<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
<TABLE>
<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)
Registrant's Telephone Number, Including Area Code 214-446-4800
</TABLE>
Indicate by check mark whether the registrant (1) had 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 .
----- -----
Number of shares of Common Stock outstanding as of August 9, 1994: 12,882,403
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PART 1. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
National Intergroup, Inc. and Subsidiaries (In thousands, except per share amounts)
------------------------------------------ ----------------------------------------
Three months ended June 30,
----------------------------------
1994 1993
------------- --------------
<S> <C> <C>
NET SALES $ 1,256,930 $ 1,286,694
COSTS AND EXPENSES
Cost of goods sold 1,175,550 1,207,809
Selling, general and administrative expenses 66,573 69,573
Depreciation and amortization 6,343 5,291
----------- -----------
8,464 4,021
Other income 2,558 1,117
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OPERATING INCOME 11,022 5,138
FINANCING COSTS
Interest expense 7,003 5,671
Interest income 1,901 451
----------- -----------
Financing costs, net 5,102 5,220
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INCOME (LOSS) BEFORE NATIONAL STEEL CORPORATION, INCOME TAX
BENEFIT AND MINORITY INTEREST 5,920 (82)
NATIONAL STEEL CORPORATION
Net preferred income 1,370 4,255
----------- -----------
INCOME BEFORE INCOME TAX BENEFIT AND MINORITY INTEREST 7,290 4,173
Income tax benefit 148 1,855
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INCOME BEFORE MINORITY INTEREST 7,438 6,028
Minority interest in results of operations of consolidated subsidiaries 2,210 771
----------- -----------
NET INCOME 5,228 5,257
Preferred stock dividends 4,701 1,265
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 527 $ 3,992
----------- -----------
NET INCOME PER SHARE $ 0.04 $ 0.20
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AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 12,997 19,697
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
National Intergroup, Inc. and Subsidiaries (In thousands of dollars)
------------------------------------------ ---------------------------------
June 30, 1994 March 31, 1994
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 67,929 $ 60,987
Receivables - net 299,751 286,707
Inventories 631,479 624,574
Other current assets 37,102 37,299
------------ ------------
TOTAL CURRENT ASSETS 1,036,261 1,009,567
INVESTMENT IN NATIONAL STEEL CORPORATION 30,615 29,261
PROPERTY, PLANT AND EQUIPMENT 210,338 204,504
Less: allowances for depreciation and amortization 75,268 71,060
------------ ------------
135,070 133,444
OTHER ASSETS
Goodwill - net 226,473 228,141
Intangible assets - net 20,446 12,786
Pre-bankruptcy receivable from Phar-Mor, Inc. 28,758 28,758
Deferred tax asset, net of valuation allowance 47,342 47,342
Miscellaneous assets 36,730 36,171
------------ ------------
359,749 353,198
------------ ------------
TOTAL ASSETS $ 1,561,695 $ 1,525,470
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
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CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
National Intergroup, Inc. and Subsidiaries (In thousands of dollars)
------------------------------------------ ----------------------------------
June 30, 1994 March 31, 1994
------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 594,195 $ 532,170
Accrued liabilities 57,136 68,770
Income taxes 31,218 31,451
Long-term debt due within one year 1,998 2,158
------------ -----------
TOTAL CURRENT LIABILITIES 684,547 634,549
LONG-TERM DEBT 293,757 310,920
RESERVES AND OTHER LIABILITIES 79,027 81,082
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 110,920 109,331
REDEEMABLE PREFERRED STOCK 168,379 164,833
STOCKHOLDERS' EQUITY
Common stock, $5.00 par value; authorized 50,000,000 shares;
24,092,744 shares issued at June 30, 1994 and 23,995,744
shares at March 31, 1994 120,464 119,979
Capital in excess of par value 208,239 207,281
Minimum pension liability (73,797) (73,797)
Net unrealized holding gain (loss) on marketable securities 448 (225)
Retained earnings 173,556 173,029
----------- -----------
428,910 426,267
Less: common stock in treasury - 11,255,941 shares at
June 30, 1994 and 11,125,441 shares at March 31, 1994 203,845 201,512
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 225,065 224,755
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,561,695 $ 1,525,470
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
National Intergroup, Inc. and Subsidiaries (In thousands of dollars)
- ------------------------------------------ ---------------------------
Three months ended June 30,
---------------------------
1994 1993
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,228 $ 5,257
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries 2,210 771
Depreciation and amortization 6,343 5,291
Net preferred income from National Steel Corporation (1,370) (4,255)
Gain on sale of investments (3,375) -
Deferred tax provision (benefit) 155 (1,619)
Provision for losses on accounts receivable 916 1,020
Cash provided (used) by working capital items, net of acquisition:
Receivables (8,479) (27,106)
Inventories (6,905) (34,515)
Other assets (2,618) (3,181)
Accounts payable and accrued liabilities 44,131 46,306
Other (1,702) 636
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 34,534 (11,395)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,459) (6,267)
Proceeds from the sale of property, plant and equipment 1,166 64
Prepayment on long-term commitment - (5,004)
Acquisition, net of cash acquired (7,922) -
Proceeds from the sale of investments 10,533 411
Other investments (4,855) (1,053)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (7,537) (11,849)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan - (125,000)
Borrowings under revolving credit facilities 363,151 341,000
Repayments under revolving credit facilities (379,771) (401,900)
Proceeds from issuance of long-term debt 6,900 222,250
Loan origination fees - (2,199)
Repurchase of common stock (2,333) -
Other debt repayments (7,597) (238)
Dividends paid to minority interests (693) (386)
Dividends paid on redeemable preferred stock (1,155) (1,265)
Other financing activities 1,443 31
---------- ----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (20,055) 32,293
---------- ----------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 6,942 9,049
Cash and short-term investments, beginning of period 60,987 54,504
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 67,929 $ 63,553
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
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.
The accompanying condensed consolidated balance sheet of the Corporation as of
June 30, 1994, and the condensed consolidated statements of income and cash
flows for the three months ended June 30, 1994 and 1993, are unaudited. In the
opinion of management, these statements have been prepared on the same basis as
the audited financial statements and include all adjustments necessary for the
fair presentation of financial position, results of operations and cash flows.
Such adjustments were of a normal recurring nature. The results of operations
for the three months ended June 30, 1994 are not necessarily indicative of the
results that may be expected for the entire year. The condensed consolidated
balance sheet as of March 31, 1994 is derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. Additional information is contained in the Corporation s Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended March 31, 1994, which should be read in conjunction with this
quarterly report.
NOTE 2 - NET INCOME PER SHARE
Net income per share of common stock is based on net income after preferred
stock dividend requirements and the weighted average number of shares of common
stock outstanding during the period after giving effect to stock options
considered to be dilutive common stock equivalents. Fully diluted net income
per share is not presented as it is substantially the same as primary net
income per share.
NOTE 3 - INVESTMENTS
The Corporation s investments in marketable equity securities, included in
"Other current assets," have been classified as available for sale. The
carrying value and gross unrealized gains and losses are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
June 30, 1994 March 31, 1994
------------- --------------
<S> <C> <C>
Carrying value $ 15,414 $ 15,969
Unrealized gains 544 348
Unrealized losses 133 683
</TABLE>
For the three months ended June 30, 1994, the change in net unrealized holding
gains (losses) was a $.7 million gain. Proceeds of $4.5 million were received
during the three months ended June 30, 1994 from the sale of marketable
securities resulting in gross realized gains of $0.1 million. The cost of
securities sold was determined using the average cost method.
NOTE 4 - LONG-TERM DEBT
On June 22, 1994, Ben Franklin entered into a new $15.0 million revolving
credit facility (the "Ben Franklin Facility") which expires in August 1995.
The Ben Franklin Facility replaced a similar $15.0 million facility that would
have expired in August 1994. The Ben Franklin Facility is unsecured and bears
interest at the prime rate
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or at Libor plus 2%. The Ben Franklin Facility requires that there be no
borrowed funds outstanding thereunder for at least 30 consecutive days each
year. Additional covenants prohibit the payment of dividends and require the
maintenance of a minimum tangible net worth.
NOTE 5 - 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>
Three months ended June 30,
---------------------------
1994 1993
--------- ---------
<S> <C> <C>
Interest paid $ 10,022 $ 2,248
Income taxes paid 508 162
Noncash transactions:
Payment of dividends in kind on preferred stock 3,230
Sale of property in exchange for note 1,000
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Corporation has retained responsibility for certain potential environmental
liabilities attributable to former operating units and as a result is subject
to federal, state or local environmental laws, rules and regulations. The laws
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 by
the Environmental Protection Agency.
The Corporation's reserves for potential environmental assessments or
remediation activities, penalties or fines that may be imposed for
non-compliance with such laws or regulations have not changed materially since
March 31, 1994. The Corporation's estimates of these costs are based on
currently available facts, existing technologies, presently enacted laws and
regulations and the professional judgment of consultants and counsel.
The amounts of these liabilities are difficult to estimate due to such factors
as the unknown extent of 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 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 January 1994, the Corporation deposited $10.0 million with National Steel
Corporation ("NSC") to cover potential environmental claims for which the
Corporation had previously indemnified NSC. The indemnification relates to
environmental claims that may arise from the operations of NSC prior to the
August 1984 sale of a 50% common stock interest in NSC to NKK Corporation. As
of June 30, 1994, no deposited funds had been expended.
6
<PAGE> 8
The Corporation continues to monitor the Phar-Mor, Inc. ("Phar-Mor") bankruptcy
proceedings closely and to work with Phar-Mor through the Unsecured Creditors'
Committee as Phar-Mor attempts to reorganize and emerge from bankruptcy. The
Corporation believes the $40.0 million allowance for possible loss it recorded
in December 1992 remains a reasonable estimate of its probable loss; however,
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.
There are various pending claims and lawsuits arising in the normal conduct of
the Corporation s business. In the opinion of management, the ultimate outcome
of these claims and lawsuits will not have a material effect on the
consolidated financial condition or results of operations of the Corporation.
NOTE 7 - PROPOSED MERGER OF THE CORPORATION WITH FOXMEYER
On July 1, 1994, the Corporation and FoxMeyer announced that they had entered
into an Agreement and Plan of Merger (the "Merger Agreement") under which
FoxMeyer would become a wholly-owned subsidiary of the Corporation. Pursuant
to the terms of the Merger Agreement, the public stockholders of FoxMeyer other
than the Corporation would receive 0.9 shares of the Corporation's common stock
(the "Exchange Ratio") for each share of FoxMeyer's common stock in a tax-free
reorganization.
The Exchange Ratio is subject to upward adjustment so that FoxMeyer's
stockholders would receive the Corporation's common stock with a value of no
less than $14.40 per share in exchange for each share of FoxMeyer's common
stock, based upon the average closing price on the New York Stock Exchange of
the Corporation's common stock during a 20-day trading period preceding the
stockholders' meeting (the "Average Price"). The Corporation has the right to
terminate the Merger Agreement if the Average Price is less than $14.40 per
share.
The Merger Agreement has been approved by the boards of directors of both the
Corporation and FoxMeyer. Consummation of the transaction is contingent on
satisfying certain conditions including (i) the approval of the transaction by
a majority of the outstanding shares of common stock of FoxMeyer (which is
assured as the Corporation, which owns 80.5% of FoxMeyer's common stock, has
agreed to vote all its shares in favor of the merger); (ii) approval of the
transaction by a majority of the Corporation's shares of common stock voting on
the merger; and (iii) the effectiveness of a registration statement filed with
the Securities and Exchange Commission with respect to shares of common stock
of the Corporation that would be issued pursuant to the merger.
In connection with the merger, FoxMeyer and the Corporation entered into a
memorandum of understanding with counsel to plaintiffs settling certain
Delaware stockholder litigation that had been brought following the March 1994
announcement of a prior proposal to acquire the shares of common stock held by
public stockholders of FoxMeyer.
NOTE 8 - ACQUISITIONS AND INVESTMENTS
As of April 1, 1994, FoxMeyer acquired all the outstanding stock of Scrip Card
Enterprises, Inc. ("Scrip Card") for $10.0 million. Based on Scrip Card
meeting certain revenue targets during each of the three years ending March
31,1997, an additional $6.0 million may be paid to the former stockholders of
Scrip Card. Scrip Card is engaged in prescription benefit management services
for small to medium-sized businesses. The transaction was accounted for by the
purchase method of accounting. The purchase price has been allocated to the
assets and liabilities of Scrip Card in amounts equal to their fair market
values. Approximately $8.1 million of the purchase price was assigned to the
customer lists acquired in the transaction. The allocation of the purchase
price is subject
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to change based on evidence of fair value still to be obtained. The results of
operations of Scrip Card have been included in the consolidated financial
statements of the Corporation since its acquisition. The unaudited pro forma
combined results of operations of the Corporation and Scrip Card for the first
quarter of fiscal 1994 are not presented as such amounts are not materially
different from those previously reported.
On June 28, 1994, FoxMeyer completed a merger of its wholly-owned subsidiary,
FoxMeyer Canada Inc. ("FoxMeyer Canada"), with Evans Health Group Limited
("Evans"). As a result of the merger and the simultaneous exercise of options
for 2,000,000 shares of Evans common stock, which options FoxMeyer had
previously acquired, FoxMeyer's ownership interest in FoxMeyer Canada was
reduced to 46.3%. FoxMeyer Canada provides health care and pharmacy services
in Canada. FoxMeyer's investment in FoxMeyer Canada at June 30, 1994 was $2.2
million. FoxMeyer has additional options to acquire up to 8,000,000 more
shares of FoxMeyer Canada common stock at prices ranging from (in Canadian
dollars) $1.50 to $3.00.
8
<PAGE> 10
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
National Intergroup, Inc. and its subsidiaries (the "Corporation") reported net
income of $5.2 million for the three months ended June 30, 1994, compared to
$5.3 million for the three months ended June 30, 1993. Net income applicable
to common stockholders was $.04 per share for the current quarter versus $.20
per share for the same quarter in the prior fiscal year. Amounts applicable to
common stockholders were significantly affected by the 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.
While the average number of shares outstanding decreased from 19.7 million at
June 30, 1993 to 13.0 million at June 30, 1994, the preferred stock dividends
increased from $1.3 million to $4.7 million.
The Corporation conducts its business principally through two operating units,
FoxMeyer Corporation ("FoxMeyer"), an 80.5%-owned subsidiary, 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 aids to independent drug stores, hospitals, alternate care
facilities and chain stores. FoxMeyer also provides various managed care,
benefit management and information-based services. Ben Franklin is engaged in
the franchising of general variety stores and the franchising and operation of
crafts stores, together with the wholesale distribution of products to those
stores.
On July 1, 1994, the Corporation and FoxMeyer announced that they had entered
into an Agreement and Plan of Merger (the "Merger Agreement") under which
FoxMeyer would become a wholly-owned subsidiary of the Corporation. Pursuant
to the terms of the Merger Agreement, the public stockholders of FoxMeyer other
than the Corporation would receive 0.9 shares of the Corporation's common stock
(the "Exchange Ratio") for each share of FoxMeyer's common stock in a tax-free
reorganization.
The Exchange Ratio is subject to upward adjustment so that FoxMeyer's
stockholders would receive the Corporation's common stock with a value of no
less than $14.40 per share in exchange for each share of FoxMeyer's common
stock, based upon the average closing price on the New York Stock Exchange of
the Corporation's common stock during a 20-day trading period preceding the
stockholders' meeting (the "Average Price"). The Corporation has the right to
terminate the Merger Agreement if the Average Price is less than $14.40 per
share.
The Merger Agreement has been approved by the boards of directors of both
FoxMeyer and the Corporation. Consummation of the transaction is contingent on
satisfying certain conditions including (i) the approval of the transaction by
a majority of the outstanding shares of common stock of FoxMeyer (which is
assured as the Corporation, which already owns 80.5% of FoxMeyer's common
stock, has agreed to vote all its shares in favor of the merger); (ii) approval
of the transaction by a majority of the Corporation's shares of common stock
voting on the merger; and (iii) the effectiveness of a registration statement
filed with the Securities and Exchange Commission with respect to shares of
common stock of the Corporation that would be issued pursuant to the merger.
In connection with the merger, the Corporation and FoxMeyer entered into a
memorandum of understanding with counsel to plaintiffs settling certain
Delaware stockholder litigation that had been brought following the March 1994
announcement of a prior proposal to acquire the shares of common stock held by
public stockholders of FoxMeyer.
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FOXMEYER
Operating income of FoxMeyer increased to $10.4 million for the three months
ended June 30, 1994 from $8.8 million for the three months ended June 30, 1993.
While sales decreased approximately 2.3% to $1.2 billion for the three months
ended June 30, 1994, as compared to the three months ended June 30, 1993, both
gross profit and operating income increased and operating expenses declined
when compared to the prior year. In addition, each of such amounts improved
over the prior year when measured as a percentage of sales. These results
reflect the effect of initiatives put in place during the prior fiscal year
that include the realignment of distribution centers, reductions in workforce,
outsourcing of certain services, implementation of warehouse automation and
quality programs, and centralization of certain administrative functions.
In April 1994, FoxMeyer acquired Scrip Card Enterprises, Inc. ("Scrip Card"), a
Utah company engaged in prescription benefit management services to small and
medium-sized businesses. The addition of Scrip Card should enhance FoxMeyer's
present prescription benefit management programs.
In June 1994, FoxMeyer entered the Canadian health care market through a merger
of its wholly-owned subsidiary FoxMeyer Canada Inc. ("FoxMeyer Canada") with
Evans Health Group Limited. Subsequent to the merger, FoxMeyer owned 46.3% of
FoxMeyer Canada. FoxMeyer Canada provides health care, pharmacy and benefit
management services in Canada.
In July 1994, FoxMeyer announced that it had signed an agreement with the
University Hospital Consortium ("UHC") for an initial three-year term with two
one-year renewal options. UHC represents an alliance of 67 academic medical
centers. When the contract becomes fully effective in February 1995, FoxMeyer
will serve as the primary supplier to UHC members that participate in UHC's
pharmacy purchasing program. Management anticipates that the UHC contract will
generate $4 to $5 billion in additional prescription drug sales over the
five-year period. FoxMeyer intends to open seven new warehouses in California,
Arizona, Utah, Washington, Tennessee, and Pennsylvania to service the UHC
contract.
BEN FRANKLIN
The operating loss for the three months ended June 30, 1994 was $0.8 million
compared to a loss of $1.3 million during the three months ended June 30, 1993.
These results reflect an improvement in Ben Franklin's wholesale business as a
result of a shift in sales mix to higher margin items and the timing of
seasonal promotions. Ben Franklin has historically had a seasonal loss in the
first fiscal quarter of each year. Sales were $75.1 million for the three
months ended June 30, 1994, or approximately 2.2% less than in the prior year,
reflecting the effects of a net decrease of 45 franchisee-owned stores and an
increase of six company-owned craft superstores over the twelve months since
June 30, 1993.
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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 Corporation's real estate limited partnership activities (in
million of dollars):
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------
1994 1993
--------- ---------
<S> <C> <C>
NET SALES
FoxMeyer $ 1,181.8 $ 1,209.9
Ben Franklin 75.1 76.8
--------- ---------
$ 1,256.9 $ 1,286.7
--------- ---------
GROSS PROFIT
FoxMeyer $ 67.6 $ 66.6
Ben Franklin 13.8 12.3
--------- ---------
$ 81.4 $ 78.9
--------- ---------
OPERATING INCOME (LOSS)
FoxMeyer $ 10.4 $ 8.8
Ben Franklin (0.8) (1.3)
Holding company 1.4 (2.4)
--------- ---------
$ 11.0 $ 5.1
--------- ---------
</TABLE>
THREE MONTHS ENDED JUNE 30, 1994 COMPARED TO THREE MONTHS ENDED JUNE 30, 1993
FOXMEYER
Net sales decreased 2.3% or $28.1 million to $1,181.8 million for the three
months ended June 30, 1994, as compared to $1,209.9 million for the three
months ended June 30, 1993. Net sales by customer group did not change
significantly between periods. While chain store sales decreased $25.2
million, sales to hospitals and alternate care facilities increased $14.5
million.
Gross margin for the first quarter of fiscal 1995 was 5.7% versus 5.5% for the
first quarter of fiscal 1994. Gross margin for warehouse operations remained
at the same level as in the prior year. Price competition in the industry and
the decline in inventory investment buying opportunities continue to put
pressure on gross margin. In an attempt to offset these margin pressures,
FoxMeyer continues to place emphasis on private label, generic product and
every day low pricing programs, as well as sales of higher margin product
lines. The 0.2% increase in gross margin was principally due to better results
in FoxMeyer's managed care operations.
Operating expenses and other income (expense) remained at 4.8% of net sales for
the three months ended June 30, 1994, as compared to the three months ended
June 30, 1993. Continued cost containment and reduction programs reduced
overall expenses as a percentage of net sales. These benefits were offset by
higher expenses related to the expansion of complementary business programs,
such as managed care benefit programs and specialty business markets, and by
$1.6 million of fees incurred in the current quarter associated with FoxMeyer's
accounts receivable financing program initiated in October 1993.
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Operating income increased $1.6 million to $10.4 million for the three months
ended June 30, 1994, compared to $8.8 million for the three months ended June
30, 1993. As a percentage of net sales, operating income increased 0.2%, which
was the result of the increase in gross margin described above.
BEN FRANKLIN
Net sales decreased $1.7 million during the first quarter of fiscal 1995 as
compared to the same quarter of the prior fiscal year due primarily to a
decrease of $3.0 million in wholesale sales that was partially offset by an
increase of $1.0 million in retail sales at company-owned stores. The decrease
in wholesale sales reflects a net decrease of 45 franchisee-owned stores over
the twelve months since June 30, 1993 and a difficult retail sales environment.
Retail sales at company-owned crafts superstores increased as a result of an
increase in the number of stores opened from 10 at June 30, 1993 to 16 at June
30, 1994. Royalty fees increased $0.3 million when compared to the prior year
quarter.
Gross profit increased $1.5 million for the three months ended June 30, 1994
over the three months ended June 30, 1993. Gross margin increased 2.4% over
the same period. Gross profit and gross margin increased for wholesale sales
primarily due to a shift in sales mix to higher margin items and the timing of
seasonal promotions. Gross profit and gross margin decreased at company-owned
crafts superstores despite an increase in sales volume. The decline reflects a
greater number of markdowns on goods than in the prior year.
Operating expenses increased $1.0 million to $14.6 million for the three months
ended June 30, 1994. As a percentage of sales, operating expenses increased
1.8%. Approximately $0.5 million of the increase was attributable to
company-owned crafts superstores reflecting the increase in the number of
stores from 10 to 16. The remainder of the increase was in warehouse
operations.
The operating loss decreased $0.5 million from a loss of $1.3 million for the
three months ended June 30, 1993, to a loss of $0.8 million for the three
months ended June 30, 1994. The decrease in the operating loss was the result
of an increase in gross profit, which was partially offset by an increase in
operating expenses as explained above.
THE HOLDING COMPANY
The Holding Company's operating results improved from a loss of $2.4 million
for the three months ended June 30, 1993 to income of $1.4 million for the
three months ended June 30, 1994. The improved results were attributable to
the recognition of an aggregate $3.6 million gain on the sale of properties and
other transactions completed by the Corporation's real estate limited
partnerships.
NET FINANCING COSTS
Net financing costs decreased $0.1 million to $5.1 million for the three months
ended June 30, 1994, as compared to $5.2 million for the three months ended
June 30, 1993. Interest income increased $1.4 million principally as a result
of the income on notes receivable held by the real estate limited partnerships.
Interest expense increased $1.3 million. Average daily borrowings increased
$42.1 million to approximately $319.6 million for the three months ended June
30, 1994, as compared to the three months ended June 30, 1993. The increase in
average daily borrowings was principally the result of the issuance by Ben
Franklin of $25.0 million in convertible subordinated notes in June 1993 and
the incurrence of non-recourse debt by the real estate limited partnerships.
The average interest rate incurred on the debt also rose approximately 0.59% in
the current quarter as compared to the prior year quarter. The increase
reflects the overall increase in rates since June 1993 on FoxMeyer's revolving
debt and the full effect of higher rates paid on other long-term debt assumed
or issued during the last twelve months by subsidiaries of the Corporation.
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<PAGE> 14
NATIONAL STEEL CORPORATION RESULTS
The net preferred income for National Steel Corporation ("NSC") was $1.4
million for the three months ended June 30, 1994, compared to $4.3 million for
the three months ended June 30, 1993. The decrease was primarily the result of
the gain recognized on the redemption of 10,000 shares of the NSC preferred
stock owned by the Corporation in May 1993.
INCOME TAXES
The current year and prior year income tax benefits were primarily the result
of the 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 based on current estimates.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
The increase in the minority interest was principally attributable to improved
results for each of FoxMeyer, Ben Franklin and the real estate limited
partnerships for the three months ended June 30, 1994, as compared to the three
months ended June 30, 1993.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $4.7 million for the three months ended June 30,
1994, compared to $1.3 million for the three months ended June 30, 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 discount recorded on this series
of preferred stock.
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 it own
operations and capital needs with only dividend payments and tax sharing
payments, where applicable, being transferred to the Holding Company. While
the merger with FoxMeyer, contemplated in the Merger Agreement, will make
FoxMeyer a wholly-owned subsidiary, the FoxMeyer debt agreements will still
limit the ability of FoxMeyer to transfer funds to the Holding Company. The
following is a discussion of the liquidity and capital resources of each
business.
FOXMEYER
Net cash provided by operations (which includes working capital components) was
$45.9 million for the three months ended June 30, 1994. An increase in
accounts payable and accrued liabilities balances at June 30, 1994, as compared
to March 31, 1994, of $41.9 million accounted for most of the increase in
funds. Inventory and accounts receivable used $9.5 million of funds. The
increases in accounts payable and inventory balances were in line with
historical purchasing patterns.
Cash used in investing activities was $12.9 million. Approximately $7.9
million was used to purchase Scrip Card, net of cash acquired. The exercise of
options on Evans common stock required $1.1 million in cash during the current
quarter. In addition, the net increase in property and equipment required $3.9
million in funds. FoxMeyer intends to spend approximately $40.0 million on
purchases of property and equipment during the remainder of the fiscal year.
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<PAGE> 15
Cash used by financing activities was $22.0 million. Borrowings under
FoxMeyer's credit facilities were reduced by $19.7 million during the quarter.
In addition, a dividend of $2.0 million was declared and paid in the current
quarter.
As of June 30, 1994, FoxMeyer had borrowed $35.0 million under its $250.0
million of revolving credit facilities. 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 in the
facilities, may not exceed 0.5 to 1.0. Under the requirements of this
covenant, FoxMeyer could have borrowed an additional $88.1 million at June 30,
1994. The average and maximum amounts borrowed during the three months ended
June 30, 1994 under the revolving credit facilities were $57.5 million and
$106.7 million, respectively.
FoxMeyer expects that cash flow from operations and continued maintenance of
its working capital facilities will provide adequate cash to fund seasonal
increases in inventories and receivables. As a result of the UHC contract and
the additional seven warehouses that will be opened to service that business,
as well as continuing investments in managed care businesses, it may be
necessary for FoxMeyer to expand existing lines of credit or seek alternative
financing. FoxMeyer believes that, if required, alternative financing can be
obtained at reasonable rates.
BEN FRANKLIN
Net cash used in operating activities (which includes working capital
components) was $5.7 million for the three months ended June 30, 1994. The
cash was used to primarily fund seasonal increases in inventories, accounts
receivable and other current assets that were only partially funded by the
increase in accounts payable.
Net cash provided by investing activities was $0.6 million. Net sales of
short-term investments resulted in cash provided of $1.2 million.
Approximately $0.6 million was used to purchase property, plant and
equipment. Ben Franklin expects to spend an additional $5.1 million during
the remainder of the fiscal year on capital improvements related to the
opening of new company-owned crafts superstores, distribution center
improvements and management information systems.
Financing activities provided $2.9 million in funds. Borrowings under its
revolving credit facility for the three months ended June 30, 1994 were $3.1
million. The average and maximum amounts borrowed under the revolving credit
facility during the three months ended June 30, 1994 were $3.8 million and $8.4
million, respectively.
On June 22, 1994, Ben Franklin entered into a new $15 million revolving credit
facility (the "Ben Franklin Facility") which expires in August 1995. The Ben
Franklin Facility replaced a similar $15 million facility that would have
expired in August 1994. The Ben Franklin Facility is unsecured and bears
interest at the prime rate or at Libor plus 2%. The Ben Franklin Facility
requires that there be no borrowed funds outstanding thereunder for at least
30 consecutive days each year. Additional covenants prohibit the payment of
dividends and require the maintenance of a minimum tangible net worth.
Ben Franklin's management believes that cash on hand, cash generated by
operations, borrowings under its 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 the remainder of the
fiscal year.
HOLDING COMPANY
At June 30, 1994, the Holding Company had unrestricted cash and short-term
investments of approximately $12.2 million. In addition, the Holding Company
had $13.8 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's cash requirements include the funding of
monthly operating expenses, lease commitments, benefit
14
<PAGE> 16
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.
The Credit Facility and the NII Loan are secured by shares of common stock of
FoxMeyer and restrict the payment of cash dividends on the Corporation's common
stock and its Series A preferred stock. No funds were borrowed under the
Credit Facility during the quarter ended June 30, 1994. At June 30, 1994,
$28.3 million in borrowings were outstanding under the NII Loan.
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 and the NII Loan to meet the cash
funding obligations described above.
OTHER MATTERS
The Corporation continues to monitor the Phar-Mor, Inc. ("Phar-Mor") bankruptcy
proceedings closely. The Corporation believes the $40 million allowance 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 effect on the Corporation's financial condition.
15
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
FoxMeyer Corporation
FoxMeyer is a defendant in several civil actions filed in late 1993 by
independent retail drug stores in the U.S. District Court for the
Southern District of New York. By order of the Judicial Panel on
Multidistrict Litigation dated February 4, 1994, all related actions
pending in the various federal courts were consolidated and
coordinated for pretrial purposes in the U.S. District Court for the
Northern District of Illinois. FoxMeyer was not named as a defendant
in any other of the pending actions. On March 9, 1994, a Consolidated
and Amended Class Action Complaint titled In re Brand Name
Prescription Drugs Antitrust Litigation (the "Amended Complaint") was
filed consolidating all pending class actions, including those in
which FoxMeyer was a named defendant. The Amended Complaint alleges,
on behalf of a purported class of retail pharmacies, that the
pharmaceutical manufacturers and drug wholesalers conspired to fix the
prices of prescription drugs sold to retail drug stores. Plaintiffs
seek remedies in the form of injunctive relief, unquantified monetary
damages (trebled as provided by law), and attorneys fees and costs.
FoxMeyer believes it has meritorious defenses to the allegations
asserted against it and intends to vigorously defend itself in this
litigation.
Prior Matters
With respect to the matters reported in the Corporation's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994, the
following additional information is provided:
After the announcement by the Corporation and FoxMeyer, on March 1,
1994, of the Corporation's proposal of a merger pursuant to which the
Corporation would acquire the shares of common stock of FoxMeyer not
already owned by the Corporation, the following nine stockholder suits
were filed in the Court of Chancery of the State of Delaware: (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.; (6) Margulies v. FoxMeyer et al.; (7)
R.S. Harmon & Co. v. National Intergroup, et al; (8) Hojnoski v.
FoxMeyer et al.; and (9) Doris Oppenheim, et al. v. FoxMeyer
Corporation, et al.
In connection with the execution of the Merger Agreement, the
Corporation and FoxMeyer have entered into a Memorandum of
Understanding with counsel to the plaintiffs settling these nine
cases.
National Steel Corporation ("NSC"), Earth Sciences, Inc. ("ESI") and
Southwire Company ("Southwire") were the original general partners in
the Alumet Partnership ("Alumet"). In 1983, NSC assigned its
partnership interest in Alumet to the Corporation. The Environmental
Protection Agency (the "EPA") issued a Special Notice Letter on May
11, 1994 to Alumet alleging that Alumet is a potentially responsible
party under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA") for cleanup of the Lowry Landfill Superfund
Site and demanding payment of the EPA's past and future response
costs.
On July 6, 1994, Alumet was served with a complaint filed in the U.S.
District Court for the District of Colorado by the City and County of
Denver, Waste Management of Colorado, Inc. and Chemical Waste
Management, Inc. against multiple companies, including Alumet, the
Corporation, NSC and Southwire. The complaint has not yet been served
on the Corporation. The complaint alleges that Alumet, the
Corporation, NSC and Southwire are liable under CERCLA for the costs
of cleaning up the Lowry Landfill.
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<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10-A - Second Amendment to Amended and Restated Loan Agreement,
dated as of June 20, 1994, by and among FoxMeyer
Corporation, FoxMeyer Drug Company, Merchandise
Coordinator Services Corporation, Harris Wholesale
Company, the Lenders and Issuer named therein, CitiCorp
U.S.A., 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-A to
FoxMeyer Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994 and incorporated herein
by reference.)
11 - Computation of earnings per common share
(b) Reports on Form 8-K
The registrant filed the following report on Form 8-K during the
three months ended June 30, 1994:
Current Report on Form 8-K dated June 30, 1994 relating to the
Agreement and Plan of Merger among the Corporation, FoxMeyer
Acquisition Corp. and FoxMeyer Corporation.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation 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
Vice President and Controller
(Chief Accounting Officer)
Date: August 11, 1994
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<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
------ --------
<S> <C>
10-A - Second Amendment to Amended and Restated Loan Agreement, dated as of June 20, 1994, by and among FoxMeyer
Corporation, FoxMeyer Drug Company, Merchandise Coordinator Services Corporation, Harris Wholesale Company,
the Lenders and Issuer named therein, CitiCorp U.S.A., 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-A to
FoxMeyer Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated
herein by reference.)
11 - Computation of earnings per common share
</TABLE>
<PAGE> 1
EXHIBIT 11
NATIONAL INTERGROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
------------------------------
1994 1993
------- --------
<S> <C> <C>
Primary
-------
Earnings
Income from operations $ 5,228 $ 5,257
Deduct dividends on preferred shares 4,701 1,265
------- --------
Net income applicable to common stockholders $ 527 $ 3,992
======= ========
Shares
Weighted average number of common shares
outstanding 12,997 19,697
======= ========
Net income $ 0.04 $ 0.20
======= ========
Assuming Full Dilution
----------------------
Earnings
Income from operations $ 5,228 $ 5,257
Dividends on non-convertible preferred 3,546 -
Dividends on convertible preferred shares (conversion of
preferred shares would be anti-dilutive) 1,155 1,265
------- --------
Net income applicable to common stockholders $ 527 $ 3,992
======= ========
Shares
Weighted average number of common shares outstanding 12,997 19,697
Conversion of preferred stock (anti-dilutive) - -
Additional dilutive effect of outstanding options (as
determined by the treasury stock method) 8 -
Assuming conversion of National Steel Corporation
4 5/8% convertible debentures 39 68
------- --------
Weighted average number of common shares
outstanding as adjusted 13,044 19,765
======= ========
Net income** $ 0.04 $ 0.20
======= ========
</TABLE>
** 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%.
