<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 DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
AVATEX CORPORATION
------------------------------------------------------------------------
(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.)
5910 N. Central Expressway, Suite 1780, Dallas, Texas 75206
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code 214-365-7450
-----------------------
FoxMeyer Health Corporation, 1220 Senlac Drive, Carrollton, Texas 75006
- --------------------------------------------------------------------------------
Former Name, Former Address, if Changed Since Last Report
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 February 11, 1997: 13,805,988
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31,
---------------------------------
(In thousands, except per share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 3,645 $ 2,225
OPERATING COSTS
Selling, general and administrative expenses 4,282 5,366
Depreciation and amortization 1,353 339
- ----------------------------------------------------------------------------------------------------------
(1,990) (3,480)
Other income 32,606 2,485
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 30,616 (995)
FINANCING COSTS
Interest income 384 618
Interest expense 1,595 1,937
- ----------------------------------------------------------------------------------------------------------
Financing costs, net 1,211 1,319
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL CORPORATION,
EQUITY IN INCOME (LOSS) OF AFFILIATES, INCOME TAX PROVISION AND
MINORITY INTEREST 29,405 (2,314)
National Steel Corporation net preferred income 401 910
Equity in income (loss) of affiliates 481 (1,050)
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION
AND MINORITY INTEREST 30,287 (2,454)
Income tax provision (10) (2,523)
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 30,277 (4,977)
Minority interest in results of operations of consolidated subsidiaries (332) (825)
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 29,945 (5,802)
DISCONTINUED OPERATIONS:
Loss from operations -- (34,562)
Loss on disposal of discontinued operations (199) --
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 29,746 (40,364)
Preferred stock dividends 5,888 5,494
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 23,858 $(45,858)
- ----------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK:
Income (loss) from continuing operations $ 1.74 $ (0.64)
Loss from discontinued operations (0.01) (1.97)
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE $ 1.73 $ (2.61)
- ----------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13,809 17,561
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 3
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended December 31,
-------------------------------
(In thousands, except per share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 12,147 $ 6,205
OPERATING COSTS
Selling, general and administrative expenses 15,965 14,669
Depreciation and amortization 2,434 599
- ----------------------------------------------------------------------------------------------------------
(6,252) (9,063)
Other income 30,788 18,923
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME 24,536 9,860
FINANCING COSTS
Interest income 1,227 2,248
Interest expense 5,162 4,780
- ----------------------------------------------------------------------------------------------------------
Financing costs, net 3,935 2,532
- ----------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL CORPORATION, EQUITY IN
LOSS OF AFFILIATES, INCOME TAX BENEFIT (PROVISION) AND
MINORITY INTEREST 20,601 7,328
National Steel Corporation net preferred income 5,226 2,750
Equity in loss of affiliates (1,906) (1,681)
- ----------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (PROVISION)
AND MINORITY INTEREST 23,921 8,397
Income tax benefit (provision) (29,596) 328
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (5,675) 8,725
Minority interest in results of operations of consolidated subsidiaries (1,342) (1,889)
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (7,017) 6,836
DISCONTINUED OPERATIONS:
Loss from operations (17,467) (33,493)
Loss on disposal of discontinued operations (239,247) --
- ----------------------------------------------------------------------------------------------------------
NET LOSS (263,731) (26,657)
Preferred stock dividends 13,048 16,099
- ----------------------------------------------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(276,779) $ (42,756)
- ----------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK:
Loss from continuing operations $ (1.30) $ (0.54)
Loss from discontinued operations (16.71) (1.95)
- ----------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE $ (18.01) $ (2.49)
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AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,364 17,160
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</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
(In thousands of dollars) 1996 1996
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ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $ 11,679 $ 26,987
Restricted cash 32,810 --
Receivables - net 3,905 291,750
Inventories -- 632,269
Net assets held for sale -- 16,527
Other current assets 12,832 43,632
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 61,226 1,011,165
INVESTMENT IN NATIONAL STEEL CORPORATION 49,460 44,099
INVESTMENTS IN AFFILIATES 38,455 49,602
PROPERTY, PLANT AND EQUIPMENT 22,296 216,604
Less: allowances for depreciation and amortization 1,319 73,749
- ----------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 20,977 142,855
OTHER ASSETS
Goodwill - net 7,072 207,935
Intangible assets - net 938 12,554
Deferred tax asset, net of valuation allowance -- 79,676
Miscellaneous assets 7,629 29,184
- ----------------------------------------------------------------------------------------------------------
15,639 329,349
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 185,757 $1,577,070
==========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
(In thousands of dollars) 1996 1996
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,374 $ 610,579
Accrued liabilities 4,975 51,475
Deferred income taxes -- 43,917
Long-term debt due within one year 2,934 28,793
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,283 734,764
LONG-TERM DEBT 28,012 403,831
OTHER LONG-TERM LIABILITIES 38,781 38,646
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 9,301 10,074
REDEEMABLE PREFERRED STOCK 183,370 187,292
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $5.00 par value; authorized 50,000,000 shares; issued -
13,805,988 shares at December 31, 1996 and 24,188,084
shares at March 31, 1996 69,030 120,940
Capital in excess of par value 119,092 209,613
Minimum pension liability (64,634) (64,634)
Net unrealized holding loss on marketable securities -- (17)
Retained earnings (deficit) (206,478) 70,431
- ----------------------------------------------------------------------------------------------------------
(82,990) 336,333
Less: cost of common stock held in treasury - 7,520,882 shares at
March 31, 1996 -- 133,870
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (82,990) 202,463
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 185,757 $ 1,577,070
==========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
December 31,
---------------------------------
(In thousands of dollars) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (263,731) $ (26,657)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries 1,342 1,889
Equity in loss of affiliates 1,906 1,681
Depreciation and amortization 2,434 599
Net preferred income from National Steel Corporation (5,226) (2,750)
Gain on investments (32,783) (8,295)
Other non-cash charges (credits) 2,262 (14,611)
Deferred income tax provision (benefit) 29,579 (360)
Depreciation and amortization, provision for losses on accounts
receivable and other items related to discontinued operations 10,392 9,175
Loss on sale of discontinued operations 239,247 --
Cash provided (used) by working capital items, net of acquisitions:
Receivables 22,101 (4,543)
Inventories 26,018 15,034
Other assets (3,793) (1,834)
Accounts payable and accrued liabilities (11,501) (32,460)
Proceeds from accounts receivable financing program 75,000 --
Other 12 (425)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 93,259 (63,557)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in cash from reclassification to discontinued operations
or change to equity method of accounting (24,366) (14,581)
Purchase of property, plant and equipment (34,084) (30,689)
Purchase of investments (6,623) (79,870)
Proceeds from the sale of investments 102,580 22,108
Acquisitions, net of cash acquired -- (4,202)
Other 550 1,866
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 38,057 (105,368)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities 447,492 1,090,080
Repayments under revolving credit facilities (326,883) (942,880)
Proceeds from issuance of long-term debt 14,520 21,696
Debt repayments (212,286) (2,011)
Loan origination fees (8,334) (967)
Purchase of treasury stock (16,726) --
Purchase of preferred stock (8,845) --
Dividends paid on redeemable preferred stock (2,697) (3,135)
Dividends paid to minority interests (1,735) (1,133)
Exercise of stock options 1,680 2,008
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (113,814) 163,658
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 17,502 (5,267)
Cash and short-term investments, beginning of period 26,987 35,232
- -------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 44,489 $ 29,965
===================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 7
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Avatex Corporation (formerly FoxMeyer Health Corporation) and its subsidiaries
(the "Corporation") are primarily engaged in the operation of hotels and office
buildings, the operation of a medical claims processor and investing in other
corporations and partnerships.
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities, at the dates of the
financial statements and the reported amounts of revenues and expenses during
such reporting periods. Actual results could differ from these estimates.
Certain previously reported amounts have been reclassified to conform to
current year presentations.
The accompanying condensed consolidated balance sheet of the Corporation as of
December 31, 1996, the condensed consolidated statements of operations for the
three and nine months ended December 31, 1996 and 1995, and the condensed
consolidated statements of cash flows for the nine months ended December 31,
1996 and 1995, are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited consolidated 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 and nine
months ended December 31, 1996, are not necessarily indicative of the results
that may be expected for the entire year. The condensed consolidated balance
sheet as of March 31, 1996, was 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
fiscal year ended March 31, 1996, and should be read in conjunction with this
quarterly report.
NOTE 2 - NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share is based on income (loss) 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 earnings per share or
is anti-dilutive, as applicable.
NOTE 3 - TRANSACTIONS IN SUBSIDIARY COMMON STOCK
On August 14, 1996, the Board of Directors of the Corporation approved a plan
to divest its drug distribution subsidiary, FoxMeyer Drug Company, the primary
operating unit of the Corporation. Therefore, the subsidiary and its parent,
FoxMeyer Corporation ("FoxMeyer"), were treated as a discontinued operation
as of the measurement date of June 30, 1996. The Corporation recognized a loss
from discontinued operations of FoxMeyer for the three months ended June 30,
1996, the measurement date, of $17.5 million, net of taxes. In addition, the
Corporation recognized a loss of $252.6 million from the write-off of its
investment in FoxMeyer as a result of FoxMeyer's bankruptcy filing discussed
below. Prior year results of operations have been reclassified to reflect
FoxMeyer as a discontinued operation. Revenues included in results of
discontinued operations were $1,427.1 million for the three months ended June
30, 1996, the measurement date, and $1,430.4 million and $4,029.1 million for
the three and nine months ended December 31, 1995, respectively. The loss from
discontinued operations is net of applicable income tax benefit of $4.6 million
in 1996 and $20.9 million and $20.1 million for the three and nine months ended
December 31, 1995, respectively.
Commencing in mid-July 1996, a group of FoxMeyer's most significant vendors
began reducing their credit lines to FoxMeyer Drug Company. Despite positive
cash flow projections, the liquidity offered by a new credit facility and
FoxMeyer's history of timely debt payments, the group of vendors eliminated
approximately $100 million of liquidity from FoxMeyer's operations over a
forty-five day period by shortening repayment terms or requiring prepayment for
inventory purchases. In addition, during July and August, 1996, FoxMeyer made
certain prepayments to its suppliers for shipments of critical orders, where
after receiving payment, the vendors refused to release the product. In August
1996, FoxMeyer met with certain key vendors requesting a reinstatement of
credit lines to previous levels; however, an agreement could not be reached.
Therefore as a result of the above noted events, FoxMeyer and most of its
subsidiaries filed for protection under Chapter 11 of the U.S. Bankruptcy Code
on August 27, 1996.
6
<PAGE> 8
On November 8, 1996, the U.S. Bankruptcy Court approved a sale of the principal
assets of FoxMeyer to McKesson Corporation ("McKesson"). In connection with
the Corporation's asset sale, McKesson paid approximately $23 million in cash
to debtors, paid off approximately $500 million in secured debt and assumed an
additional $75 million in other liabilities. The Corporation received no
proceeds from the sale of FoxMeyer's assets to McKesson.
The Corporation wrote off the remaining book value of its investment in Ben
Franklin Retail Stores, Inc. ("Ben Franklin") of approximately $2.0 million at
June 30, 1996. The write-off resulted from the Chapter 11 bankruptcy filing by
Ben Franklin on July 26, 1996. As a result of the write-off of this investment,
the Corporation will no longer account for Ben Franklin on an equity basis.
NOTE 4 - OTHER TRANSACTIONS
On October 7, 1996, the Corporation announced that it had sold special warrants
that allowed holders to acquire all the shares of FoxMeyer Canada Inc.
("FoxMeyer Canada") that the Corporation owned or could acquire through
exercise of its options. The net proceeds from the sale were $37.4 million. In
connection with the sale, the Corporation recognized a gain of approximately
$34.0 million in the third quarter of fiscal 1997. Such gain is included in
"Other income" in the accompanying Statements of Operations.
The Corporation's interest in FoxMeyer Canada was received as a dividend from
FoxMeyer on June 19, 1996. The Corporation had agreed with the Official
Committee of Unsecured Creditors in FoxMeyer's Chapter 11 case (the
"Committee") to escrow all but $5.0 million of the net proceeds for a period of
90 days from October 28, 1996. Once held in escrow for 90 days, the Corporation
may request payment of all such amounts upon a 45-day notice to FoxMeyer and
the Committee, during which time the Committee and FoxMeyer have the right to
seek an injunction prohibiting such payment. On January 30, 1997, the
Corporation gave notice requesting payment of all amounts held in the escrow
account by March 17, 1997. See Note 8 for a further discussion of legal actions
taken by the Committee.
During the third quarter of fiscal 1997, the Corporation sold its ownership
interest in certain real estate limited partnerships for $9.9 million, which
consisted of $8.2 million in cash and a note for $1.7 million which was repaid
in December 1996. The transactions resulted in a gain of approximately $6.1
million which is included in "Other income" in the Statements of Operations.
In July 1995, the Corporation adopted a plan to dispose of certain of its
managed care and information services operations. On August 2, 1996, the
pharmacy benefit management operations were sold for $30.5 million with an
additional $2.5 million due in one year. The additional payment may increase to
a maximum of $5.0 million based on certain criteria. The transaction resulted
in a gain on disposal of discontinued operations of approximately $13.3 million
after establishing certain additional reserves related to the final disposition
of all remaining assets. This sale completed the dispositions announced in July
1995.
NOTE 5 - LONG-TERM DEBT
On August 2, 1996, the Corporation retired its $15.0 million revolving credit
facility. In addition, the Corporation had $14.9 million outstanding under a
term loan (the "Hamilton Facility") and $16.0 million in outstanding
non-recourse real estate loans.
On December 12, 1996, the Corporation amended the Hamilton Facility. The
amendment required additional collateral and also required that the Corporation
maintain at least three months expected interest charges in an escrow account.
As a result of the amendment, the Corporation is in compliance with the
covenants of the Hamilton Facility.
7
<PAGE> 9
NOTE 6 - 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>
- ------------------------------------------------------------------------------------------
Nine months ended December 31,
------------------------------
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Interest paid $18,140 $27,916
Income taxes paid 25 199
Noncash transactions:
Payment of dividends in kind on preferred stock 4,354 11,700
Cumulative dividends in arrears accrued 5,344 --
Payment of dividend in common stock of Ben Franklin -- 29,697
- ------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
As a result of the plan to divest FoxMeyer, the Corporation reviewed its
valuation allowance on the deferred tax assets available to the Corporation.
Without the projected taxable income from FoxMeyer, the Corporation has
determined that an additional valuation allowance of $29.9 million was needed
at June 30, 1996.
NOTE 8 - 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, 1996. 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 reserves for environmental 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 cost and expenses it may incur
for such environmental liabilities. Management recognizes additional work may
have to be performed to ascertain the ultimate liability for such sites, and
further information could ultimately change management's current assessment of
the adequacy of its environmental liabilities. Any changes in the estimated
liability might have a material impact on the financial condition and results
of operations of the Corporation.
On November 25, 1996, in connection with the Chapter 11 cases of FoxMeyer and
certain of its subsidiaries (the "Debtors"), the Committee filed a lawsuit
against the Corporation in the United States Bankruptcy Court for the District
of Delaware (the "Court"), Adversary No. 96-205. In the lawsuit, the Committee
alleges that certain property transferred by FoxMeyer to the Corporation as a
dividend on June 19, 1996, constituted an avoidable fraudulent transfer or
preference. The dividend consisted of assets unrelated to FoxMeyer's core
distribution
8
<PAGE> 10
business, including assets of its pharmacy benefits management operations, its
investments in Phar-Mor, Inc. (equal to a 7.8% interest in Phar-Mor), FoxMeyer
Canada and other marketable securities, US HealthData Interchange, Inc., and a
$31.3 million loan from FoxMeyer to the Corporation. The Committee seeks to
recover the property transferred or the value of the property transferred. The
Corporation believes that the dividend was lawful and is vigorously contesting
the lawsuit.
On January 13, 1997, the Court entered a Temporary Restraining Order which
requires the Corporation to provide prior notice to the Committee of any
proposed (i) transfer, sale or other disposition of any assets that were
conveyed by FoxMeyer to the Corporation on June 19, 1996, or any proceeds from
any sale or other disposition thereof, (ii) transfer, sale or other disposition
of any of the Corporation's other assets except in the ordinary course of
business, or (iii) encumbrance or pledge of any of such assets. The Court set a
hearing on March 5, 1997, on the Committee's motion for a preliminary
injunction seeking the foregoing relief. The Corporation will vigorously
contest the Committee's motion.
On January 10, 1997, the Corporation filed a ten count lawsuit against McKesson
Corporation ("McKesson") and certain major pharmaceutical manufacturers in the
95th Judicial District Court of Dallas County, Texas. In the lawsuit, the
Corporation alleges that McKesson and the pharmaceutical manufacturers
conspired to drive the Corporation's pharmaceutical distribution subsidiary,
FoxMeyer Drug Company, out of business. The lawsuit alleges that McKesson
misused confidential financial and competitive information to which it had
gained access in conceiving, perpetrating and promoting a plan to drive
FoxMeyer Drug Company out of its industry, and that McKesson exploited this
information by interfering with FoxMeyer Drug Company's customer and vendor
relationships and disrupting its operations in order to ultimately effectuate a
purchase of its competitor at a significantly distressed price. With respect to
the pharmaceutical manufacturer defendants, the lawsuit alleges that they
tightened or outright denied credit to FoxMeyer Drug Company and thereafter
refused to work with an investment group that had agreed to buy FoxMeyer Drug
Company's operations, thereby forcing it into Chapter 11. The lawsuit alleges
that these actions were the result of an unlawful civil conspiracy. The
Corporation seeks to recover in excess of $400 million in compensatory damages
on account of the value of the Corporation's interests in FoxMeyer Drug
Company, plus punitive damages. In early February 1997, certain defendants in
the lawsuit filed various papers attempting to remove and transfer the
litigation to the Court as a proceeding related to the Chapter 11 cases of
FoxMeyer and certain of its subsidiaries. The Corporation intends to oppose the
removal and transfer.
The Corporation and certain of its current and former officers and directors
have been named as defendants in a series of purported class actions that have
been filed since August 1996, and consolidated in federal court in the Northern
District of Texas, Dallas Division. These actions purport to be brought on
behalf of purchasers of the Corporation's common stock and the Series A and
cumulative preferred stock during the period July 19, 1995, through August 27,
1996. Plaintiffs assert violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and seek unspecified money damages.
Specifically, the complaints allege that the defendants made materially false
and misleading statements and failed to disclose material information
concerning a variety of matters, including but not limited to the terms of
contracts with major customers, the Corporation's inventory management and
order processing systems, and the automated warehouse at Washington Court
House, Ohio; and that the Corporation's financial statements were false and
misleading. All of the lawsuits that were filed in federal court were
consolidated under Zuckerman, et al. v. FoxMeyer Health Corporation, et al in
the U.S. District Court for the Northern District of Texas, Dallas Division.
Pending the resolution of various procedural motions in the case, the
Corporation anticipates that the court will direct the plaintiffs to file a
consolidated complaint in the near future. The Corporation intends to
vigorously defend the consolidated lawsuit.
The Corporation and certain officers also have been named as defendants in an
action in Texas State Court which purports to be brought on behalf of all
holders of the Corporation's common stock during the period from October 30,
1995, to July 1, 1996, and which seeks unspecified money damages. Plaintiff
asserts claims of common law fraud and negligent misrepresentation, based on
allegations that she was induced not to sell her shares by supposed
misrepresentations and omissions that are substantially the same as those
alleged in the federal actions described above. On January 27, 1997, the
Corporation moved for summary judgment in the lawsuit on the ground that the
proposed plaintiff class, as plaintiffs themselves allege, did not purchase or
sell any of the Corporation's securities during the class period. The
plaintiffs' time to respond to the summary judgment motion has not yet run.
The Corporation intends to continue to vigorously defend the lawsuit.
9
<PAGE> 11
There are various other pending claims and lawsuits arising out of the normal
conduct of the Corporation. 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 9 - CAPITAL STOCK
During the period from July 3, 1996, to September 10, 1996, the Corporation
purchased 562,000 shares of common stock under a previously announced stock
buyback program, 1,000,000 shares under a stock buyback program announced in
July 1996 and 1,404,800 shares under a 2,000,000 share repurchase program
approved in August 1996. The 2,966,800 shares were purchased at a cost of $16.7
million. These shares along with the 7,415,296 shares of common stock
repurchased and not reissued from prior periods were canceled with a
corresponding reduction in common stock and capital in excess of par value of
$148.7 million.
The Corporation also purchased, during the period from August 1996 through
December 1996, 88,000 shares of its $5.00 cumulative convertible preferred
stock (the "Convertible Preferred") for $2.9 million. These purchases satisfied
the sinking fund requirements for the current fiscal year. In addition, the
Corporation purchased 317,000 shares under a 500,000 share repurchase program
announced in August 1996 of its $4.20 cumulative exchangeable Series A
preferred stock (the "Series A Preferred") at a cost of $6.0 million during
September 1996.
The Corporation did not declare, nor did it pay, the dividends due January 15,
1997, on either the Convertible Preferred or Series A Preferred. These two
issues are cumulative; therefore, the amount of the dividend that would have
been paid has been deducted from net income in the accompanying Statements of
Operations in the amounts of $0.8 million for the Convertible Preferred ($1.25
per share) and $4.5 million for the Series A Preferred ($1.05 per share).
10
<PAGE> 12
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Avatex Corporation (formerly FoxMeyer Health Corporation) and its subsidiaries
(the "Corporation") are principally engaged in the operation of hotels and
office buildings, primarily in the Washington D.C. area; the operation of a
medical claims processor, US HealthData Interchange, Inc. ("USHDI"); and making
investments in other corporations or partnerships.
On August 14, 1996, the Corporation's Board of Directors approved a plan to
divest the Corporation's primary operating unit, FoxMeyer Corporation
("FoxMeyer") including its drug distribution subsidiary, FoxMeyer Drug Company.
FoxMeyer's operating loss to the measurement date of June 30, 1996, of $17.5
million is shown as a loss from discontinued operations. The Corporation has
also recorded a $252.6 million loss on disposal of discontinued operations from
the write-off of its investment in FoxMeyer as a result of FoxMeyer's
bankruptcy filing discussed below.
Commencing in mid-July 1996, a group of FoxMeyer's most significant vendors
began reducing their credit lines to FoxMeyer Drug Company. Despite positive
cash flow projections, the liquidity offered by a new credit facility and
FoxMeyer's history of timely debt payments, the group of vendors eliminated
approximately $100 million of liquidity from FoxMeyer's operations over a
forty-five day period by shortening repayment terms or requiring prepayment for
inventory purchases. In addition, during July and August, 1996, FoxMeyer made
certain prepayments to its suppliers for shipments of critical orders, where
after receiving payment, the vendors refused to release the product. In August
1996, FoxMeyer met with certain key vendors requesting a reinstatement of
credit lines to previous levels; however, an agreement could not be reached.
Therefore as a result of the above noted events, FoxMeyer and most of its
subsidiaries filed for protection under Chapter 11 of the U.S. Bankruptcy Code
on August 27, 1996.
On November 8, 1996, the U.S. Bankruptcy Court approved a sale of the principal
assets of FoxMeyer to McKesson Corporation ("McKesson"). In connection with the
Corporation's asset sale, McKesson paid approximately $23 million in cash to
debtors, paid off approximately $500 million in secured debt and assumed an
additional $75 million in other liabilities. The Corporation received no
proceeds from the sale of FoxMeyer's assets to McKesson.
On July 26, 1996, Ben Franklin Retail Stores, Inc. ("Ben Franklin") filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the
Corporation wrote off its remaining investment of $2.0 million in Ben Franklin
and will no longer account for Ben Franklin on an equity basis.
On August 2, 1996, the Corporation sold its pharmacy benefit management
operations which had been accounted for as a discontinued operation since July
1995. The Corporation received $30.5 million in cash plus a note for $2.5
million. The note may increase in value to $5.0 million based on certain
occurrences. The Corporation recognized a gain on disposal of discontinued
operations of approximately $13.3 million.
On October 7, 1996, the Corporation announced that it had sold special warrants
which allowed holders to acquire all the shares of FoxMeyer Canada Inc.
("FoxMeyer Canada") that the Corporation owned or could acquire through
exercise of its options. The net proceeds from the sale were $37.4 million. In
connection with the sale, the Corporation recognized a gain of approximately
$34.0 million in the third quarter of fiscal 1997. Such gain in included in
"Other income" in the accompanying financial statements.
The Corporation's interest in FoxMeyer Canada was received as a dividend from
FoxMeyer on June 19, 1996. The Corporation agreed with the Official Committee
of Unsecured Creditors in FoxMeyer's Chapter 11 case (the "Committee") to
escrow all but $5.0 million of the net proceeds for a period of 90 days from
October 28, 1996. Once held in escrow for 90 days, the Corporation may request
payment of all such amounts upon a 45-day notice to FoxMeyer and the Committee,
during which time the Committee and FoxMeyer have the right to seek an
injunction prohibiting such payment. On January 30, 1997, the Corporation gave
notice requesting payment of all amounts held in the escrow account by March
17, 1997.
During the third quarter of fiscal 1997, the Corporation sold certain of its
real estate limited partnership interests for $9.9 million. The transaction
resulted in a gain of approximately $6.1 million which is included in "Other
income" in the accompanying financial statements.
See Liquidity and Capital Resources below for further legal actions by the
Committee against the Corporation.
11
<PAGE> 13
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE AND NINE MONTHS
ENDED DECEMBER 31, 1995
OPERATING INCOME (LOSS)
Revenues, primarily from real estate operations, increased to $3.6 million and
$12.1 million for the three and nine months ended December 31, 1996,
respectively, as compared to $2.2 million and $6.2 million for the three and
nine months ended December 31, 1995. The increase is primarily the result of an
increase in hotel revenues, including an increase related to the addition of a
new hotel management agreement and the reclassification of a hotel held for
sale to operating status in the fourth quarter of fiscal 1996, and to an
increase in revenues from USHDI. Future revenues will decrease as a result of
the sale of real estate described above. The Corporation still operates two
hotels and an office building and is renovating another building.
Operating expenses for the three months ended December 31, 1996, were down
slightly to $5.6 million from $5.7 million for the three months ended December
31, 1995. For the nine months ended December 31, 1996, operating expenses
increased to $18.4 million from $15.3 million in the same period of the prior
year. The overall increase for the current year is consistent with the
increased revenues while the decline for the three months ended December 31,
1996, as compared to the prior year was due primarily to a reduction in
corporate overhead.
For the three months ended December 31, 1996, other income increased to $32.6
million from $2.5 million for the three months ended December 31, 1995. In the
current quarter, the Corporation recognized gains on the sale of FoxMeyer
Canada and from the sale of real estate partnerships, discussed elsewhere,
which were partially offset by decreases in the market value of trading and
other securities. In the prior year, other income represented gains on
securities during the quarter. For the nine months ended December 31, 1996,
other income is $30.8 million as compared to $18.9 million in the prior year.
The current year gain represents the gain from the sale of FoxMeyer Canada and
real estate properties partially offset by the write-off of the Corporation's
investment in Ben Franklin and realized and unrealized losses on securities. In
the prior year, the gain was due principally to the settlement of certain
issues related to the 1992 sale of The Permian Corporation and gains on trading
and other securities.
NET FINANCING COSTS
For the three months ended December 31, 1996, net financing costs decreased to
$1.2 million from $1.3 million for the three months ended December 31, 1995. In
the current quarter, interest expense decreased approximately $0.3 million due
to lower borrowings for corporate activities partially offset by higher
borrowings for real estate operations. Interest income decreased $0.2 million
due to reduced investments in notes receivable in the real estate operations.
For the nine months ended December 31, 1996, net financing costs increased to
$3.9 million from $2.5 million in the prior year. Interest expense increased
$0.4 million primarily as a result of increased borrowings for real estate
operations partially offset by lower interest expense for other corporate
activities. Interest income decreased $1.0 million to $1.2 million for the nine
months when compared to the same period of the prior year primarily due to
reduced investments in notes receivable in the real estate operations.
NATIONAL STEEL CORPORATION RESULTS
Net preferred income for National Steel Corporation ("NSC") was $0.4 million and
$5.2 million for the three and nine months ended December 31, 1996,
respectively, as compared to $0.9 million and $2.8 million for the same periods
in the prior year. For the nine-month period, the increase is primarily due to
the reduction in the actuarially determined expense in the current year related
to the Weirton pension obligation partially offset by a valuation reserve
established in the third quarter of fiscal 1997 in connection with the
determination of the value of the investment in NSC. For the three-month period,
the valuation reserve offset the decrease in pension obligation expense
resulting in a decrease of $0.5 million in net preferred income as compared to
the prior year.
12
<PAGE> 14
EQUITY IN INCOME (LOSS) OF AFFILIATES
For the three months ended December 31, 1996, the equity in income (loss) of
affiliates was income of $0.5 million as compared to a loss of $1.1 million for
the prior year period. The increase was due primarily to the change from the
equity method of accounting for Ben Franklin in the prior year to the cost
basis (see Note 3 to the condensed consolidated financial statements concerning
the write-off of the investment in Ben Franklin). The equity in loss of
affiliates was $1.9 million for the nine months ended December 31, 1996, as
compared to $1.7 million for the nine months ended December 31, 1995. The
increase in the loss resulted from higher losses in FoxMeyer Canada during the
current period as compared to the prior year (see Overview above concerning the
sale of FoxMeyer Canada) and losses from the investment in Phar-Mor, Inc.
("Phar-Mor") for the nine months ended December 31, 1996, which investment was
not acquired until September 1995. The increased loss in the current year was
partially offset by increased income from equity investments in real estate and
the change from the equity method of accounting for Ben Franklin in the prior
year to the cost method.
INCOME TAXES
The Corporation recorded an income tax expense of $29.6 million for the nine
months ended December 31, 1996. The expense reflects the increase in the
deferred tax asset valuation allowance as a result of the loss of FoxMeyer's
future estimated operating earnings. The benefit of $0.3 million for the nine
months ended December 31, 1995, was a result of reductions in the deferred tax
valuation allowance. The prior year provision of $2.5 million for the three
months ended December 31, 1995, represented an adjustment of the valuation
allowance due to losses incurred by FoxMeyer in that quarter.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
The minority interest in the results of operations of consolidated subsidiaries
was $0.3 million and $1.3 million for the three and nine months ended December
31, 1996, respectively, as compared to $0.8 million and $1.9 million for the
same periods in the prior fiscal year. The decrease in the minority interest
for the three-month period is primarily related to lower income in the current
year associated with the minority interest in Hamilton Morgan LLC ("Hamilton
Morgan"). For the nine-month period, the decrease associated with Hamilton
Morgan was partially offset by an increase in the minority interest from higher
operating results of the real estate operations.
DISCONTINUED OPERATIONS
The loss from discontinued operations was $17.5 million for the nine months
ended December 31, 1996, which represented the operating loss of FoxMeyer to
the measurement date of June 30, 1996. The prior year loss of $34.6 million and
$33.5 million for the three and nine months ended December 31, 1995,
respectively, also represent FoxMeyer's losses. The loss on disposal of
discontinued operations of $239.2 million for the nine months ended December
31, 1996, primarily represents the loss from the write-off of FoxMeyer of
$252.6 million less the gain from the sale of the pharmacy benefit management
operations of $13.3 million. The charge of $0.2 million for the current quarter
represents additional reserves accrued in connection with the disposition of
the remaining assets of the managed care and information services segments.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $5.9 million and $13.0 million for the three and
nine months ended December 31, 1996, respectively, as compared to $5.5 million
and $16.1 million for the three and nine months ended December 31, 1995. The
increase for the three-month period is due to the accrual of the cumulative
dividend on the Series A preferred stock based on a cash dividend of $1.05 per
share in the current year quarter versus the pay-in-kind dividend whose charge
against operations was based on the market value of the preferred stock on the
ex-dividend date in the prior year. The increase was partially offset by the
decrease in the number of shares of convertible preferred stock outstanding.
For the nine-month period, the decrease was due to the decrease in the number
of shares of convertible preferred stock as compared to the same period in the
prior year and to the first two quarterly pay-in-kind dividends on the Series A
preferred stock in the current year. The market value of the Series A preferred
stock had decreased compared to the prior year resulting in lower dividend
expense for the first two quarters in the current year.
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
As of February 11, 1997, the Corporation had cash and short-term investments of
approximately $9.8 million, excluding cash and short-term investments in real
estate limited partnerships and $32.9 million held in escrow resulting primarily
from the sale of FoxMeyer Canada. The ability of the Corporation to obtain and
use the escrow funds may be withheld pending a decision on the lawsuit filed by
the Committee as described in Note 8 to the condensed consolidated financial
statements. In addition, the Corporation had borrowed $14.9 million under a
secured loan (the "Hamilton Facility").
The Corporation's mandatory cash requirements include the funding of monthly
operating activities, benefit obligations, and cash outlays attributable to
environmental liabilities of previously-owned businesses, the amounts and
timing of which are uncertain. A principal payment of $2.5 million is required
in September 1997 under the Hamilton Facility. The Corporation also expects to
spend an increasing amount of funds on litigation expenses.
The Corporation announced in December 1996 that it would not make the cash
dividend payments on its Series A or convertible preferred stocks due January
15, 1997. This action was taken to preserve as much working capital as possible
for the continuing operations. As a result of stock repurchases previously
made, the Corporation has fully complied with its January 15, 1997, mandatory
sinking fund obligation for its convertible preferred stock. If the Corporation
does not pay dividends on its preferred stock for six consecutive quarters, the
preferred shareholders would have the ability to elect a specified number of
members to the Board of Directors.
The Corporation received a dividend from FoxMeyer on June 19, 1996, consisting
of assets unrelated to FoxMeyer's core distribution business, including assets
of FoxMeyer's pharmacy benefit management operations; USHDI; FoxMeyer's
investment in Phar-Mor (equal to a 7.8% interest in Phar-Mor), FoxMeyer Canada
and other marketable securities; and FoxMeyer's forgiveness of a $31.3 million
loan to the Corporation.
As a result of FoxMeyer's bankruptcy filing, the Committee has contested the
dividend payment and has demanded return of the assets or their fair market
value. Because of this demand, it may be difficult for the Corporation to
liquidate assets. Should the unsecured creditors prevail in challenging the
dividend payment, the Corporation's financial position would be materially
impaired. The Corporation believes that the dividend was lawful and shall
contest vigorously such claim.
On January 13, 1997, the U.S. Bankruptcy Court for the District of Delaware
(the "Court"), presiding over the Chapter 11 case of certain of the
Corporation's subsidiaries as explained above, entered a Temporary Restraining
Order (the "Order") in litigation filed by the Committee against the
Corporation. The Order requires the Corporation to provide ten days prior
notice to the Committee of any proposed (i) transfer, sale or other disposition
of any assets conveyed to it by FoxMeyer or its subsidiaries on June 19, 1996,
or any proceeds from any sale or disposition thereof, (ii) transfer, sale or
other disposition of any of the Corporation's other assets except in the
ordinary course of business, or (iii) encumbrance or pledge of any of such
assets. The Order, however, does not affect the sale of FoxMeyer Canada. The
Bankruptcy Court has set a hearing on March 5, 1997, on the Committee's motion
for a preliminary injunction seeking the forgoing relief.
On December 19, 1996, the Corporation announced that it has exercised its
option to either sell its 69.8% majority investment in Hamilton Morgan or buy
the minority interest, at a price of $9.00 per share, from the partnership's
other major investor, Robert Haft, Chairman and Chief Executive Officer of
Phar-Mor. Hamilton Morgan is a limited liability company whose sole investment
is its approximately 31% stake (3,750,000 shares) of Phar-Mor, a deep discount
drug store chain which has entered into an agreement, along with Shopko Stores,
to sell or exchange their respective businesses to a newly created company,
Cabot Noble, Inc.
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<PAGE> 16
Under the provisions of the Hamilton Morgan agreement, Mr. Haft has 90 days in
which to respond to the Corporation by agreeing to either sell his interest in
or purchase the Corporation's interest in Hamilton Morgan. According to the
letter sent by the Corporation to Mr. Haft, a decision to purchase the
Corporation's interest would result in total cash proceeds of approximately
$26.5 million to the Corporation. If Mr. Haft elects to sell his shares, he
would receive proceeds amounting to approximately $7.2 million, of which $3.6
million would be paid at closing and the remainder would be due in 18 months.
Mr. Haft has elected to invoke the arbitration provisions of the Hamilton
Morgan agreement with respect to the interpretation of the buy/sell provisions
of that agreement, the method of determining the respective purchase prices and
for certain other matters. The Corporation currently owns, and will continue to
own after the conclusion of this transaction, approximately one million shares
of Phar-Mor outside of its investment in Hamilton Morgan. These shares were
received as part of the June 19, 1996, dividend from FoxMeyer.
The Corporation will rely on cash on hand, the FoxMeyer Canada escrow to the
extent released, the sale of real estate or other investments and any excess
cash from its real estate operations to meet its future obligations. The
Corporation will continue liquidating its assets, to the extent necessary and
as permitted, in order to meet its cash needs. Because there can be no
assurance as to the value of these assets or the ability of the Corporation to
timely liquidate these investments when funds are needed, the Corporation's
future ability to meet its ongoing expenses is not assured.
OTHER
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 ("SFAS 125") "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", which is
effective for transfers of assets and extinguishments of liabilities occurring
after December 31, 1996. The Corporation does not believe there will be any
material effect on its financial position or the results of operations from the
adoption of SFAS 125.
15
<PAGE> 17
PART II - OTHER INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
On November 25, 1996, in connection with the Chapter 11 cases of FoxMeyer
Corporation and certain of its subsidiaries (the "Debtors"), the Official
Committee of Unsecured Creditors of the Debtors (the "Creditors' Committee")
filed a lawsuit against the registrant in the United States Bankruptcy Court
for the District of Delaware (the "Court"), Adversary No. 96-205. In the
lawsuit, the Creditors' Committee alleged that certain property transferred by
FoxMeyer Corporation to the registrant as a dividend on June 19, 1996,
constituted an avoidable fraudulent transfer or preference. The dividend
consisted of assets unrelated to FoxMeyer Corporation's core distribution
business, including assets of its pharmacy benefits management operations, its
investments in Phar-Mor, Inc., FoxMeyer Canada Inc. and other marketable
securities, US HealthData Interchange, Inc., and a $31.3 million loan from
FoxMeyer Corporation to the registrant. The Creditors' Committee seeks to
recover the property transferred or the value of the property transferred. The
registrant believes that the dividend was lawful and is vigorously contesting
the lawsuit.
On January 13, 1997, the Court entered a Temporary Restraining Order which
requires the registrant to provide prior notice to the Creditors' Committee of
any proposed (a) transfer, sale or other disposition of any assets that were
conveyed by FoxMeyer Corporation to the registrant on June 19, 1996, or any
proceeds from any sale or other disposition thereof, (b) transfer, sale or
other disposition of any of the registrant's other assets except in the
ordinary course of business, or (c) encumbrance or pledge of any of such
assets. The Court set a hearing on March 5, 1997, on the Creditors' Committee's
motion for a preliminary injunction seeking the foregoing relief. The
registrant will vigorously contest the Creditors' Committee's motion on March 5,
1997.
On January 10, 1997, the registrant filed a ten count lawsuit against McKesson
Corporation ("McKesson") and certain major pharmaceutical manufacturers in the
95th Judicial District Court of Dallas County, Texas. In the lawsuit, the
registrant alleges that McKesson and the pharmaceutical manufacturers conspired
to drive the registrant's pharmaceutical distribution subsidiary, FoxMeyer Drug
Company, out of business. The lawsuit alleges that McKesson misused
confidential financial and competitive information to which it had gained
access in conceiving, perpetrating and promoting a plan to drive FoxMeyer Drug
Company out of its industry, and that McKesson exploited this information by
interfering with FoxMeyer Drug Company's customer and vendor relationships and
disrupting its operations in order to ultimately effectuate a purchase of its
competitor at a significantly distressed price. With respect to the
pharmaceutical manufacturer defendants, the lawsuit alleges that they tightened
or outright denied credit to FoxMeyer Drug Company and thereafter refused to
work with an investment group that had agreed to buy FoxMeyer Drug Company's
operations, thereby forcing it into Chapter 11. The lawsuit alleges that these
actions were the result of an unlawful civil conspiracy. The registrant seeks
to recover in excess of $400 million in compensatory damages on account of the
value of the registrant's interests in FoxMeyer Drug Company, plus punitive
damages. In early February 1997, certain defendants in the lawsuit filed
various papers attempting to remove and transfer the litigation to the Court as
a proceeding related to the Chapter 11 cases of FoxMeyer Corporation and
certain of its subsidiaries. The registrant intends to oppose the removal and
transfer.
In August 1994, a group of four individuals filed a class action lawsuit
against their former employer, FoxMeyer Drug Company, in Texas State Court. The
lawsuit alleged that the termination of the plaintiffs' employment, made as
part of a reduction-in-force, violated the Age Discrimination in Employment
Act. The lawsuit also named FoxMeyer Corporation and the registrant as
defendants, all of which denied the plaintiffs' allegations. The lawsuit was
subsequently removed to the United States District Court for the Northern
District of Texas, Dallas Division and, in August 1996, the case against
FoxMeyer Drug Company and FoxMeyer Corporation was stayed following their
filing for relief under Chapter 11 of the Bankruptcy Code. On September 9,
1996, the Court granted the registrant's motion for summary judgment and
entered a partial final judgment in the registrant's favor on the ground that
the registrant could not be considered a "single employer" of the plaintiffs
under the Age Discrimination in Employment Act. The plaintiffs have appealed
the judgment to the United States Court of Appeals for the Fifth Circuit, No.
96-11278, and the registrant is scheduled to file its Brief in support of the
judgment on or before February 28, 1997.
16
<PAGE> 18
With respect to matters reported in the registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996, and Form 10-Q's for the fiscal
quarters ended June 30, 1996, and September 30, 1996, the following additional
information is provided:
Shareholder Litigation. With reference to the series of purported class action
lawsuits commenced against the registrant in 1996, as previously reported in
the registrant's Form 10-Q for the fiscal quarter ended September 30, 1996, all
of the lawsuits that were filed in federal court have been consolidated under
Zuckerman, et al. v. FoxMeyer Health Corporation, et al., in the United States
District Court for the Northern District of Texas, Dallas Division, Case No.
396-CV-2258-T. Pending the resolution of various procedural motions in the
case, the registrant anticipates that the court will direct the plaintiffs to
file a consolidated complaint in the near future. The registrant intends to
vigorously defend the consolidated lawsuit.
With reference to the purported class action lawsuit filed against the
registrant in Texas State Court, as previously reported in the registrant's
Form 10-Q for the fiscal quarter ended September 30, 1996, on January 27, 1997,
the registrant moved for summary judgment in the lawsuit on the ground that the
proposed plaintiff class, as plaintiffs themselves allege, did not purchase or
sell any of the registrant's securities during the class period.
The plaintiffs' time to respond to the summary judgment motion has not yet run.
Environmental Insurance Litigation. With reference to the lawsuit filed by the
registrant and others against various insurance carriers in Hancock County,
West Virginia, as previously reported in the registrant's Form 10-K for the
fiscal year ended March 31, 1996, the principal parties have continued in court
ordered mediation sessions through January 1997 and, as a result of these
sessions, the plaintiffs have entered into settlement agreements with certain
excess carriers. The court has set the first phase of the case for trial in
September 1997 with respect to four environmental sites located in West
Virginia.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
The registrant did not declare, nor did it pay, the dividends due January 15,
1997 on either the Convertible Preferred Stock or Series A Preferred Stock.
These two issues are cumulative. On January 15, 1997, the amount of dividend
arrearages were approximately $0.8 million for the Convertible Preferred Stock
($1.25 per share) and $4.5 million for the Series A Preferred Stock ($1.05 per
share).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10-A - Third Amendment to Credit
Agreement dated as of September 13,
1996, between the registrant and
Credit Lyonnais New York Branch.
10-B - Fourth Amendment to Credit
Agreement, dated as of December 12,
1996, between the registrant and
Credit Lyonnais New York Branch.
11 - Computation of Earnings Per Common
Share
27 - Financial Data Schedule
(b) Reports on Form 8-K
The registrant filed the following Current Reports
on Form 8-K during the three months ended December
31, 1996.
Form 8-K dated October 3, 1996, announcing
the signing of an asset purchase agreement
with McKesson Corporation for substantially
all the assets of the companies in
17
<PAGE> 19
the Chapter 11 bankruptcy proceedings. In
addition, it announced the sale of special
warrants to acquire shares of FoxMeyer
Canada Inc. owned by the registrant for
Cdn. $50.4 million. Each special warrant is
convertible into one share of common stock
of FoxMeyer Canada Inc. owned by the
registrant, or subject to an option held by
the registrant.
Form 8-K dated December 20, 1996,
announcing the quarterly dividends due on
its Series A and Convertible Preferred
Stock will not be made in January 1997 as
scheduled. The registrant also announced
the exercise of its option to buy out the
minority shareholder of Hamilton Morgan LLC
or sell the registrant's interest to the
minority shareholder.
The registrant filed the following Current Report on
Form 8-K after December 31, 1996, but prior to the
date of this filing.
Form 8-K dated February 3, 1997, announcing
the change of the registrant's name to
Avatex Corporation and the issuance of a
temporary restraining order against the
registrant.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVATEX CORPORATION
By: /s/ Edward L. Massman
-----------------------------
Edward L. Massman
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 14, 1997
19
<PAGE> 21
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10-A - Third Amendment to Credit Agreement dated as of September 13,
1996, between the registrant and Credit Lyonnais New York
Branch.
10-B - Fourth Amendment to Credit Agreement, dated as of December 12,
1996, between the registrant and Credit Lyonnais New York
Branch.
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10-A
THIRD AMENDMENT TO CREDIT AGREEMENT AND
SECOND AMENDMENT TO SECURITY AGREEMENT
(AND WAIVER)
THIS AMENDMENT is entered into as of September 13, 1996, between
FOXMEYER HEALTH CORPORATION, a Delaware corporation ("BORROWER"), and CREDIT
LYONNAIS NEW YORK BRANCH, a duly licensed branch under the New York Banking Law
of a foreign banking corporation organized under the Laws of the Republic of
France ("LENDER").
Borrower and Lender are party to the Credit Agreement (as renewed,
extended, and amended, the "CREDIT AGREEMENT") dated as of September 6, 1995,
providing for $20,000,000 term loan and party to the Security Agreement (as
renewed, extended, and amended, the "SECURITY AGREEMENT") dated as of September
6, 1995. Borrower and Lender have agreed, upon the following terms and
conditions, to amend the Credit Agreement to include additional Collateral and
to temporarily waive Lender's right under the Credit Agreement to make demand
under SECTION 2.4 of the Credit Agreement. Accordingly, for valuable and
acknowledged consideration, Borrower and Lender agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this
amendment (a) terms defined in the Credit Agreement have the same meanings when
used in this amendment and (b) references to "SECTIONS," "SCHEDULES," and
"EXHIBITS" are to the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is
amended as follows effective as of the date of this amendment:
(a) SECTION 4.1 is amended to add the following
subsections:
(e) All present and future right, title, and
interest owned now or in the future by Borrower in the right,
title, and interest that M&A Investments, Inc. ("M&A"),
limited partner of DNL Partners, L.P. ("DNL") holds in DNL
(including, but not limited to DNL's present and future
right, title, and interest owned now or in the future, in DNL
Savannah Holdings Corp., including all of its right, title,
and interest in Carson, Inc. and/or Carson Products, Inc.).
Borrower shall take whatever steps are necessary to obtain
all necessary consents to allow M&A to execute, and to have
M&A so execute, a pledge agreement in favor of Lender
granting a direct security interest of M&A's interest in DNL.
(f) All present and future right, title, and
interest owned now or in the future by Borrower or M&A in
Carson, Inc. and/or Carson Products, Inc.
3. AMENDMENT TO SECURITY AGREEMENT. PARAGRAPH 4 of the Security
Agreement is amended to add the following sub-paragraphs as follows:
(d) All present and future right, title, and
interest now owned or subsequently acquired by Debtor in the
right, title, and interest that M&A Investments, Inc.
("M&A"), limited partner of DNL Partners, L.P. ("DNL") holds
in DNL (including, but not limited to DNL's present and
future right, title, and interest owned now or in the future,
in DNL
<PAGE> 2
Savannah Holdings Corp., including all of its right, title,
and interest in Carson, Inc. and/or Carson Products, Inc.),
together with, subject to PARAGRAPH 9(E) of this agreement,
all of the following: (i) All present and future increases,
profits, combinations, and reclassifications of, stock
dividends, options, warrants, or subscription or similar
rights issued in connection with, and substitutes and
replacements for, any of such right, title, or interest that
M&A Investments, Inc. holds in DNL (including, but not
limited to DNL's present and future right, title, and
interest owned now or in the future, in DNL Savannah Holdings
Corp., including all of its right, title, and interest in
Carson, Inc. and/or Carson Products, Inc.), whether arising
in connection with any recapitalization, reclassification,
merger, consolidation, conversion, sale of assets,
combination of shares, stock split, or spin-off; and (ii) all
dividends and other cash and noncash proceeds of, or
distributions in connection with, any of the foregoing.
Debtor shall take whatever steps are necessary to obtain all
necessary consents to allow M&A to execute, and to have M&A
so execute, a pledge agreement in favor of Secured Party
granting a direct security interest of M&A's interest in DNL.
(e) All present and future right, title, and
interest owned now or in the future by Debtor or M&A in
Carson, Inc. and/or Carson Products, Inc.
4. WAIVER. In consideration of the grant of the security interest
described in PARAGRAPHS 2 and 3 above and upon Borrower's request, through and
including September 27, 1996, Lender waives all Defaults which have occurred or
will occur solely in connection with SECTIONS 8.6, 9.1, and 9.2. Additionally,
Lender agrees that it will not, on or before September 27, 1996, make demand
under SECTION 2.4 due to the existence of a Collateral-Base Deficiency, unless,
prior to September 27, 1996, Borrower is unable to provide the necessary
consents, if any, to the grant of the security interests described in
PARAGRAPHS 2 and 3 above. Except as expressly stated, this paragraph is not a
waiver of existing or future Potential Defaults or Existing Defaults or a
waiver of Lender's rights to insist upon compliance by all other relevant
parties with each Loan Document.
5. CONDITIONS PRECEDENT. PARAGRAPHS 2 and 3 above are not
effective until (a) Lender receives counterparts of this amendment executed by
each party listed below; and (b) Borrower provides Lender with all consents
necessary, if any, to the grant of the security interest described in
PARAGRAPHS 2 and 3.
6. RATIFICATIONS. Borrower (a) ratifies and confirms all
provisions of the Loan Documents as amended by this amendment, (b) ratifies and
confirms that all guaranties, assurances, and Liens granted, conveyed, or
assigned to Lender under the Loan Documents (as they may have been renewed,
extended, and amended) are not released, reduced, or otherwise adversely
affected by this amendment and continue to guarantee, assure, and secure full
payment and performance of the present and future Obligation, and (c) agrees to
perform such acts and duly authorize, execute, acknowledge, deliver, file, and
record such additional documents, and certificates as Lender may request in
order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens.
7. REPRESENTATIONS. Borrower represents and warrants to Lender
that as of the date of this amendment (and except as may have been waived
pursuant to PARAGRAPH 4 above) (a) all representations and warranties in the
Loan Documents are true and correct in all material respects except to the
extent that (i) any of them speak to a different specific date or (ii) the
facts on which any of them
- 2 -
<PAGE> 3
were based have been changed by transactions contemplated or permitted by the
Credit Agreement, (b) no Material-Adverse Event (other than as may exist as a
result of the bankruptcy filing by FoxMeyer Corporation and certain of its
subsidiaries), Default or Potential Default exists, and (c) the consent or
approval of Hamilton Morgan, L.L.C., to this amendment is not required under
any circumstances, including, without limitation, for the continued
effectiveness of the Security Agreement dated as of September 6, 1995, executed
by Hamilton Morgan, L.L.C., as Pledgor, for the benefit of Lender as Secured
Party.
8. MISCELLANEOUS. All references in the Loan Documents to the
"Credit Agreement" refer to the Credit Agreement as amended by this amendment.
This amendment is a "Loan Document" referred to in the Credit Agreement, and
the provisions relating to Loan Documents in SECTIONS 1 and 11 are incorporated
in this amendment by reference. Except as specifically amended and modified in
this amendment, the Credit Agreement is unchanged and continues in full force
and effect. This amendment may be executed in any number of counterparts with
the same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one and the same
instrument. This amendment binds and inures to each of the undersigned and
their respective successors and permitted assigns, subject to SECTION 11.12.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first stated above.
FOXMEYER HEALTH CORPORATION, CREDIT LYONNAIS NEW YORK
as Borrower BRANCH, as Lender
By By
------------------------ ---------------------------
Grady E. Schleier, Vice (Name)
President and Treasurer ---------------------------
(Title)
---------------------------
- 3 -
<PAGE> 1
EXHIBIT 10-B
FOURTH AMENDMENT TO CREDIT AGREEMENT AND
THIRD AMENDMENT TO SECURITY AGREEMENT
THIS AMENDMENT is entered into as of December 12, 1996, between
FOXMEYER HEALTH CORPORATION, a Delaware corporation ("BORROWER"), and CREDIT
LYONNAIS NEW YORK BRANCH, a duly licensed branch under the New York Banking Law
of a foreign banking corporation organized under the Laws of the Republic of
France ("LENDER").
Borrower and Lender are party to the Credit Agreement (as renewed,
extended, and amended, the "CREDIT AGREEMENT") dated as of September 6, 1995,
providing for $20,000,000 term loan and party to the Security Agreement (as
renewed, extended, and amended, the "SECURITY AGREEMENT") dated as of September
6, 1995. Borrower and Lender have agreed, upon the following terms and
conditions, to amend the Credit Agreement and Security Agreement to, among
other things, remove certain financial covenants, include additional
Collateral, establish an interest expense escrow account, and to effect various
other changes described below. Accordingly, for valuable and acknowledged
consideration, Borrower and Lender agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this
amendment (a) terms defined in the Credit Agreement have the same meanings when
used in this amendment and (b) references to "SECTIONS," "SCHEDULES," and
"EXHIBITS" are to the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is
amended as follows effective as of the date of this amendment:
(a) SECTION 1.1 is amended to entirely amend or to add
the following definitions:
ADDITIONAL OBLIGATION means all present and future
(a) indebtedness, obligations, and liabilities of Borrower to
Lender arising directly or indirectly (by way of
reinstatement, participation, or otherwise) under or
evidenced by any past, present, or future agreement,
document, or instrument other than the Loan Documents, (b)
interest accruing on, and attorneys' fees incurred in the
enforcement or collection of, any of the foregoing, (c) costs
incurred by Lender to obtain, preserve, perfect and enforce
the Liens contemplated to secure payment of any of the
foregoing and to maintain, preserve, and collect the property
in which Lender has been granted a Lien to secure such
payment, and (d) renewals, extensions (but Lender has no
obligation whatsoever to extend any of the foregoing),
modifications, and refinancings of any of the foregoing.
CARSON STOCK means the greater of EITHER (i) the
shares of common stock of Carson, Inc., that Borrower, M&A,
or both are entitled to receive on account of ownership of
the DNL Interest OR (ii) the shares of common stock of
Carson, Inc., that Borrower, M&A, or both actually receive on
account of ownership of the DNL Interest.
COLLATERAL BASE means, at any time, the Collateral
Value of the Carson Stock and Publicly-Traded Stock and the
actual amount of cash collateral held in escrow in
FOURTH AMENDMENT
<PAGE> 2
each case that is (a) subject to Lender Liens, (b) subject to
no other Liens except Permitted Liens, and (c) subject to no
restrictions on transfer except under general corporate and
securities Laws and (i) solely in respect of Phar-Mor stock,
the LLC Agreement and Proxy, and (ii) solely in respect of
the Carson Stock, the Supplementary Agreement dated August
18, 1995, as amended by the Amendment to Supplementary
Agreement dated October 3, 1996, between M&A and DNL Group,
L.L.C.
COLLATERAL-BASE DEFICIENCY means -- at any time and
if positive -- the amount by which (a) 200% times (i) the
unpaid principal balance of the Loan less (ii) the aggregate
amount held in the Interest Expense Escrow Accounts (after
subtracting the amount necessary for the Interest Payment for
the immediately subsequent one-month period) exceeds the
total Collateral Base, or (b) 87.5% times (i) the unpaid
principal balance of the Loan less (ii) the aggregate amount
held in the Interest Expense Escrow Accounts (after
subtracting the amount necessary for the Interest Payment for
the immediately subsequent one-month period) exceeds the
Collateral Base applicable to Publicly-Traded Stock.
COLLATERAL VALUE means:
(a) For the Carson Stock and at any time,
either (i) the closing-sale price on the immediately
preceding Business Day as appearing on any
regularly-published reporting or quotation service,
or (ii) the value reasonably determined by Lender in
good faith after taking into account marketability,
applicable restrictions, and other relevant factors.
(b) For Publicly-Traded Stock and at any
time, either (i) the closing-sale price on the
immediately preceding Business Day as appearing on
any regularly-published reporting or quotation
service, or (ii) if not so reported, the value
agreed upon by Borrower and Lender in good faith
after taking into account marketability, applicable
restrictions, and other relevant factors, or (iii)
absent that agreement, as determined by Lender in
its sole discretion.
DNL INTEREST means all present and future right,
title, and interest now owned or subsequently acquired by
Borrower, M&A, or both as a limited partner in DNL Partners,
a Delaware limited partnership ("DNL"), including, but not
limited to, the rights of Borrower, M&A, or both (a) in and
to the Carson Stock and (b) under the Assignment dated August
18, 1995, between M&A and DNL Group, L.L.C., and the
Supplementary Agreement dated August 18, 1995, as amended by
the Amendment to Supplementary Agreement dated October 3,
1996, between M&A and DNL Group, L.L.C., together with all of
the following: (i) All present and future increases, profits,
combinations, and reclassifications of, stock dividends,
options, warrants, or subscription, or similar rights issued
in connection with, and substitutes and replacements for, any
portion of the DNL Interest or the Carson Stock, whether
arising in connection with any recapitalization,
reclassification, merger, consolidation, conversion, sale of
assets, combination of shares, stock split, or spin-off; and
(ii) all present and future dividends and other cash and
non-cash proceeds of, or distributions
-2- FOURTH AMENDMENT
<PAGE> 3
in connection with, any of the foregoing.
INTEREST EXPENSE ESCROW ACCOUNTS means
interest-bearing deposit accounts established by Borrower
with Lender [Account #s 01 26165 0001 01 001 (Non-Dividend)
and 01 26165 0001 02 001(Commingled)] for deposit of proceeds
from the sale (or anything derived from or income produced by
such proceeds) of Other Assets.
INTEREST PAYMENT means the PRODUCT of (a) the SUM of
the three-month Eurodollar Deposit Rate as published in the
Wall Street Journal on the first Business Day of each month
PLUS 2.75% TIMES (b) unpaid principal balance of the Loan.
M&A means M&A Investments, Inc.
NATIONAL STEEL TRUE-UP means the estimated amount
that Borrower anticipates and represents that it will receive
at the time of redemption of the Series B Preferred Stock of
National Steel Corporation, a Delaware corporation.
OTHER ASSETS means those assets which are not
associated with or related to the dividend distributed by
FoxMeyer Corporation on June 19, 1996.
SECURITY AGREEMENT means (a) for Borrower, a
Security Agreement in substantially the form of EXHIBIT B-1,
(b) for Hamilton Morgan, a Security Agreement in
substantially the form of EXHIBIT B-2, and (c) for M&A, a
Security Agreement in substantially the form of EXHIBIT B-4.
(b) SECTION 2.4 is entirely amended as follows:
2.4 Collateral-Base Deficiency. If a Collateral-Base
Deficiency ever exists, then, within three Business Days
after demand by Lender, Borrower shall wholly eliminate that
Collateral-Base Deficiency by (a) prepaying principal of the
Loan, (b) pledging additional Carson Stock or Publicly-Traded
Stock, as the case may be, to Lender in accordance with
SECTION 4 if that would eliminate the particular
Collateral-Base Deficiency, or (c) any combination of the
foregoing. Lender may become aware of a Collateral-Base
Deficiency and elect in its sole discretion to not make (or
to defer making) demand upon Borrower under this section.
That election by Lender is not a waiver of any
Collateral-Base Deficiency then or subsequently existing and
is revocable in Lender's sole discretion at any time.
(c) A new SECTION 3.7(d) is added and the final two
sentences of SECTION 3.7 are entirely amended as follows:
(d) Borrower shall make a mandatory
prepayment of a percentage of the net proceeds from
the sale of any Other Asset, which percentage shall
be one of the following:
(i) 50%, except to the extent
that either CLAUSE (II) or CLAUSE (III)
below is applicable; or
-3- FOURTH AMENDMENT
<PAGE> 4
(ii) 25%, to the extent that (A)
$5,000,000 in prepayments have been made
under this SECTION 3.7(D) and (B) 250% of
the unpaid principal balance of the Loan is
less than the total Collateral Base; or
(iii) 0%, to the extent that (A)
the unpaid principal balance of the Loan is
less than $10,000,000 and (B) 300% of the
unpaid principal balance of the Loan is
less than the total Collateral Base.
All prepayments under this SECTION 3.7(d) shall be
applied in the following order: (1) amounts (if any)
required to be deposited into the Interest Expense
Escrow Accounts; (2) to principal of the Loan in
reduction of the payment of principal of $2,500,000,
due on September 6, 1997; and (3) otherwise as a
prepayment of principal of the Loan.]
Except as stated in CLAUSE (D) above, all partial prepayments
shall be applied to the principal installments on the Note in
inverse order of maturity. All prepayments may be made
without premium or penalty but with all amounts owed under
SECTION 3.14(b) as a result of the prepayment. No prepayment
may be reborrowed under this agreement by Borrower.
(d) The first sentence of SECTION 3.8 is entirely
amended as follows:
All payments and prepayments of principal of, and interest
on, the Note to Lender must be made by Borrower before 2:00
p.m. in federal or other immediately available funds at
Credit Lyonnais New York Branch for the account of Lender
and, unless Lender otherwise first agrees in writing, from
Other Assets or the proceeds of Other Assets; and,
notwithstanding the following provisions, no payments or
prepayments shall, without Lender's consent first being
obtained, be applied to the Additional Obligation until the
Obligation is paid and performed in full.
(e) A new SECTION 3.17 is added as follows:
3.17 Interest Expense Escrow Accounts.
(a) Interest on the Obligation shall be
paid from the Interest Expense Escrow Accounts. As
of December 12, 1996, Borrower shall deposit
approximately $600,000 into the Interest Expense
Escrow Account (Non-Dividend). Thereafter, to the
extent required, Borrower shall make additional
deposits into the Interest Expense Escrow Accounts
such that the balance thereof shall always be equal
to at least the amount required to cover all
Interest Payments that will become due during any
subsequent three month period.
(b) In connection with each deposit into
either of the Interest Expense Escrow Accounts,
Borrower shall deliver to Lender a Funds Source
Certificate in the form of EXHIBIT C-6 attached
designating the account into which the funds should
be deposited and designating the source of such
funds.
-4- FOURTH AMENDMENT
<PAGE> 5
(f) The preamble to SECTION 4.1 is entirely amended as
follows:
4.1 Collateral. Borrower shall cause the full
payment and performance of the (i) Obligation to be secured
by Lender Liens on all of the following items and types of
property (together with all cash and noncash proceeds and
other related items and types of property described in the
Security Agreements, the "COLLATERAL"), and (ii) Additional
Obligation to be secured by Lender Liens on all of the
Collateral except any Collateral arising under CLAUSES (b) or
(D) below:
(g) SECTION 4.1(a) (and all references to SECTION
4.1(A)) are entirely deleted and, in the case of SECTION 4.1(A) (but
not the cross references thereto), replaced with the words
"Intentionally Deleted."
(h) SECTIONS 4.1(e), (f), and (g) are entirely amended or
added as follows:
(e) All proceeds owed to Borrower and now or in
the future paid to Borrower from the National Steel True-Up.
(f) All present and future right, title, and
interest owned now or in the future directly or indirectly by
Borrower, M&A, or both in the DNL Interest and the Carson
Stock.
(g) The Interest Expense Escrow Accounts and all
funds and proceeds now or in the future deposited into those
accounts.
(i) A new SECTION 4.3 is added as follows:
4.3 Further Release Provisions.
(a) If the Obligation has been paid and
performed in full, if the Collateral arising under
SECTIONS 4.1(b) and (d) has been released from all
Lender Liens, and if any Additional Obligation is
outstanding and liquidated (i.e., certain what and
how much is due and payable), then (upon Borrower's
written request and at Borrower's cost and expense)
Lender shall cause the Lender Liens on the
Collateral arising under SECTION 4.1(f) to be
partially released up to the extent that the
Collateral Value of that Collateral at that time
exceeds the Additional Obligation.
(b) Upon Borrower's written request and at
Borrower's cost and expense, Lender shall cause the
Lender Liens on all Collateral to be released if (i)
the Obligation has been fully paid and performed and
(ii) if there is any outstanding liquidated (I.E.,
certain what and how much is due and payable)
Additional Obligation, it has been fully paid and
performed.
(c) As of December 12,1996, none of the
Additional Obligation is outstanding and liquidated
(i.e., certain what and how much is due and
-5- FOURTH AMENDMENT
<PAGE> 6
payable).
(j) SECTION 9 (and all cross-references to SECTION 9) are
entirely deleted and, in the case of SECTION 9 (but not the
cross-references thereto), replaced with the words "Intentionally
Deleted."
(k) SECTION 10.1(I) (and all references to SECTION
10.1(I)) are entirely deleted and in the case of SECTION 10.1(I) (but
not the cross-references thereto), replaced with the words
"Intentionally Deleted."
(l) SCHEDULE 8.6 is entirely replaced with AMENDED
SCHEDULE 8.6, and all references to SCHEDULE 8.6 shall refer to the
attached AMENDED SCHEDULE 8.6.
(m) New EXHIBIT B-4 is added to the Credit Agreement in
the form of the attached EXHIBIT B-4.
(n) EXHIBIT C-3 is entirely replaced with AMENDED EXHIBIT
C-3, and all references to EXHIBIT C-3 shall refer to the attached
AMENDED EXHIBIT C-3.
(o) A new EXHIBIT C-6 is added as attached.
3. AMENDMENTS TO SECURITY AGREEMENT.
(a) PARAGRAPH 2 of the Security Agreement is entirely
amended as follows:
2. SECURITY INTEREST. Upon and subject to the terms
and conditions of this agreement and the Credit Agreement and
to secure the prompt, unconditional, and complete payment and
performance of the (a) Obligation when due, Debtor grants to
Secured Party a security interest in the Collateral and
pledges and collaterally transfers and assigns the Collateral
to Secured Party, and (b) Additional Obligation when due,
Debtor grants to Secured Party a security interest in the
Collateral (except any Collateral arising under CLAUSE (C)
below) and pledges and collaterally transfers and assigns the
Collateral (except any Collateral arising under CLAUSE (C)
below) to Secured Party.
(b) The first sentence of PARAGRAPH 3 of the Security
Agreement is entirely amended as follows:
The Security Interest is given as security only for the
purposes described in PARAGRAPH 2 above.
(c) PARAGRAPH 4 of the Security Agreement is amended to
add the following sub-paragraphs as follows:
(d) All present and future right, title, and interest now
owned or subsequently acquired by Debtor as a limited partner in DNL
Partners, a Delaware limited partnership ("DNL"), including but not
limited to the rights of Debtor (i) in and to the Carson Stock that
-6- FOURTH AMENDMENT
<PAGE> 7
Debtor is entitled to receive, or actually receives, on account of any
ownership of a partnership interest in DNL and (ii) under the
Assignment dated August 18, 1995 between M&A Investments, Inc. ("M&A")
and DNL Group, L.L.C. and the Supplementary Agreement dated August 18,
1995, as amended by the Amendment to Supplementary Agreement dated
October 3, 1996, between M&A and DNL Group, L.L.C., together with all
of the following: (i) all present and future increases, profits,
combinations and reclassifications of, stock dividends, options,
warrants or subscription or similar rights issued in connection with,
and substitutes and replacements for, any portion of any of the
foregoing, whether arising in connection with any recapitalization,
reclassification, merger, consolidation, conversion, sale of assets,
combination of shares, stock split or spin-off; and (ii) all dividends
and other cash and non-cash proceeds of, or distributions in
connection with, any of the foregoing. Debtor shall cause M&A to
execute and deliver to Secured Party, a pledge agreement in favor of
Secured Party granting a direct security interest of M&A's interest in
the foregoing.
(e) All present and future right, title, and interest
owned now or in the future by Debtor in Carson, Inc.
(f) All proceeds owed to Debtor and now or in the future
paid to Debtor from the National Steel True-Up.
(g) All present and future right, title, and interest
owned now or in the future directly or indirectly by Debtor, M&A, or
both in the DNL Interest and the Carson Stock.
(h) The Interest Expense Escrow Accounts and all
funds and proceeds now or in the future deposited into those accounts.
4. CONDITIONS PRECEDENT. PARAGRAPHS 2 and 3 above are not
effective until (a) Lender receives counterparts of this amendment executed by
each party listed below, (b) Borrower provides Lender with a fully executed
Security Agreement in the form of EXHIBIT B-4 (attached) granting of the
security interest described in PARAGRAPHS 2 and 3 of it, (c) Borrower executes
any financing statements and financing statement amendments necessary in
connection with the grant of the additional security interests, (d) Borrower
provides Lender with evidence of the establishment and initial funding of the
Interest Expense Escrow Accounts, (e) Borrower shall cause M&A to provide to
Lender, within ten days of the date of this amendment, an executed Officers'
Certificate, certifying to the Articles of Incorporation, Bylaws, board
resolutions, and incumbency of M&A and provide copies of each of the above, (f)
Borrower remits to Lender an amendment fee equal to $55,875, and (g) Borrower
remits to Haynes and Boone, L.L.P., $27,141.65 for outstanding invoices as of
the date of this amendment in respect of services rendered to Lender under the
Loan Documents.
5. RATIFICATIONS. Borrower (a) ratifies and confirms all
provisions of the Loan Documents as amended by this amendment, (b) ratifies and
confirms that all guaranties, assurances, and Liens granted, conveyed, or
assigned to Lender under the Loan Documents (as they may have been renewed,
extended, and amended) are not released, reduced, or otherwise adversely
affected by this amendment and continue to guarantee, assure, and secure full
payment and performance of the present and future Obligation, and (c) agrees to
perform such acts and duly authorize, execute, acknowledge, deliver, file, and
record such additional documents, and certificates as Lender may request in
order to create, perfect, preserve, and protect those guaranties, assurances,
and Liens.
-7- FOURTH AMENDMENT
<PAGE> 8
6. REPRESENTATIONS. Borrower represents and warrants to Lender
that as of the date of this amendment (and except as may have been waived
pursuant to PARAGRAPH 4 above) (a) all representations and warranties in the
Loan Documents are true and correct in all material respects except to the
extent that (i) any of them speak to a different specific date or (ii) the
facts on which any of them were based have been changed by transactions
contemplated or permitted by the Credit Agreement, (b) no Material-Adverse
Event (other than as may exist as a result of the bankruptcy filing by FoxMeyer
Corporation and certain of its subsidiaries), Default or Potential Default
exists, and (c) the consent or approval of Hamilton Morgan, L.L.C., to this
amendment is not required under any circumstances, including, without
limitation, for the continued effectiveness of the Security Agreement dated as
of September 6, 1995, executed by Hamilton Morgan, L.L.C., as Pledgor, for the
benefit of Lender as Secured Party.
7. MISCELLANEOUS. All references in the Loan Documents to the
"Credit Agreement" refer to the Credit Agreement as amended by this amendment.
This amendment is a "Loan Document" referred to in the Credit Agreement, and
the provisions relating to Loan Documents in SECTIONS 1 and 11 are incorporated
in this amendment by reference. Except as specifically amended and modified in
this amendment, the Credit Agreement is unchanged and continues in full force
and effect. This amendment may be executed in any number of counterparts with
the same effect as if all signatories had signed the same document. All
counterparts must be construed together to constitute one and the same
instrument. This amendment binds and inures to each of the undersigned and
their respective successors and permitted assigns, subject to SECTION 11.12.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[Remainder of page intentionally blank]
-8- FOURTH AMENDMENT
<PAGE> 9
EXECUTED as of the date first stated above.
FOXMEYER HEALTH CORPORATION, CREDIT LYONNAIS NEW YORK BRANCH,
as Borrower as Lender
By By
--------------------------------- ----------------------------------
Grady E. Schleier, Vice (Name)
President and Treasurer -------------------------------
(Title)
------------------------------
SIGNATURE PAGE TO FOURTH AMENDMENT FOURTH AMENDMENT
<PAGE> 10
AMENDED SCHEDULE 8.6
PERMITTED DISTRIBUTIONS
1. Redemptions by Borrower of its common stock in exchange for its
securities ("PIK SECURITIES") that (a) do not mature until after the
Stated-Termination Date and (b) either (i) any Distributions paid or
payable on those securities on or before the Stated-Termination Date
are paid in kind (and not in cash) by the issuance of additional
securities of the same class and nature or (ii) are issued at a
discount from face or par value and do not pay any Distributions.
2. Other redemptions by Borrower of its common stock after November 25,
1996, that when aggregated with Borrower's redemption of common stock,
never involves more than $10,000,000 total purchase price.
3. In respect of the 836,000 shares of Borrower's $5 Cumulative
Convertible Preferred Stock that are issued and outstanding as of the
Closing Date (a) dividends in the ordinary course of Borrower's
business payable in accordance with the stated terms of that stock in
effect as of the Closing Date, and (b) redemptions of that stock, in
the ordinary course of Borrower's business, in accordance with the
following-described redemption requirements. Borrower is required to
set aside in trust, when and as appropriated by the Board of Directors
out of funds legally available for the purpose, on or before the next
business day preceding January 15 in each of the years 1993 to 2002,
inclusive, as a sinking fund payment, an amount in cash sufficient to
redeem on each such January 15, 88,000 shares of Borrower's $5
Cumulative Convertible Preferred Stock and on or before January 15,
2003, as a sinking fund payment, an amount in cash sufficient to
redeem on such date, 220,000 shares of $5 Cumulative Convertible
Preferred Stock. Each such sinking fund payment must be applied on
January 15 to the redemption at the redemption price of $50 per share,
plus an amount equal to the dividends accrued and unpaid on such
shares to the date of redemption. The sinking fund requirements set
forth in the preceding sentence are cumulative.
4. In respect of the 4,074,126.54 shares of Borrower's $4.20 Cumulative
Exchangeable Series A Preferred Stock and any additional shares of
that stock that are issuable as dividends thereon (a) dividends in the
ordinary course of Borrower's business payable in accordance with the
stated terms of that stock in effect as of the Closing Date, and (b)
redemptions of that stock in exchange for PIK Securities.
5. Payments by Borrower under the Tax-Sharing Agreement as in effect on
the Closing Date.
6. Dividends in kind by Borrower to its shareholders of the capital stock
of Ben Franklin Retail Stores, Inc., owned as of the Closing Date by
Borrower.
7. Redemption by Borrower of its preferred stock after November 25, 1996,
that, when aggregated with Borrower's redemption of common stock, does
not exceed $10,000,000 total purchase price.
AMENDED SCHEDULE 8.6
<PAGE> 11
EXHIBIT B-4
SECURITY AGREEMENT
(M&A Investments, Inc.)
THIS AGREEMENT is executed as of December 12, 1996, by M&A
INVESTMENTS, INC., a Delaware corporation ("PLEDGOR"), for the benefit of
CREDIT LYONNAIS NEW YORK BRANCH, a duly licensed branch under the New York
Banking Law of a foreign banking corporation organized under the Laws of the
Republic of France ("SECURED PARTY").
Secured Party and FoxMeyer Health Corporation ("BORROWER") have
executed the Credit Agreement (as renewed, extended, amended, or restated, the
"CREDIT AGREEMENT") dated as of September 6, 1995. Borrower owns 100% of
Pledgor. Therefore, Pledgor will substantially and directly benefit by that
loan by Secured Party to Borrower. The execution and delivery of this agreement
are integral to transactions contemplated by the Credit Agreement, are
conditions precedent to Secured Party's amendment to the Credit Agreement.
ACCORDINGLY, for adequate and sufficient consideration, Pledgor agrees
with Secured Party as follows:
1. Definitions. Terms defined in the Credit Agreement or the UCC
have the same meanings when used -- unless otherwise defined -- in this
agreement. If the definition given a term in the Credit Agreement conflicts
with the definition given that term in the UCC, then the Credit Agreement
definition controls to the extent allowed by Law. If the definition given a
term in Chapter 9 of the UCC conflicts with the definition given that term in
any other chapter of the UCC, then the Chapter 9 definition controls.
Furthermore, as used in this agreement:
COLLATERAL is defined in PARAGRAPH 4 below.
CREDIT AGREEMENT is defined in the recitals to this agreement.
DEFAULT is defined in PARAGRAPH 8 below.
OBLIGOR means any Person obligated with respect to any of the
Collateral, whether as a party to a contract, an account debtor, issuer of any
securities, or otherwise.
PROCESS AGENT means either (a) CT Corporation, whose address is 350
St. Paul Street, Dallas, Texas 75201, or (b) M&A Investments, c/o Mr. Abbey J.
Butler, 207 Davis Road, Box 137, West Hampton Beach, New York 11978.
SECURED OBLIGATION means (a) the "Obligation" and "Additional
Obligation" as defined in the Credit Agreement, (b) all present and future
indebtedness, liabilities, and obligations of Pledgor arising under this
agreement, and (c) all present and future costs, attorneys' fees, and expenses
reasonably incurred by Secured Party to enforce its rights under this agreement
or to enforce Borrower's or any other obligor's payment of any of the
Obligation, including, without limitation (to the extent lawful), all present
and future amounts that would become due but for the operation of Section 502
or 506 or any other provision of Title 11 of the United States Code and all
present and future accrued and unpaid interest (including, without limitation,
all post-petition interest if Borrower or Pledgor voluntarily or involuntarily
becomes subject to any Debtor Law).
SECURED PARTY is defined in the preamble to this agreement and
includes any successors, participants, or assigns under SECTION 11.12 of the
Credit Agreement.
EXHIBIT B-4
<PAGE> 12
SECURITY INTEREST means the security interests granted and the
transfers, pledges, and assignments made under PARAGRAPH 2 below, which is a
"Lender Lien," as defined in the Credit Agreement.
UCC means the Uniform Commercial Code as adopted in New York or any
other applicable jurisdiction.
2. SECURITY INTEREST. To secure the prompt, unconditional, and
complete payment and performance of the Secured Obligation when due, Pledgor
grants to Secured Party a security interest in the Collateral and pledges and
collaterally transfers and assigns the Collateral to Secured Party, all upon
and subject to the terms and conditions of this agreement.
3. NO ASSUMPTION OR MODIFICATION. The Security Interest is given
as security only in order to secure the prompt, unconditional, and complete
payment and performance of the Secured Obligation when due. Secured Party does
not assume or may not become liable for Pledgor's liabilities, duties, or
obligations under or in connection with the Collateral. Neither Secured Party's
acceptance of this agreement nor its taking any action in carrying out this
agreement constitutes Secured Party's approval of the Collateral or Secured
Party's assumption of any obligation under or in connection with the
Collateral. This agreement does not affect or modify Pledgor's obligations with
respect to any Collateral.
4. COLLATERAL. The term "COLLATERAL" means the following items
and types of property:
A. Any and all present and future shares of Carson, Inc.
currently held or in the future received by Pledgor, together with (a)
All present and future increases, profits, combinations, and
reclassifications of, stock dividends, options, warrants, or
subscription or similar rights issued in connection with, and
substitutes and replacements for, any of that stock, whether arising
in connection with any recapitalization, reclassification, merger,
consolidation, conversion, sale of assets, combination of shares,
stock split, or spin-off; and (b) all dividends and other cash and
noncash proceeds of, or distributions in connection with, any of the
foregoing. In connection with such pledge, Pledgor will execute and
will cause DNL Partners to execute the acknowledgment of pledge
substantially in the form attached as ANNEX 1, within 10 days after
the date of this agreement.
B. All present and future right, title, and interest now
owned or subsequently acquired by Pledgor as a limited partner in DNL
Partners, a Delaware limited partnership ("DNL"), including but not
limited to the rights of Pledgor (i) in and to the shares of common
stock of Carson, Inc. that Pledgor is entitled to receive, or actually
receives, on account of any ownership of a partnership interest in DNL
and (ii) under the Assignment dated August 18, 1995 between Pledgor
and DNL Group, L.L.C. and the Supplementary Agreement dated August 18,
1995, as amended by the Amendment to Supplementary Agreement dated
October 3, 1996, between Pledgor and DNL Group, L.L.C., together with
all of the following: (i) all present and future increases, profits,
combinations and reclassifications of, stock dividends, options,
warrants or subscription or similar rights issued in connection with,
and substitutes and replacements for, any portion of any of the
foregoing, whether arising in connection with any recapitalization,
reclassification, merger, consolidation, conversion, sale of assets,
combination of shares, stock split or spin-off; and (ii) all dividends
and other cash and non-cash proceeds of, or distributions in
connection with, any of the foregoing.
The description of Collateral does not permit any action prohibited by this
agreement or by any other Loan Document.
5. FRAUDULENT CONVEYANCE. Notwithstanding any contrary provision,
Pledgor agrees that, if -- but for the application of this paragraph -- any of
the Secured Obligation or the Security Interest would constitute a preferential
transfer under 11 U.S.C. Section 547, a fraudulent conveyance under 11 U.S.C.
Section 548, or a fraudulent conveyance or transfer under any state fraudulent
conveyance, fraudulent transfer, or similar Law in effect from
EXHIBIT B-4
<PAGE> 13
time to time (each a "FRAUDULENT CONVEYANCE"), then the Secured Obligation
and Security Interest remain enforceable to the maximum extent possible without
causing any of the Secured Obligation or the Security Interest to be a
fraudulent conveyance, and this agreement is automatically amended to carry out
the intent of this paragraph.
6. REPRESENTATIONS AND WARRANTIES. Pledgor represents and
warrants to Secured Party that:
a. Organization. Pledgor is a Delaware corporation,
duly organized and existing in good standing under Delaware laws, is
duly qualified and is in good standing in all other states in which it
is doing business, and has the power and authority to own its
properties and assets and to transact the business in which it is
engaged.
b. Authorization and Power. Pledgor has the power and
requisite authority to execute, deliver, and perform this agreement.
Pledgor is duly authorized to execute, deliver, and perform this
agreement.
c. No Conflicts or Consents. Neither the execution and
delivery of, nor the consummation of any of the transactions
contemplated in, nor compliance with the terms and provisions of, this
agreement will contravene or materially conflict with its articles of
incorporation, bylaws, or with the partnership agreement of DNL
Partners or any provision of Law to which Pledgor is subject, or any
judgment, license, order, or permit applicable to Pledgor, or any
indenture, loan agreement, mortgage, deed of trust, or other agreement
or instrument to which Pledgor is a party or by which Pledgor may be
bound or subject. No consent, approval, authorization, or order of any
Governmental Authority or third party is required in connection with
the execution and delivery by Pledgor of, or the consummation of the
transactions contemplated by, this agreement.
d. Solvency. The fair-market value of Pledgor's assets
exceeds its liabilities, Pledgor it has sufficient cash flow to enable
it to pay its debts as they mature, and Pledgor does not have
unreasonably small capital to conduct its businesses.
e. Binding Obligation. This agreement has been duly
executed and delivered by Pledgor and is the legal and binding
obligation of Pledgor, enforceable in accordance with its terms,
except as limited by Debtor Laws and general principles of equity.
f. Lender Lien. This agreement creates a legal, valid,
and binding Lender Lien in and to the Collateral in favor of Secured
Party and enforceable against Pledgor. Once perfected, the Security
Interest will constitute a first-priority Lender Lien on the
Collateral.
g. Additional Collateral. The foregoing representations
and warranties will be true and correct in all respects with respect
to any additional Collateral or additional specific descriptions of
certain Collateral delivered by Pledgor to Secured Party in the
future. The failure of any of these representations or warranties to
be accurate and complete does not impair the Security Interest in any
Collateral.
7. COVENANTS. While Lender is committed to lend or extend credit under
the Credit Agreement and until the Secured Obligation is fully paid and
performed, Pledgor covenants and agrees with Secured Party that, without first
obtaining Secured Party's written consent to the contrary:
a. Other Collateral. Pledgor shall hold in trust (and
not commingle with other assets of Pledgor) for Secured Party all
Collateral that constitutes instruments or documents at any time
received by Pledgor and promptly deliver same to Secured Party unless
Secured Party at its option (which may be evidenced only by a writing
signed by Secured Party stating that Secured Party elects to permit
Pledgor
-3- EXHIBIT B-4
<PAGE> 14
to so retain) permits Pledgor to retain the same, but any instruments
or documents so retained shall be marked to state that they are
assigned to Secured Party and each such instrument shall be endorsed
to the order of Secured Party (but the failure of same to be so marked
or endorsed shall not impair the Security Interest thereon).
b. Liens. Pledgor may not create, incur, or suffer or
permit to be created or incurred or to exist any Lien upon or against
any of the Collateral.
c. Distribution of Stock. On or after April 30, 1997, at
the request of Secured Party, Pledgor will cause DNL Partners to (i)
distribute the Carson Stock to Pledgor (within 10 days of such
request) and (ii) deliver the Carson Stock and blank stock powers
within 15 days of such request to Lender, each as permitted by the
Supplementary Agreement dated August 18, 1995, and the Amendment to
Supplementary Agreement dated October 3, 1996, between Pledgor and DNL
Group, L.L.C.
d. Further Assurances. Pledgor shall from time to time
promptly execute and deliver to Secured Party all such other
assignments, certificates, supplemental documents, and financing
statements, and do all other acts or things as Secured Party may
reasonably request in order to more fully create, evidence, perfect,
continue, and preserve the priority of the Security Interest.
8. DEFAULT. The term "DEFAULT" means the occurrence of any one
or more of the following events ("DEFAULT"):
a. Credit Agreement. The occurrence of a Default as
defined in the Credit Agreement.
b. Covenants. Pledgor fails or refuses to perform,
observe, or comply with any agreement, covenant, or provision in this
agreement, and that failure or refusal continues for ten days after
written notice to Pledgor.
c. Receivers, etc. Pledgor (i) applies for or consents
to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself or of all or a substantial part of its assets,
(ii) files a voluntary petition in bankruptcy, admits in writing that
it is unable to pay its debts as they become due, or generally does
not pay its debts as they become due, (iii) makes a general assignment
for the benefit of creditors, (iv) files a petition or answer seeking
reorganization of an arrangement with creditors or to take advantage
of any bankruptcy or insolvency laws, (v) files an answer admitting
the material allegations of, or consents to, or defaults in answering,
a petition filed against it in any bankruptcy, reorganization or
insolvency proceeding, or (vi) takes corporate action for the purpose
of effecting any of the foregoing.
d. Debtor Laws. An involuntary petition or complaint is
filed against Pledgor seeking bankruptcy or reorganization of Pledgor
or the appointment of a receiver, custodian, trustee, intervenor or
liquidator of Pledgor, or all or substantially all of its assets, and
such petition or complaint shall not have been dismissed within 60
days of the filing thereof; or an order, order for relief, judgment or
decree is entered by any court of competent jurisdiction or other
competent authority approving a petition or complaint seeking
reorganization of Pledgor or appointing a receiver, custodian,
trustee, intervenor or liquidator of Pledgor, or of all or
substantially all of its assets.
9. REMEDIES UPON DEFAULT. While a Default exists, Secured Party
is entitled to exercise any one or more of the following rights.
a. Rights. Subject to PARAGRAPH 11(L) below, Secured
Party may exercise any and all rights available to a secured party
under the UCC, in addition to any and all other rights afforded by
this agreement and the other Loan Documents, at law, in equity, or
otherwise, including, without limitation
-4- EXHIBIT B-4
<PAGE> 15
(i) applying by appropriate judicial proceedings for appointment of a
receiver for Collateral, (ii) applying to the Secured Obligation any
cash held by Secured Party under this agreement, and (iii) foreclosing
the Security Interest and any other Liens Secured Party may have or
otherwise realize upon any and all of the rights Secured Party may
have in and to Collateral.
b. Securities. In connection with the sale of any
Collateral that is securities, Secured Party is authorized, but not
obligated, to limit prospective purchasers to the extent deemed
necessary or desirable by Secured Party to render such sale exempt
from the registration requirements of the Securities Act and any
applicable state securities Laws, and no sale so made in good faith by
Secured Party may be deemed not to be "commercially reasonable"
because so made.
c. Other Sales. Secured Party's sale of less than all
Collateral does not exhaust Secured Party's rights under this
agreement in respect of the Collateral not sold. Secured Party is
specifically empowered to make successive sales until all Collateral
is sold. If the proceeds of a sale of less than all Collateral is less
than the Secured Obligation, then this agreement and the Security
Interest remain in full force and effect as to the unsold portion of
the Collateral just as though no sale had been made. In the event any
sale under this agreement is not completed or is, in Secured Party's
opinion, defective, that sale does not exhaust Secured Party's rights
under this agreement, and Secured Party is entitled to cause a
subsequent sale or sales to be made. All statements of fact or other
recitals made in any bill of sale or assignment or other instrument
evidencing any foreclosure sale under this agreement -- whether about
nonpayment of the Secured Obligation, the occurrence of any Default,
Secured Party's having declared all of the Secured Obligation to be
due and payable, notice of time, place, and terms of sale and the
properties to be sold having been duly given, or any other act or
thing having been duly done by Secured Party -- shall be taken as
prima facie evidence of the truth of the facts so stated and recited.
Secured Party may appoint or delegate any one or more Persons as agent
to perform any act or acts necessary or incident to any sale held by
Secured Party, including the sending of notices and the conduct of
sale, but such acts must be done in the name and on behalf of Secured
Party.
d. Application of Proceeds. Secured Party shall apply
the proceeds of any sale or other disposition of Collateral in the
following order: (i) Payment of all its reasonable expenses incurred
in retaking, holding, and preparing any Collateral for disposition, in
arranging for such disposition, and in actually disposing of the same
(all of which are part of the Secured Obligation); (ii) repayment of
amounts reasonably expended by Secured Party under PARAGRAPH 10 below;
(iii) payment of the balance of the Secured Obligation in the order
and manner specified in the Credit Agreement; and (iv) delivery either
(A) to Pledgor or (B) as a court of competent jurisdiction may direct.
10. OTHER RIGHTS.
a. Collateral in Secured Party's Possession. Except for
Secured Party's own fraud, gross negligence, or willful misconduct,
the risk of accidental loss or damage to, or diminution in value of,
any Collateral is on Pledgor. Secured Party has no duty to fix or
preserve rights against any Obligors in respect of any Collateral and
is never liable for any failure to use diligence to collect any amount
payable in respect of any Collateral (other than to account to Pledgor
for what Secured Party may actually collect or receive).
b. Certain Proceeds. Notwithstanding any contrary
provision in this agreement, the Security Interest in the profits,
stock dividends, options, warrants, subscription or similar rights,
dividends and other cash and noncash proceeds, and other distributions
that are described in PARAGRAPH 4 (the "Collateral Proceeds") may only
be enforced while a Default exists. If any Collateral Proceeds (while
a Default exists) or any other Collateral (whether a Default exists or
not) are received by Pledgor, Pledgor shall hold it in trust for
Secured Party's benefit and shall immediately deliver it to Secured
Party (accompanied by proper instruments of assignment or stock or
bond powers executed by Pledgor in
-5- EXHIBIT B-4
<PAGE> 16
accordance with Secured Party's instructions) to be held subject to
the terms of this agreement. Any cash proceeds of any Collateral that
come into Secured Party's possession (including, without limitation,
insurance proceeds) may, at Secured Party's option, be applied in
whole or in part to the Secured Obligation (to the extent then due),
be fully or partially released to or under the written instructions of
Pledgor for any general or specific purpose, or be fully or partially
retained by Secured Party as additional Collateral. Any cash
Collateral in Secured Party's possession may be invested by Secured
Party in certificates of deposit issued by Secured Party or any other
state or national bank having combined capital and surplus greater
than $100,000,000 or in securities issued or guaranteed by the United
States of America or any of its agencies. Secured Party is never
obligated to make any investment and never has any liability to
Pledgor for any loss that may result from any investment in accordance
with this CLAUSE (B) or non-investment. All interest and other amounts
earned from any investment may be dealt with by Secured Party in the
same manner as other cash Collateral.
11. MISCELLANEOUS.
a. Term. This agreement terminates when Lender does not
have any commitment to lend or extend credit under the Credit
Agreement and the Secured Obligation is fully paid and performed.
b. No Release. Neither the Security Interest, Pledgor's
obligations, nor Secured Party's rights under this agreement are
released, diminished, impaired, or adversely affected by the
occurrence of any one or more of the following events: (i) The taking
or accepting of any other security or assurance for any Secured
Obligation; (ii) any release, surrender, exchange, subordination, or
loss of any security or assurance at any time existing in connection
with any Secured Obligation; (iii) the modification of, amendment to,
or waiver of compliance with any terms of any other Loan Document
without the consent of Pledgor except as required in that Loan
Document; (iv) any present or future insolvency, bankruptcy, or lack
of corporate or trust power of any party at any time liable for the
payment of any Secured Obligation; (v) except as specifically required
by any other Loan Document, any renewal, extension, or rearrangement
of the payment of any Secured Obligation (either with or without
notice to or consent of any Pledgor) or any adjustment, indulgence,
forbearance, or compromise that may be granted or given by Secured
Party to Pledgor; (vi) any neglect, delay, omission, failure, or
refusal of Secured Party to take or prosecute any action in connection
with any Agreement, document, guaranty, or instrument evidencing,
securing, or assuring the payment of any Secured Obligation; (vii) any
failure of Secured Party to notify any Pledgor of renewal, extension,
or assignment of any Secured Obligation, or the release of any
security under any other document or instrument, or of any other
action taken or refrained from being taken by Secured Party against
Pledgor, or any new Agreement between Secured Party, and Pledgor, it
being understood that, except as expressly required by the Credit
Agreement, Secured Party is not required to give Pledgor any notice of
any kind under any circumstances whatsoever with respect to or in
connection with the Secured Obligation, including, without limitation,
notice of acceptance of this agreement or any Collateral ever
delivered to or for the account of Secured Party under this agreement;
(viii) the illegality, invalidity, or unenforceability of any Secured
Obligation against any third party obligated with respect to it by
reason of the fact that the Secured Obligation, or the interest paid
or payable with respect to any of it, exceeds the amount permitted by
Law, the act of creating any of it is ultra vires, or the officers,
partners, or trustees creating any of it acted in excess of their
authority, or for any other reason; or (ix) if any payment by any
party obligated with respect to any Secured Obligation is held to
constitute a preference under applicable Laws or for any other reason
Secured Party is required to refund any payment on any Secured
Obligation or pay the amount of it to someone else.
c. Releases. When the Secured Obligation is fully paid
and performed or when any of the Collateral is permitted to be
released under Section 4.2 of the Credit Agreement, Secured Party
shall execute and deliver to Pledgor such releases and do all other
acts or things as may be required to release the Security Interest in
that portion of the Collateral to be released at that time, including,
without
-6- EXHIBIT B-4
<PAGE> 17
limitation, returning to Pledgor all stock certificates evidencing any
Collateral being released. For purposes of enforcing the right to
obtain partial releases in accordance with the terms of the Loan
Documents, Pledgor is hereby made a third-party beneficiary of the
provisions of Sections 4.2(c), (d), or (e) of the Credit Agreement.
d. Waivers. To the maximum extent lawful, except to the
extent expressly otherwise provided in this agreement or in any other
Loan Document, Pledgor waives (i) any right to require Secured Party
to proceed against any other Person, to exhaust rights in Collateral,
or to pursue any other right that Secured Party may have; (ii) with
respect to the Secured Obligation, presentment and demand for payment,
protest, notice of protest and nonpayment, notice of acceleration, and
notice of intent to accelerate; and (iii) all rights of marshaling in
respect of any Collateral.
e. Financing Statement. Secured Party may at any time
file this agreement (or a carbon, photographic, or other reproduction
of this agreement) as a financing statement, but the failure of
Secured Party to do so does not impair the validity or enforceability
of this agreement.
f. Information. Except as otherwise provided by Law,
Secured Party's charge for furnishing each statement of account or
each list of Collateral is $10.00.
g. Loan Document. This agreement is a Loan Document and
is subject to the applicable provisions of SECTIONS 1 and 11 of the
Credit Agreement, all of which are incorporated in this agreement by
reference the same as if set forth in this agreement verbatim. For
purposes of the notice provisions of Section 11.2 of the Credit
Agreement incorporated into this agreement, Pledgor's address and
telecopier number are stated beside its signature on this agreement.
h. Amendments, Etc. No amendment, waiver, or discharge
to or under this agreement is valid unless it is in writing and is
signed by the party against whom it is sought to be enforced and is
otherwise in conformity with the requirements of SECTION 11.10 of the
Credit Agreement.
i. ENTIRETY. THIS AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
j. Governing Law. The Laws of the State of New York
and of the United States of America govern the rights and duties of
the parties to this agreement and the validity, construction,
enforcement, and interpretation of this agreement.
k. Forum, Consent to Service and Jurisdiction, and Jury
Trial. Any Litigation against Pledgor with respect to this agreement
or any judgment entered by any court in respect of this agreement may
be brought in New York courts or in the United States courts located
in the Borough of Manhattan in New York City as Lender in its sole
discretion may elect. Pledgor hereby submits to the non-exclusive
jurisdiction of those courts for the purpose of any Litigation.
Pledgor hereby agrees that service of all writs, process, and
summonses in any Litigation brought in New York may be brought upon
Process Agent, and Pledgor irrevocably appoints Process Agent as
Pledgor's true and lawful attorney-in-fact in Pledgor's name, place,
and stead to accept that service of all of those writs, process, and
summonses. Pledgor irrevocably consents to the service of process in
any Litigation in those courts by the mailing it by registered or
certified mail, postage prepaid, to Pledgor's address for purposes of
notices under this agreement. Pledgor hereby irrevocably waives any
objections which it may now or in the future have to the laying of
venue of any Litigation arising out of or relating to this agreement
brought in any court located in the Borough of Manhattan, New York
City, and further irrevocably waives any claim that any such
Litigation brought in that court has been brought in an inconvenient
-7- EXHIBIT B-4
<PAGE> 18
forum. PLEDGOR WAIVES, TO THE FULLEST EXTENT LAWFUL TO DO SO, ITS
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT.
l. Nonrecourse Obligation. This agreement is nonrecourse
to Pledgor. Secured Party agrees to look solely to Borrower and others
obligated for the payment of any of the Secured Obligation and any
other assurances or security for the payment of any of the Secured
Obligation, including, without limitation, the Collateral, and not to
seek any personal judgment or other recourse against Pledgor or any of
its assets (other than the Collateral) for any of the Secured
Obligation.
m. Parties. This agreement binds and inures to Secured
Party, Pledgor, and their respective successors and assigns. The
rights and obligations of Secured Party under this agreement may be
transferred together along with any assignment of the Secured
Obligation. The Credit Agreement contains provisions governing
assignments of the Secured Obligation and of rights and obligations
under this agreement.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.
-8- EXHIBIT B-4
<PAGE> 19
EXECUTED as of the date first stated above.
M&A Investments, Inc. M&A INVESTMENTS, INC., as Pledgor
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Telephone ( ) -
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Telecopier ( ) - By
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Attention: , , President
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CREDIT LYONNAIS NEW YORK BRANCH,
as Secured Party
By
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(Name)
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(Title)
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SIGNATURE PAGE TO SECURITY AGREEMENT EXHIBIT B-4
<PAGE> 1
EXHIBIT 11
AVATEX CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(In thousands, except per share data)
<TABLE>
<CAPTION>
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For the three months ended For the nine months ended
December 31, December 31,
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1996 1995 1996 1995
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<S> <C> <C> <C> <C>
PRIMARY
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income (loss) from continuing operations $ 29,945 $ (5,802) $ (7,017) $ 6,836
Dividends on preferred shares (5,888) (5,494) (13,048) (16,099)
-------- -------- --------- --------
Income (loss) from continuing operations
applicable to stockholders $ 24,057 $(11,296) $ (20,065) $ (9,263)
======== ======== ========= ========
LOSS FROM DISCONTINUED OPERATIONS $ (199) $(34,562) $(256,714) $(33,493)
======== ======== ========= ========
SHARES
Weighted average number of common shares
outstanding 13,809 17,561 15,364 17,160
======== ======== ========= ========
Income (loss) from continuing operations $ 1.74 $ (0.64) $ (1.30) $ (0.54)
Loss from discontinued operations (0.01) (1.97) (16.71) (1.95)
-------- -------- --------- --------
Net income (loss) $ 1.73 $ (2.61) $ (18.01) $ (2.49)
======== ======== ========= ========
ASSUMING FULL DILUTION
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income (loss) from continuing operations $ 29,945 $ (5,802) $ (7,017) $ 6,836
Dividends on non-convertible preferred shares (815) (1,045) (2,587) (3,135)
Dividends on convertible preferred shares
(conversion of preferred shares would be
anti-dilutive) (5,073) (4,449) (10,461) (12,964)
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Income (loss) from continuing operations
applicable to common stockholders $ 24,057 $(11,296) $ (20,065) $ (9,263)
======== ======== ========= ========
LOSS FROM DISCONTINUED OPERATIONS $ (199) $(34,562) $(256,714) $(33,493)
======== ======== ========= ========
SHARES
Weighted average number of common shares
outstanding 13,809 17,561 15,364 17,160
Conversion of preferred stock (anti-dilutive) -- -- -- --
Additional dilutive effect of outstanding options
(as determined by the treasury stock method) -- 92 1 459
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Weighted average number of common shares
outstanding as adjusted 13,809 17,653 15,365 17,619
======== ======== ========= ========
Income (loss) from continuing operations $ 1.74 $ (0.64) $ (1.30) $ (0.53)
Loss from discontinued operations (0.01) (1.96) (16.71) (1.90)
======== ======== ========= ========
Net income (loss)** $ 1.73 $ (2.60) $ (18.01) $ (2.43)
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</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%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AVATEX CORPORATION FOR THE NINE
MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 44,489
<SECURITIES> 11,319
<RECEIVABLES> 5,477
<ALLOWANCES> 1,572
<INVENTORY> 0
<CURRENT-ASSETS> 61,226
<PP&E> 22,296
<DEPRECIATION> 1,319
<TOTAL-ASSETS> 185,757
<CURRENT-LIABILITIES> 9,283
<BONDS> 28,012
183,370
0
<COMMON> 69,030
<OTHER-SE> (152,020)
<TOTAL-LIABILITY-AND-EQUITY> 185,757
<SALES> 12,147
<TOTAL-REVENUES> 12,147
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 199
<INTEREST-EXPENSE> 5,162
<INCOME-PRETAX> 23,921
<INCOME-TAX> 29,596
<INCOME-CONTINUING> (5,675)
<DISCONTINUED> (256,714)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (263,731)
<EPS-PRIMARY> (18.01)
<EPS-DILUTED> (18.01)
</TABLE>
