corporation's basis in the Ben Franklin stock being
sold.
A decision to discontinue the Ben Franklin operations occurred in June
1990, at which time a provision of $56.6 million was recorded to reflect losses
associated with the potential sale of Ben Franklin and the results of operations
through the projected disposition date. In the fourth quarter of 1991, this
amount was adjusted to $46.1 million in recognition of the Board of Directors
decision to explore opportunities other than a sale of Ben
41
<PAGE> 43
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Franklin. After the decision was made by the Board of Directors to proceed with
a public offering of Ben Franklin common stock, reserves of $8.8 million which
were previously recorded as a loss on disposal of discontinued operations and
remained at September 30, 1991, were reversed.
NOTE C -- ACQUISITIONS AND DISPOSITIONS
Harris Wholesale Company
On May 7, 1992, the Corporation, through a wholly-owned subsidiary of
FoxMeyer, acquired all the issued and outstanding shares of capital stock of
Harris Wholesale Company ("Harris") for $119.9 million in cash including
repayment of Harris' bank indebtedness. FoxMeyer borrowed $130.0 million under a
term loan to finance the purchase of Harris. The $10.1 million excess borrowings
over the purchase price were used to pay for integration and transaction costs
incurred in connection with the acquisition. The transaction was accounted for
by the purchase accounting method. The purchase price has been allocated to the
assets and liabilities of Harris in amounts equal to their respective fair
values. The excess of the purchase price over the sum of the amounts assigned to
identifiable assets acquired less liabilities assumed, which was approximately
$90.2 million, was recorded as goodwill. The goodwill is being amortized over 40
years. The results of operations of Harris have been included in the
consolidated financial statements of the Corporation since May 8, 1992.
As the acquisition was near the beginning of fiscal 1993, unaudited pro
forma combined results of operations of the Corporation and of Harris for the
year ended March 31, 1993 are not presented. The unaudited pro forma combined
results of operations of the Corporation and Harris for the year ended March 31,
1992, after giving effect to certain pro forma adjustments, were as follows (in
thousands, except per share amounts):
<TABLE>
<S> <C>
Net sales........................................................ $4,153,104
Income from continuing operations before extraordinary item...... $ 6,660
Per common share:
Income from continuing operations before extraordinary item.... $ .05
</TABLE>
The foregoing unaudited pro forma combined results of operations reflect
the amortization of goodwill resulting from the acquisition and the additional
interest expense resulting from the incremental borrowings related to the
purchase of Harris. These results of operations are not necessarily indicative
of either the results of operations that would have occurred had the Corporation
and Harris actually been combined during the period presented or of future
results of operations of the combined companies.
The Permian Corporation
In the first quarter of 1991, the Corporation recognized an estimated loss
of $182.9 million in connection with the sale of The Permian Corporation ("TPC")
and the results of operations through the projected disposition date. With the
signing of a definitive sales agreement on April 29, 1991, the loss for 1991 was
adjusted to $174.1 million.
In July 1991, the Corporation completed the sale of TPC to Ashland Oil,
Inc. ("Ashland") and, upon the conclusion of an audit of the balance sheet,
ultimately received $69.7 million in cash and 2.2 million shares of Ashland
common stock. As part of the agreement, Ashland assumed approximately $79.0
million in debt. In connection with the final settlement, a $16.8 million gain
was recognized as previously recorded reserves were adjusted. Subsequently, all
shares of Ashland common stock were sold in the open market resulting in a gain
of $3.3 million in 1992.
42
<PAGE> 44
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Development
Development acts as a 50% general partner in several limited partnerships
engaged in the buying, holding, operating and disposing of real estate and real
estate loans available through the Resolution Trust Corporation and other
financial institutions. Development's partnerships are generally obligated to
return Development's initial investment together with a preferred rate of return
on the undistributed investment before other partners may receive distributions.
Such preferred returns are accounted for as liquidating dividends. Development
had invested through March 31, 1994, approximately $8.6 million in various real
estate partnerships.
Other
On September 15, 1992, FoxMeyer acquired the warehouse, distribution
systems and related working capital of Snyder's Drug Stores, Inc. for
approximately $18.7 million.
NOTE D -- ACCOUNTS RECEIVABLE FINANCING
On October 29, 1993, FoxMeyer entered into a one year agreement to sell a
percentage ownership interest in a defined pool of FoxMeyer's trade accounts
receivable with limited recourse. Proceeds of $125.0 million from the sale were
used to reduce amounts outstanding under FoxMeyer's revolving credit facilities.
Generally, an undivided interest in new accounts receivable will be sold daily
as existing accounts receivable are collected to maintain the participation
interest at $125.0 million. Such accounts receivable sold are not included in
the accompanying consolidated balance sheet at March 31, 1994. An allowance for
doubtful accounts has been retained on the participation interest sold based on
estimates of the Corporation's risk of credit loss from its obligation under the
recourse provisions. The cost of the accounts receivable financing program is
based on a 30-day commercial paper rate plus certain fees. The total cost of the
program in 1994 was $2.2 million and was charged against "Other income" in the
accompanying consolidated statements of operations. Under the agreement,
FoxMeyer also acts as agent for the purchaser by performing recordkeeping and
collection functions on the participation interest sold. The agreement contains
certain covenants regarding the quality of the accounts receivable portfolio, as
well as other covenants which are substantially identical to those contained in
FoxMeyer's credit facilities (see Note I).
NOTE E -- PHAR-MOR, INC. RECEIVABLE
On August 17, 1992, Phar-Mor, Inc., a large deep-discount drug store chain
("Phar-Mor") filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
FoxMeyer's records reflect that on the filing date it had receivables due from
Phar-Mor of approximately $68.8 million, including $18.7 million for which
FoxMeyer has filed a reclamation claim in Phar-Mor's bankruptcy proceedings. In
the accompanying consolidated balance sheets, all amounts due from Phar-Mor for
goods sold prior to August 17, 1992, were classified as long-term assets, net of
allowances.
Subsequent to the filing, the Corporation has monitored the situation
closely and worked with Phar-Mor through the Unsecured Creditors' Committee as
Phar-Mor attempts to reorganize and emerge from bankruptcy. As part of its
restructuring, Phar-Mor has closed over 140 stores since its bankruptcy filing.
The effect of these store closures was to reduce the Corporation's net sales to
Phar-Mor by $183.8 million as compared to 1993.
During 1993, the Corporation recorded a pre-tax charge to earnings of $41.0
million ($20.5 million after taxes and minority interest or $1.02 per common
share) representing a $40.0 million provision for possible loss on amounts due
from Phar-Mor and a $1.0 million provision for legal and other costs related to
the bankruptcy. The Corporation has analyzed the available information
concerning Phar-Mor that has been
43
<PAGE> 45
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
provided to the Unsecured Creditors' Committee and continues to believe that the
$40.0 million allowance reflects a reasonable estimate of its probable loss
based on such information. While the Corporation believes that the $40.0 million
allowance is sufficient to cover its estimated loss, there could be future
developments and additional information could become available that may indicate
that the estimated loss should be adjusted. The Corporation believes that future
adjustments to the allowance recorded to date, if any, would not have a material
adverse effect on the Corporation's financial condition. However, should such
adjustments be necessary, the amounts could be material to the results of
operations for the period or periods in which they are reported.
NOTE F -- OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Trade receivables subject the Corporation to a concentration of credit risk
with customers in the retail and in the hospital and alternate care facility
sectors. This risk is limited due to the large number of customers comprising
the Corporation's customer base and their geographic dispersion. No one customer
accounted for more than 10% of net sales in 1994. The Corporation performs
ongoing credit evaluations of its customers' financial condition and maintains
reserves for potential credit losses. Generally, the Corporation requires no
collateral from its customers. In addition, temporary cash investments may also
subject the Corporation to a concentration of credit risk. The Corporation
places its temporary cash investments primarily with major financial
institutions and diversified money market mutual funds.
NOTE G -- INVENTORIES
Inventories valued by the LIFO cost method totalled $495.7 million and
$452.9 million at March 31, 1994 and 1993, respectively. If the FIFO cost method
had been used, inventories would have been $65.7 million and $62.8 million
higher than the amounts reported in the accompanying consolidated balance sheets
at March 31, 1994 and 1993, respectively. In addition, liquidation of LIFO
inventories carried at lower costs prevailing in prior years, as compared with
the current cost of purchases, had the effect of increasing net income in 1994
by $0.3 million or $0.02 per share.
NOTE H -- INVESTMENT IN NATIONAL STEEL CORPORATION
In January 1984, the Corporation, through its then wholly-owned subsidiary
National Steel Corporation ("NSC"), sold substantially all of the assets of the
Weirton Steel Division ("Weirton") to Weirton Steel Corporation. In connection
with the sale, NSC retained certain liabilities arising out of the operation of
Weirton prior to May 1, 1983, including certain environmental liabilities, a
note payable to the NSC pension trust (the "NSC Note") and employee benefits for
Weirton employees, which consisted principally of pension benefits for active
employees based on service prior to May 1, 1983, and pension, life and health
insurance benefits for retired employees (the "Weirton Liabilities"). In August
1984, the Corporation sold a 50% common stock interest in NSC to NKK Corporation
("NKK") and agreed to provide NSC with sufficient funds for payment of and to
indemnify NSC against all Weirton Liabilities. The Corporation also agreed to
indemnify NSC against certain environmental liabilities related to the former
operations of NSC.
On June 26, 1990, the Corporation sold 20,000 shares of its remaining
50,000 share common stock interest in NSC to NKK for $146.6 million in cash,
which represented the book value of the shares sold. The Corporation then
transferred the $146.6 million to NSC in exchange for NSC releasing the
Corporation from an equivalent amount of its indemnification liability with
respect to the Weirton Liabilities (the "Released Liabilities"). Simultaneously,
the Corporation exchanged a further 20,000 shares of its NSC common stock
interest for an equivalent number of shares of newly issued NSC redeemable
Series B preferred stock (the "NSC Preferred Stock"). The NSC Preferred Stock
had voting rights equivalent to the common stock, an 11% cumulative annual
dividend, a minimum redemption value of $121.6 million and a mandatory
redemption
44
<PAGE> 46
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
of one half of the shares by the fifth anniversary of their issuance and of the
remainder by the tenth anniversary. The fair market value of the NSC Preferred
Stock, as determined by independent investment bankers, was $135.7 million on
the date of the exchange. The fair market value premium in excess of the minimum
redemption value of the NSC Preferred Stock is being amortized against
operations on an effective yield basis over the life of the NSC Preferred Stock.
The dividends and redemption payments on the NSC Preferred Stock are subject to
a put agreement whereby the Corporation has the right to cause NKK to purchase
the Corporation's right to such dividends and redemption payments if NSC does
not fulfill these obligations when due.
Under the terms of the Stock Purchase and Recapitalization Agreement (the
"Agreement") between the Corporation, NKK and NSC related to the above described
transactions, the Corporation has committed all NSC Preferred Stock dividends
and redemption amounts to be used to satisfy the Weirton Liabilities, excluding
the Released Liabilities (the "Remaining Liabilities"), before any funds are
available to the Corporation for general corporate purposes. The Agreement
further provides for an independent actuarial valuation of the Weirton
Liabilities that relate to employee benefits. If prior to or coincident with a
full redemption of the NSC Preferred Stock, the pension-related Weirton
Liabilities are determined to be fully funded, the amount of any adjustment to
the Weirton Liabilities, as determined by the independent actuary, will increase
or decrease the proceeds available to the Corporation from the redemption of the
NSC Preferred Stock.
The Remaining Liabilities have been presented in the Corporation's
consolidated balance sheets as a reduction in the carrying value of the NSC
Preferred Stock due to the requirement that the dividend and redemption payments
thereon first be used to offset these obligations. At March 31, 1994, there were
$39.4 million of Remaining Liabilities, including a $17.7 million net pension
liability, the NSC Note of $20.5 million and $1.2 million for other benefit
obligations offset against the carrying value of the NSC Preferred Stock. At
March 31, 1993, there were $83.0 million of Remaining Liabilities, offset
against the carrying value of the NSC Preferred Stock.
Additionally, the Corporation has reflected its dividend income on the NSC
Preferred Stock, interest accretion and pension charges on the Remaining
Liabilities and premium amortization on the NSC Preferred Stock as a single net
amount on its consolidated statements of operations due to the requirement that
dividends and redemption payments on the NSC Preferred Stock be used first to
fund the Remaining Liabilities.
In March 1993, NSC completed a public offering of 10.9 million shares of
Class B common stock at $14 per share. In anticipation of the public offering,
in February 1993, NSC, NKK and the Corporation entered in a definitive agreement
(the "New Agreement") which amended certain terms and conditions of the
Agreement. Among other things, the New Agreement provided for the (i)
redesignation of the existing NSC common stock as Class A common stock and that
such class of stock have two votes per share, (ii) declaration of a dividend on
the Class A common stock of 339 shares of Class A common stock for each share
outstanding, resulting in an increase in the Corporation's holding to 3.4
million shares of Class A common stock, (iii) creation of a new Class B common
stock, in all respects pari passu with the Class A common stock except that such
shares carry only one vote per share, (iv) convertibility of the Class A common
stock into Class B common stock, and (v) elimination of the voting rights of the
NSC Preferred Stock. Generally, in the New Agreement, the Corporation has agreed
to pay to NSC, from a portion of the proceeds of any sale of Class B common
stock, resulting from the conversion of shares of Class A common stock it holds,
up to $10.0 million as a prepayment for potential environmental liabilities for
which the Corporation had previously agreed to indemnify NSC. The New Agreement
provides that if NSC does not expend $10.0 million by certain dates (up to 20
years after the payment date) to pay environmental liabilities indemnified by
the Corporation, the difference between the amount spent by NSC and $10.0
million will be paid by NSC to the
45
<PAGE> 47
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Corporation. Under the New Agreement, the Corporation would continue to be
obligated to indemnify NSC for all other liabilities for which the Corporation
has previously agreed to indemnify NSC, including any environmental liabilities
exceeding the $10.0 million payment.
On May 4, 1993, NSC redeemed 10,000 shares of the NSC Preferred Stock owned
by the Corporation as provided for in the New Agreement. As required by the
Agreement, the $67.8 million of proceeds received on the redemption was
immediately deposited in the Weirton Pension Trust to satisfy the Remaining
Liabilities. A net gain of $2.4 million was realized on the redemption. The New
Agreement also provides that, without the Corporation's consent, NSC will not,
prior to 1998, exercise its option to redeem early the Corporation's remaining
10,000 shares of NSC Preferred Stock that are subject to mandatory redemption in
August 2000. The minimum redemption value at maturity of the remaining NSC
Preferred Stock is $58.3 million.
It had been the Corporation's intention to sell its NSC common stock
investment after converting its Class A common stock into Class B common stock.
Therefore, the Corporation included its investment in NSC common stock on the
March 31, 1993, consolidated balance sheet under "Other current assets" and
reduced the carrying value of the NSC common stock to its then current market
value less a selling allowance. The resulting loss of $22.4 million was included
in the 1993 consolidated statement of operations. In January 1994, the
Corporation sold substantially all of its 3.4 million shares of NSC Class B
common stock at an additional loss of $2.4 million. As a result of the sale, the
Corporation transferred $10.0 million to NSC as required under the New Agreement
to prepay potential environmental liabilities.
As described above, the Corporation has agreed to provide NSC with
sufficient funds for the payment and discharge of Weirton pension benefits for
active and retired employees based on service with Weirton prior to May 1, 1983.
These employee benefits are provided pursuant to the Weirton Retirement Program
sponsored by NSC. The obligation of the Corporation relating to the Weirton
Retirement Program is a contractual obligation of the Corporation, and the
Corporation does not sponsor, maintain or administer the Weirton Retirement
Program or the Weirton Pension Trust.
Pension costs for the Corporation's obligation relating to the Weirton
Retirement Program for the three years ended March 31, 1994, determined by
assuming an expected long-term rate of return on plan assets of 9.5%, 10.5% and
12% in 1994, 1993 and 1992, respectively, were as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net periodic pension costs for the Weirton
Retirement Program:
Service cost -- benefits earned for the year...... $ 159 $ 201 $ 225
Interest cost on projected benefit obligation..... 42,169 44,582 47,181
Return on plan assets............................. (34,659) (65,966) (54,274)
Net amortization and deferral..................... (10,104) 25,741 11,301
-------- -------- --------
Net periodic pension costs (income)............... $ (2,435) $ 4,558 $ 4,433
======== ======== ========
</TABLE>
46
<PAGE> 48
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
The funded status of the Weirton Retirement Program and amounts recognized
in the Corporation's consolidated balance sheets at March 31, 1994 and 1993,
utilizing a discount rate of 7.9% in 1994 and 9.5% in 1993 are set forth in the
table below (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Accumulated benefit obligation including vested benefits of
$491,534 and $467,395 in 1994 and 1993, respectively......... $512,667 $474,745
Projected benefit obligation................................... 512,667 474,745
Plan assets at fair market value............................... 495,001 420,929
-------- --------
Projected benefit obligation in excess of plan assets.......... 17,666 53,816
Unrecognized transition asset.................................. 8,308 9,210
Unrecognized net loss.......................................... (82,105) (43,101)
Adjustment required to recognize minimum liability............. 73,797 33,891
-------- --------
Accrued pension cost........................................... $ 17,666 $ 53,816
======== ========
</TABLE>
At March 31, 1994, the assets of the Weirton Pension Trust available to
service these obligations were comprised of approximately 68.4% bonds, 18.4%
stocks and 13.2% other.
NOTE I -- LONG-TERM DEBT
Long-term debt was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
FoxMeyer senior notes........................................... $198,000 $ --
FoxMeyer revolving credit facilities............................ 54,700 134,000
FoxMeyer term loan.............................................. -- 125,000
Ben Franklin convertible subordinated notes..................... 28,750 --
Ben Franklin revolving credit agreement......................... -- 4,500
Development notes with interest rates ranging from 6.5% to
8.56%......................................................... 17,668 --
Industrial development revenue bonds with interest rates ranging
from 3.75% to 9.0% per annum with various maturities.......... 2,031 2,284
Notes and mortgages with interest rates ranging from 6.25% to
12.0% per annum with various maturities....................... 11,683 3,784
Capital lease obligations with interest rates ranging from 9.3%
to 14.0% per annum with various maturities.................... 246 552
-------- --------
313,078 270,120
Long-term debt due within one year.............................. 2,158 13,476
-------- --------
Total........................................................... $310,920 $256,644
======== ========
</TABLE>
On January 13, 1994, the Corporation entered into a $15.0 million revolving
credit facility (the "Credit Facility") to be used by it for working capital and
general corporate purposes. The Credit Facility, which is secured by 3,725,000
shares of common stock of FoxMeyer, restricts the payment of cash dividends on
the Corporation's common stock and its Series A Preferred Stock (see Note J) and
imposes limits on the repurchase of shares of its common stock. In addition,
certain other limitations have been placed on the Corporation by the Credit
Facility that, among other things, require the Corporation to maintain a minimum
net worth and place certain restrictions on investments, additional indebtedness
and acquisitions. The Credit
47
<PAGE> 49
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Facility expires on April 1, 1996. The interest rate is a Euro-dollar rate (as
defined) plus 1.875% or the prime rate plus .25%. The Credit Facility replaced a
$10.0 million credit facility that was obtained in July 1993. The average and
maximum amounts outstanding under these credit facilities were $2.9 million and
$12.6 million, respectively. At March 31, 1994, there were no balances
outstanding under the Credit Facility.
On April 29, 1993, FoxMeyer issued $198.0 million of 7.09% senior notes due
April 15, 2005 (the "FoxMeyer Senior Notes"). The FoxMeyer Senior Notes are
payable in eight equal annual installments commencing on April 15, 1998. The
FoxMeyer Senior Notes contain certain restrictions and covenants which, among
other things, place limitations on debt, liens, investments, payment of
dividends, repurchases by FoxMeyer of its common stock and transactions by
FoxMeyer with related parties. In addition, the FoxMeyer Senior Notes are
subject to a potential prepayment penalty based on interest rates at the time of
prepayment. Proceeds from the FoxMeyer Senior Notes were used to pay down
balances then outstanding under FoxMeyer's credit facility (the "FoxMeyer Credit
Facility") including the retirement of the $125.0 million outstanding under the
term loan facility (the "FoxMeyer Term Loan").
The FoxMeyer Credit Facility, which provided FoxMeyer with the FoxMeyer
Term Loan and a revolving credit facility (the "FoxMeyer Revolving Credit
Facility"), was amended and restated on April 29, 1993, simultaneously with the
issuance of the FoxMeyer Senior Notes. The amended FoxMeyer Credit Facility
increased the amount available on the FoxMeyer Revolving Credit Facility from
$200.0 million to $210.0 million, extended the maturity date to March 31, 1996
and released the collateral. The FoxMeyer Credit Facility contained certain
affirmative and negative covenants including: (i) restrictions on acquisitions,
mergers, consolidations and sales of certain assets by FoxMeyer; (ii)
restrictions on FoxMeyer's ability to enter into transactions with affiliates;
(iii) restrictions on FoxMeyer's ability to incur additional indebtedness, to
make capital expenditures, and to make certain loans, advances and investments;
and (iv) requirements that FoxMeyer maintain certain levels of net worth,
interest coverage, debt service coverage, debt to total capitalization and
current ratios. These covenant requirements limit FoxMeyer's ability to pay
dividends. FoxMeyer may select an interest rate on the FoxMeyer Revolving Credit
Facility based on a Euro-dollar rate (as defined) plus 1.25%, the prime rate or
rates offered by banks that are parties to the FoxMeyer Credit Facility.
On August 30, 1993, FoxMeyer entered into a separate one-year $40.0 million
revolving credit facility that provides for an interest rate based on a
Euro-dollar rate (as defined) plus 1.125% or the prime rate. The covenants under
this facility are substantially identical to those in the FoxMeyer Credit
Facility.
At March 31, 1994, $54.7 million was outstanding under FoxMeyer's revolving
credit facilities at an average interest rate of 4.6%. The average and maximum
amounts borrowed under FoxMeyer's revolving credit facilities during 1994 were
$97.3 million and $215.5 million, respectively.
At March 31, 1994, $28.3 million was outstanding under an intercompany loan
(the "NII Loan") from FoxMeyer to National Intergroup, Inc. (the "Parent
Company") which matures December 15, 1996. The NII Loan contains certain
restrictions and covenants, one of which restricts the payment of cash dividends
on the common stock and Series A Preferred Stock of the Corporation while the
loan is outstanding (see Note J). In addition, the Parent Company may not incur
any additional indebtedness which is senior to the NII Loan. The Parent Company
may incur up to $25.0 million in additional indebtedness that ranks pari passu
with the NII Loan. The NII Loan does not limit the amount of non-recourse or
subordinated debt that the Parent Company may incur, and it allows for debt
arising from an exchange for the Series A Preferred Stock as discussed in Note
J. The Parent Company pledged 4,500,000 shares of FoxMeyer common stock as
collateral for the NII Loan.
In June 1993, Ben Franklin issued $28.8 million of 7.5% convertible
subordinated notes due June 1, 2003 (the "Ben Franklin Notes"). The Ben Franklin
Notes are unsecured general obligations of Ben Franklin
48
<PAGE> 50
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
subordinated to all existing and future senior debt and are convertible into the
common stock of Ben Franklin at $7.75 per share. The Ben Franklin Notes are
redeemable, at the option of Ben Franklin, in whole or in part, on or after June
1, 1996, at redemption prices ranging from 105% of the principal amount thereof
in 1996 to 100% in 2002.
Ben Franklin maintains a revolving credit agreement for its working capital
requirements with a maximum borrowing capacity of $15.0 million (the "Ben
Franklin Revolving Credit Agreement") that terminates in August 1994. Borrowings
under the Ben Franklin Revolving Credit Agreement bear interest at the prime
rate and are secured by Ben Franklin's accounts receivable, inventories, and one
of its distribution centers. Borrowings must be reduced for at least fifteen
consecutive days each year to $5.0 million. The Ben Franklin Revolving Credit
Agreement contains a number of restrictive covenants and conditions regarding,
among other things, the payment of dividends and the maintenance of a minimum
tangible net worth. These limitations prevent the payment of dividends by Ben
Franklin on its common stock. At March 31, 1994, no amounts were outstanding
under the Ben Franklin Revolving Credit Agreement. The average and maximum
amounts borrowed during 1994 were $2.3 million and $9.4 million, respectively.
The limited partnerships controlled by Development and consolidated herein
have incurred certain indebtedness in connection with the acquisition of real
estate and other assets from the Resolution Trust Corporation and other
financial institutions (the "Development Notes"). Such indebtedness is typically
non-recourse and secured solely by the underlying assets. The Development Notes
bear interest at fixed rates and, generally, have balloon payments at the end of
their term.
The industrial development revenue bonds, notes and mortgages represent
different issues with varying principal payments. Some of these issues bear
interest at fixed rates and others bear interest at floating rates. These
obligations are generally secured by the underlying real estate. The largest of
these mortgages is an $8.1 million obligation of Ben Franklin which bears
interest at the prime rate and matures in December 2000.
The Corporation has letters of credit outstanding in connection with its
insurance liabilities, product purchases and leases of $14.7 million at March
31, 1994.
Maturity and sinking fund requirements on all long-term debt of the
Corporation by fiscal year are as follows: $2.2 million in 1995; $56.6 million
in 1996; $2.6 million in 1997; $5.1 million in 1998; $35.3 million in 1999; and
$211.3 million thereafter.
At March 31, 1994, the aggregate cost of properties under capital lease
obligations amounted to $1.4 million with accumulated amortization of $1.2
million. The Corporation had subleases on these properties which result in lease
revenues exceeding lease payments. Total remaining lease payments and sublease
income under these obligations is $.2 million and $.4 million, respectively.
NOTE J -- CAPITAL STOCK
Share Repurchase: On November 5, 1991, the Corporation's Board of Directors
authorized the repurchase of up to 2,000,000 shares of the Corporation's common
stock. By August 1992, the Corporation had purchased the 2,000,000 shares at a
cost of $28.7 million.
On July 28, 1992, the Board of Directors authorized a second common stock
repurchase program to allow the Corporation to repurchase up to an additional
1,000,000 shares of the Corporation's common stock. During 1993 the Corporation
repurchased 174,500 shares under this second repurchase program at a cost of
$2.1 million.
In December 1993, the Corporation announced that it may purchase up to
1,300,000 shares of its common stock. No shares had been repurchased under this
program at March 31, 1994.
49
<PAGE> 51
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
Preferred Share Purchase Rights: By action of the Board of Directors, on
June 1, 1992, all the outstanding rights issued in connection with the
Corporation's Preferred Share Purchase Rights Plan were redeemed. Holders of the
rights received $.05 for each right outstanding on that date or a total of
approximately $1.0 million.
Redeemable Preferred Stock: The Corporation is authorized to issue
10,000,000 shares of preferred stock. At March 31, 1994, there were two series
of redeemable preferred stock outstanding.
At March 31, 1994 and 1993, the Corporation had 924,000 and 1,012,000
shares of cumulative convertible preferred stock outstanding, respectively, at a
stated price of $50.00 per share. Each share of this preferred stock is entitled
to a cumulative annual dividend of $5.00 and is convertible into common stock of
the Corporation at a conversion price of $26.75 per share. The Corporation has
reserved 1,727,103 shares of its common stock for issuance upon the conversion
of this preferred stock. The shares are redeemable at a price of $50.00 per
share. The Corporation is required to make sinking fund payments in each of the
years from 1995 to 2002 in an amount sufficient to redeem 88,000 shares annually
and 220,000 shares in 2003.
In connection with an exchange offer, on November 4, 1993, the Corporation
reacquired 6,833,505 shares of its common stock in exchange for 3,416,753 shares
of newly issued $4.20 Cumulative Exchangeable Series A Preferred Stock, par
value $5 per share, with a liquidation preference of $40 (the "Series A
Preferred Stock"). Dividends on the Series A Preferred Stock are payable
quarterly. On and prior to October 15, 1996, the Corporation, at its option, may
pay dividends on the Series A Preferred Stock in cash or by means of the
issuance of such number of additional shares of Series A Preferred Stock that
have an aggregate liquidation preference equal to the amount of the dividend.
Thereafter, dividends must be paid in cash. The Credit Facility and the NII Loan
both contain covenants which prevent the Corporation from paying dividends on
the Series A Preferred Stock in cash while either the Credit Facility or the NII
Loan is outstanding.
The Corporation is required to redeem the Series A Preferred Stock on
November 30, 2003. The Series A Preferred Stock may be redeemed at the option of
the Corporation, in whole or in part, at any time on or after October 15, 1998
at its liquidation preference plus unpaid dividends thereon. The common stock
accepted by the Corporation in connection with the exchange offer is being held
as treasury stock. The cost of the treasury stock was equal to the sum of the
direct expenses related to the exchange offer plus the fair market value of the
Series A Preferred Stock on the exchange date. The difference in the Series A
Preferred Stock's liquidation preference and its market value on the exchange
date is being amortized on an effective yield basis as additional preferred
stock dividends and charged to retained earnings over the life of the Series A
Preferred Stock.
The Corporation issued 70,761 additional shares of Series A Preferred Stock
in lieu of cash dividends on the Series A Preferred Stock in 1994. In addition,
91,547 additional shares of Series A Preferred Stock were issued on April 15,
1994 in lieu of cash dividends. This dividend was declared and charged to
retained earnings in March 1994. The charge to retained earnings for these
dividends was based on the ending market value of the Series A Preferred Stock
on the ex-dividend date. The difference in the Series A Preferred Stock's
liquidation preference and its market value on the ex-dividend date is being
amortized on an effective yield basis as additional preferred stock dividends
and charged to retained earnings over the remaining life of the Series A
Preferred Stock.
In addition, the Series A Preferred Stock will be exchangeable, at the
option of the Corporation, in whole but not in part, commencing on October 15,
1996, and on any dividend payment date thereafter, for the Corporation's 10.5%
subordinated notes due 2003 (the "Exchange Notes") with a principal amount equal
to the aggregate liquidation value of the outstanding Series A Preferred Stock.
The Exchange Notes will mature on November 30, 2003. The Exchange Notes may be
redeemed, at the option of the Corporation, in whole or in part, at any time on
and after October 15, 1998, at a redemption price equal to the principal amount
thereof.
50
<PAGE> 52
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
The payments of principal and interest on the Exchange Notes will be
subordinated to all senior indebtedness of the Corporation.
Common Stock: The Corporation has reserved 38,925 shares of its common stock for
issuance in the event of conversion of the 4.625% convertible subordinated
debentures of NSC. At March 31, 1994, those debentures were convertible into the
common stock of the Corporation at $59.37 per share.
The Corporation has also reserved 3,739,100 shares of its common stock for
issuance under its stock option and performance award plans (see Note K).
Certain limitations on the payment of dividends have been placed on the
Corporation through covenants under the Credit Facility and the NII Loan (see
Note I). Under these restrictions, no dividends may be paid on the common stock
of the Corporation.
NOTE K -- EMPLOYEE COMPENSATION PLANS
The Corporation maintains a 1993 Restated Stock Option and Performance
Award Plan (the "Plan"). The Plan provides for the granting of incentive options
and non-qualified options to purchase shares of the Corporation's common stock
to certain officers and key employees of the Corporation and its subsidiaries
and for the granting of non-qualified stock options to the outside directors on
an automatic basis. The Plan also permits the granting of performance shares,
restricted shares and performance units to participants (other than outside
directors). Under the Plan, the Personnel and Compensation Committee of the
Board of Directors of the Corporation determines the price at which options are
to be granted, the period over which options are exercisable, the duration of
performance or restriction periods and performance targets over which
performance shares shall be earned. Options for an aggregate of 2,000,000 shares
of the Corporation's common stock may be granted under the Plan.
Options to purchase 440,000 shares of common stock at $15.00 per share were
granted in October 1991 to each of the Co-Chief Executive Officers of the
Corporation pursuant to their employment agreements. These options expire in
October 1994.
The following table summarizes the information with respect to stock
options for the two years ended March 31, 1994. The table includes stock options
granted under the plans discussed above and under the Company's 1987 Restated
Stock Option and Performance Award Plan, which stock options are still
exercisable. All options granted in 1994 and 1993 were at the published market
price of the Corporation's common stock on the date of grant.
<TABLE>
<CAPTION>
1994 1993
------------------------------ ------------------------------
NUMBER OF OPTION PRICE NUMBER OF OPTION PRICE
SHARES RANGE PER SHARE SHARES RANGE PER SHARE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 2,041,740 $14.00 - $34.44 2,675,915 $14.06 - $34.44
Granted.............................. 5,000 12.81 38,000 14.00 - 14.06
Exercised............................ 7,533 14.06 - 14.88 -- --
Canceled............................. 300,107 12.81 - 34.44 672,175 14.06 - 34.44
--------- ---------------- --------- ----------------
Outstanding at end of year........... 1,739,100 12.81 - 27.50 2,041,740 14.00 - 34.44
--------- ---------------- --------- ----------------
Exercisable at end of year........... 1,733,100 14.00 - 27.50 1,617,658 14.06 - 34.44
Reserved for future grants........... 2,000,000 1,206,845
</TABLE>
FoxMeyer has adopted a Stock Option and Performance Award Plan (the
"FoxMeyer Plan") which authorizes the Option Committee of FoxMeyer's Board of
Directors to grant to certain officers and key employees of FoxMeyer and the
Corporation incentive or non-qualified stock options, stock appreciation
51
<PAGE> 53
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
rights, performance shares, restricted shares and performance units. The
FoxMeyer Plan also provides for the grant of non-qualified stock options to
outside directors on an automatic basis. Options to purchase 1,800,000 shares of
FoxMeyer common stock may be granted under the FoxMeyer Plan. At the time each
grant is made to participants other than outside directors, the FoxMeyer Option
Committee determines the prices and terms at which options are to be granted. At
March 31, 1994, there were 1,419,000 FoxMeyer options outstanding, at prices
ranging from $9.81 to $14.75 per share, of which 946,000 options were then
exercisable.
Ben Franklin has adopted a Stock Option and Performance Award Plan (the
"Ben Franklin Plan") which authorizes the Option, Personnel and Compensation
Committee of the Ben Franklin Board of Directors to grant to key employees and
directors of Ben Franklin and the Corporation incentive and non-qualified stock
options, stock appreciation rights, performance shares, restricted shares or
performance units. Options to purchase up to 530,000 shares of Ben Franklin
common stock may be granted under the Ben Franklin Plan. Determination of price,
terms and other features of the grant are similar to the FoxMeyer Plan. At March
31, 1994, there were 490,000 Ben Franklin options outstanding, at prices ranging
from $4.50 to $7.38 per share, of which 113,000 were then exercisable.
NOTE L -- RETIREMENT PLANS
The Corporation and its subsidiaries have a number of retirement plans
covering substantially all employees, consisting of both defined benefit and
defined contribution plans. Pension benefits under the defined benefit plans are
generally based upon years of service or a combination of remuneration and years
of service. No current active employees of the Corporation are covered under the
defined benefit plans. The Corporation's funding policy for defined benefit
plans is to make payments to the pension trust in accordance with the funding
requirements of federal laws and regulations.
The defined contribution plans maintained by the Corporation and its
subsidiaries provide for employee contributions and matching employer
contributions as defined in the individual plans and prescribed by applicable
law.
Pension costs for the Corporation's retirement plans for the three years
ended March 31, 1994, are presented in the table below (in thousands of
dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net periodic pension costs for defined benefit plans:
Service cost -- benefits earned for the year........ $ 20 $ 29 $ 27
Interest cost on projected benefit obligation....... 4,728 4,756 4,921
Return on plan assets............................... (4,378) (9,115) (6,277)
Net amortization and deferral....................... (1,463) 3,750 893
------- ------- -------
Net periodic pension costs.......................... (1,093) (580) (436)
Pension costs for defined contribution plans.......... 2,026 1,645 1,577
------- ------- -------
Total pension costs................................... $ 933 $ 1,065 $ 1,141
======= ======= =======
</TABLE>
The net periodic pension costs for defined benefit plans were determined
assuming an expected long-term rate of return on plan assets of 10% for the
three years ended March 31, 1994.
52
<PAGE> 54
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
The following table sets forth the funded status of the Corporation's
defined benefit pension plans and amounts recognized in the Corporation's
consolidated balance sheets at March 31, 1994 and 1993, utilizing a weighted
average discount rate of 7.9% in 1994 and 8.9% in 1993 (in thousands of
dollars):
<TABLE>
<CAPTION>
MARCH 31, 1994 MARCH 31, 1993
--------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDING BENEFITS EXCEEDING BENEFITS
ACCUMULATED EXCEEDING ACCUMULATED EXCEEDING
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
including vested benefits of
$58,578 and $55,479 in 1994 and
1993, respectively................ $50,963 $ 7,615 $47,619 $ 7,860
Projected benefit obligation........ 50,963 7,615 47,619 7,860
Plan assets at fair market value.... 56,560 846 57,755 951
------- ------- ------- -------
Projected benefit obligation less
than (in excess of) plan assets... 5,597 (6,769) 10,136 (6,909)
Unrecognized transition asset....... (1,458) -- (1,642) --
Unrecognized net gain............... (326) (56) (5,734) (179)
------- ------- ------- -------
Prepaid (accrued) pension cost
included in the consolidated
balance sheet..................... $ 3,813 $(6,825) $ 2,760 $(7,088)
======= ======= ======= =======
</TABLE>
At March 31, 1994, the assets of the Corporation's pension plans were
comprised of approximately 80.5% bonds, 12.2% stocks and 7.3% other.
NOTE M -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation has several plans relating to retired employees which
provide for postretirement health care and life insurance benefits. Health
benefits include major medical insurance with deductible and coinsurance
provisions. Life insurance benefits are usually for a flat benefit that
decreases to age 65. Certain plans provide that retirees pay for a portion of
their coverage. The plans are not funded. The Corporation pays all benefits on a
current basis.
The net periodic postretirement benefit cost for the three years ended
March 31, 1994 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits earned during the year.............. $ -- $ -- $ --
Interest cost............................................. 2,523 3,333 3,336
Amortization of prior service cost........................ (573) (68) (11)
------ ------ ------
Total postretirement benefit cost......................... $1,950 $3,265 $3,325
====== ====== ======
</TABLE>
The following table sets forth the funded status of the Corporation's
postretirement health care and life insurance plans and amounts recognized in
the Corporation's consolidated balance sheets at March 31, 1994
53
<PAGE> 55
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
and 1993, utilizing a weighted average discount rate of 7.9% for 1994 and 8.8%
for 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation..................... $31,676 $33,857
Unrecognized prior service cost................................... 4,815 472
Unrecognized net gain............................................. 3,346 5,781
------- -------
Amount of postretirement benefit obligation included in
consolidated balance sheet...................................... $39,837 $40,110
======= =======
</TABLE>
Medical costs were assumed to increase at a rate of 12.0% during 1994. This
trend in the cost for health care was assumed to decline over a period of 30
years to a rate of 5.75%. An analysis of this trend rate scenario shows medical
costs, on a national basis, stabilizing at 20% of Gross National Product. In
order to demonstrate the volatility of the valuation results based on this
assumption, the impact of a 1% increase in the cost of health care would result
in a 12.4% increase in the postretirement benefit obligation and a 16.2%
increase in the postretirement benefit cost.
NOTE N -- INCOME TAXES
The provision (benefit) for income taxes consisted of the following for the
three years ended March 31, 1994 (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1993 1992
------- -------- ------
<S> <C> <C> <C>
Federal
Current.............................................. $ -- $ 3,355 $1,350
Deferred............................................. (3,025) (29,813) 6,000
State.................................................. 1,832 1,210 605
------- -------- ------
Total.................................................. $(1,193) $(25,248) $7,955
======= ======== ======
</TABLE>
The Corporation files a consolidated federal income tax return with
subsidiaries in which it has 80% or greater ownership. Accordingly, neither Ben
Franklin's operating results since its public offering in May 1992, nor
FoxMeyer's operating results for the period from its September 1991 initial
public offering through the completion of the joint tender offer for FoxMeyer's
common stock in November 1992 (the "Offer"), have been included in the
Corporation's consolidated federal income tax filing. Therefore, for these
periods, any net taxable income of these subsidiaries may not be offset by
losses of the remaining entities in the Corporation's consolidated federal
income tax group.
The Corporation recorded a federal income tax benefit of $3.0 million in
1994. The federal income tax benefit is attributable to Ben Franklin and is the
result of the recognition of benefits from net operating losses. A federal
income tax charge of $18.2 million attributable to FoxMeyer was entirely offset
by a federal income tax benefit attributable to the Corporation's current year
federal income tax net operating loss.
The Corporation recorded a federal income tax benefit of $26.4 million in
1993. The federal income tax benefit includes a federal income tax charge of
$3.6 million attributable to income generated by FoxMeyer between its initial
public offering and the Offer, a federal income tax benefit of $6.8 million
attributable to Ben Franklin, and a federal income tax benefit of $23.2 million
attributable to a reduction of the Corporation's valuation allowance on deferred
tax assets.
54
<PAGE> 56
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
FoxMeyer was included in the Corporation's federal consolidated income tax
return through the date of the FoxMeyer initial public offering in September
1991. The Corporation recorded a federal income tax charge of $7.4 million in
1992 primarily attributable to income of FoxMeyer after its initial public
offering. This tax provision also included the Corporation's alternative minimum
tax liability for 1992 allocated to FoxMeyer and Ben Franklin under their tax
sharing agreements in the amounts of $.8 million and $.1 million, respectively.
The reasons for the difference between the total tax provision (benefit)
and the amount computed by applying the statutory federal income tax rate to
income (loss) from continuing operations before income taxes, minority interest
and extraordinary item were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1993 1992
------- -------- -------
<S> <C> <C> <C>
Statutory rate applied to pre-tax income.............. $11,799 $ (6,621) $ 9,549
Change in deferred tax asset valuation allowance...... (6,472) (12,530) (5,184)
Corporate dividend-received deduction................. (2,457) (3,838) --
State income taxes (net of federal tax benefit)....... 1,191 798 399
Weirton interest expense.............................. (4,420) (12,664) --
Loss (gain) on disposition of investment in NSC....... (270) 7,611 --
Amortization of goodwill and other nondeductible
items............................................... 2,265 2,285 1,577
Tax attribute adjustment (Harris)..................... (2,768) -- --
Other items........................................... (61) (289) 1,614
------- -------- -------
Effective tax provision (benefit)..................... $(1,193) $(25,248) $ 7,955
======= ======== =======
</TABLE>
The Corporation's current and noncurrent deferred taxes, which net to a
$18.0 million asset as of March 31, 1994, and a $14.3 million net asset as of
March 31, 1993, consisted of the following temporary differences and net
operating losses, at the statutory rate, tax credits, and valuation allowance
(in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Inventory methods................................ $ -- $42,555 $ -- $36,778
Basis difference on acquired assets and
liabilities assumed (Harris)................... 3,683 -- 7,126 --
Phar-Mor receivable allowance.................... 11,972 -- 11,972 --
Allowance for possible losses on accounts
receivable..................................... 6,520 -- 5,202 --
Other reserves................................... 29,466 -- 41,128 --
Depreciation..................................... -- -- -- 3,639
Tax net operating losses......................... 84,721 -- 69,031 --
Tax credits...................................... 11,323 -- 9,177 --
All other........................................ 486 3,979 1,210 --
-------- ------- -------- -------
Total deferred assets and liabilities............ 148,171 46,534 144,846 40,417
Valuation allowance on deferred tax assets....... (83,655) -- (90,127) --
-------- ------- -------- -------
Total deferred taxes............................. 64,516 $46,534 54,719 $40,417
======= =======
Less: deferred tax liability..................... (46,534) (40,417)
-------- --------
Deferred tax asset, net.......................... $ 17,982 $ 14,302
======== ========
</TABLE>
55
<PAGE> 57
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
The net change in the valuation allowance during 1994 was a decrease of
$6.5 million.
At March 31, 1994, the Corporation had, for federal income tax purposes,
operating loss, capital loss, and investment credit carryforwards of
approximately $240.0 million, $206.5 million, and $3.8 million, respectively.
Operating loss carryforwards available for utilization in the Corporation's
consolidated income tax return expire as follows: 1997 through 2000 -- $2.3
million; 2003 -- $19.7 million; 2004 -- $58.3 million; 2006 -- $107.4 million;
2008 -- $.5 million; and 2009 -- $34.2 million. Operating loss carryforwards of
$15.6 million attributable to FoxMeyer are limited in their utilization because
they were incurred prior to the acquisition by the Corporation of FoxMeyer or
one of its subsidiaries. Operating loss carryforwards available for utilization
in Ben Franklin's income tax returns are $17.6 million and expire in various
years from 2004 through 2009. The capital loss carryforwards available for
utilization in the Corporation's consolidated income tax return expire as
follows: 1996 -- $47.5 million; 1997 -- $63.9 million; and 1999 -- $95.1
million. Investment credit carryforwards will expire during the years 1995
through 2002. The Corporation also has alternative minimum tax credit
carryforwards of $7.5 million, which are available to offset the future regular
tax liability of the Corporation. Alternative minimum tax credit carryforwards
do not expire.
The net operating losses referred to in the preceding paragraph have not
been examined by the U.S. Internal Revenue Service and, therefore, may be
subject to adjustment. The availability of net operating loss and investment tax
credit carryforwards to reduce the Corporation's future consolidated federal
income tax liability are subject to various limitations under the Internal
Revenue Code of 1986, as amended (the "Code"), including limitations in the
availability of loss carryforwards in the event of substantial ownership changes
(as defined in the Code) in the Corporation's stock. Future events, some of
which may be beyond the Corporation's control, may cause such an ownership
change.
NOTE O -- EXTRAORDINARY ITEM
In 1992, the Corporation redeemed $160.3 million of its 11.2% subordinated
notes at a total cost of $164.3 million which, together with the recognition of
the remaining original deferred debt issuance costs of $1.7 million and the
early extinguishment of another loan, resulted in an extraordinary loss of $5.8
million.
NOTE P -- COMMITMENTS AND CONTINGENCIES
Directly or through its subsidiaries, the Corporation leases various types
of properties, primarily warehouse property, computer equipment, transportation
equipment and corporate aircraft, through noncancellable operating leases.
Certain leases contain escalation clauses and provide for renewal options
generally at fair market rates. Rental expense under operating leases totalled
$21.0 million in 1994, $20.0 million in 1993 and $18.1 million in 1992. Minimum
rental payments under these leases with initial or remaining terms of one year
or more at March 31, 1994, and for which no liability has been accrued, total
$93.7 million and payments due during the next five fiscal years are
1995 -- $12.1 million; 1996 -- $10.9 million; 1997 -- $10.0 million;
1998 -- $8.7 million; 1999 -- $17.6 million and thereafter $34.4 million.
The Corporation has retained responsibility for certain potential
environmental liabilities attributable to former operating units and as a result
is subject to federal, state and local environmental laws, rules and regulations
including the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended ("CERCLA"), and similar state superfund statutes which
generally impose joint and several liability on present and former owners and
operators, transporters and generators for remediation of contaminated
properties regardless of fault. The Corporation and its subsidiaries have
received various claims and demands from governmental agencies relating to
investigations and remedial actions to address environmental clean-up costs and
in some instances have been designated as a potentially responsible party
("PRP") by the Environmental Protection Agency ("EPA").
56
<PAGE> 58
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
At March 31, 1994, the Corporation had reserves of $2.0 million for
environmental assessments or remediation activities, penalties or fines at 10
sites that may be imposed for non-compliance with such laws or regulations.
Reserves are established when it is probable that liability for such costs will
be incurred and the amount can be reasonably estimated. The Corporation's
estimates of these costs are based upon currently available facts, existing
technology, presently enacted laws and regulations and the professional judgment
of consultants and counsel. Where the available information is sufficient to
estimate the amount of the liability, that estimate has been used. Where the
information is only sufficient to establish a range of probable liability and no
point within the range is more likely than the other, the lower end of the range
has been used.
The amounts of these liabilities are difficult to estimate due to such
factors as the unknown extent of the remedial actions that may be required and,
in the case of sites not owned by the Corporation, the unknown extent of the
Corporation's probable liability in proportion to the probable liability of
other parties. Moreover, the Corporation may have environmental liabilities that
the Corporation cannot in its judgment estimate at this time and losses
attributable to remediation costs may arise at other sites. The Corporation
cannot now estimate the additional costs and expenses it may incur for such
environmental liabilities. While management of the Corporation does not believe
the liabilities associated with such other sites will have a material adverse
effect on its financial condition or results of operations, it recognizes that
additional work may need to be performed to ascertain the ultimate liability for
such sites, and further information could ultimately change management's current
assessment.
In arriving at a reasonable estimate of the costs, the Corporation has not
assumed any of such costs will be recoverable from third parties. The
Corporation is not aware of any site where other companies that have been
designated a PRP by the EPA would not have the financial resources and
commitment to fulfill their portion of the obligations in the event they and the
Corporation are found to be jointly and severally liable.
In 1994, the Corporation paid $10.0 million to NSC as a deposit to cover
potential environmental claims for which it has indemnified NSC (see Note H).
From time to time, FoxMeyer makes advances to customers in anticipation of
future sales. At March 31, 1994, advances aggregating $15.2 million were
outstanding. In addition, FoxMeyer has guaranteed debt of certain customers to
their banks aggregating $1.3 million at March 31, 1994.
Ben Franklin, under a prepayment incentive program for franchisees,
provides merchandise credits at a rate equal to the prime rate of interest for
prepayment of inventory purchases. Ben Franklin had $6.1 million of inventory
prepayments outstanding at March 31, 1994.
In March 1994, the Corporation proposed a merger (the "Proposed Merger") in
which a wholly-owned subsidiary of the Corporation would be merged with and into
FoxMeyer, making FoxMeyer a wholly-owned subsidiary of the Corporation. At
present, the Corporation owns 80.5% of FoxMeyer's outstanding capital stock.
Actions have been brought against the Corporation and certain of its directors
and officers by plaintiffs purporting to represent the public stockholders of
FoxMeyer. Nine complaints have been filed in the Court of Chancery of the State
of Delaware, each purporting to be asserted on behalf of a class of FoxMeyer's
stockholders against the Corporation, FoxMeyer and certain present directors and
officers of one or both companies. All of the cases seek to enjoin the Proposed
Merger or, in the alternative, to rescind the transaction if it takes place, and
request unspecified money damages, attorneys' fees and costs. No further action
has been taken by plaintiffs since the filing of the cases. Management believes
these suits are without merit, and the Corporation intends to defend itself
vigorously. In the opinion of management, it is premature to form a judgment as
to the ultimate outcome of any of these cases at this time.
There are various other pending claims and lawsuits arising out of the
normal conduct of the Corporation's businesses. In the opinion of management,
the ultimate outcome of these claims and lawsuits
57
<PAGE> 59
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
will not have a material effect on the consolidated financial condition or
results of operations of the Corporation.
NOTE Q -- SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided for interest
and income taxes paid and for noncash transactions (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
Interest paid......................................... $ 15,530 $10,831 $24,945
Income taxes paid..................................... 459 2,318 9,400
Noncash transactions:
Exchange of preferred stock for common stock........ 112,753 -- --
Payment of dividends in kind on preferred stock..... 5,389 -- --
</TABLE>
NOTE R -- BUSINESS SEGMENT DATA
The Corporation operates principally in two segments: (i) FoxMeyer -- a
company engaged primarily in the distribution of a full line of pharmaceutical
and health and beauty aid products to independent drug stores, hospitals,
alternative care facilities and chain stores, as well as providing managed care
prescription benefit services and (ii) Ben Franklin -- a company engaged in the
franchising of general variety stores and the franchising and operation of
crafts stores, together with the wholesale distribution of products to these
stores. In addition, the Corporation conducts certain holding company, corporate
office and other miscellaneous activities (collectively the "Holding Company").
The activities of Development and its related limited partnerships are included
in amounts reported for the Holding Company. Such limited partnerships are
engaged in the buying, holding, operating and disposing of real estate and real
estate loans available through the Resolution Trust Corporation and other
financial institutions. Information about the Corporation's different segments
for the past three years follows (in thousands of dollars):
<TABLE>
<CAPTION>
BEN HOLDING COMPANY
FOXMEYER FRANKLIN & ELIMINATIONS CONSOLIDATED
--------- -------- --------------- ------------
<S> <C> <C> <C> <C>
1994
Sales............................ $5,071,446 $337,933 $ -- $ 5,409,379
Operating income (loss).......... 64,259 (2,112) (10,817) 51,330
Depreciation and amortization.... 19,630 2,610 (253) 21,987
Identifiable assets.............. 1,280,354 163,279 81,837 1,525,470
Capital expenditures............. 26,456 16,775 13,091 56,322
1993
Sales............................ $4,505,434 $346,175 $ -- $ 4,851,609
Operating income (loss).......... 13,976 4,589 (8,476) 10,089
Depreciation and amortization.... 16,647 2,392 (179) 18,860
Identifiable assets.............. 1,333,121 128,160 100,814 1,562,095
Capital expenditures............. 17,356 2,720 -- 20,076
1992
Sales............................ $3,077,695 $340,644 $ (7,048) $ 3,411,291
Operating income (loss).......... 50,716 3,755 (16,694) 37,777
Depreciation and amortization.... 12,518 2,198 -- 14,716
Identifiable assets.............. 896,270 114,094 127,007 1,137,371
Capital expenditures............. 18,118 2,045 -- 20,163
</TABLE>
58
<PAGE> 60
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
NOTE S -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by
the Corporation based on available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates are not necessarily indicative of the amounts that the Corporation
might realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value.
The carrying amounts of cash and short-term investments, accounts
receivable, accounts payable and other accrued liabilities are reasonable
estimates of their fair value.
The carrying value of notes receivable is $50.3 million at March 31, 1994,
while the estimated fair value of these notes is $54.9 million using interest
rates based on the credit worthiness of the debtors. The carrying value of
long-term debt is $313.9 million at March 31, 1994, while the estimated fair
value is $304.0 million based upon interest rates available to the Corporation
for issuance of similar debt with similar terms and remaining maturities.
The carrying value of notes receivable and long-term debt for 1993
approximate their estimated fair value using interest rates based on the credit
worthiness of the debtor or using interest rates available to the Corporation
for issuance of similar debt with similar terms and remaining maturities.
The carrying value of marketable securities approximates their estimated
fair value using quoted market prices.
The investment in NSC Preferred Stock is net of the Remaining Liabilities
(see Note H). The carrying value of the NSC Preferred Stock is $65.7 million and
$131.9 million at March 31, 1994 and 1993, respectively. The estimated fair
market value of the NSC Preferred Stock is approximately $74.0 million and
$140.0 million, respectively, based on NSC's other outstanding debt with similar
terms and remaining maturity. The carrying value of the Remaining Liabilities
consists principally of pension liabilities and the $20.5 million NSC Note
bearing interest at 8 1/2% with a 14 year remaining amortization. The carrying
value of the NSC Note approximates its fair value.
The fair value of the Corporation's redeemable preferred stock, based on
quoted market prices at March 31, 1994 and 1993, were $169.4 million and $51.4
million, respectively.
It is not practicable to estimate the fair value of the pre-bankruptcy
receivable due from Phar-Mor. While the Corporation believes it has adequately
provided for the eventual loss resulting from Phar-Mor's bankruptcy, it is
unable to estimate the timing and form of the ultimate settlement of the amounts
due the Corporation.
The fair value estimates were based on pertinent information available to
management as of March 31, 1994 and 1993. Such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates, and current estimates of fair value may differ significantly from the
amounts presented herein.
59
<PAGE> 61
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE YEARS ENDED MARCH 31, 1994
NOTE T -- QUARTERLY DATA (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the years ended March 31, 1994 and 1993 (in thousands of dollars,
except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
Net sales.................................... $1,286,694 $1,371,142 $1,396,705 $1,354,838
Gross profit................................. 78,885 88,479 86,547 91,072
Operating income............................. 5,138 15,444 12,070 18,678
Net income................................... 5,257 146 7,579 16,530
Earnings (loss) per common share............. 0.20 (0.06) 0.28 0.88
1993
Net sales.................................... $1,015,790 $1,201,080 $1,301,304 $1,333,435
Gross profit................................. 65,977 76,761 83,518 89,714
Operating income (loss)...................... 9,264 12,198 (30,850) 19,477
Net income (loss)............................ 7,412 3,885 (6,349) (4,345)
Earnings (loss) per common share............. .29 .13 (.39) (.28)
</TABLE>
The results of operations for the third quarter of 1993 reflect the
establishment of a $41.0 million allowance related to the Phar-Mor bankruptcy
(see Note E). The net loss for the fourth quarter of 1993 reflects the $22.4
million writedown of the investment in NSC common stock (see Note H).
Per share amounts are computed independently for each quarter based on the
average number of shares outstanding during that quarter. Therefore, the sum of
the quarterly per share amounts may not equal the total for the fiscal year
because of stock or other transactions that occurred during such years (see Note
J).
60
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE BOARD OF DIRECTORS
Under the terms of the By-laws of the registrant, the Board of Directors is
to be divided into three classes of directors, with the total number of
directors to be allocated among the three classes as equally as possible. The
Board of Directors presently consists of six members. Three members, Messrs.
Abbey J. Butler, Melvyn J. Estrin and William G. Tull, were elected at the 1993
annual meeting of stockholders to serve until the annual meeting to be held in
1996 (the "1996 Class"). The terms of the other three members of the Board,
Messrs. Sheldon W. Fantle, Paul M. Finfer and Alfred H. Kingon, expire at the
1994 annual meeting of stockholders (the "1994 Class"). There are no members of
the Board presently remaining in the class that had been elected to serve until
the annual meeting of stockholders in 1995 (the "1995 Class").(1)
The registrant has no present intention to increase the size of the Board
of Directors. In order to divide the present six members of the Board of
Directors equally into three classes of equal size, the Board has established
that the 1995 Class shall have two directors. In future years, the Board will
take action as is necessary to adjust the size of the other two classes of
directors so that each class will, in time, consist of two members.
The Board has elected Messrs. Paul M. Finfer and Alfred H. Kingon (each of
whose term would have expired at the 1994 annual meeting of stockholders) to
fill the vacancies in the 1995 Class. Messrs. Finfer and Kingon will serve on
the Board until the annual meeting of stockholders to be held in 1995.
The following sets forth, with respect to each member of the registrant's
Board of Directors, his name, age, period served as director, present position,
if any, with the registrant and other business experience.
TERM EXPIRING IN 1994:
SHELDON W. FANTLE, 71, has been a director since 1991. Mr. Fantle has been
the Chairman and Chief Executive Officer of Fantle Enterprises, Inc., a venture
capital, consulting and public relations firm since 1990. From 1987 to 1990, he
served as the Chairman of the Board, President and Chief Executive Officer of
Dart Drug Stores, Inc., which operated as Fantle's Drugstores and which filed a
petition under Chapter 11 of the United States Bankruptcy Code in 1989 and was
subsequently liquidated thereunder. Prior thereto, from 1975 through 1987, he
served as Chairman of the Board, President and Chief Executive Officer of
Peoples Drug Stores, Inc. Mr. Fantle currently serves as a director of FoxMeyer,
Ben Franklin, Washington Gas Light Company, a public utility company, Medlantic
Healthcare Corporation, a hospital management company, and the National
Association of Chain Drug Stores.
TERMS EXPIRING IN 1995:
PAUL M. FINFER, 55, has been a director since 1991. Mr. Finfer has been the
President and Chief Executive Officer of Franklin Acceptance Corporation, a
consumer finance company since October 1989. From May 1986 through February
1988, he served as the Chairman of the Board and Chief Executive Officer
- - - ---------------
(1) At the annual meeting of stockholders held in 1992, the following
individuals were elected to the 1995 Class: Mr. Robert J. Slater, who
resigned from the Board in September 1993; Mr. Robert L. King, who resigned
from the Board in May 1993; and Mr. Charles P. Abod, who died in December
1992.
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<PAGE> 63
of FBX Corporation, a manufacturer and distributor of electronic fire and
burglar alarm signal processing products. Mr. Finfer also serves as a director
of FoxMeyer and Kitchen Bazaar, Inc., a specialty retailer.
ALFRED H. KINGON, 63, has been a director since 1991. Mr. Kingon has been a
principal of Kingon International, Inc., an international investment and
consulting firm since September 1989. From April 1987 through June 1988, he
served as the United States Ambassador to the European Communities. Mr. Kingon
served as the Assistant to the President of the United States and Secretary of
the Cabinet from February 1985 through April 1987. Mr. Kingon is a director of
Ben Franklin.
TERMS EXPIRING IN 1996:
ABBEY J. BUTLER, 57, has been a director since 1990. Mr. Butler is the
Co-Chairman of the Board and Co-Chief Executive Officer of the registrant and
FoxMeyer. Mr. Butler has served as Co-Chairman of the Board of the registrant
and FoxMeyer since March 1991. Mr. Butler was appointed Co-Chief Executive
Officer of the registrant in October 1991 and became Co-Chief Executive Officer
of FoxMeyer in May 1993. Since November 1991, he has also served as Co-Chairman
of the Board of Ben Franklin. Mr. Butler has also been the President and a
director of C.B. Equities Corp., a private investment company, since 1982. Mr.
Butler presently serves as a director of CST Entertainment Imaging, Inc., a
company engaged in digital color enhancement of black and white films, and a
director and a member of the Executive Committee of FWB Bancorporation, the
holding company of FWB Bank of Maryland. Mr. Butler also serves as a trustee and
a member of the Executive Committee of The American University, Washington,
D.C., a director of the Starlight Foundation, a charitable organization, and is
a member of the advisory boards of the Pediatric AIDS Foundation and the
National Center for Survivors of Child Abuse. Mr. Butler was appointed by
President Bush to serve on the President's Advisory Committee on the Arts and he
now serves as a member of the Executive Committee of the National Committee for
the Performing Arts, John F. Kennedy Center, Washington, D.C.
MELVYN J. ESTRIN, 51, has been a director since 1990. Mr. Estrin is the
Co-Chairman of the Board and Co-Chief Executive Officer of the registrant and
FoxMeyer. Mr. Estrin has served as Co-Chairman of the Board of the registrant
and FoxMeyer since March 1991. Mr. Estrin was appointed Co-Chief Executive
Officer of the registrant in October 1991 and became Co-Chief Executive Officer
of FoxMeyer in May 1993. Since November 1991, he has also served as the
Co-Chairman of the Board of Ben Franklin. From December 1983 to the present, Mr.
Estrin has also served as the Chairman of the Board and Chief Executive Officer
of Human Service Group, Inc., a private management and investment firm, and of
University Research Corporation, a consulting firm. Mr. Estrin presently serves
as a director and a member of the Executive Committee of FWB Bancorporation, the
holding company of FWB Bank of Maryland, a director of Washington Gas Light
Company, a public utility company, and as a trustee of the University of
Pennsylvania. Mr. Estrin serves as a Commissioner on the President's National
Capital Planning Commission.
WILLIAM G. TULL, 65, has been a director since 1990. Mr. Tull served as the
President and Chief Operating Officer of American Security Bank, N.A., a
commercial bank, from April 1985 until January 1990. Upon his retirement in
January 1990, Mr. Tull became a self-employed financial consultant. Mr. Tull
serves as a director of Ramtron International Corporation, a company that
develops, manufactures and sells non-volatile semiconductor memory products.
EXECUTIVE OFFICERS
A brief biography of each executive officer of the registrant (other than
the Co-Chairmen of the Board and Co-Chief Executive Officers whose biographies
are set forth above) who served during the fiscal year ended March 31, 1994
("Fiscal 1994") is provided below.
PETER B. MCKEE, 56, has been Vice President and Chief Financial Officer of
the registrant since February 1994. He has also served as Senior Vice President
and Chief Financial Officer of FoxMeyer since January 1994. From October 1991 to
December 1993, he was Executive Vice President and Chief Financial Officer of
InterSolve Group, a managerial consulting firm. From March 1988 to September
1991, he was Senior Vice President and Chief Financial Officer of Metro
Airlines, a regional airline that operated in the Southwest and
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Eastern United States and in the Caribbean, which filed a petition under Chapter
11 of the United States Bankruptcy Code in April 1991 and was subsequently
reorganized thereunder.
EDWARD L. MASSMAN, 35, has been Controller of the registrant since July
1993. He has also served as Director of Accounting of FoxMeyer since September
1990. Mr. Massman was employed by Deloitte & Touche from January 1983 to
September 1990, serving most recently as Senior Audit Manager.
FORMER EXECUTIVE OFFICER
LAWRENCE J. PILON, 45, was Vice President, Human Resources of the
registrant from June 1986 to January 1994. He was Secretary of the registrant
from August 1991 to January 1994. He also served as Senior Vice
President -- Administration of FoxMeyer from September 1990 to January 1994.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the 1934 Act ("Section 16(a)"), requires the registrant's
directors, executive officers and persons who beneficially own more than 10% of
a registered class of the registrant's equity securities ("10% Owners") to file
reports of beneficial ownership of the registrant's securities and changes in
such beneficial ownership with the Securities and Exchange Commission (the
"Commission"). Directors, executive officers and 10% Owners are also required by
rules promulgated by the Commission to furnish the registrant with copies of all
forms they file pursuant to Section 16(a).
Based solely upon a review of the copies of the forms filed pursuant to
Section 16(a) furnished to the registrant, or written representations that no
year-end Form 5 filings were required for transactions occurring during Fiscal
1994, the registrant believes that its directors, executive officers and 10%
Owners complied with Section 16(a) filing requirements applicable to them during
Fiscal 1994.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the three fiscal years
ended March 31, 1994 received by the registrant's Co-Chief Executive Officers
and the three remaining most highly compensated executive officers of the
registrant in Fiscal 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
(A)
-----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ---------- ----------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND FISCAL COMPENSATION OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(B) SARS(#) PAYOUTS($) ($)(C)
- - - ----------------------------- ------ ------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Abbey J. Butler(D) 1994 709,000 318,330 53,974 28,000 -0- 5,372
Co-Chairman of the 1993 702,000 175,000 (H) 540,000 -0- 1,750
Board and Co-Chief 1992 556,250 139,000 (H) 110,000 -0- 1,750
Executive Officer
Melvyn J. Estrin(D) 1994 709,000 318,330 50,997 28,000 -0- 5,958
Co-Chairman of the 1993 702,000 175,000 (H) 540,000 -0- 1,167
Board and Co-Chief 1992 556,250 139,000 (H) 110,000 -0- 1,750
Executive Officer
Lawrence J. Pilon(E) 1994 174,042 -0- (H) -0- -0- 3,748
Vice President, 1993 197,937 28,000 (H) 17,000 62,500 4,456
Human Resources 1992 185,811 42,200 66,456 60,000 -0- 4,325
(through January 1994)
Edward L. Massman(F) 1994 94,338 24,379 (H) -0- -0- 3,115
Controller 1993 82,362 9,500 -0- -0- -0- 2,471
1992 75,775 12,200 -0- -0- -0- 1,263
Peter B. McKee(G) 1994 44,302 35,750 -0- 60,000 -0- -0-
Vice President and 1993 -0- -0- -0- -0- -0- -0-
Chief Financial Officer 1992 -0- -0- -0- -0- -0- -0-
(effective February 1994)
</TABLE>
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- - - ---------------
(A) The registrant made no awards of restricted stock during the three fiscal
years ended March 31, 1994 to any of the five executive officers of the
registrant named in the Summary Compensation Table.
(B) For Fiscal 1994, the amount set forth under "Other Annual Compensation"
includes amounts paid by the registrant or by FoxMeyer to each executive
officer under FoxMeyer's Supplemental Savings Plan, which is a nonqualified
plan for employees whose contributions to the FoxMeyer Employees' Savings
and Profit Sharing Program (the "FoxMeyer 401(k) Plan") are limited by the
Internal Revenue Code's limitations on elective contributions thereto.
(C) Represents amounts contributed by the registrant or by FoxMeyer to each
executive officer's account under the FoxMeyer 401(k) Plan.
(D) In Fiscal 1994, Mr. Butler and Mr. Estrin each received $350,000 from the
registrant for serving as Co-Chief Executive Officer of the registrant,
$275,000 from FoxMeyer for serving as Co-Chairman of the Board and Co-Chief
Executive Officer of FoxMeyer and $84,000 from Ben Franklin for serving as
Co-Chairman of the Board of Ben Franklin. For Fiscal 1994, Mr. Butler and
Mr. Estrin each received a $175,000 bonus from the registrant, a $137,500
incentive bonus from FoxMeyer and a $5,830 bonus under FoxMeyer's
performance plus plan (a plan which paid bonuses to all FoxMeyer employees
upon the attainment by FoxMeyer of an earnings target). In Fiscal 1993, Mr.
Butler and Mr. Estrin each received $350,000 from the registrant for
serving as Co-Chief Executive Officer of the registrant, $275,000 from
FoxMeyer for serving as Co-Chairman of the Board of FoxMeyer and $77,000
from Ben Franklin for serving as Co-Chairman of the Board of Ben Franklin.
For Fiscal 1993, Mr. Butler and Mr. Estrin each received a $65,000 bonus
from the registrant, an $85,000 bonus from FoxMeyer and a $25,000 bonus
from Ben Franklin. In Fiscal 1992, Mr. Butler and Mr. Estrin each received
$350,000 from the registrant for serving as Co-Chief Executive Officer of
the registrant and $206,250 (which represents payments from July 1992
through March 1993) from FoxMeyer for serving as Co-Chairman of the Board
of FoxMeyer. The $139,000 bonus paid to each of Mr. Butler and Mr. Estrin
for Fiscal 1992 was paid by FoxMeyer.
In Fiscal 1994, Ben Franklin extended the expiration date (from April 27,
1997 to April 27, 2001) of options for 10,000 shares of common stock of Ben
Franklin ("Ben Franklin Common Stock") held by each of Mr. Butler and Mr.
Estrin and granted each of them additional options for 18,000 shares of Ben
Franklin Common Stock. In Fiscal 1993, Mr. Butler and Mr. Estrin were each
granted options for 440,000 shares of the registrant's common stock
("Common Stock"), options for 50,000 shares of common stock of FoxMeyer
("FoxMeyer Common Stock") and options for 50,000 shares of Ben Franklin
Common Stock. In Fiscal 1992, Mr. Butler and Mr. Estrin were each granted
options for 110,000 shares of FoxMeyer Common Stock.
(E) Until January 1994, Mr. Pilon served as the Vice President, Human
Resources, of the registrant but did not receive compensation from the
registrant in such capacity. Mr. Pilon was also the Senior Vice
President -- Administration of FoxMeyer, which paid all of his compensation
for services rendered in Fiscal 1994, 1993 and 1992.
In Fiscal 1993, Mr. Pilon received a $62,500 payment from FoxMeyer for
25,000 performance units granted by the registrant in April 1990 ("1990
Performance Units") under the Performance Units Supplement to the
registrant's 1987 Restated Stock Option and Performance Award Plan. The
value of the 1990 Performance Units were tied to the operating results of
FoxMeyer Drug Company, a wholly-owned subsidiary of FoxMeyer, and were
based on operating goals set by the Personnel and Compensation Committee of
the Board of Directors of the registrant related to return on invested
capital of FoxMeyer Drug Company over the three-year period ended March 31,
1993. For Fiscal 1992, $55,586 of the amount shown under "Other Annual
Compensation" represent payments made to Mr. Pilon in connection with his
relocation from Pittsburgh to Dallas.
(F) Mr. Massman serves as the Controller of the registrant but does not receive
compensation from the registrant in such capacity. Mr. Massman is the
Director of Accounting of FoxMeyer, which paid all of his compensation for
services rendered in Fiscal 1994, 1993 and 1992 except for a $5,000 special
bonus paid by the registrant in Fiscal 1994.
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(G) Since February 1994, Mr. McKee has served as the Vice President and Chief
Financial Officer of the registrant but does not receive compensation from
the registrant in such capacity. Mr. McKee is the Senior Vice President and
Chief Financial Officer of FoxMeyer, which paid all of his compensation for
services rendered in Fiscal 1994. In Fiscal 1994, Mr. McKee was granted
options for 60,000 shares of FoxMeyer Common Stock.
(H) Other annual compensation to this executive officer, including payment of
club dues, personal use of corporate property (including the use of the
registrant's airplane) and other personal benefits, did not exceed the
lesser of $50,000 or 10% of such executive officers's total salary and
bonus for such fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The registrant did not grant options in Fiscal 1994 to any of the executive
officers of the registrant named in the Summary Compensation Table. The
following table provides information regarding the options granted by FoxMeyer
and Ben Franklin to certain executive officers of the registrant.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- - - ---------------------------------------------------------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
OPTIONS/ VALUE
NUMBER OF SARS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED OF STOCK PRICE
UNDERLYING TO APPRECIATION
OPTIONS/ EMPLOYEES EXERCISE OR FOR OPTION TERM(A)
SARS IN FISCAL BASE PRICE EXPIRATION -------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- - - --------------------------------------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
GRANTS BY FOXMEYER:
Peter B. McKee 60,000(B) 37.5% 12.25 1/16/99 203,067 448,725
GRANTS BY BEN FRANKLIN:
Abbey J. Butler 10,000(C) 5.0% 5.00 4/27/2001 13,814 30,526
18,000 16.5% 4.50 1/16/2003 22,379 49,451
Melvyn J. Estrin 10,000(C) 5.0% 5.00 4/27/2001 13,814 30,526
18,000 16.5% 4.50 1/16/2003 22,279 49,451
</TABLE>
- - - ---------------
(A) The potential realizable values set forth under these columns result from
calculations assuming 5% and 10% growth rates as set by the Commission and
are not intended to forecast future price appreciation of either FoxMeyer
Common Stock or Ben Franklin Common Stock. The amounts reflect potential
future value based upon growth at these prescribed rates. The registrant
did not use an alternative formula for a grant date valuation, an approach
which would state gains at present, and therefore lower, value. The
registrant is not aware of any formula which will determine with reasonable
accuracy a present value based on future unknown or volatile factors.
Actual gains, if any, on stock option exercises are dependent on the future
performance of FoxMeyer Common Stock and Ben Franklin Common Stock. There
can be no assurance that the amounts reflected in this table will be
achieved.
(B) One-third ( 1/3) of these options will become exercisable on January 17,
1995, another 1/3 will become exercisable on January 17, 1996 and the
remaining 1/3 will become exercisable on January 17, 1997.
(C) These options were originally granted on April 28, 1992 and became fully
exercisable on April 28, 1994. On December 20, 1993, Ben Franklin extended
the expiration date of all non-incentive stock options granted on April 28,
1992 from April 27, 1997 to April 27, 2001, including those held by Messrs.
Butler and Estrin.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
Lawrence J. Pilon, the registrant's former Vice President, Human Resources,
exercised options to acquire 5,000 shares of Common Stock at $14.0625 per share
on June 1, 1993. Mr. Pilon resigned from the registrant in January 1994 and all
of his options terminated 30 days after his resignation. See Note 9 to the table
under Item 12 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Aside from Mr. Pilon, none of the executive officers named in the Summary
Compensation Table exercised options during Fiscal 1994.
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LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR (A)
<TABLE>
<CAPTION>
NUMBER PERFORMANCE
OF SHARES, OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR PERIOD UNTIL NON-STOCK PRICE-BASED PLANS
OTHER MATURATION --------------------------------------------------
NAME RIGHTS OR PAYOUT THRESHOLD($)(B) TARGET($)(C) MAXIMUM($)(D)
- - - ----------------------------------- ---------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Abbey J. Butler 8.0% 3/31/97 0 483,781 1,342,861
Co-Chairman of the Board and
Co-Chief Executive Officer
Melvyn J. Estrin 8.0% 3/31/97 0 483,781 1,342,861
Co-Chairman of the Board and
Co-Chief Executive Officer
Lawrence J. Pilon(E) 5.0% 3/31/97 -- -- --
Vice President, Human Resources
(through January 1994)
Peter B. McKee 6.0% 3/31/97 0 362,836 1,007,146
Vice President and
Chief Financial Officer
(effective February 1994)
</TABLE>
- - - ---------------
(A) In April 1993, FoxMeyer adopted a Long-Term Incentive Plan (the "FoxMeyer
LTIP") to motivate and reward sustained improvements in FoxMeyer's
financial performance over a long-term period. Under the FoxMeyer LTIP, the
Personnel and Compensation Committee of FoxMeyer's Board of Directors (the
"FoxMeyer Compensation Committee") is authorized to create, from time to
time, pools to be funded by FoxMeyer ("performance pools") for the payment
of incentive payments to participants in the FoxMeyer LTIP upon the
attainment by FoxMeyer of certain earnings and financial parameters. The
FoxMeyer Compensation Committee created the first performance pool in April
1993 (the "1993 Performance Pool") and it will be funded by FoxMeyer based
on the attainment of sustained annual growth in its earnings before taxes
("EBT") over a four-year period from Fiscal 1994 through Fiscal 1997. If
another performance pool is created under the FoxMeyer LTIP, amounts to be
allocated to the 1993 Performance Pool subsequent thereto may be adjusted
based upon terms and conditions to be established at such time by the
FoxMeyer Compensation Committee.
Under the 1993 Performance Pool, FoxMeyer's EBT target for Fiscal 1994 was
$46.1 million, which also served as the EBT starting point. Because
FoxMeyer has achieved its Fiscal 1994 EBT target, 2.5% of FoxMeyer's actual
EBT for Fiscal 1994 (which was $46.8 million) was allocated to the 1993
Performance Pool. Thereafter, if FoxMeyer's EBT increases from year to year
by at least 7.5%, a certain percentage of FoxMeyer's EBT (the "Multiplier")
of the just completed fiscal year will be allocated to the 1993 Performance
Pool. The Multiplier is 3% if growth in FoxMeyer's EBT equals 7.5% but is
less than 15%; 4% if growth in EBT equals 15% but is less than 20%; 5% if
growth in EBT equals 20% but is less than 25%; and 7% if growth in EBT is
equal to or greater than 25%. If FoxMeyer's EBT declines from year to year,
dollars will be deducted from the amount allocated to the 1993 Performance
Pool based on the same scale, except that in calculating the amount to be
deducted the Multiplier will be applied to the higher of FoxMeyer's EBT
target that year or the actual EBT.
Messrs. Butler and Estrin were each awarded an 8% share of the 1993
Performance Pool in their capacities as Co-Chairmen of the Board and
Co-Chief Executive Officers of FoxMeyer. Mr. McKee was awarded 6% of the
1993 Performance Pool in his capacity as Senior Vice President and Chief
Financial Officer of FoxMeyer. Mr. Massman is not a participant in the
FoxMeyer LTIP. The first payouts from the 1993 Performance Pool may be made
after the end of Fiscal 1995 (of up to 50% of the aggregate amount
accumulated therein) and the final payouts will be made after the end of
Fiscal 1997.
(B) If FoxMeyer's EBT after Fiscal 1994 declines each year, deductions will be
made from the 1993 Performance Pool and, depending upon the magnitude of
the decline in EBT each year, the $1,170,250 allocated to the 1993
Performance Pool for Fiscal 1994 may be reduced to $0 by the end of Fiscal
1997. If this occurs, the individuals who have been granted shares in the
1993 Performance Pool would receive no payments.
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(C) These amounts are provided for illustrative purposes only and are calculated
based on each individual's share in the 1993 Performance Pool and assumes
that, after Fiscal 1994, FoxMeyer's EBT will grow by a factor of 7.5% each
year. Based on an assumed EBT growth rate of 7.5% each year, $1,509,622
would be allocated by FoxMeyer to the 1993 Performance Pool for Fiscal
1995; $1,622,844 for Fiscal 1996; and $1,744,557 for Fiscal 1997, resulting
in a hypothetical aggregate amount allocated to the 1993 Performance Pool
by the end of Fiscal 1997 of $6,047,273. There can be no assurances that
the EBT growth reflected in the amounts set forth in this table will be
achieved by FoxMeyer.
(D) These amounts are provided for illustrative purposes only and are calculated
based on each individual's share in the 1993 Performance Pool and assumes
that, after Fiscal 1994, FoxMeyer's EBT will grow by a factor of 25% each
year. Based on an assumed EBT growth rate of 25% each year, $4,095,875
would be allocated by FoxMeyer to the 1993 Performance Pool for Fiscal
1995; $5,119,843 for Fiscal 1996; and $6,399,804 for Fiscal 1997, resulting
in a hypothetical aggregate amount allocated to the 1993 Performance Pool
by the end of Fiscal 1997 of $16,785,772. There can be no assurances that
the EBT growth reflected in the amounts set forth in this table will be
achieved by FoxMeyer.
(E) Mr. Pilon had been awarded a 5% share of the 1993 Performance Pool in his
capacity as Senior Vice President -- Administration of FoxMeyer which he
forfeited upon his resignation from FoxMeyer in January 1994.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the registrant or one of its
subsidiaries or members of the Executive and Nominating Committee receive an
annual fee of $15,000. They also receive $1,000 for each meeting of the Board of
Directors or of a committee of the Board of Directors (other than the Executive
and Nominating Committee) they attend. Chairmen of each of the committees
receive an additional $1,000 for each meeting of the committee they attend.
Directors are reimbursed for travel and lodging expenses in connection with
Board and committee meetings.
Under the terms of the registrant's 1993 Stock Option and Performance Award
Plan (the "Plan"), directors who are not officers or employees of the registrant
or one of its subsidiaries ("outside directors") are automatically granted
options to purchase 15,000 shares of Common Stock when first elected to serve on
the Board of Directors and, in each year they continue to serve as members of
the Board of Directors, options to purchase 1,000 shares of Common Stock on the
third trading date following the later of (i) the date on which the annual
meeting of the registrant's stockholders, or any adjournment thereof, is held
each year or (ii) the date on which the registrant's earnings for the fiscal
quarter immediately preceding the date of such annual meeting are released to
the public.
The registrant has a Director's Retirement Plan which provides for the
payment of retirement benefits to directors (other than directors who are, or at
any time subsequent to December 31, 1975 have been, officers of the registrant
or an affiliated corporation). Each qualifying director is entitled, at the
later of retirement or age 60, to receive a monthly benefit for a period equal
to his years of service or 15 years, whichever is less. Such monthly benefit is
equal to one-twelfth ( 1/12) of the highest annual fee in effect for directors
during such director's years of service on the Board of Directors.
The registrant has agreed to pay Mr. Robert J. Slater, a former director of
the registrant who resigned from the Board of Directors on September 30, 1993,
quarterly payments of $7,625 until July 31, 1995 in exchange for consulting
services. The registrant has also agreed to credit Mr. Slater for service
through July 31, 1995 for purposes of the Director's Retirement Plan.
EMPLOYMENT AGREEMENTS
Effective October 24, 1991, the registrant entered into employment
agreements with each of Messrs. Butler and Estrin pursuant to which they each
agreed to serve as Co-Chief Executive Officers of the registrant through October
31, 1994 at a minimum annual base salary of $350,000, subject to periodic
increases by the Board of Directors. The Co-Chief Executive Officers are also
entitled to participate in the
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benefits generally available to senior executives of the registrant and to
receive such other amounts as the Board of Directors of FoxMeyer or any other
entity controlled by the registrant may authorize. For additional compensation
received by Messrs. Butler and Estrin, see the Summary Compensation Table on
page 63 and Note D thereto.
In addition to base salary, Messrs. Butler and Estrin have each been
granted, as an incentive bonus under their employment agreements, options to
purchase 440,000 shares of Common Stock at an exercise price of $15.00 per share
(the average price per share of Common Stock on the effective date of the
employment agreements), which options were approved by the registrant's
stockholders at the annual meeting in 1992 (the "Bonus Award Options").
All of the Bonus Award Options are presently exercisable and will expire on
October 31, 1994, unless the executive's employment is terminated for just
cause, in which event the right to exercise any unexercised Bonus Award Options
will terminate. The options contain anti-dilution provisions to maintain the
percentage ownership represented by the shares issuable upon exercise thereof
and are not transferrable (other than by will or the laws of descent and
distribution). However, each Co-Chief Executive Officer has certain rights to
have the registrant register his or his transferee's shares of Common Stock
issuable upon exercise of the Bonus Award Options and to pay the expenses
incurred in connection therewith.
If either executive is removed without his consent as Co-Chairman of the
Board or Co-Chief Executive Officer of the registrant, or if either executive
dies or becomes permanently or totally disabled during the term of the
employment agreements, each executive (or his estate, as the case may be) is
entitled to exercise his Bonus Award Options.
Mr. McKee, the Vice President and Chief Financial Officer of the
registrant, has an employment agreement with FoxMeyer in his capacity as Senior
Vice President and Chief Financial Officer of FoxMeyer which expires on January
14, 1997. Under the terms of the agreement, Mr. McKee's minimum annual base
salary may not be less than his annual base salary as of January 15, 1994 (which
was $200,000 per annum). If Mr. McKee's employment with FoxMeyer is terminated
for any reason other than for cause, Mr. McKee will be entitled to receive
monthly severance payments equivalent to his monthly base salary in effect at
the time of termination for a period equal to the longer of the remaining term
of his employment agreement or one year.
REPORT OF THE PERSONNEL AND COMPENSATION COMMITTEE
The Personnel and Compensation Committee of the Board of Directors (the
"Compensation Committee") is comprised of three directors: Mr. Sheldon W.
Fantle, who is the Chairman, and Messrs. Paul M. Finfer and Alfred H. Kingon,
all of whom are outside directors.
Compensation for the registrant's executive officers is comprised of base
salary, annual incentive payments and long-term incentive awards in the form of
stock option grants. The goal of the registrant's executive compensation policy
is to reward its executive officers for overseeing and managing the registrant's
operating subsidiaries, for their contributions towards long-term strategic
planning and for improving long-term stockholder value. Decisions with respect
to the compensation of the Co-Chief Executive Officers of the registrant are
made by the Compensation Committee. The registrant generally does not pay any
compensation to the registrant's other executive officers, whose salaries and
bonuses are paid solely by FoxMeyer and are determined by the FoxMeyer
Compensation Committee, which consists of Messrs. Fantle and Finfer and Messrs.
Abbey J. Butler, Melvyn J. Estrin and Daniel J. Callahan, III.
FoxMeyer provides an executive compensation program that aims to reinforce
FoxMeyer's overall business mission, strategies, values and objectives. The
goals of FoxMeyer's executive compensation program are to motivate and reward
its executive officers and other key employees to improve long-term stockholder
value and to attract and retain high-quality executive talent. FoxMeyer's
executive compensation program consists of base salary, annual and long-term
incentive payments, stock options and employee benefits. FoxMeyer reviews its
compensation programs periodically and compares its pay practices with other
companies in the wholesale distribution business and with companies staffed with
similarly-skilled executives.
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<PAGE> 70
FoxMeyer's objective is to position total compensation at approximately the
median of market pay for executives in similar positions. Annual incentive
payments are based on the attainment of specific goals established each year.
Long-term incentives, in the form of cash payments and stock option grants, are
designed to reward sustained corporate performance over a three to five-year
period.
During the first fiscal quarter of each year, the FoxMeyer Compensation
Committee meets to review salary increases for the current year and incentive
payments to be made in connection with the previous year's performance. The
FoxMeyer Compensation Committee also reviews the current fiscal year's business
plan and establishes performance objectives for each FoxMeyer executive officer.
Goals relating to FoxMeyer's financial performance, based on such factors as
return on capital, pre-tax income or net income, are set as a primary component
of executive incentive compensation. Individual performance objectives are also
determined for officers and are weighted to reflect their respective functions,
significance and contribution to FoxMeyer business goals. In making its
decisions, the FoxMeyer Compensation Committee receives recommendations from
FoxMeyer's Co-Chief Executive Officers and President on senior executives and
then meets privately (without the presence of management, including FoxMeyer's
Co-Chief Executive Officers in relation to their compensation) to determine
compensation for FoxMeyer's Co-Chief Executive Officers. The FoxMeyer
Compensation Committee's decisions are based on input from FoxMeyer's human
resources department, and periodically from outside advisors, to maintain the
desired level of competitiveness and congruence with long-term company
performance.
During the year, the Compensation Committee and the FoxMeyer Compensation
Committee receive periodic updates on FoxMeyer's operating results and the
progress made by FoxMeyer's executive officers towards performance targets
relevant to FoxMeyer's incentive programs. Discussions of management
contribution and performance are held periodically.
CO-CHIEF EXECUTIVE OFFICERS
During Fiscal 1994, the registrant paid each of Messrs. Butler and Estrin,
the registrant's Co-Chief Executive Officers, a base salary of $350,000. This
base salary was approved by the Board of Directors in October 1991, based upon
the recommendation of the Compensation Committee (which had consulted with an
outside advisor). See "EMPLOYMENT AGREEMENTS" above. No salary increase was
granted to the Co-Chief Executive Officers for Fiscal 1994. For Fiscal 1994, the
Board of Directors of the registrant, based upon the recommendation of the
Compensation Committee, awarded each Co-Chief Executive Officer a bonus of
$175,000 for their management of the registrant and their involvement in a
number of financing transactions by FoxMeyer and Ben Franklin during Fiscal 1994
that provided enhanced liquidity to these companies at lower cost; their work on
the registrant's exchange offer in November 1993 in which the registrant
exchanged approximately 6.8 million shares of Common Stock for a new series of
$4.20 Cumulative Exchangeable Series A Preferred Stock; and their work in
obtaining a $15 million revolving loan facility for the registrant.
In determining the amount of the Co-Chief Executive Officers' bonuses for
Fiscal 1994, the Compensation Committee took into consideration the aggregate
compensation payable to them by the registrant, FoxMeyer and Ben Franklin
relative to their performance on behalf of the registrant's stockholders and the
fact that no increase in base salary had been authorized for either of them
since Fiscal 1992.
In Fiscal 1994, each Co-Chief Executive Officer received $275,000 from
FoxMeyer for his services as Co-Chairman of the Board and Co-Chief Executive
Officer of FoxMeyer. The Board of Directors of FoxMeyer (the "FoxMeyer Board")
consisted of eight members in Fiscal 1994, including Messrs. Butler, Estrin,
Fantle and Finfer (who were also directors of the registrant). Although Messrs.
Butler and Estrin are members of the FoxMeyer Board and the FoxMeyer
Compensation Committee, they do not participate in the determination of their
annual compensation, bonuses and the grant of FoxMeyer options to them. The
$275,000 annual payment to each of Messrs. Butler and Estrin was approved by the
FoxMeyer Board (without the participation of Messrs. Butler and Estrin) in June
1991 based upon the substantial, but not full-time services they were expected
to render to FoxMeyer as Co-Chairmen of the Board, including financial and
strategic planning and supervisory and managerial services. When they assumed
the additional offices of
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Co-Chief Executive Officers of FoxMeyer in May 1993, there was no increase in
the payments to Messrs. Butler and Estrin from FoxMeyer. For Fiscal 1994, the
FoxMeyer Board, based upon the recommendation of the FoxMeyer Compensation
Committee, awarded each Co-Chief Executive Officer a bonus of $137,500 for their
contributions in the rebuilding and restructuring of FoxMeyer's operating
businesses and financial structure, the completion of a number of FoxMeyer's
financing transactions in Fiscal 1994 that have provided FoxMeyer with greater
liquidity at lower cost, the improved profitability experienced by FoxMeyer in
Fiscal Year 1994 and the preparation of FoxMeyer's three-year strategic plan.
The board of directors of Ben Franklin (the "Ben Franklin Board") consisted
of seven members in Fiscal 1994, including Messrs. Butler, Estrin, Fantle and
Kingon (who were also directors of the registrant). Although Messrs. Butler and
Estrin are members of the Ben Franklin Board, they do not participate in the
determination of their annual fees, bonuses and the grant of Ben Franklin
options to them. In May 1992, the Ben Franklin Board approved (without the
participation of Messrs. Butler and Estrin) the payment of $84,000 per annum to
each of them for serving as Co-Chairman of the Board of Ben Franklin in which
capacity each of them would render substantially the same services as those
rendered to FoxMeyer.
SHELDON W. FANTLE (CHAIRMAN)
PAUL M. FINFER
ALFRED H. KINGON
The foregoing report is not incorporated by reference in any prior or
future filings of the registrant under the Securities Act of 1933, as amended
(the "1933 Act"), or under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), unless the registrant specifically incorporates the report by
reference, and the report shall not otherwise be deemed filed under such Acts.
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PERFORMANCE GRAPH
The following performance graph compares the performance of the Common
Stock, the Standard & Poor's 500 Index and an index of peer companies selected
by the registrant (the "Peer Group Index") for the registrant's last five fiscal
years. The graph assumes that the value of the investment in the Common Stock
and in each index was $100 on April 1, 1989, and that all dividends were
reinvested.
The registrant has two operating subsidiaries: FoxMeyer, in which the
registrant owns approximately 80.5% of the outstanding shares and which
contributed approximately 94% of the registrant's net sales in Fiscal 1994, and
Ben Franklin, in which the registrant owns approximately 67% of the outstanding
shares and which contributed approximately 6% of the registrant's net sales in
Fiscal 1994. The Peer Group Index shown on the performance graph (which is
weighted on the basis of market capitalization) consists of the registrant,
FoxMeyer and Ben Franklin; the following companies which are engaged primarily
in the wholesale drug distribution business: Bergen Brunswig Corporation,
Bindley Western Industries, Inc., Cardinal Health, Inc., D&K Wholesale Drug,
Inc., Krelitz Industries, Inc., McKesson Corporation, Moore Medical Corporation
and Owens & Minor, Inc.; and the following companies which are engaged primarily
in the sale of variety and crafts merchandise: Ambers Stores, Inc. and Michaels
Stores, Inc.
<TABLE>
<CAPTION>
Measurement Period The S&P 500 Peer Group
(Fiscal Year Covered) Registrant Index Index
- - - ------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
4/1/89 100.00 100.00 100.00
1990 94.93 119.27 106.14
1991 89.13 136.46 145.05
1992 77.54 151.53 146.44
1993 75.63 174.60 147.18
1994 93.08 177.17 181.76
</TABLE>
The foregoing graph is not incorporated in any prior or future filings of
the registrant under the 1933 Act or the 1934 Act unless the registrant
specifically incorporates the graph by reference, and the graph shall not
otherwise be deemed filed under such Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 17, 1994 with
respect to the beneficial ownership of Common Stock by (i) persons known to the
registrant to be the beneficial owners of more than 5% of the outstanding shares
of Common Stock, (ii) all directors and nominees for election as directors of
the registrant, (iii) each of the executive officers named in the Summary
Compensation Table (which appears on page 63) and (iv) all directors and
executive officers of the registrant as a group.
The number of shares of Common Stock beneficially owned by each individual
set forth below is determined under rules of the Commission and the information
is not necessarily indicative of beneficial
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<PAGE> 73
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which an individual has sole or shared voting power or
investment power and any shares which an individual presently, or within 60 days
of June 29, 1994 (the date on which this report is due at the Commission, the
"Due Date"), has the right to acquire through the exercise of any stock option
or other right. Unless otherwise indicated, each individual has sole voting and
investment power (or shares such powers with his spouse) with respect to the
shares of Common Stock set forth in the following table.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS (1) OF COMMON STOCK PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING SHARES
- - - ------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
The Centaur Group...................................... 3,777,000(2) 29.4%
c/o Centaur Partners IV
17 Battery Place, Suite 709
New York, New York 10004
Directors and Nominees for Directors
(including those who are also Executive Officers):
Abbey J. Butler...................................... 4,217,000(2)(3) 31.8%
Melvyn J. Estrin..................................... 4,217,000(2)(4) 31.8%
Sheldon W. Fantle.................................... 16,500(5) (11)
Paul M. Finfer....................................... 16,500(6) (11)
Alfred H. Kingon..................................... 16,500(7) (11)
William G. Tull...................................... 19,500(8) (11)
Executive Officers:
Lawrence J. Pilon.................................... 85,000(9) (11)
(through January 1994)
Peter B. McKee....................................... -0-(10) --
Edward L. Massman.................................... -0- --
All Directors and Executive Officers as a Group (9
persons).......................................... 4,726,000(12)(13) 34.3%(12)(13)
</TABLE>
- - - ---------------
(1) The business address of each of the persons listed above is c/o National
Intergroup, Inc., 1220 Senlac Drive, Carrollton, Texas 75006.
(2) The Centaur Group is comprised of Messrs. Butler and Estrin, Centaur
Partners IV, a New York general partnership ("Centaur IV"), Estrin Abod
Equities Limited Partnership, a Maryland limited partnership ("Estrin
Abod"), and Butler Equities II, L.P., a Delaware limited partnership
("Butler Equities"). The general partners of Centaur IV are Estrin Abod and
Butler Equities.
Mr. Estrin owns 82.5% of the outstanding capital stock of Human Service
Group, Inc., a Delaware corporation ("Human Service"). Human Service owns
all of the capital stock of HSG Acquisition Co., a Delaware corporation
("HSG"). HSG and MJE, Inc., a Virginia corporation controlled by Mr.
Estrin, are the general partners of Estrin Abod.
Mr. Butler owns all of the outstanding capital stock of AB Acquisition
Corp., a Delaware corporation ("AB Acquisition"). AB Acquisition is the
sole general partner of Butler Equities.
The Centaur Group in the aggregate holds 3,777,000 shares of Common Stock.
These shares are held directly by the persons and entities described above
as follows: Mr. Butler, none; Mr. Estrin, 392,375; Centaur IV, 1,000
shares; Estrin Abod, 1,495,625 shares; and Butler Equities, 1,888,000
shares. Pursuant to the terms of the Centaur IV partnership agreement,
neither Estrin Abod nor Butler Equities may acquire or dispose of shares of
Common Stock without the consent of Centaur IV. In addition, pursuant to
the Centaur IV partnership agreement, Estrin Abod and Butler Equities must
vote all shares of Common Stock owned by each such entity as directed by
Centaur IV. Accordingly, Centaur IV, which directly holds 1,000 shares, may
be deemed to share the power to direct the voting and disposition of the
1,495,625 and the 1,888,000 shares held by each of Estrin Abod and Butler
Equities, respectively.
Estrin Abod has designated Mr. Estrin and Butler Equities has designated
Mr. Butler to act as a "Coordinating Person" pursuant to the Centaur IV
partnership agreement. Messrs. Estrin and Butler,
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acting together, manage the affairs of Centaur IV and have the authority to
make all decisions concerning Centaur IV's interest in the Common Stock.
Estrin Abod disclaims beneficial ownership of the shares of Common Stock
owned by Butler Equities and Butler Equities disclaims beneficial ownership
of the shares of Common Stock owned by Estrin Abod and Mr. Estrin
individually.
(3) In addition to his beneficial ownership of Common Stock through The Centaur
Group, Mr. Butler also holds an option to purchase 440,000 shares of Common
Stock which is presently exercisable. This option expires on October 31,
1994. Mr. Butler also holds 86,948 shares of common stock of FoxMeyer
Common Stock directly, 2,140.7 shares of FoxMeyer Common Stock through his
participation in the FoxMeyer 401(k) Plan and options to purchase 135,000
shares of FoxMeyer Common Stock which are presently exercisable or
exercisable within 60 days of the Due Date, which shares and options
represent less than 1% of the outstanding FoxMeyer Common Stock. Mr. Butler
also holds options to purchase 50,000 shares of Ben Franklin Common Stock
which are presently exercisable or exercisable within 60 days of the Due
Date, which options represent less than 1% of the outstanding Ben Franklin
Common Stock.
(4) In addition to his beneficial ownership of Common Stock through The Centaur
Group, Mr. Estrin also holds an option to purchase 440,000 shares of Common
Stock which is presently exercisable. This option expires on October 31,
1994. Mr. Estrin holds 421.4 shares of FoxMeyer Common Stock through his
participation in the FoxMeyer 401(k) Plan, he is a co-trustee for two
trusts which hold an aggregate of 20,000 shares of FoxMeyer Common Stock
(the beneficial ownership of which he disclaims) and he holds options to
purchase 135,000 shares of FoxMeyer Common Stock which are presently
exercisable or exercisable within 60 days of the Due Date, which shares and
options represent less than 1% of the outstanding FoxMeyer Common Stock.
Mr. Estrin is also a co-trustee for two trusts which hold an aggregate of
10,000 shares of Ben Franklin Common Stock (the beneficial ownership of
which he disclaims) and he holds options to purchase 50,000 shares of Ben
Franklin Common Stock which are presently exercisable or exercisable within
60 days of the Due Date, which shares and options represent less than 1% of
the outstanding Ben Franklin Common Stock.
(5) Mr. Fantle holds options to purchase 16,500 shares of Common Stock which
are presently exercisable or exercisable within 60 days of the Due Date. He
also holds 1,000 shares of FoxMeyer Common Stock and options to purchase
16,500 shares of FoxMeyer Common Stock which are presently exercisable or
exercisable within 60 days of the Due Date, which shares and options
represent less than 1% of the outstanding FoxMeyer Common Stock.
(6) Mr. Finfer holds options to purchase 16,500 shares of Common Stock which
are presently exercisable or exercisable within 60 days of the Due Date. He
also holds 400 shares of FoxMeyer Common Stock and options to purchase
16,500 shares of FoxMeyer Common Stock which are presently exercisable or
exercisable within 60 days of the Due Date, which shares and options
represent less than 1% of the outstanding FoxMeyer Common Stock.
(7) Mr. Kingon holds options to purchase 16,500 shares of Common Stock which
are presently exercisable or exercisable within 60 days of the Due Date.
(8) Mr. Tull holds 3,000 shares of Common Stock and options to purchase 16,500
shares of Common Stock which are presently exercisable or exercisable
within 60 days of the Due Date. Mr. Tull also holds 3,000 shares of
FoxMeyer Common Stock, which shares represent less than 1% of the
outstanding FoxMeyer Common Stock.
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(9) Mr. Pilon held options to purchase 85,000 shares of Common Stock which were
all exercisable. After his resignation from the registrant, Mr. Pilon had
the right to exercise his options for a period of 30 days after his last
date of employment. All of Mr. Pilon's options have terminated.
(10) Mr. McKee shares beneficial ownership of 1,000 shares of FoxMeyer Common
Stock with a minor child, which shares represent less than 1% of the
outstanding FoxMeyer Common Stock.
(11) Indicates less than 1%.
(12) Includes 946,000 shares of Common Stock subject to options which are
presently exercisable, or exercisable within 60 days of the Due Date, held
by all directors and executive officers of the registrant (but excludes
options formerly belonging to Mr. Pilon which terminated 30 days after his
resignation from the registrant) as a group under the registrant's 1987
Restated Stock Option and Performance Award Plan and the options held by
Mr. Butler and Mr. Estrin.
(13) Includes the 3,777,000 shares of Common Stock held by members of The
Centaur Group, as described above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH FOXMEYER
The Loan. In November 1992, the registrant and FoxMeyer completed a joint
tender offer (the "Offer") for 3,300,000 shares (the "Shares") of FoxMeyer
Common Stock at $13.50 per share, net in cash to the seller. Three million three
hundred thousand Shares were purchased pursuant to the Offer, with the
registrant and FoxMeyer each purchasing 1,650,000 Shares. As a result of the
Offer, the registrant presently owns approximately 80.5% of the outstanding
shares of FoxMeyer Common Stock.
The funds to purchase the Shares were provided from borrowings under
FoxMeyer's bank credit facility, which was amended on October 20, 1992 to permit
the use of such borrowings to pay for the Shares in the Offer. Among other
things, this amendment allowed FoxMeyer, pursuant to a Loan Agreement dated as
of November 25, 1992, to lend the registrant up to $30,000,000 (the "Loan") to
be used by the registrant to purchase its portion of the Shares pursuant to the
Offer, to pay its portion of related fees and expenses and to provide additional
funds for general corporate purposes and working capital requirements.
Under the terms of the Loan, the registrant borrowed $22,300,000 to finance
the registrant's portion of the Offer and to pay related fees and expenses.
Additionally, the registrant may borrow up to an additional $7,700,000 for
general purposes, working capital requirements and additional tender offer
expenses. The entire principal amount of the Loan is due on December 16, 1996.
Effective as of July 1, 1993, interest on the Loan was 9.09% per annum (which is
equal to 2.0% over the interest rate that FoxMeyer pays on its Senior Notes due
April 15, 2005 (the "Senior Notes")). If the Senior Notes are no longer
outstanding, interest on the Loan will be adjusted each calendar quarter to
equal the sum of 2.0% plus the annual interest rate in effect on the first day
of each such calendar quarter under the loan having the longest-term maturity
date under FoxMeyer's then existing credit facilities. The Loan is secured by a
pledge by the registrant of 4,500,000 shares of FoxMeyer Common Stock.
Tax Sharing Agreement. Pursuant to the Offer, the registrant increased its
ownership of FoxMeyer Common Stock to more than 80% of the outstanding shares.
As a result, FoxMeyer and the registrant are able to consolidate for federal
income tax purposes. As members of the registrant's consolidated tax group (the
"NII Consolidated Group"), FoxMeyer and each of its subsidiaries file a
consolidated federal income tax return with the registrant. As members of the
NII Consolidated Group, FoxMeyer and each of its subsidiaries are severally
liable for all federal income tax liabilities of every member of the NII
Consolidated Group for years during which FoxMeyer and its subsidiaries are
members of such group. The registrant and FoxMeyer have entered into a Tax
Sharing Agreement, dated as of November 25, 1992 (the "Tax Sharing Agreement"),
which relates to the payment of taxes and certain related matters effective for
periods following the closing of the Offer. During the term of the Tax Sharing
Agreement, FoxMeyer will be obligated to pay to the registrant
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<PAGE> 76
an amount equal to those federal income taxes FoxMeyer would have incurred if,
subject to the exceptions described below, FoxMeyer (on behalf of itself and its
subsidiaries) had filed a separate federal income tax return. If a Potential
Default or Event of Default (as defined in FoxMeyer's bank credit facility or
replacement thereof) occurs or is reasonably likely to occur thereunder or if,
in general, net income of FoxMeyer and its subsidiaries was not positive for the
preceding year, the amount of the payments made by FoxMeyer under the Tax
Sharing Agreement may not exceed the amount of the federal income taxes actually
payable by the registrant until such time as such Potential Default or Event of
Default is cured, or net income is positive, at which time any amounts otherwise
payable under the Tax Sharing Agreement will be paid. Further, under the Tax
Sharing Agreement, the registrant will compensate FoxMeyer to the extent a tax
attribute of FoxMeyer is used to reduce the amount of federal income taxes that
otherwise would have been paid by the registrant. Any tax attributes for which
FoxMeyer is so compensated will not be available to FoxMeyer to reduce amounts
owing to the registrant under the Tax Sharing Agreement. The Tax Sharing
Agreement provides for analogous principles to be applied to any consolidated,
combined or unitary state or local taxes. In Fiscal 1994, FoxMeyer paid the
registrant $7,664,362 pursuant to the Tax Sharing Agreement.
Management Agreement. The registrant and FoxMeyer are parties to a
management agreement pursuant to which certain management and administrative
personnel of FoxMeyer perform certain functions for the registrant, including
general management, financial, legal, information, public and investor relation
and administrative services. Effective January 1, 1992, the registrant has paid
a quarterly fee of $175,000 to FoxMeyer for providing such services. The
management fee is intended to approximate the personnel and overhead costs to
FoxMeyer of providing such services and is subject to increase or decrease in
the event of a change of circumstances that materially affects the quantity of
services provided by FoxMeyer to the registrant or the cost to FoxMeyer of
providing such services.
OTHER TRANSACTIONS
The Registrant. National Intergroup Realty Corporation ("NIRC") and
National Intergroup Realty Development, Inc. ("NIRD") are wholly-owned
subsidiaries of the registrant engaged in the activity of buying, holding,
operating and disposing of real estate assets put up for bid by the Resolution
Trust Corporation and other financial institutions.
The business activities of NIRC and NIRD are typically conducted through
joint ventures (the "Joint Ventures") in which NIRC or NIRD holds a 50% general
partner's interest. In general, the terms of the partnership agreements
governing the Joint Ventures provide for either NIRC or NIRD to receive a
preferred return on its investment (ranging from 12% to 18%) until its
investment is returned in full and 50% of all subsequent distributions. The
managing general partner of each of the Joint Ventures is an affiliate of The
Bernstein Companies, a real estate development firm based in Washington, D.C.
Melvyn J. Estrin, who is the Co-Chairman of the Board and the Co-Chief
Executive Officer of the registrant, is a director of NIRC and NIRD. Wilma E.
Bernstein, who is Mr. Estrin's sister, and Stuart A. Bernstein, who is Mr.
Estrin's brother-in-law, are owners of The Bernstein Companies.
In Fiscal 1994 and 1993, NIRC and NIRD invested an aggregate of $8,566,777
in the Joint Ventures. As of March 31, 1994, NIRC and NIRD had recouped
$3,969,440 of their investment in the Joint Ventures.
In Fiscal 1994, NIRC purchased for $2,000,000 a $2,800,000 note secured by
real property from Chemical Bank. The borrower on the note is RCHLP Limited
Partnership, the sole general partner of which is Z Investors, Inc. (formerly
Bernstein Investments, Inc.), a corporation which is owned solely by Stuart
Bernstein. Mr. Bernstein is also a guarantor of the note. Wilma Bernstein has
purchased a $800,000 participation in the note from NIRC, thereby reducing
NIRC's investment in the note to $1,200,000.
Ben Franklin. LBD Crafts, Inc., the sole stockholder of which is Lorin B.
DiBenedetto, owns and operates a Ben Franklin Crafts franchised store in
Commack, Long Island, New York, which opened in Fiscal 1994. Ms. DiBenedetto is
the daughter of Abbey J. Butler, who is the registrant's Co-Chairman of the
Board and Co-Chief Executive Officer and Ben Franklin's Co-Chairman of the
Board. LBD Crafts has purchased store fixtures and store merchandise from Ben
Franklin for a total of approximately $930,000 in Fiscal 1994.
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As a franchisee, LBD Crafts is required to pay royalties to Ben Franklin Crafts
based on the customary royalty rate of 2.5% of net store revenues. LBD Crafts
also contributes 0.5% of net store revenues into a national advertising fund
administered by Ben Franklin Crafts.
Other. The registrant and its subsidiaries maintain deposit accounts at FWB
Bank of Maryland, the holding company of which is FWB Bancorporation. Melvyn J.
Estrin, the registrant's Co-Chairman of the Board and Co-Chief Executive
Officer, is a director and a member of the Executive Committee of FWB
Bancorporation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Reference is made to the listing on page 78 of all financial
statements filed as part of this report.
(2) Financial Statement Schedules
Reference is made to the listing on page 78 of all financial statement
schedules filed as part of this report.
(3) Exhibits
Reference is made to the Exhibit Index beginning on page 86 for a list
of all exhibits filed as part of this report.
(b) Reports on Form 8-K
During the three months ended March 31, 1994, the registrant filed the
following Current Reports on Form 8-K:
(1) Form 8-K dated March 1, 1994, announcing the proposed business
combination in which a wholly-owned subsidiary of the registrant
would merge with and into FoxMeyer and pursuant to which merger
FoxMeyer would become a wholly-owned subsidiary of the registrant.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NATIONAL INTERGROUP, INC.
By /s/ EDWARD L. MASSMAN
Edward L. Massman
Controller
June 22, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICERS:
/s/ ABBEY J. BUTLER Co-Chairman of the Board and June 22, 1994
Abbey J. Butler Co-Chief Executive Officer
/s/ MELVYN J. ESTRIN Co-Chairman of the Board and June 22, 1994
Melvyn J. Estrin Co-Chief Executive Officer
/s/ PETER B. McKEE Vice President and Chief June 22, 1994
Peter B. McKee Financial Officer (Principal
Financial Officer)
/s/ EDWARD L. MASSMAN Controller (Principal June 22, 1994
Edward L. Massman Accounting Officer)
ADDITIONAL DIRECTORS:
/s/ SHELDON W. FANTLE Director June 22, 1994
Sheldon W. Fantle
/s/ PAUL M. FINFER Director June 22, 1994
Paul M. Finfer
/s/ ALFRED H. KINGON Director June 22, 1994
Alfred H. Kingon
/s/ WILLIAM G. TULL Director June 22, 1994
William G. Tull
</TABLE>
77
<PAGE> 79
ITEM 14(A) (1) AND (2) AND ITEM 14(D)
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of the registrant and its
subsidiaries are included in Item 14(a):
<TABLE>
<CAPTION>
PAGE NO. IN
FORM 10-K
-----------
<S> <C>
Independent Auditors' Report............................................. 34
Consolidated Statements of Operations -- For the Three Years Ended
March 31, 1994......................................................... 35
Consolidated Balance Sheets -- March 31, 1994 and 1993................... 36
Consolidated Statements of Stockholders' Equity -- For the Three Years
Ended March 31, 1994................................................... 37
Consolidated Statements of Cash Flows -- For the Three Years Ended
March 31, 1994......................................................... 38
Notes to Consolidated Financial Statements -- For the Three Years Ended
March 31, 1994......................................................... 39
</TABLE>
The following financial statement schedules of National Intergroup, Inc.
and subsidiaries are included in Item 14(d):
<TABLE>
<CAPTION>
PAGE NO. IN
FORM 10-K
-----------
<S> <C>
Schedule III -- Condensed Financial Information of Registrant............ 79
Schedule VIII -- Valuation and Qualifying Accounts....................... 83
Independent Auditors' Consent............................................ 85
</TABLE>
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the consolidated
financial statements and notes thereto or such information is not applicable.
78
<PAGE> 80
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NATIONAL INTERGROUP, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------
ASSETS 1994 1993
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Current assets
Cash and short-term investments...................................... $ 17,195 $ 6,678
Current deferred tax asset, net of valuation allowance............... 2,104 2,104
Other current assets................................................. 1,927 46,392
-------- --------
Total current assets......................................... 21,226 55,174
Intercompany receivables from subsidiaries............................. 24,987 10,793
Investments in subsidiaries and affiliates............................. 358,261 344,214
Investment in National Steel Corporation............................... 29,261 51,277
Deferred tax asset, net of valuation allowance......................... 28,960 18,034
Other assets........................................................... 322 2,223
-------- --------
Total assets................................................. $463,017 $481,715
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................................... $ 661 $ 479
Accrued and other liabilities........................................ 7,754 12,295
-------- --------
Total current liabilities.................................... 8,415 12,774
Note payable to FoxMeyer Corporation................................... 28,325 26,825
Reserves and other liabilities......................................... 36,689 31,423
Redeemable preferred stock............................................. 164,833 50,599
Stockholders' equity
Common stock......................................................... 119,979 119,942
Capital in excess of par value....................................... 207,281 207,204
Retained earnings.................................................... 99,007 120,456
-------- --------
426,267 447,602
Less: cost of common stock held in treasury.......................... 201,512 87,508
-------- --------
Total stockholders' equity................................... 224,755 360,094
-------- --------
Total liabilities and stockholders' equity................... $463,017 $481,715
======== ========
</TABLE>
See notes to condensed financial statements.
79
<PAGE> 81
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NATIONAL INTERGROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating costs
Administrative and general expenses........................ $ 10,701 $ 8,684 $ 9,675
Unusual items.............................................. -- -- 11,475
Other expense (income)..................................... -- (55) (6,408)
-------- -------- --------
Operating loss..................................... 10,701 8,629 14,742
Financing costs
Interest income............................................ 235 389 2,409
Intercompany interest income (expense)..................... (2,412) (613) 413
Interest expense........................................... 1,644 1,452 13,308
-------- -------- --------
Financing costs, net............................... 3,821 1,676 10,486
-------- -------- --------
Loss from continuing operations before income tax benefit,
equity in income of subsidiaries and affiliates, National
Steel Corporation and extraordinary item................... (14,522) (10,305) (25,228)
Income tax benefit........................................... 18,273 23,204 --
-------- -------- --------
Income (loss) from continuing operations before equity in
income of subsidiaries and affiliates, National Steel
Corporation and extraordinary item......................... 3,751 12,899 (25,228)
Equity in income of subsidiaries and affiliates.............. 20,456 2,824 28,356
National Steel Corporation
Loss on common stock investment............................ (2,350) (22,385) --
Net preferred dividend income.............................. 7,655 7,265 7,543
-------- -------- --------
Income from continuing operations before extraordinary
item....................................................... 29,512 603 10,671
Discontinued operations
Gain on disposal of discontinued operations................ -- -- 25,569
-------- -------- --------
Income before extraordinary item............................. 29,512 603 36,240
Extraordinary item........................................... -- -- (5,837)
-------- -------- --------
Net income................................................... $ 29,512 $ 603 $ 30,403
======== ======== ========
</TABLE>
See notes to condensed financial statements.
80
<PAGE> 82
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NATIONAL INTERGROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------
1994 1993 1992
-------- -------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 29,512 $ 603 $ 30,403
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Loss on common stock of National Steel Corporation........ 2,350 22,385 --
Net preferred dividend income from National Steel
Corporation............................................ (7,655) (7,265) (7,543)
Equity in income of subsidiaries and affiliates........... (20,456) (2,824) (28,356)
Extraordinary loss on extinguishment of debt.............. -- -- 5,837
Unusual items............................................. -- -- 11,475
Deferred tax benefit...................................... (10,034) (23,204) --
Gain on discontinued operations, net of tax............... -- -- (25,569)
Gain on sale of marketable securities..................... -- -- (3,266)
Cash provided (used) by working capital items:
Receivables and other current assets...................... (658) 2,004 962
Accounts payable and accrued liabilities.................. 2,541 1,317 (12,901)
Net intercompany activity with subsidiaries................. (14,253) 662 (9,889)
Funds transferred to National Steel Corporation for
potential environmental liabilities....................... (10,000) -- --
Other....................................................... (2,400) 1,768 (2,912)
-------- -------- ---------
Net cash provided (used) by operating activities............ (31,053) (4,554) (41,759)
-------- -------- ---------
Cash flows from investing activities:
Proceeds from the sale of operations...................... -- 7,850 69,650
Investments in subsidiaries and affiliates................ (179) (23,288) --
Sale of marketable securities............................. 44,672 -- 63,243
Dividends received from subsidiaries and affiliates....... 6,353 6,001 111,286
Other..................................................... 446 -- 290
-------- -------- ---------
Net cash provided (used) by investing activities............ 51,292 (9,437) 244,469
-------- -------- ---------
Cash flows from financing activities:
Dividends paid............................................ (5,060) (5,462) (5,500)
Mandatory redemption of preferred stock................... (4,399) (4,412) --
Redemption of preferred share purchase rights............. -- (1,024) --
Note payable to FoxMeyer Corporation...................... 1,500 26,825 --
Loan origination fees..................................... (512) -- --
Borrowings under revolving credit facilities.............. 25,700 -- --
Repayments under revolving credit facilities.............. (25,700) -- --
Repurchase of 11.2% subordinated notes.................... -- -- (164,303)
Repurchase of treasury stock.............................. (1,251) (11,254) (19,521)
Cost of issuing subsidiary stock to public................ -- -- (1,540)
Other debt repayments..................................... -- -- (5,284)
-------- -------- ---------
Net cash provided (used) by financing activities............ (9,722) 4,673 (196,148)
-------- -------- ---------
Net increase (decrease) in cash and short-term
investments............................................... 10,517 (9,318) 6,562
Cash and short-term investments, beginning of year.......... 6,678 15,996 9,434
-------- -------- ---------
Cash and short-term investments, end of year................ $ 17,195 $ 6,678 $ 15,996
======== ======== =========
</TABLE>
See notes to condensed financial statements.
81
<PAGE> 83
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NATIONAL INTERGROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments consist
principally of amounts held in demand deposit accounts and amounts invested in
liquid time deposit instruments having a maturity of three months or less at the
time of purchase and are recorded at cost. National Intergroup, Inc. (the
"Parent Company") had $3.0 million of cash and short-term investments at March
31, 1994 that were restricted as to availability, primarily as collateral for a
lease.
DEFERRED TAX ASSET: The Parent Company's current and noncurrent deferred tax
assets consist almost entirely of tax net operating loss carryforwards and
reserves which were not deductible for federal income tax purposes when accrued.
The valuation allowances netted against the deferred tax assets at March 31,
1994 and 1993 were $75.8 million and $83.4 million, respectively.
INTERCOMPANY RECEIVABLES AND NOTE PAYABLE TO FOXMEYER CORPORATION: The
intercompany receivables between the Parent Company and its subsidiaries are not
evidenced by notes and do not bear interest. The note payable to FoxMeyer
Corporation is evidenced by a note, bears interest at 2% above the subsidiary's
long-term borrowing rate, and contains certain covenants. These covenants
prevent the Parent Company from borrowing any additional funds which are senior
to this note, allows the Parent Company to issue $25.0 million of debt that
ranks pari passu with the note and does not limit the Parent Company from
issuing subordinated or non-recourse debt. The note also restricts the payment
of cash dividends on the Parent Company's common stock and on the Series A
Preferred Stock (see Note J to Consolidated Financial Statements). The Parent
Company pledged 4.5 million shares of FoxMeyer Corporation's common stock as
collateral for the note.
RECLASSIFICATIONS: Certain wholly-owned subsidiaries of the Parent Company were
merged into the Parent Company during fiscal 1994 and accounted for as a pooling
of interests. Accordingly, the accompanying condensed financial statements have
been restated to include the accounts and operations of these subsidiaries for
all periods prior to the merger.
NOTE B -- DIVIDENDS RECEIVED
Dividends received in cash from subsidiaries and affiliates for each of the
three years ended March 31, 1994 were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ --------
<S> <C> <C> <C>
FoxMeyer Corporation....................................... $6,353 $6,001 $106,036
Ben Franklin Retail Stores, Inc............................ -- -- 5,250
------ ------ --------
$6,353 $6,001 $111,286
====== ====== ========
</TABLE>
NOTE C -- TAX SHARING PAYMENTS
Under tax sharing agreements with its subsidiaries, the Parent Company
received the following payments for each of the three years ended March 31, 1994
(in thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ --------
<S> <C> <C> <C>
FoxMeyer Corporation....................................... $7,664 $3,753 $ --
Ben Franklin Retail Stores, Inc............................ -- 114 --
------ ------ --------
$7,664 $3,867 $ --
====== ====== ========
</TABLE>
82
<PAGE> 84
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- - - ------------------------------------------------ ---------- ---------------------------- ------------ ----------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES -- DESCRIBE DESCRIBE PERIOD
- - - ------------------------------------------------ ---------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1994
(THOUSANDS OF DOLLARS)
RESERVES DEDUCTED FROM ASSETS
Allowances for possible losses on trade notes
and accounts receivable.................... $ 18,841 $ 1,757 $ -- $ 5,465(3) $ 15,133
Allowance for possible loss on pre-bankruptcy
receivable from Phar-Mor, Inc.............. 40,000 -- -- -- 40,000
Reserve for inventory shrinkage............... 3,058 1,816 -- 738(1) 4,136
RESERVES SHOWN ELSEWHERE
Long-term reserves for facility sales,
shutdowns and discontinued operations...... 21,823 628 2,023(7) 1,836(5) 22,638
YEAR ENDED MARCH 31, 1993
(THOUSANDS OF DOLLARS)
RESERVES DEDUCTED FROM ASSETS
Allowances for possible losses on trade notes
and accounts receivable.................... $ 14,833 $ 6,866 $ 4,336(6) $ 7,194(3) $ 18,841
Allowance for possible loss on pre-bankruptcy
receivable from Phar-Mor, Inc.............. -- 40,000 -- -- 40,000
Reserve for inventory shrinkage............... 3,076 1,890 1,037(6) 2,945(1) 3,058
RESERVES SHOWN ELSEWHERE
Long-term reserves for facility sales,
shutdowns and discontinued operations...... 27,252 504 -- 5,933(5) 21,823
YEAR ENDED MARCH 31, 1992
(THOUSANDS OF DOLLARS)
RESERVES DEDUCTED FROM ASSETS
Allowances for possible losses on trade notes
and accounts receivable.................... $ 12,774 $ 7,826 $ 1,781(2) $ 7,548(3) $ 14,833
Reserve for inventory shrinkage............... 1,059 2,888 -- 871(1) 3,076
RESERVES SHOWN ELSEWHERE
Long-term reserves for facility sales,
shutdowns and discontinued operations...... 16,695 654 22,354(4) 12,451(5) 27,252
</TABLE>
83
<PAGE> 85
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
FOR THE THREE YEARS ENDED MARCH 31, 1994
<TABLE>
<S> <C>
Note 1 -- Consists principally of inventory writeoffs and sales.
Note 2 -- Reconsolidation of Ben Franklin Retail Stores, Inc.'s allowance for doubtful
accounts.
Note 3 -- Principally relates to doubtful accounts which have been written off and the
reversal of reserves for doubtful accounts.
Note 4 -- Includes $19.1 million of reserves associated with, and retained subsequent to,
the sale of The Permian Corporation and other businesses. Amounts were
reclassified from "Net realizable value of assets held for disposition". Remainder
principally relates to the reconsolidation of Ben Franklin Retail Stores, Inc.
Note 5 -- Principally cash disbursements related to these reserves.
Note 6 -- Principally relates to reserves recorded under the purchase method of accounting
for the Harris Wholesale Company acquisition.
Note 7 -- Reclassified from short-term liabilities.
</TABLE>
84
<PAGE> 86
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
2-56083, 2-91622, 2-95028, 33-16919, 33-27060 and 33-27719 on Form S-8, No.
33-2289 and 33-37531 on Form S-3 and No. 2-45941 on Form S-16 of National
Intergroup, Inc. of our report dated May 11, 1994, appearing in this Annual
Report on Form 10-K of National Intergroup, Inc. for the year ended March 31,
1994.
DELOITTE & TOUCHE
Dallas, Texas
June 27, 1994
85
<PAGE> 87
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - - ---------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
3-A -- Restated Certificate of Incorporation of the registrant and all
subsequent amendments thereto. (Filed as Exhibit 3-A to the
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993 and incorporated herein by reference.)
3-B -- Certificate of Resolution relating to the registrant's $5 Cumulative
Convertible Preferred Stock. (Filed as Exhibit 4-B to the
registrant's Registration Statement on Form 8-B (File No. 1-8549) and
incorporated herein by reference.)
3-C -- Certificate of Designations, Rights and Preferences relating to the
registrant's $4.20 Cumulative Exchangeable Series A Preferred Stock.
(Filed as Exhibit 9(c)(1) to the registrant's Schedule 13E-4 Issuer
Tender Offer Statement dated October 6, 1993 and incorporated herein
by reference.)
3-D -- By-laws of the registrant. (Filed as Exhibit 3-A to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1991 and incorporated herein by reference.)
10-A -- National Intergroup, Inc. 1993 Stock Option and Performance Award
Plan.*
10-B -- National Intergroup, Inc. Director's Retirement Plan dated December
1, 1983. (Filed as Exhibit 10-A to the registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992 and incorporated
herein by reference.)
10-C -- FoxMeyer Corporation Employees' Savings and Profit Sharing Program.
(Filed as Exhibit 10-D to FoxMeyer Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994 and incorporated
herein by reference.)
10-D -- FoxMeyer Corporation Fiscal Year 1994 Executive Incentive
Compensation Plan. (Filed as Exhibit 10-E to FoxMeyer Corporation's
Annual Report on Form 10-K for the fiscal year ended March 31, 1994
and incorporated herein by reference.)
10-E -- FoxMeyer Corporation Long-Term Incentive Plan. (Filed as Exhibit 10-F
to FoxMeyer Corporation's Annual Report on Form 10-K for the fiscal
year ended March 31, 1994 and incorporated herein by reference.)
10-F -- FoxMeyer Corporation Amended and Restated Supplemental Savings Plan.
(Filed as Exhibit 10-G to FoxMeyer Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994 and incorporated
herein by reference.)
10-G -- FoxMeyer Drug Company Amended and Restated Special Severance Plan.
(Filed as Exhibit 10-L to FoxMeyer Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992 and incorporated
herein by reference.)
10-H -- Loan Agreement, dated as of January 13, 1994, among the registrant
and Banque Paribas, as Agent, and the Banks named therein. (Filed as
Exhibit 10-A to the registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1993 and incorporated herein by
reference.)
10-I -- Tax Sharing Agreement, dated as of November 25, 1992, between
FoxMeyer Corporation and the registrant. (Filed as Exhibit 28(a) to
FoxMeyer Corporation's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1992 and incorporated herein by reference.)
</TABLE>
86
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - - ---------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
10-J -- Amendment dated April 21, 1993 to the Tax Sharing Agreement, dated as
of November 25, 1992, between FoxMeyer Corporation and the
registrant. (Filed as Exhibit 10-M to FoxMeyer Corporation's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.)
10-K -- Loan Agreement, dated as of November 25, 1992, between FoxMeyer
Corporation and the registrant. (Filed as Exhibit 28(b) to FoxMeyer
Corporation's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1992 and incorporated herein by reference.)
10-L -- Amendment dated April 21, 1993 to the Loan Agreement, dated as of
November 25, 1992, between FoxMeyer Corporation and the registrant.
(Filed as Exhibit 10-O to FoxMeyer Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1993 and incorporated
herein by reference.)
10-M -- Amendment dated September 30, 1993 to the Loan Agreement, dated as of
November 25, 1992, between FoxMeyer Corporation and the registrant.
(Filed as Exhibit 10-R to FoxMeyer Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994 and incorporated
herein by reference.)
10-N -- Amendment dated December 17, 1993 to the Loan Agreement, dated as of
November 25, 1992, between FoxMeyer Corporation and the registrant.
(Filed as Exhibit 10-S to FoxMeyer Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994 and incorporated
herein by reference.)
10-O -- Stock Purchase Pledge Agreement, dated as of November 25, 1992,
between FoxMeyer Corporation and the registrant. (Filed as Exhibit
28(c) to FoxMeyer Corporation's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1992 and incorporated herein by
reference.)
10-P -- Working Capital Pledge Agreement, dated as of November 25, 1992,
between FoxMeyer Corporation and the registrant. (Filed as Exhibit
28(d) to FoxMeyer Corporation's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1992 and incorporated herein by
reference.)
10-Q -- Amended and Restated Management Agreement, dated as of January 1,
1992, between FoxMeyer Corporation and the registrant. (Filed as
Exhibit 10-A to FoxMeyer Corporation's Annual Report on Form 10-K for
the fiscal year ended March 31, 1992 and incorporated herein by
reference.)
10-R -- Stock Purchase and Recapitalization Agreement, dated as of June 26,
1990, among the registrant, NII Capital Corporation, NKK Corporation,
NKK U.S.A. Corporation and National Steel Corporation. (Filed as
Exhibit 10-AQ to the registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1990 and incorporated herein by
reference.)
10-S -- Amendment to Stock Purchase and Recapitalization Agreement, dated as
of July 31, 1991, among the registrant, NII Capital Corporation, NKK
Corporation, NKK U.S.A. Corporation and National Steel Corporation.
(Filed as Exhibit 2-F to National Steel Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991 and
incorporated herein by reference.)
10-T -- Put Agreement, dated as of June 26, 1990, among NII Capital
Corporation, NKK U.S.A. Corporation and National Steel Corporation.
(Filed as Exhibit 10-AQ to the registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1990 and incorporated herein
by reference.)
</TABLE>
87
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - - ---------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
10-U -- Amended and Restated Weirton Liabilities Agreement, dated as of June
26, 1990, among the registrant, NII Capital Corporation and National
Steel Corporation. (Filed as Exhibit 10-AQ to the registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1990 and
incorporated herein by reference.)
10-V -- Amendment to Amended and Restated Weirton Liabilities Agreement,
dated as of July 31, 1991, between the registrant, NII Capital
Corporation and National Steel Corporation. (Filed as Exhibit 10-H to
National Steel Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 and incorporated herein by
reference.)
10-W -- Agreement, dated as of February 3, 1993, among the registrant, NII
Capital Corporation, NKK Corporation, NKK U.S.A. Corporation and
National Steel Corporation. (Filed as Exhibit 10.30 to National Steel
Corporation's Registration Statement on Form S-1 (File No. 33-57952)
and incorporated herein by reference.)
10-X -- Amended and Restated Loan Agreement, dated as of April 29, 1993, by
and among FoxMeyer Corporation, FoxMeyer Drug Company, Merchandise
Coordinator Services Corporation, Harris Wholesale Company, the
Lenders and Issuer named therein, Citicorp USA, Inc., as
Administrative Agent for the Lenders, and NationsBank of Texas, N.A.,
and Banque Paribas, as Co-Agents for the Lenders. (Filed as Exhibit
10-J to FoxMeyer Corporation's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993 and incorporated herein by
reference.)
10-Y -- First Amendment to Amended and Restated Loan Agreement, dated as of
October 18, 1993, by and among FoxMeyer Corporation, FoxMeyer Drug
Company, Merchandise Coordinator Services Corporation, Harris
Wholesale Company, the Lenders and Issuer named therein, Citicorp
USA, Inc., as Administrative Agent for the Lenders, and NationsBank
of Texas, N.A. and Banque Paribas, as Co-Agents for the Lenders.
(Filed as Exhibit 10-B to FoxMeyer Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993 and incorporated
herein by reference.)
10-Z -- Credit Agreement dated as of August 30, 1993 among FoxMeyer
Corporation, FoxMeyer Drug Company, Merchandise Coordinator Services
Corporation and Harris Wholesale Company, various financial
institutions named therein and Continental Bank, N.A., individually
and as Agent. (Filed as Exhibit 10-C to FoxMeyer Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993 and incorporated herein by reference.)
10-AA -- First Amendment to Credit Agreement dated as of October 18, 1993
among FoxMeyer Corporation, FoxMeyer Drug Company, Merchandise
Coordinator Services Corporation and Harris Wholesale Company,
various financial institutions named therein and Continental Bank,
N.A., individually and as Agent. (Filed as Exhibit 10-C to FoxMeyer
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 and incorporated herein by reference.)
10-AB -- Form of Note Agreement, dated as of April 15, 1993, between FoxMeyer
Corporation and each Purchaser that is a party thereto, relating to
$198,000,000 of FoxMeyer Corporation's 7.09% Senior Notes Due April
15, 2005. (Filed as Exhibit 4-A to FoxMeyer Corporation's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.)
</TABLE>
88
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - - ---------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
10-AC -- Trade Receivables Purchase and Sale Agreements dated as of October
29, 1993 among FoxMeyer Corporation and, as applicable, Enterprise
Funding Corporation, Corporate Asset Funding Company, Inc., Citibank,
N.A., Citicorp North America, Inc., individually and as agent, and
NationsBank of North Carolina, N.A., individually and as co-agent.
(Filed as Exhibit 10-A to FoxMeyer Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993 and incorporated
herein by reference.)
10-AD -- Indenture for Ben Franklin Retail Stores, Inc. 7.5% Convertible
Subordinated Notes due June 1, 2003. (Filed as an Exhibit to Ben
Franklin Retail Stores, Inc.'s Registration Statement on Form S-1
File No. 33-62632, and incorporated herein by reference.)
10-AE -- Amended and Restated Loan Agreement between Ben Franklin Retail
Stores, Inc. and subsidiaries and LaSalle National Bank dated June
22, 1994. (Filed as Exhibit 10.36 to Ben Franklin Retail Stores,
Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31,
1994 and incorporated herein by reference.)
10-AF -- Employment Agreement, dated as of October 24, 1991, between the
registrant and Abbey J. Butler. (Filed as Exhibit 10-W to the
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1992 and incorporated herein by reference.)
10-AG -- Employment Agreement, dated as of October 24, 1991, between the
registrant and Melvyn J. Estrin. (Filed as Exhibit 10-X to the
registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1992 and incorporated herein by reference.)
10-AH -- Employment Agreement, dated as of January 15, 1994, between FoxMeyer
Corporation and Peter B. McKee. (Filed as Exhibit 10-X to FoxMeyer
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994 and incorporated herein by reference.)
11 -- Statement Re: Computation of per share earnings.*
21 -- Subsidiaries of the registrant.*
23 -- Consent of Independent Auditors is included in the List of Financial
Statements and Financial Statement Schedules.
</TABLE>
- - - ---------------
*Filed herewith
89
<PAGE> 1
EXHIBIT 10-A
NATIONAL INTERGROUP, INC.
1993 STOCK OPTION
AND
PERFORMANCE AWARD PLAN
1. Purpose
National Intergroup, Inc., a Delaware corporation (the "Company"), by
means of this 1993 Stock Option and Performance Award Plan (the "Plan"),
desires to afford its directors, officers, and certain of its key employees and
the key employees of any parent corporation or subsidiary corporation thereof
now existing or hereafter formed or acquired who are responsible for the
continued growth of the Company, an opportunity to acquire a proprietary
interest in the Company, and thus to create in such persons an increased
interest in and a greater concern for the welfare of the Company and any parent
corporation or subsidiary corporation thereof. As used in this Plan, the terms
"parent corporation" and "subsidiary corporation" shall mean, respectively, a
corporation within the definition of such terms contained in Sections 424(e)
and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code").
The stock options ("Options") and other awards ("Plan Awards") to be
granted pursuant to this Plan are a matter of separate inducement and are not
in lieu of any salary or other compensation for services.
2. Administration
The Plan shall be administered by the Personnel and Compensation
Committee, or any successor thereto, of the Board of Directors of the Company
or by such
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other committee, as may be determined by the Board of Directors (the
"Committee"). The Committee shall consist of not less than two members of the
Board of Directors of the Company, each of whom shall qualify as a
"disinterested person" within the meaning of Rule 16b-3, as amended, or other
applicable rules under Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Committee shall administer the Plan so as to
comply at all times with the Exchange Act. A majority of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by a majority
of the members of the Committee, shall be the acts of the Committee.
3. Shares Available
Subject to the adjustments provided in Section 11, the maximum aggregate
number of shares of common stock of the Company which may be granted for all
purposes under the Plan shall be 2,000,000 shares. In the event that an option
or an award of shares on a restricted basis under the Plan to any individual
expires, is terminated unexercised, or is forfeited as to any shares covered
thereby, such shares shall thereafter be available for awards to such
individual or other individuals under the Plan. To the extent that a stock
appreciation right included in an option is exercised, such option shall be
deemed to have been exercised. Options, stock appreciation rights, performance
share awards, restricted stock grants and performance units awarded may be
fulfilled in accordance with the terms of the Plan with either authorized and
unissued shares of the common stock of the Company or issued shares of such
common stock held in the Company's treasury.
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4. Eligibility and Bases of Participation
Grants under the Plan (i) may be made, pursuant to Sections 6, 8 and 9, to
key employees, officers and directors (but not to any director who is not also
an employee) of the Company, or any parent corporation or subsidiary
corporation thereof, who are regularly employed on a salaried basis and who are
so employed on the date of such grant (the "Officer and Key Employee
Participants") and (ii) shall be made, subject to and in accordance with
Section 7, to individuals not regularly employed by the Company who serve as
directors of the Company (the "Outside Director Participants").
5. Authority of Committee
Subject to, and consistent with, the express provisions of the Plan and the
Code, the Committee shall have plenary authority, in its sole discretion, to:
a. determine the persons, other than Outside Director Participants, to whom
Options and Plan Awards shall be granted, the time when such Options and
Plan Awards shall be granted, the number of Options and Plan Awards, the
purchase price or exercise price of each Option, the period(s) during
which such Option shall be exercisable (whether in whole or in part),
the restrictions to be applicable to Options and Plan Awards and the
other terms and provisions thereof (which need not be identical);
b. require, as a condition to the granting of any Option or Plan Award,
that the person receiving such Option or Plan Award agree not to sell or
otherwise dispose of such Security, any common stock acquired pursuant
to such Security or any other "derivative security" (as defined by Rule
16a-1(c) under
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the Exchange Act) for a period of six (6) months following the later of
(i) the date of the grant of such Option or Plan Award or (ii) the date
when the exercise price of such Option or Plan Award is fixed if such
exercise price is not fixed at the date of grant;
c. provide an arrangement through registered broker-dealers whereby
temporary financing may be made available to an optionee by the
broker-dealer, under the rules and regulations of the Federal Reserve
Board, for the purpose of assisting an optionee in the exercise of an
Option, such authority to include the payment by the Company of the
commissions of the broker-dealer;
d. provide the establishment of procedures for an optionee (i) to have
withheld from the total number of shares to be acquired upon the
exercise of an Option that number of shares having a Fair Market Value
(as defined in Section 14) which, together with such cash as shall be
paid in respect of fractional shares, shall equal the Option exercise
price, and (ii) to exercise a portion of an Option by delivering that
number of shares already owned by such optionee having a Fair Market
Value which shall equal the partial Option exercise price and to deliver
the shares thus acquired by such optionee in payment of shares to be
received pursuant to the exercise of additional portions of such Option,
the effect of which shall be that such optionee can in sequence utilize
such newly acquired shares in payment of the exercise price of the
entire Option, together with such cash as shall be paid in respect of
fractional shares;
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e. provide the establishment of a procedure whereby a number of shares of
common stock or other securities may be withheld from the total number
of shares of common stock or other securities to be issued upon exercise
of an Option to meet the obligation of withholding for taxes incurred by
an optionee upon such exercise;
f. prescribe, amend, modify and rescind rules and regulations relating to
the Plan;
g. make all determinations specified in or permitted by the Plan or deemed
necessary or desirable for its administration or for the conduct of the
Committee's business; and
h. establish any procedures determined to be appropriate in discharging its
responsibilities under the Plan.
The Committee may delegate to one or more of its members, or to one or more
agents, such administrative duties as it may deem advisable, and the Committee
or any person to whom it has delegated duties as aforesaid, may employ one or
more persons to render advice with respect to any responsibility the Committee
or such person may have under the Plan; provided, however, that the Committee
may not delegate any duties to a member of the Board of Directors of the
Company who, if elected to serve on the Committee, would not qualify as a
"disinterested person" to administer the Plan as contemplated by Rule 16b-3, as
amended, or other applicable rules under the Exchange Act. The Committee may
employ attorneys, consultants, accountants, or such other persons as it may
deem appropriate, and the Committee, the Company, and its officers and
directors shall be entitled to rely upon the
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advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon the Company, all persons who have received Options or
Plan Awards under the Plan and all other interested persons. No member or
agent of the Committee shall be personally liable for any action, determination
or interpretation made in good faith with respect to the Plan and all members
and agents of the Committee shall be fully protected by the Company in respect
of any such action, determination or interpretation.
6. Stock Options for Officers and Key Employee Participants
The Committee shall have the authority, in its sole discretion, to grant to
Officers and Key Employee Participants (i) incentive stock options ("Incentive
Options") pursuant to Section 422 of the Code, (ii) non-qualified stock options
("Non-Qualified Options") (options which do not qualify under Section 422 of
the Code) or (iii) both types of Options. The terms and conditions of the
Options shall be determined from time to time by the Committee; provided,
however, that the Options granted under the Plan shall be subject to the
following:
a. Option Price. The Committee shall establish the option price at the
time any Option is granted at such amount as the Committee shall
determine; provided, however, that the option price for each share
purchasable under any Incentive Option granted hereunder shall be such
amount as the Committee shall, in its best judgment, determine to be not
less than one hundred percent (100%) of the Fair Market Value (as
defined in Section 14) per share at the date the Option is granted; and
provided, further, however, that in the case of an Incentive Option
granted to a person who, at the time such Incentive Option is
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granted, owns shares of the Company, or any parent corporation or
subsidiary corporation thereof, which possess more than ten percent
(10%) of the total combined voting power of all classes of shares of the
Company or of any subsidiary corporation or parent corporation of the
Company, the purchase price for each share shall be such amount as the
Committee, in its best judgment, shall determine to be not less than one
hundred ten percent (110%) of the Fair Market Value per share at the
date the Option is granted. The Option price will be subject to
adjustment in accordance with the provisions of Section 11 of the Plan.
b. Payment. The price per share of common stock of the Company with
respect to each Option shall be payable at the time the Option is
exercised. Such price shall be payable in cash, which may be paid by
wire transfer in immediately available funds, by check or by any other
instrument acceptable to the Company or, in the discretion of the
Committee, by delivery to the Company of shares of common stock of the
Company owned by the optionee or by the Company withholding from the
total number of shares to be acquired pursuant to the Option a portion
of such shares. Shares delivered to or withheld by the Company in
payment of the option price shall be valued at the Fair Market Value of
the common stock of the Company on the day preceding the date of the
exercise of the Option.
c. Continuation of Employment. Notwithstanding anything else contained
herein, each Option by its terms shall require the optionee to remain in
the continuous
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employ of the Company, or any parent corporation or subsidiary
corporation thereof, for at least six (6) months (three (3) months in
the case of an Incentive Option) from the date of grant of the Option
before the right to exercise any part of the Option will accrue.
d. Exercisability of Stock Option. Subject to subsections (e), (f) and (g)
below, each Option shall be exercisable in such installments as may be
determined by the Committee at the time of the grant. The right to
purchase shares shall be cumulative so that when the right to purchase
any shares has accrued such shares or any part thereof may be purchased
at any time thereafter until the expiration or termination of the
Option. No Option by its terms shall be exercisable after the
expiration of ten (10) years from the date of grant of the Option;
provided, however, in the case of an Incentive Option granted to a
person who, at the time such Option is granted, owns stock of the
Company, or any parent corporation or subsidiary corporation thereof,
possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, or any corporation or
subsidiary corporation thereof, such Option shall not be exercisable
after the expiration of five (5) years from the date such Option is
granted.
e. Death. In the event of the death of any optionee, (i) all options held
by such optionee on the date of death shall become exercisable and (ii)
the estate of such optionee shall have the right, within one (1) year
after the date of death (but in no event after the expiration date of
the Option), to exercise such
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optionee's Option with respect to all or any part of the shares of stock
underlying the Options held by such optionee immediately prior to the
time of his death.
f. Disability. If the employment of any optionee is terminated because of
Disability (as defined in Section 14), (i) all options held by such
optionee as of the date of such termination shall become exercisable and
(ii) such optionee shall have the right within one (1) year after the
date of such termination (but in no event after the expiration of the
Option), to exercise the Option with respect to all or any part of the
shares of stock underlying the Options held by such optionee immediately
prior to the time of such termination.
g. Retirement. If an optionee retires (as defined in Section 14) from the
Company, its parent or any of its subsidiaries, (i) all Options held by
such optionee on the date of his retirement shall become exercisable and
(ii) such optionee shall have the right, within one year (or three (3)
months in the case of an Incentive Stock Option) after the date of his
retirement (but in no event after the expiration date of the Option) to
exercise his Option with respect to all or any part of the shares of
stock underlying the Options held by such optionee immediately prior to
the time of retirement.
h. Other Termination or For Cause. If the employment of an optionee is
terminated for any reason other than those specified in subsections
6(e), (f) or (g) above, such optionee shall have the right, within
thirty (30) days (or three (3) months in the case of an Incentive
Option) after the date of such
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termination (but in no event after the expiration date of the Option),
to exercise his Option with respect to all or any part of the shares of
stock which such optionee was entitled to purchase immediately prior to
the time of such termination; provided, however, that, if such
optionee's employment was terminated by the Company, or any parent
corporation or subsidiary corporation thereof, for good cause, or if the
optionee voluntarily terminates employment without the consent of the
Company, or any parent corporation or subsidiary corporation thereof (of
which fact the Committee shall be the sole judge), such optionee shall
immediately forfeit all rights under his Option, except as to shares of
common stock of the Company already purchased thereunder. Termination
for "good cause" shall mean (unless another definition is agreed to in
writing by the Company and the optionee) termination by action of the
Board of Directors because of: (i) the optionee's conviction of, or
plea of nolo contendere to, a felony or a crime involving moral
turpitude; (ii) the optionee's personal dishonesty, incompetence,
willful misconduct, willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or breach of
fiduciary duty which involves personal profit; (iii) the optionee's
commission of material mismanagement in the conduct of his duties as
assigned to him by the Board of Directors or the Chief Executive Officer
of the Company; (iv) the optionee's willful failure to execute the
policies of the Company or his stated duties as established by the Board
of Directors or the Chief Executive Officer of the Company, or
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intentional failure to perform his stated duties; or (v) drug addiction
on the part of the optionee. The determination that there exists "good
cause" for termination shall be made by the Committee (unless otherwise
agreed to in writing by the Company and the optionee) and such
determination shall be conclusive.
i. Maximum Exercise. The aggregate Fair Market Value of shares of common
stock of the Company (determined at the time of the grant of the Option)
with respect to which Incentive Options are exercisable for the first
time by an optionee during any calendar year under all plans of the
Company, or any parent corporation or subsidiary corporation thereof,
shall not exceed $100,000.
7. Stock Option Grants to Outside Director Participants
Subject to the terms and conditions of this Section 7, commencing with
the Annual Meeting of the Company's stockholders to be held in 1994, each
person who is serving as an Outside Director Participant on the third trading
day following the later of (i) the date on which the Annual Meeting of the
Company's stockholders or any adjournment thereof is held in any year or (ii)
the date on which the Company publicly announces the results of operations of
the Company for the fiscal quarter immediately preceding such Annual Meeting,
shall automatically be granted an Option to purchase 1,000 shares of common
stock of the Company. In addition, but without duplication with respect to the
foregoing grant to existing Outside Directors, an initial grant of an Option to
purchase 15,000 shares of common stock shall automatically be granted to each
individual who is first
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elected an Outside Director on the third trading date following the effective
date of such election. The terms and conditions of the Options granted to
Outside Director Participants hereunder shall be determined from time to time
by the Committee; provided, however, that the Options granted hereunder shall
be Non-Qualified Options and shall be subject to the following:
a. Option Price. The option price of each share covered by such Options
shall be equal to the Fair Market Value per share of the common stock of
the Company on the date of grant.
b. Payment. The price per share of common stock of the Company with
respect to each Option shall be payable at the time the Option is
exercised. Such price shall be payable in cash, which may be paid by
wire transfer in immediately available funds, by check or by any other
instrument acceptable to the Company or, in the discretion of the
Committee, by delivery to the Company of other shares of common stock of
the Company owned by the optionee or by the Company withholding from the
total number of shares to be acquired pursuant to the Option, a portion
of such shares. Shares delivered to or withheld by the Company in
payment of the option price shall be valued at the Fair Market Value of
the common stock of the Company on the day preceding the date of the
exercise of the Option.
c. Exercisability of Stock Option. Subject to subsections (d) and (f)
below, fifty percent (50%) of each Option shall be exercisable within
one (1) year after the date of the grant, with the remainder becoming
exercisable two (2) years after
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the date of grant. The right to purchase shares shall be cumulative so
that when the right to purchase any shares has accrued such shares or
any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. No Option by its terms shall
be exercisable after the expiration of five (5) years from the date of
grant of the Option.
d. Death. In the event of the death of an Outside Director Participant,
(i) all Options held by such optionee on the date of death shall become
exercisable and (ii) the estate of such optionee shall have the right
within one (1) year after the date of death (but in no event after the
expiration of the Option) to exercise his Option with respect to all or
any part of the shares of stock underlying the Options held by such
optionee immediately prior to the time of his death.
e. Disability. If an Outside Director Participant's service as a director
of the Company is terminated because of Disability, (i) all options held
by such optionee as of the date of such termination shall become
exercisable and (ii) such optionee shall have the right within one (1)
year after the date of such termination (but in no event after the
expiration of the Option) to exercise his Option with respect to all or
any part of the shares of stock underlying the Options held by such
optionee immediately prior to the time of such termination.
f. Retirement. If an Outside Director Participant retires (as defined in
Section 14) from the Company, (i) all Options held by such optionee on
the date of his
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retirement shall become exercisable and (ii) such optionee shall have
the right, within one year after the date of his retirement (but in no
event after the expiration date of the Option) to exercise his Option
with respect to all or any part of the shares of stock underlying the
Options held by such optionee immediately prior to the time of
retirement.
g. Other Termination or For Cause. In the event an Outside Director
Participant is terminated for any reason other than those specified in
subsections 7(d), (e) or (f) above, such optionee shall have the right,
within thirty (30) days after the date of such termination (but in no
event after the expiration date of the Option), to exercise his Option
with respect to all or any part of the shares of stock which such
optionee was entitled to purchase immediately prior to such termination;
provided, however, that if the optionee is removed from office for cause
by action of the stockholders of the Company in accordance with its
by-laws and the General Corporation Law of the State of Delaware, or if
such optionee voluntarily terminates his service without the consent of
the Company (of which fact the Committee shall be the sole judge), then
such optionee shall immediately forfeit his rights under his Option,
except as to the shares of common stock of the Company already purchased
thereunder.
h. Ineligibility for Other Grants. Any Outside Director Participant who
receives an Option pursuant to this Section 7 shall be ineligible to
receive any other Option under any other Section of this Plan.
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i. The Committee. The provisions of this Section 7 shall be administrated
by the Committee solely in accordance with the terms hereof; provided,
however, that the Committee shall maintain the authority to interpret
this Section of the Plan and to make all determinations permitted by
this Section 7 or deemed necessary for its administration.
j. Amendment. The provisions of this Section 7 shall not be amended more
than one time in any six month period, other than to comply with
amendments to the Code, the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the rules and regulations thereunder.
8. Stock Appreciation Rights
The Committee shall have the authority to grant stock appreciation
rights to Officers and Key Employee Participants in connection with an Option,
either at the time of grant of the Option or by amendment. Each such right
shall be subject to the same terms and conditions as the related Option and
shall be exercisable only at such times and to such extent as the related
Option is exercisable; provided, however, that a stock appreciation right may
be exercised only when the Fair Market Value of the common stock of the Company
exceeds the exercise price of the related Option. A stock appreciation right
shall entitle the optionee to surrender to the Company unexercised the related
Option, or any portion thereof, and to receive from the Company in exchange
therefor that number of shares having an aggregate value equal to the excess of
(i) the Fair Market Value of one share of the common stock of the Company on
the day preceding the surrender of such Option over (ii) the option price per
share multiplied by (iii) the number of shares called for by the Option, or
portion
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thereof, which is surrendered; provided, however, that no fractional shares
shall be issued. The number of shares of common stock of the Company which may
be received pursuant to the exercise of a stock appreciation right may not
exceed the number of shares called for by the Option, or portion thereof, which
is surrendered. The Committee shall have the right to determine, in its sole
discretion, whether (i) the Company's obligation to any person exercising a
stock appreciation right shall be paid in cash, or partly in cash and partly in
shares of the common stock of the Company or (ii) to approve an election by a
participant to receive cash in whole or in part in settlement of the stock
appreciation right.
An election by a participant to receive cash in settlement of a stock
appreciation right, and any exercise of such stock appreciation right for cash,
may be made only by a request by a participant during the period beginning on
the third business day following the date of release for publication by the
Company of its quarterly or annual summary statement of operations and ending
on the twelfth business day following such date. Within thirty (30) days
following the receipt by the Committee of a request to receive cash in whole or
in part in settlement of a stock appreciation right or to exercise such stock
appreciation right for cash, the Committee shall, in its sole discretion,
either consent to or disapprove, in whole or in part, such request. A request
to receive cash in whole or in part in settlement of a stock appreciation right
or to exercise a stock appreciation right for cash may provide that, in the
event the Committee shall disapprove such request, such request shall be deemed
to be an exercise of such stock appreciation right for shares of common stock
of the Company.
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If the Committee disapproves any election by a participant to receive
cash in whole or in part in settlement of a stock appreciation right or to
exercise such stock appreciation right for cash, such disapproval shall not
affect such participant's right to exercise such stock appreciation right at a
later date, to the extent that such stock appreciation right shall be otherwise
exercisable, or to elect the form of payment at a later date, provided that an
election to receive cash at such later date also shall be subject to the
approval of the Committee. Additionally, such disapproval shall not affect
such holder's right to exercise any related Option or Options granted to such
holder under this Plan. A holder of a stock appreciation right shall not be
entitled to request or receive cash in full or partial settlement of such stock
appreciation right unless such stock appreciation right shall have been held
for a period of at least six (6) months after the date of acquisition of such
stock appreciation right.
9. Performance Shares, Restricted Shares and Performance Units
The Committee shall have the authority to grant to Officer and Key
Employee Participants performance shares, restricted shares or performance
units either separately or in combination with other awards authorized by the
Plan. The terms and conditions of performance and restricted shares or
performance units shall be determined from time to time by the Committee
without limitation, except as may otherwise be provided in the Plan; provided,
however, that any performance shares, restricted shares, performance units, or
any other shares, securities or rights granted to a participant with respect to
this Section 9 shall require such participant to remain in the continuous
employ of the Company, its parent or
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any of its subsidiaries, for at least six (6) months from the date of such
grant before the right to exercise any part of such grant will accrue. In
addition:
a. each award shall be granted for services rendered and at no additional
cost to the participant, provided, however, that the value of the
services performed must, in the opinion of counsel to the Company, equal
or exceed the par value of the shares of the Company to be granted to
the participant;
b. each award shall be evidenced by a signed written agreement between the
Company and the participant containing the terms and conditions of the
award;
c. the Company shall establish a performance account for each participant
to whom performance or restricted shares or performance units are
granted, and the performance or restricted shares or performance units
granted shall be credited to such account. Shares in the form of
restricted common stock or other securities, when issued, shall be
registered in the name of the participant and, together with a stock
power endorsed in blank, deposited with the Company at the time the
account is credited;
d. the duration of the performance or restriction period shall be
determined by the Committee at the time each grant is made. Performance
or restricted shares or performance units may not be sold, assigned,
transferred, redeemed, pledged or otherwise encumbered during the
restriction period, except as provided in Section 9(h). More than one
grant may be outstanding at any one time, and performance or restriction
periods may be different lengths;
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e. at the time of each grant, the Committee shall establish performance
targets at which performance shares or units shall be earned or times at
which restrictions placed on restricted shares or units shall lapse.
The Committee may also establish a relationship between performance
targets and the number of performance shares or the number or value of
performance units which shall be earned. The Committee also shall
establish a relationship between performance results other than the
targets and the number of performance or restricted shares and the
number or value of performance units, if any, which shall be earned.
The Committee shall determine the measures of performance to be used in
determining the extent to which performance shares or units are earned
or restrictions on restricted shares or units shall lapse. Performance
measures and targets may vary among grants, but once established for a
grant may not be modified with respect to that grant, except as provided
in Section 10 and provided that, with respect to performance shares and
performance units, the Committee may, in its sole discretion, make such
adjustments to performance targets, the number of performance shares or
the number or value of performance units which shall be earned, or such
other changes as it may deem necessary or advisable in the event of
material changes in the criteria used for establishing performance
targets which would result in the dilution or enlargement of a
participant's award outside the goals intended by the Committee at the
time of the grant of the award;
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f. The Committee may provide that amounts equivalent to dividends or
interest shall be payable with respect to performance or restricted
shares or performance units held in the participant's performance
account. Such amounts shall be credited to the performance account, and
shall be payable to the participant at such time as the restrictions on
the respective shares or performance units are removed and the shares or
other interests are distributed to the participant. The Committee
further may provide that amounts equivalent to interest or dividends
held in the performance accounts be credited to such accounts on a
periodic or other basis;
g. Performance awards shall be earned to the extent that the terms and
conditions of the Plan and the grant are met;
h. If the participant ceases to be an employee with the consent of the
Committee, or dies, becomes Disabled, or retires, the award earned under
this Section with respect to any outstanding performance or restricted
shares or performance units shall be determined by the Committee. If
the participant ceases to be an employee for any other reason, all
shares or other interests awarded hereunder and subject to restrictions
shall be forfeited. In such case, the Company shall have the right to
complete the blank stock power with respect to performance or restricted
shares or their equivalent and transfer the same to its treasury.
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10. Deferral of Payments
The Committee may establish procedures by which a participant may elect
to defer payment of a Plan Award. The Committee shall determine the terms and
conditions of such deferral. Any such deferral shall be subject to the
following:
a. Contingent Nature of Allocation. Every allocation under the Plan to a
performance account shall be considered "contingent" and unfunded until
any forfeiture restrictions under the terms of the award expire or
lapse, until all conditions contained in the award are satisfied, and
until any elective deferral period expires. Such contingent allocations
shall be considered bookkeeping entries only, notwithstanding the
"crediting" of "dividends" or "interest". Such accounts shall be
subject to the general claims of the Company's creditors. Nothing
contained herein shall be construed as creating a trust or fiduciary
relationship between the participants and the Company or the Committee.
b. Participant's Rights to Awards. Until a Plan Award vests, the elective
deferral period expires, and any restrictions are lifted, the
participant's performance account balance cannot be sold, conveyed,
transferred, pledged, hypothecated, or assigned. Until the Plan Award
vests and becomes payable, such account balances shall be the property
of the Company. The participant's rights to such account balances shall
be no greater than that of a general creditor of the Company. Receipt
of a Plan Award is conditioned upon satisfactory
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compliance with the terms and conditions of the award and other
requirements of the Plan.
If a certificate of stock or other security is issued pursuant to the
Plan, such certificates shall bear the appropriate legend referring to
the terms, conditions and restrictions applicable to such stock or other
security. Any attempt to dispose of such stock or other security in
violation of such restrictions shall be ineffective.
c. Election to Defer Payment. If a Plan participant desires to defer the
normal receipt of funds due him under a Plan Award, he must make an
irrevocable election in a calendar year prior to the calendar year or
years in which he is to perform services that will entitle him to the
award. Such election shall provide a fixed date for the termination of
the deferral period. The participant shall not be permitted to receive
his award prior to the end of the elected deferral period, except in the
event of death or retirement from the Company, its parent, or a
subsidiary thereof, Disability, or termination of employment with the
Company's consent as determined by the Committee. The decision of the
Committee shall be final.
11. Adjustment of Shares
In the event there is any change in the common stock of the Company by
reason of any reorganization, recapitalization, stock split, stock dividend or
otherwise, the number or kind of shares or interests subject to any Option,
restricted share grant, or performance share or unit award, and the per share
price or value thereof shall be
- 22 -
<PAGE> 23
appropriately adjusted by the Committee at the time of such event, provided
that each participant's position with respect to such Option, restricted share
grant, or performance share or unit award, and the per share price or value
thereof shall not, as a result of such adjustment, be of less value than it had
been immediately prior to such event. Notwithstanding the foregoing, (i) each
such adjustment with respect to an Incentive Stock Option shall comply with the
rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment
be made which would render any Incentive Stock Option granted hereunder other
than an "incentive stock option" for purposes of Section 422 of the Code.
12. Change of Control
In the event of a Change of Control (as defined in Section 14) all
Options previously issued pursuant to the Plan shall become immediately
exercisable; provided, however, that in the event of a merger between the
Company and another corporation in which the Company is not the surviving
entity, any Options or other Plan Awards issued pursuant to this Plan which
have not been exercised shall, in the sole discretion of the Committee, either
(i) be cancelled and replacement awards shall be issued by the surviving entity
in accordance with Rule 16b-3(f)(1) under the Exchange Act or (ii) all such
Options shall become immediately exercisable.
13. Miscellaneous Provisions
a. Assignment or Transfer. No grant of any "derivative security" (as
defined by Rule 16a-1(c) under the Exchange Act) made under the Plan or
any rights or interests therein shall be assignable or transferable by a
participant except by will or the laws of descent and distribution or
pursuant to a qualified domestic
- 23 -
<PAGE> 24
relations order as defined by the Code or Title I of ERISA, or the rules
thereunder. During the lifetime of a participant, Options and Plan
Awards granted hereunder shall be exercisable only by the participant.
b. Investment Representation. If a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect
to awards paid in shares of common stock or other securities, is not in
effect at the time an Option or other applicable Plan Award is
exercised, the Company may require, for the sole purpose of complying
with the Securities Act, that prior to delivering such common stock to
the participant, such participant must deliver to the Secretary of the
Company a written statement (i) representing and warranting that such
common stock is being acquired for investment only and not with a view
to the resale or distribution thereof, (ii) acknowledging and confirming
that such common stock may not be sold unless registered for sale under
the Securities Act or pursuant to an exemption from such registration
and (iii) agreeing that the certificates representing such common stock
shall bear a legend to the effect of the foregoing. If, subsequent to
the delivery by a participant of the written statement described in the
preceding sentence, the common stock is registered under the Securities
Act, the Company may release such participant from such written
statement without effecting a "modification" of the Plan within the
meaning of Section 424(h)(3) of the Code.
- 24 -
<PAGE> 25
c. Withholding Taxes. In the case of distributions of common stock or
other securities hereunder, the Company, as a condition of such
distribution, may require the payment (through withholding from the
participant's salary, reduction of the number of shares of common stock
or other securities to be issued, or otherwise) of any federal, state,
local or foreign taxes required by law to be withheld with respect to
such distribution.
d. Costs and Expenses. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any
Option or Plan Award, or to any employee receiving a Plan Award.
e. Funding of Plan. The Plan shall be unfunded. The Company shall not be
required to make any segregation of assets to assure the payment of any
Option or Plan Award under the Plan.
f. Other Incentive Plans. The adoption of the Plan does not preclude the
adoption by appropriate means of any other incentive plan for employees.
g. Vesting. Except as otherwise provided herein, any Plan Award granted
pursuant to the Plan shall become exercisable and, hence, vested as
determined by the Board of Directors of the Company.
h. Affect on Employment. Nothing contained in this Plan or any agreement
related hereto or referred to herein shall affect, or be construed as
affecting, the terms of employment of any Officer or Key Employee
Participant except to the extent specifically provided herein or
therein. Nothing contained in this Plan or any agreement related hereto
or referred to herein shall impose, or be
- 25 -
<PAGE> 26
construed as imposing, an obligation on (i) the Company, or any parent
corporation or subsidiary corporation thereof, to continue the
employment of any Officer or Key Employee Participant, or (ii) any
Officer or Key Employee Participant to remain in the employ of the
Company, or any parent corporation or subsidiary corporation thereof.
14. Definitions
a. "Fair Market Value" shall, as it relates to the common stock of the
Company, mean the average of the high and low prices of a share of such
common stock as reported on the New York Stock Exchange on the date
specified herein, or if there were no sales on such date, on the next
preceding day on which there were sales, or if such common stock is no
longer listed on the New York Stock Exchange, another exchange, or
regularly traded in the over-the-counter market, the value of such
common stock on such date as determined by the Committee in good faith.
b. "Disability" shall be construed under the appropriate provisions of the
long-term disability plan maintained for the benefit of employees of the
Company, or any parent corporation or subsidiary corporation thereof,
who are regularly employed on a salaried basis, unless another meaning
shall be agreed to in writing by the Committee and the optionee.
c. A "Change of Control" shall be deemed to have occurred if, subsequent to
the Effective Date of this Plan (as defined in Section 16), (i) any
"person" (as such term is defined in Section 13(d) of the Exchange Act)
is or becomes the
- 26 -
<PAGE> 27
beneficial owner, directly or indirectly, of either (x) a majority of
the Company's outstanding shares of common stock or (y) securities of
the Company representing a majority of the combined voting power of the
Company's then outstanding voting securities, or (ii) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Company cease, at any
time after the beginning of such period, for any reason to constitute a
majority of the Board of Directors of the Company, unless each new
director was nominated or the election of such director was ratified by
at least two-thirds of the directors still in office who were directors
at the beginning of such two-year period.
d. "Retirement" shall mean (i) with respect to any Officer or Key Employee
Participant, the termination of employment from the Company, its parent
or any of its subsidiaries, who at the time of such termination is at
least fifty-five (55) years of age and who has completed at least ten
(10) years of service (at least 1,000 hours in any fiscal year) with the
Company, its parent or any subsidiary, or any combination thereof or
(ii) with respect to an Outside Director Participant, either failure of
the Company to retain or nominate for re-election such Outside Director
Participant or such director is ineligible to run for re-election
pursuant to the Company's by-laws.
15. Amendment of Plan
Subject to the provisions of Section 7(j), the Board of Directors of the
Company shall have the right to amend, modify, suspend or terminate the Plan at
any time,
- 27 -
<PAGE> 28
provided that no amendment shall be made which shall (i) increase the total
number of shares of the common stock of the Company which may be issued and
sold pursuant to Options and Plan Awards granted under the Plan, (ii) decrease
the minimum option price in the case of an Incentive Option or (iii) modify the
provisions of the Plan relating to eligibility with respect to Incentive
Options, unless each such amendment is made by or with the approval of the
stockholders of the Company. The Board of Directors shall be authorized to
amend the Plan and the Options and Plan Awards granted thereunder (i) to
qualify as "incentive stock options" within the meaning of Section 422 of the
Code or (ii) to comply with Rule 16b-3 (or any successor rule) under the
Exchange Act. No amendment, modification, suspension or termination of the
Plan shall alter or impair any Options or Plan Awards previously granted under
the Plan, without the consent of the holder thereof.
16. Effective Date and Term of Plan
The Plan shall become effective (the "Effective Date") on the date the
Plan is approved by a vote of the stockholders of the Company at an Annual
Meeting or by written consent in accordance with Rule 16b-3 of the Exchange
Act. The Plan shall remain in effect for ten (10) years after the Effective
Date, unless sooner terminated by the Board of Directors. No awards or grants
may be made under the Plan subsequent to the expiration date.
- 28 -
<PAGE> 1
EXHIBIT 11
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Primary
Earnings
Income from continuing operations before extraordinary
item................................................... $29,512 $ 603 $10,671
Dividends on preferred shares............................ (10,830) (5,352) (5,500)
------- ------- -------
Income (loss) from continuing operations applicable to
common stockholders before extraordinary item.......... 18,682 (4,749) 5,171
Discontinued operations.................................. -- -- 25,569
Extraordinary item....................................... -- -- (5,837)
------- ------- -------
Earnings (loss) applicable to common stockholders........ $18,682 $(4,749) $24,903
======= ======= =======
Shares
Weighted average number of common shares outstanding..... 16,931 19,967 21,444
======= ======= =======
Primary earnings per common share:
Income (loss) from continuing operations applicable to
common stockholders before extraordinary item.......... $ 1.10 $ (.24) $ .24
Discontinued operations.................................. -- -- 1.19
Extraordinary item....................................... -- -- (.27)
------- ------- -------
Earnings (loss).......................................... $ 1.10 $ (.24) $ 1.16
======= ======= =======
</TABLE>
<PAGE> 2
EXHIBIT 11
PAGE 2
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Assuming Full Dilution
Earnings
Income from continuing operations before extraordinary
item.................................................... $29,512 $ 603 $10,671
Dividends on non-convertible preferred shares............. (5,880)
Dividends on convertible preferred shares (conversion of
preferred shares would be anti-dilutive)................ (4,950) (5,352) (5,500)
------- ------- -------
Income (loss) from continuing operations applicable to
common stockholders before extraordinary item........... 18,682 (4,749) 5,171
Discontinued operations................................... -- -- 25,569
Extraordinary item........................................ -- -- (5,837)
------- ------- -------
Earnings (loss) applicable to common stockholders......... $18,682 $(4,749) $24,903
======= ======= =======
Shares
Weighted average number of common shares outstanding...... 16,931 19,967 21,444
Conversion of preferred stock (anti-dilutive)............. -- -- --
Assuming conversion of National Steel Corporation 4 5/8%
convertible debentures (anti-dilutive in 1993)*......... 39 -- 68
Additional dilutive effect of outstanding options (as
determined
by application of the treasury stock method)............ 55 -- --
------- ------- -------
Weighted average number of common shares outstanding as
adjusted................................................ 17,025 19,967 21,512
======= ======= =======
Earnings per common share assuming full dilution:
Income (loss) from continuing operations applicable to
common stockholders before extraordinary item........... $ 1.10 $ (.24) $ .24
Discontinued operations................................... -- -- 1.19
Extraordinary item........................................ -- -- (.27)
------- ------- -------
Net income (loss)**.................................. $ 1.10 $ (.24) $ 1.16
======= ======= =======
</TABLE>
- - - ---------------
* The debentures are convertible into the common stock of National Intergroup,
Inc.
** This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
<PAGE> 1
EXHIBIT 21
NATIONAL INTERGROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
(AS OF JUNE 17, 1994)
FoxMeyer Corporation (Delaware) (80.5%)
FoxMeyer Drug Company (Kansas)
DrxCare, Inc. (Delaware)
FoxMeyer Drug Company (Delaware)
Harris Wholesale Company (Delaware)
HCPP Holdings, Inc. (Delaware)
Health Care Pharmacy Providers, Inc. (Delaware)
FoxMeyer Canada, Inc. (Ontario)
Health Mart, Inc. (Colorado)
IVPartners, Inc. (Delaware)
FoxMeyer Realty Company (Delaware)
FoxMeyer Software, Inc. (Delaware) (80%)
Healthcare Transportation System, Inc. (Delaware)
Health Systems, Inc. (Delaware)
Merchandise Coordinator Services Corporation (Delaware)
d/b/a FoxMeyer Trading Company
Full Value Distributors
Scrip Card Enterprises, Inc. (Utah)
Carol Stream Holdings, Inc. (Illinois)
Ben Franklin Retail Stores, Inc. (Delaware) (67.2%)
Belmont Insurance Co., Ltd. (Bermuda)
Ben Franklin Crafts, Inc. (Delaware)
Ben Franklin Stores, Inc. (Delaware)
BF Services, Inc. (Illinois)
Ben Franklin Insurance Agency, Inc. (Illinois)
Ben Franklin Realty Corporation (Delaware)
Ben Franklin Transportation, Inc. (Delaware)
Intergroup Services, Inc. (Delaware)
M&A Investments, Inc. (Delaware)
National Aluminum Corporation (Delaware)
National Intergroup Realty Corporation (Delaware)
National Intergroup Realty Development, Inc. (Delaware)
National Magnesium Corporation (Texas)
National Steel Products Company (Texas)
National Steel Products Company, Inc. (Indiana)
Natmin Development Corporation (Delaware)
Natoil Corporation (Kansas)
NII Health Care Corporation (Delaware)
NI World Trade, Incorporated (Delaware)
Oceanside Enterprises, Inc. (Delaware)
Riverside Insurance Co., Ltd. (Bermuda)
Starcom International, Inc. (Delaware) (80%)
