<PAGE>
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 SEPTEMBER 30, 1998
[ ] 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)
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
--------------------------------- -----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Registrant's Telephone Number,
Including Area Code 214-365-7450
-----------------------
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 October 31, 1998: 13,806,375
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<PAGE>
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended September 30,
(in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 2,353 $ 3,660
OPERATING COSTS
Operating costs, including general and
administrative costs 3,694 4,264
Depreciation and amortization 194 250
Unusual items -- (1,704)
- ---------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (1,535) 850
Other expense (582) (326)
Interest income 521 55
Interest expense 523 1,452
- ---------------------------------------------------------------------------------------
LOSS BEFORE NATIONAL STEEL CORPORATION, EQUITY IN LOSS OF
AFFILIATES, INCOME TAX PROVISION AND MINORITY INTEREST (2,119) (873)
National Steel Corporation net preferred dividend income -- 2,251
Equity in loss of affiliates (608) (2,928)
- ---------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX PROVISION AND MINORITY INTEREST (2,727) (1,550)
Income tax provision 19 --
- ---------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (2,746) (1,550)
Minority interest in results of operations of
consolidated subsidiaries 38 35
- ---------------------------------------------------------------------------------------
NET LOSS (2,784) (1,585)
Preferred stock dividends 6,957 6,323
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LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (9,741) $ (7,908)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE $ (0.71) $ (0.57)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Average number of common shares outstanding 13,806 13,806
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COMPREHENSIVE LOSS $ (5,557) $ (3,724)
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months
ended September 30,
(in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 4,929 $ 6,823
OPERATING COSTS
Operating costs, including general and
administrative costs 7,277 7,405
Depreciation and amortization 386 452
Unusual items -- 31,588
- ---------------------------------------------------------------------------------------
OPERATING LOSS (2,734) (32,622)
Other expense (2,194) (5,306)
Interest income 1,086 648
Interest expense 1,028 2,814
- ---------------------------------------------------------------------------------------
LOSS BEFORE NATIONAL STEEL CORPORATION, EQUITY IN LOSS OF
AFFILIATES, INCOME TAX PROVISION AND MINORITY INTEREST (4,870) (40,094)
National Steel Corporation net preferred dividend income -- 4,509
Equity in loss of affiliates (352) (2,610)
- ---------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX PROVISION AND MINORITY INTEREST (5,222) (38,195)
Income tax provision 37 --
- ---------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (5,259) (38,195)
Minority interest in results of operations of
consolidated subsidiaries 107 336
- ---------------------------------------------------------------------------------------
NET LOSS (5,366) (38,531)
Preferred stock dividends 13,749 12,498
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LOSS APPLICABLE TO COMMON STOCKHOLDERS $(19,115) $ (51,029)
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BASIC AND DILUTED LOSS PER SHARE $ (1.38) $ (3.70)
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- ---------------------------------------------------------------------------------------
Average number of common shares outstanding 13,806 13,806
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COMPREHENSIVE LOSS $ (9,384) $ (42,802)
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, March 31,
(in thousands of dollars) 1998 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 28,243 $ 34,193
Receivables - net 7,729 11,783
Other current assets 2,476 3,971
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 38,448 49,947
INVESTMENTS IN AFFILIATES 23,195 25,343
PROPERTY AND EQUIPMENT 30,420 20,657
Less accumulated depreciation and
amortization 1,963 1,630
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NET PROPERTY AND EQUIPMENT 28,457 19,027
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE -- --
MISCELLANEOUS ASSETS 22,486 24,986
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TOTAL ASSETS $ 112,586 $ 119,303
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,282 $ 2,665
Other accrued liabilities 4,309 6,169
Long-term debt due within one year 516 492
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TOTAL CURRENT LIABILITIES 6,107 9,326
LONG-TERM DEBT 32,025 22,923
OTHER LONG-TERM LIABILITIES 12,108 13,402
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 558 558
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK 228,744 214,996
STOCKHOLDERS' DEFICIT
Common stock $5.00 par value; authorized
50,000,000 shares; issued: 13,806,375 shares 69,032 69,032
Capital in excess of par value 119,100 119,100
Accumulated other comprehensive income (loss) (2,850) 1,168
Accumulated deficit (352,238) (331,202)
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TOTAL STOCKHOLDERS' DEFICIT (166,956) (141,902)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 112,586 $ 119,303
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months
ended September 30,
(in thousands of dollars) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,366) $(38,531)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
Minority interest in results of operations of
consolidated subsidiaries 107 336
Equity in loss of affiliates 352 2,610
Depreciation and amortization 386 452
Net preferred income from National Steel Corporation -- (4,509)
Unusual item -- 33,292
Loss on investments 2,334 5,322
Other non-cash charges (credits) (564) 745
Cash provided (used) by working capital items,
net of acquisitions:
Receivables 4,292 171
Other assets and restricted cash (990) 5,651
Accounts payable and accrued liabilities (5,141) (2,652)
- --------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (4,590) 2,887
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired -- (7,399)
Purchase of property and equipment (9,079) (1,881)
Purchase of investments (2,309) (6,210)
Proceeds from investments 1,590 782
Other -- 18
- --------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (9,798) (14,690)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 8,779 7,693
Debt repayments (234) (304)
Debt issuance costs -- (184)
Dividends paid to minority interest (107) (100)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 8,438 7,105
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NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (5,950) (4,698)
Cash and short-term investments, beginning of period 34,193 7,173
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CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 28,243 $ 2,475
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS: Avatex Corporation is a holding company that, along
with its subsidiaries (collectively, the "Corporation"), owns interests in
hotels and office buildings and in other corporations and partnerships.
Through Phar-Mor, Inc. ("Phar-Mor"), its 38% owned affiliate, the Corporation
is involved in operating a chain of discount retail drugstores.
BASIS OF PRESENTATION: 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.
The accompanying condensed consolidated balance sheet of the Corporation as
of September 30, 1998, the condensed consolidated statements of operations
and comprehensive loss for the three and six months ended September 30, 1998
and 1997, and the condensed consolidated statements of cash flows for the six
months ended September 30, 1998 and 1997, 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 six months ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the entire year. The condensed consolidated balance sheet as of
March 31, 1998 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, 1998, and should be read in conjunction with this
quarterly report.
RESTRICTED CASH: Use of approximately $0.4 million of cash included in "Other
current assets" at September 30, 1998 and $0.3 million at March 31, 1998 was
restricted in connection with certain real estate loans.
COMPREHENSIVE LOSS: The difference in comprehensive loss and net loss is due
to unrealized losses on marketable securities for the three and six months
ended September 30, 1998 and to an increase in the minimum pension liability
adjustment for the three and six months ended September 30, 1997.
UNUSUAL ITEMS: The unusual items for the three months ended September 30,
1997 represented income from settlement of litigation primarily with
insurance carriers related to environmental liability claims. For the six
months ended September 30, 1997, unusual items also included a charge related
to the settlement of litigation between the Corporation and the Chapter 7
Bankruptcy Trustee (the "Trustee") of FoxMeyer Corporation ("FoxMeyer") and
certain of its subsidiaries. The litigation concerned the validity of the
transfer of certain property from FoxMeyer to the Corporation as a dividend
on June 19, 1996.
COMMON STOCK OF AVATEX CORPORATION HELD BY AN AFFILIATE: As of September 30,
1998, Phar-Mor had acquired 2,086,200 shares of the Corporation's common
stock through open market transactions at a cost of approximately $5.0
million. The Corporation accounts for its investment in Phar-Mor on an equity
basis and treats Phar-Mor's investment in the Corporation's common stock
similar to treasury stock, with a charge to the accumulated deficit on
September 30, 1998 of $1.9 million. The charge is equal to the Corporation's
38.4% ownership in the cost of its common stock held by Phar-Mor.
5
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NOTE 2 - NET LOSS PER SHARE OF COMMON STOCK
There were no differences in either the net loss applicable to common
stockholders or the average number of shares outstanding used in calculating
basic and diluted loss per share for either the three or six months ended
September 30, 1998 and 1997, respectively. Options to purchase approximately
3.9 million shares were outstanding at September 30, 1998 and 1997,
respectively. These options were not included in the computation of diluted
loss per share because the effect of including the options in the calculation
would be anti-dilutive. Conversion of the convertible preferred stock
outstanding was also not included in the calculation of diluted loss per
share as it would also have been anti-dilutive.
NOTE 3 - LONG-TERM DEBT
One of the Corporation's consolidated real estate partnerships borrowed $9.0
million during the six months ended September 30, 1998, under a construction
loan for the renovation of an office building into a hotel. The total balance
outstanding under the loan is currently $11.2 million at an interest rate of
1.75% over LIBOR. The loan has been treated as long-term in the condensed
consolidated balance sheet as the partnership has already secured permanent
financing to replace the construction loan upon completion of the project. In
order to complete the project, the Corporation expects to contribute
approximately $0.4 million in addition to the remaining $2.3 million of funds
available under the construction loan.
NOTE 4 - CAPITAL STOCK
The Corporation has not declared or paid any dividends on its preferred stock
since October 15, 1996. The two issues of preferred stock are cumulative.
Therefore, the dividends that would have been paid if declared have been
shown in the condensed consolidated statements of operations as if they had
been declared, with a corresponding charge to the accumulated deficit. The
liability for the cumulative unpaid dividends has been added to the carrying
amount of the redeemable preferred stock in the condensed consolidated
balance sheets. The cumulative dividends accrued but not paid at September
30, 1998 were $6.5 million ($10.00 per share) and $39.7 million ($9.21 per
share) on the convertible preferred stock and Series A preferred stock,
respectively.
NOTE 5 - SUPPLEMENTAL CASH FLOW AND BALANCE SHEET INFORMATION
The following supplemental cash flow information is provided for interest and
income taxes paid and for non-cash transactions (in thousands of dollars):
<TABLE>
<CAPTION>
For the six months
ended September 30,
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Interest paid $ 734 $ 1,709
Income taxes paid 67 -
Non-cash transactions:
Cumulative dividends in
arrears accrued 12,349 11,294
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
6
<PAGE>
The following supplemental information is provided for miscellaneous assets and
other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
- --------------------------------------------------------------------
<S> <C> <C>
Miscellaneous assets:
Prepaid pension cost $ 10,169 $ 9,440
Securities available for sale 3,194 7,212
Other investments, at cost 6,733 6,028
Other 2,390 2,306
- --------------------------------------------------------------------
Total $ 22,486 $ 24,986
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Other long-term liabilities:
Pension and postretirement
benefits $ 5,174 $ 5,290
Environmental liabilities 1,256 1,417
Liabilities related to
discontinued operations 3,379 4,334
Other 2,299 2,361
- --------------------------------------------------------------------
Total $ 12,108 $ 13,402
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On April 14, 1998, the Corporation announced that it would merge with and
into its wholly-owned subsidiary, Xetava Corporation ("Xetava"). Under the
proposed merger, the Corporation's existing common and preferred stockholders
would receive new common stock of Xetava, which upon consummation of the
merger would be renamed Avatex. In late April 1998, a preferred stockholder
of the Corporation and a putative class of preferred stockholders filed a
total of three lawsuits in the Delaware Court of Chancery (the "Delaware
Court") against the Corporation, Xetava and seven of the Corporation's
directors. In May 1998, the Delaware Court consolidated the lawsuits under
the caption IN RE AVATEX CORPORATION SHAREHOLDERS LITIGATION, C.A. No. 16334.
The lawsuits challenge the merger of the Corporation with and into Xetava,
contend that the merger is subject to a separate class vote by the holders of
the Corporation's preferred stock and that the exchange ratios for the merger
are unfair to the preferred stockholders. Plaintiffs seek a declaration that
the defendant directors have breached their fiduciary duties, injunctive
relief and damages and costs. In August 1998, the Delaware Supreme Court
ruled that the holders of the Corporation's convertible preferred stock have
the right to vote separately as a class on the proposed merger of the
Corporation into Xetava, as it was structured and announced by the
Corporation on April 14, 1998. Following this decision, the Corporation
announced that its Board of Directors would consider the appropriate course
of action to take with respect to the merger, which may include proceeding
forward with a modified structure or different terms of a merger, or taking
other action that the Board deems in the best interests of all of its
stockholders. The Board has not yet taken any further action related to the
merger.
The Corporation has retained responsibility for certain potential
environmental liabilities attributable to former operating units. As a
result, the Corporation is subject to federal, state and local environmental
laws, rules and regulations, including the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, and similar
state superfund statutes. These statutes 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 environmental assessments, remediation
activities, penalties or fines that may be imposed for non-compliance with
such laws or regulations have not changed materially since March 31, 1998.
The Corporation's estimates of these costs are based upon currently available
facts,
7
<PAGE>
existing technology, 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 the remedial actions
that may be required and, in the case of sites not owned by the Corporation,
the unknown extent of the Corporation's probable liability in proportion to
the probable liability of other parties. Moreover, the Corporation may have
environmental liabilities that the Corporation cannot in its judgment
estimate at this time and losses attributable to remediation costs may arise
at other sites. Management recognizes that additional work may need to be
performed to ascertain the ultimate liability for such sites, and further
information could ultimately change management's current assessment. A change
in the estimated liability could have a material impact on the financial
condition and results of operations of the Corporation.
On March 1, 1994, the Corporation and FoxMeyer announced that the Corporation
had proposed a merger in which FoxMeyer would be merged with and into a
wholly-owned subsidiary of the Corporation, thereby making FoxMeyer a
wholly-owned subsidiary of the Corporation. Shortly after the announcement,
class action lawsuits were filed against the Corporation, FoxMeyer and
certain of FoxMeyer's officers and directors. Following a number of
procedural matters, and the execution (and subsequent withdrawal) of a
Memorandum of Understanding dated June 30, 1994 under which the litigation
would be dismissed, the litigation was consolidated and an amended complaint
was filed on February 13, 1996 in IN RE FOXMEYER CORPORATION SHAREHOLDER
LITIGATION, No. 13391, in the Delaware Court. The amended complaint alleges
that the defendants breached their fiduciary duties to FoxMeyer's
stockholders by agreeing to the merger at an unfair price and at a time
designed so that the Corporation could take advantage of, among other things,
an alleged substantial growth in the business of FoxMeyer. The complaint also
alleges that the proxy statement issued in connection with the merger failed
to disclose certain matters relating to the proposed merger. In October 1998,
a stipulation was entered that governs certain scheduling matters, including
briefing of plaintiff's class certification motion. The Corporation is unable
at this time to estimate the possible loss, if any, which may accrue from
this lawsuit.
The Corporation and certain of its current and former officers and directors
have been named in a series of purported class action lawsuits that were filed
and subsequently 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. The lawsuit
purports to be brought on behalf of purchasers of the Corporation's common and
its Series A and convertible preferred stocks during the period July 19, 1995
through August 27, 1996. On May 1, 1997, plaintiffs in the lawsuit filed a
consolidated amended class action complaint, which alleges that the Corporation
and the defendant officers and directors made misrepresentations of material
facts in public statements or omitted material facts from public statements,
including the failure to disclose purportedly negative information concerning
its National Distribution Center and Delta computer systems and the resulting
impact on the Corporation's existing and future business and financial
condition. On March 31, 1998, the court denied the Corporation's motion to
dismiss the amended complaint in the lawsuit. The Corporation intends to
continue to vigorously defend itself in the lawsuit. The Corporation is unable
at this time to estimate the possible loss, if any, which may accrue from this
lawsuit.
The Corporation and its Co-Chairmen and Co-Chief Executive Officers have also
been named as defendants in GROSSMAN V. FOXMEYER HEALTH CORP., ET AL., Cause
No. 96-10866-J, in the 191st Judicial Court of Dallas County, Texas. The
lawsuit purports to be brought on behalf of all holders of the Corporation's
common stock during the period October 30, 1995 through July 1, 1996, and
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 ZUCKERMAN action described
above. On September 28, 1997, the court denied the Corporation's motion for
summary judgment in the lawsuit. The Corporation intends to continue to
vigorously defend itself in the lawsuit. The Corporation is unable at this
time to estimate the possible loss, if any, which may accrue from this
lawsuit.
8
<PAGE>
In fiscal 1998, the bankruptcy trustee and certain creditors of the
Corporation's 17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("Ben
Franklin"), filed lawsuits against certain former officers and directors of
Ben Franklin, the Corporation and certain current and former officers and
directors of the Corporation. The Corporation and its officers and directors
have since been dropped as defendants in the lawsuits. In connection with
paying its own defense costs and those of its officers and directors, the
Corporation also initially paid a portion of the defense costs of certain
individuals who are named as defendants in these lawsuits by reason of the
fact that they may have been serving at the request of the Corporation as a
director or officer of Ben Franklin. In accordance with Delaware law, the
Corporation may, if appropriate, agree at a future date to indemnify certain
of the remaining defendants in the lawsuit. In October 1998, the United
States Bankruptcy Court for the Northern District of Illinois issued
Memorandum Opinions that granted motions to dismiss two of the lawsuits
against all but one defendant. The plaintiffs are appealing and have filed
objections to the Opinions. The third remaining lawsuit is still pending in
Illinois state court with a hearing on a motion to dismiss set for November
1998.
In April 1998, the Trustee filed a lawsuit against the five former directors
of FoxMeyer, in which the Trustee alleges that the defendants breached their
fiduciary duty in connection with the June 19, 1996 dividend of certain
assets to the Corporation. In October 1997, in connection with the settlement
of a separate lawsuit brought by the Trustee against the Corporation, the
Corporation was released by the Trustee from all liability and the
director-defendants in this lawsuit received covenants not to execute from
the Trustee. The Corporation has agreed to pay the initial defense costs of
the individuals who are named as defendants in the lawsuit by reason of the
fact that they may have been serving at the request of the Corporation as a
director or officer of FoxMeyer.
In June 1998, Steven Mizel IRA and Anvil Investment Partners, L.P. filed a
lawsuit, allegedly on behalf of the Corporation, against seven of the
directors of the Corporation and three of its former directors who were
members of the Corporation's Personnel and Compensation Committee. The
lawsuit is styled STEPHEN MIZEL IRA ET. AL. V. BUTLER, ET. AL., No.
602773198, in the Supreme Court of the State of New York, County of New York.
The plaintiffs are holders of the Corporation's Series A preferred stock, and
the lawsuit relates primarily to agreements and transactions between the
Corporation and its Co-Chairmen and Co-Chief Executive Officers, Abbey J.
Butler and Melvyn J. Estrin. The Corporation is paying the initial defense
costs of the defendants in accordance with Delaware General Corporation Law,
the Corporation's charter and by-laws, and the terms and conditions of
certain indemnification agreements between the Corporation and certain of the
defendants.
Thomas L. Anderson, the former president of FoxMeyer, is the defendant in a
lawsuit brought by Midwest Freight Systems, Inc. ("Midwest") and Leo Glynn in
the United States District Court for the Western District of Missouri, Case
No. 97-0089CV-W-2. The lawsuit relates to Midwest's purchase in 1991 of
substantially all of the assets of Heatlhcare Transportation System, Inc.,
which was then a subsidiary of FoxMeyer. Midwest has asserted claims against
Mr. Anderson for breach of contract, fraud, negligent misrepresentation and
tortious interference with contract. Mr. Anderson has denied all liability in
the lawsuit and has asserted that the Corporation is required to indemnify
him under the terms of the 1994 Merger Agreement between the Corporation and
FoxMeyer. The Corporation is currently paying Mr. Anderson's defense costs in
the lawsuit. The Corporation is unable at this time to estimate the possible
loss, if any, which may accrue from this lawsuit.
There are various other pending claims and lawsuits arising out of the normal
conduct of the Corporation's businesses. In the opinion of management, the
ultimate outcome of these claims and lawsuits will not have a material effect
on the consolidated financial condition or results of operations of the
Corporation.
9
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
(IN THOUSANDS OF DOLLARS)
OVERVIEW
Avatex Corporation is a holding company that, along with its subsidiaries
(collectively, the "Corporation"), owns interests in hotels and office
buildings and in other corporations and partnerships. Through Phar-Mor, Inc.
("Phar-Mor"), its 38% owned affiliate, the Corporation is involved in
operating a chain of discount retail drugstores.
On April 14, 1998, the Corporation announced that it would merge with and
into its wholly-owned subsidiary, Xetava Corporation ("Xetava"). Under the
proposed merger, the Corporation's existing common and preferred stockholders
would receive new common stock of Xetava, which upon consummation of the
merger would be renamed Avatex. In late April 1998, a preferred stockholder
of the Corporation and a putative class of preferred stockholders filed a
total of three lawsuits in the Delaware Court of Chancery (the "Delaware
Court") against the Corporation, Xetava and seven of the Corporation's
directors. In May 1998, the Delaware Court consolidated the lawsuits under
the caption IN RE AVATEX CORPORATION SHAREHOLDERS LITIGATION, C.A. No. 16334.
The lawsuits challenge the merger of the Corporation with and into Xetava,
contend that the merger is subject to a separate class vote by the holders of
the Corporation's preferred stock and that the exchange ratios for the merger
are unfair to the preferred stockholders. Plaintiffs seek a declaration that
the defendant directors have breached their fiduciary duties, injunctive
relief and damages and costs. In August 1998, the Delaware Supreme Court
ruled that the holders of the Corporation's convertible preferred stock have
the right to vote separately as a class on the proposed merger of the
Corporation into Xetava, as it was structured and announced by the
Corporation on April 14, 1998. Following this decision, the Corporation
announced that its Board of Directors would consider the appropriate course
of action to take with respect to the merger, which may include proceeding
forward with a modified structure or different terms of a merger, or taking
other action that the Board deems in the best interests of all of its
stockholders. The Board has not yet taken any further action related to the
merger.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND SIX
MONTHS ENDED SEPTEMBER 30, 1997
OPERATING INCOME (LOSS)
Revenues from real estate operations decreased $1,307 and $1,894 to $2,353
and $4,929 for the three and six months ended September 30, 1998,
respectively, compared to $3,660 and $6,823 for the three and six months
ended September 30, 1997, respectively. The decrease was primarily the result
of the disposal of a property in fiscal 1998. In addition, revenues at the
remaining two properties decreased slightly compared to the prior periods. In
late October 1998, a real estate partnership in which the company owns a 50%
interest opened a new hotel. Significant additional revenues from the new
hotel are not expected for several months.
Operating costs including depreciation and amortization decreased $626 to
$3,888 for the quarter ended September 30, 1998 compared to $4,514 for the
quarter ended September 30, 1997. A reduction in real estate operating costs
of $1,166, primarily attributable to the property disposed of in fiscal 1998,
was offset by an increase in corporate overhead costs of $540. Such increased
corporate expenses related primarily to
10
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$913 of additional costs, including costs associated with the proposed
merger, as discussed above, as well as compensation and legal costs,
partially offset by lower expenses for pensions, travel and other operating
costs.
For the six months ended September 30, 1998, operating costs including
depreciation and amortization decreased $194 to $7,663 compared to $7,857 for
the six months ended September 30, 1997. A reduction in real estate operating
costs of $1,497, that was primarily attributable to the property disposed of
in fiscal 1998, was offset by an increase in corporate overhead costs of
$1,303. Such increased corporate expenses were primarily the result of $2,000
of additional costs, including costs associated with the proposed merger as
well as compensation, legal and insurance costs, partially offset by lower
expenses for pensions, consultants, travel and other operating costs.
The unusual items for the three months ended September 30, 1997 represented
income from settlement of litigation primarily with insurance carriers
related to environmental liability claims. For the six months ended September
30, 1997, unusual items also included a charge related to the settlement of
litigation between the Corporation and the Chapter 7 Bankruptcy Trustee of
FoxMeyer Corporation ("FoxMeyer") and certain of its subsidiaries. The
litigation concerned the validity of the transfer of certain property from
FoxMeyer to the Corporation as a dividend on June 19, 1996.
OTHER EXPENSE
Other expense of $582 for the three months ended September 30, 1998 related
to a reduction of $1,210 in the carrying value of certain of the
Corporation's investments offset by $628 of income primarily from a royalty
payment on a property sold in the prior fiscal year and dividends accrued on
investments. Other expense of $326 for the three months ended September 30,
1997 related primarily to the reduction in the carrying value of certain of
the Corporation's investments.
Other expense of $2,194 for the six months ended September 30, 1998 related
to a $3,925 reduction in the carrying value of certain of the Corporation's
investments offset by $1,731 in gains primarily from the recovery on an
investment which had been written-off in a prior year, a royalty payment from
a property sold in the prior fiscal year and dividends accrued on
investments. In the prior year, other expense of $5,306 for the six months
ended September 30, 1997 related primarily to the reduction in the carrying
value of certain of the Corporation's investments.
INTEREST INCOME (EXPENSE)
Interest income increased $466 to $521 for the three months ended September
30, 1998 compared to $55 for the three months ended September 30, 1997. For
the six months ended September 30, 1998, interest income increased $438 to
$1,086 compared to $648 for the six months ended September 30, 1997. For both
periods, the amount of funds invested increased substantially compared to the
prior year due to cash received primarily from the National Steel Corporation
("NSC") settlement and sale of US HealthData Interchange, Inc. in November
1997 and interest earned on the note received as part of the NSC settlement.
Interest expense decreased $929 to $523 for the three months ended September
30, 1998 compared to $1,452 for the three months ended September 30, 1997.
For the six months ended September 30, 1998, interest expense decreased
$1,786 to $1,028 compared to $2,814 for the six months ended September 30,
1997. A decrease of $250 and $499, respectively, for the three and six months
ended September 30, 1998, related to real estate operations primarily due to
the absence of debt on the property disposed of in fiscal 1998 and interest
capitalized in the current fiscal year in connection with the property being
renovated. Interest expense related to corporate activities decreased $679
and $1,287, respectively, for the three and six months ended September 30,
1998, due primarily to the termination or settlement of certain employee
deferred compensation plans and other benefit plans of subsidiaries of the
Corporation, which obligations had originally been recorded at a discount,
and the repayment of a secured debt facility during fiscal 1998. This
decrease in interest expense for corporate activities was partially offset
for both periods by additional interest expense related to the note payable
to the FoxMeyer Chapter 7 Bankruptcy Trustee.
11
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NATIONAL STEEL CORPORATION
The decrease in net preferred dividend income for the three and six months
ended September 30, 1998 as compared to the prior year is due to the November
1997 redemption of the NSC preferred stock by NSC and the settlement of all
related liabilities.
EQUITY IN LOSS OF AFFILIATES
Equity in loss of affiliates was $608 and $352 for the three and six months
ended September 30, 1998, respectively, compared to an equity in loss of
$2,928 and $2,610 for the three and six months ended September 30, 1997,
respectively. The decrease was primarily due to a reduction in Phar-Mor's net
loss in the current year as compared to the prior year. The reduction, for
the most part, is related to a charge for severance expense for the former
chief executive officer incurred in the prior year.
INCOME TAXES
The Corporation recorded no federal income tax provision for the current or
prior year. Any income tax benefit related to the current or prior year's
loss was offset by a corresponding change in the deferred tax asset valuation
allowance. The tax expense for the current year represents state income taxes
related to real estate operations.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
The minority interest in results of operations of consolidated subsidiaries
for the three months ended September 30, 1998 was not significantly different
than for the three months ended September 30, 1997. For the six months ended
September 30, 1998, the minority interest decreased $229 to $107 compared to
$336 in the prior year. Of the decrease, $219 related to reduced earnings on
real estate still owned as well as a result of a property sold in fiscal 1998.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends have increased to $6,957 and $13,749 for the three
and six months ended September 30, 1998, respectively, compared to $6,323 and
$12,498 for the three and six months ended September 30, 1997, respectively.
The increase was due to (i) an increase of $100 and $196, respectively, in
the amortization of discount on the Series A preferred stock and (ii) an
increase of $534 and $1,055, respectively, in the dividend on the Series A
preferred stock attributable to the required compounding of dividends on
previously unpaid amounts.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Corporation had cash and short-term investments
of approximately $28,243. During the six months ended September 30, 1998, the
Corporation committed approximately $2,309 to new investments and $1,031 to
real estate development.
The debt of the Corporation consists of a note payable to the FoxMeyer
Chapter 7 Bankruptcy Trustee and the debt of consolidated real estate
partnerships, which debt is without recourse to the parent company, Avatex
Corporation. The Corporation has two issues of redeemable preferred stock
outstanding. Beginning with the quarterly payments due January 15, 1997, the
Corporation has not declared nor paid any cash dividends on its Series A
preferred stock or its convertible preferred stock. The Corporation also did
not make the annual sinking fund payment on the convertible preferred stock
due January 1998.
See the "Overview" section above for a discussion of a proposed merger of the
Corporation with its Xetava subsidiary. If the proposed merger is approved as
originally proposed, the preferred stockholders would receive common stock of
Xetava in exchange for their preferred stock. As discussed above, the
Corporation announced that its Board of Directors would review the proposed
merger and may consider other appropriate courses of action. The Board has
not yet taken any further action related to the merger.
12
<PAGE>
The Corporation believes that its real estate operations will provide adequate
cash flow to fund recurring real estate operating expenses, including required
payments on related debt. Cash required for necessary real estate capital
improvements may be funded from excess cash flow from real estate operations,
additional borrowings, or contributions from the Corporation or minority
interests. For corporate operations other than real estate, cash requirements
include the funding of monthly operating activities, the payment of benefit
obligations, and the funding of environmental liabilities of previously owned
businesses, the amounts and timing of which are uncertain.
The Corporation continuously evaluates current and potential investments in
connection with an ongoing review of its investment strategies and, as
opportunities arise, will continue to invest in real estate and other
publicly and privately held companies which the Corporation believes would be
a strategic fit or sell those investments which the Corporation believes no
longer fit its investment criteria. In addition, the Corporation may pursue
the acquisition of an operating company.
The Corporation will rely on cash on hand, any excess cash from its real
estate operations and, if necessary, the sale of real estate or other
investments to meet its future obligations. The Corporation is involved in
litigation which, if the Corporation were to lose, would have a material
impact on the Corporation's financial condition, liquidity and results of
operations. These financial statements have been prepared on a going concern
basis which contemplates the realization of the Corporation's assets and the
settlement of its liabilities and commitments in the normal course of
business.
OTHER
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures
about Segments of an Enterprise and Related Information" which is effective
for the current fiscal year. SFAS No. 131 does not have any impact on the
financial results or financial condition of the Corporation, but will result
in certain changes in required disclosure of segment information.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Therefore, the
Corporation will be required to adopt SFAS No. 133 for its fiscal year
beginning April 1, 2000. The Corporation has not yet determined the impact,
if any, from the adoption of SFAS No. 133.
What is commonly referred to as the "Year 2000" issue relates, in part, to
many hardware and software systems that use only two digits to represent the
year being unable to recognize dates beyond 1999. The Corporation's internal
systems, both hardware and software, are Year 2000 compliant. The Year 2000
readiness of the Corporation's vendors, and companies in which the
Corporation has invested, however may vary. The Corporation is currently
trying to ascertain and monitor the Year 2000 readiness of these companies.
If any of the companies in which the Corporation has made a significant
investment are not Year 2000 compliant, there may be a material impact on the
value of that investment and, correspondingly, on the Corporation's results
of operations and financial condition. If certain vendors are not Year 2000
compliant, especially vendors that provide electricity, telephone services,
food and management services, the Corporation may suffer reduced revenues and
increased costs at its real estate operations as well as potentially
significant disruptions to its overall operations, depending upon the length
and severity of the problems. At this time, it is still uncertain to what
extent the Corporation may be affected by such matters at these other
entities.
13
<PAGE>
PART II - OTHER INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
With respect to the matters reported in the Corporation's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 and the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, the following additional
information is provided:
MCKESSON/VENDOR LITIGATION. With reference to the Delaware lawsuit that seeks
to enjoin the Corporation from prosecuting its Texas lawsuit against McKesson
Corporation and certain pharmaceutical manufacturers, (i) on August 24, 1998,
the Delaware Bankruptcy Court denied the defendants' first motion for summary
judgment and ruled that the parties should return to Texas and move the Texas
lawsuit forward as much as possible, and (ii) on September 17, 1998, the
Delaware Bankruptcy Court held a hearing on the defendants' second motion for
summary judgment. In addition, following the Delaware Bankruptcy Court's
August 24, 1998 ruling, the Dallas Bankruptcy Court held a hearing on October
16, 1998 on the Corporation's motion to remand the Texas lawsuit back to
state court. The parties are awaiting the Courts' rulings on the pending
motions.
BEN FRANKLIN LITIGATION. With reference to the three pending lawsuits filed
by the bankruptcy trustee and certain creditors of the Corporation's
17%-owned subsidiary, Ben Franklin Retail Stores, Inc. ("Ben Franklin"),
against certain former officers and directors of Ben Franklin, on October 13,
1998, the United States Bankruptcy Court for the Northern District of
Illinois issued Memorandum Opinions in two of the lawsuits. The Opinions,
which were submitted in accordance with 28 U.S.C. 157(c)(1) in lieu of
proposed findings of fact and conclusions of law, granted motions to dismiss
two of the lawsuits against all of the defendants except David Brainard. The
plaintiffs in these two lawsuits are attempting either to move to reconsider,
to object to, or to appeal from the Opinions. The third lawsuit that is
pending in Illinois state court is subject to a similar motion to dismiss
that is set for hearing in November 1998.
PREFERRED STOCKHOLDER LITIGATION. With reference to the litigation filed by
certain preferred stockholders of the Corporation against the Corporation and
certain of its directors, in August 1998, the Delaware Supreme Court ruled
that the holders of the Corporation's convertible preferred stock have the
right to vote separately as a class on the proposed merger of the Corporation
into Xetava Corporation, as it was structured and announced by the
Corporation on April 14, 1998. Following this decision, the Corporation
announced that its Board of Directors would consider the appropriate course
of action to take with respect to the merger, which may include proceeding
forward with a modified structure or different terms of a merger, or taking
other action that the Board deems in the best interests of all of its
stockholders. The Board has not yet taken any further action related to the
merger.
1994 MERGER LITIGATION. With reference to the lawsuit filed in connection
with the merger of FoxMeyer Corporation ("FoxMeyer") into a wholly-owned
subsidiary of the Corporation, a stipulation was entered in October 1998 that
governs certain scheduling matters, including briefing of plaintiffs' class
certification motion.
MIDWEST FREIGHT LITIGATION. Thomas L. Anderson, the former president of
FoxMeyer, is the defendant in a lawsuit brought by Midwest Freight Systems,
Inc. ("Midwest") and Leo Glynn in the United States District Court for the
Western District of Missouri, Case No. 97-0089CV-W-2. The lawsuit relates to
Midwest's purchase in 1991 of substantially all of the assets of Heatlhcare
Transportation System, Inc., which was then a subsidiary of FoxMeyer. Midwest
has asserted claims against Mr. Anderson for breach of contract, fraud,
negligent misrepresentation and tortious interference with contract. Mr.
Anderson has denied all liability in the lawsuit, and has asserted that the
Corporation is required to indemnify him under the terms
14
<PAGE>
of the 1994 Merger Agreement between the Corporation and FoxMeyer. The
Corporation is currently paying Mr. Anderson's defense costs in the lawsuit.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
The Corporation did not declare, nor did it pay, the dividends due for the
quarterly periods since October 15, 1996 on either the convertible preferred
stock or the Series A preferred stock. These two issues are cumulative. The
cumulative dividends accrued and unpaid at September 30, 1998 were
approximately $6.5 million ($10.00 per share) and $39.7 million ($9.21 per
share) on the convertible preferred stock and Series A preferred stock,
respectively. In addition, the annual sinking fund payment due January 1998
for 88,000 shares of the convertible preferred stock was not made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
--------
<S> <C>
27 - Financial Data Schedule
(b) Reports on 8-K
No Current Reports on Form 8-K were filed by the Corporation
during the three months ended September 30, 1998.
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVATEX CORPORATION
November 12, 1998 By: /s/ Edward L. Massman
-------------------------------
Edward L. Massman
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
November 12, 1998 By: /s/ Scott E Peterson
--------------------------------
Scott E Peterson
Vice President Finance and
Controller
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AVATEX CORPORATION FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,243
<SECURITIES> 539
<RECEIVABLES> 7,756
<ALLOWANCES> 27
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<CURRENT-ASSETS> 38,448
<PP&E> 30,420
<DEPRECIATION> 1,963
<TOTAL-ASSETS> 112,586
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<BONDS> 32,025
228,744
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<COMMON> 69,032
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<TOTAL-LIABILITY-AND-EQUITY> 112,586
<SALES> 4,929
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