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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
5910 NORTH CENTRAL EXPRESSWAY, SUITE 1780 , 75206
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 214-365-7450
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $5 per share New York Stock Exchange
$5 Cumulative Convertible Preferred Stock New York Stock Exchange
$4.20 Cumulative Exchangeable Series A Preferred Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
---
On June 22, 1998, the aggregate value of voting stock held by non-affiliates of
the registrant was approximately $27,680,300.
On June 22, 1998, there were 13,806,375 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. 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. In addition, during a
portion of the fiscal year, the Corporation was involved in electronic
medical claims processing through a wholly-owned subsidiary US HealthData
Interchange, Inc. ("USHDI"). On November 19, 1997, the Corporation sold
substantially all of the assets of USHDI.
The Corporation was incorporated in Delaware on September 27, 1982, for the
purpose of effecting a corporate restructuring of National Steel Corporation
("NSC") and its subsidiaries in which NSC assets pertaining to the steel
industry were separated from its non-steel assets. Pursuant to the
restructuring, on September 13, 1983, NSC was merged into a subsidiary of the
Corporation and the stockholders of NSC became stockholders of the
Corporation. The Corporation sold substantially all of its investment in NSC
and related metals operations by fiscal 1991 and invested in distribution
businesses, principally FoxMeyer Corporation ("FoxMeyer"). On August 27,
1996, FoxMeyer and several of its subsidiaries filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. On November 8, 1996, the Bankruptcy
Court approved the sale of the principal assets of FoxMeyer to McKesson
Corporation. On March 18, 1997, the Chapter 11 cases were converted into
Chapter 7 liquidation cases.
DESCRIPTION OF BUSINESS
Except for historical information contained herein, the matters discussed in
this annual report contain forward-looking statements which involve risks and
uncertainties including, but not limited to, economic, competitive,
governmental and technological factors affecting the Corporation's and its
investments' operations, markets, products and services.
REAL ESTATE
The Corporation has made certain investments in real estate through limited
partnerships. These limited partnerships are controlled by wholly-owned
subsidiaries of the Corporation which hold a 50% partnership interest in
these limited partnerships. The Corporation controls these partnerships
pursuant to rights granted by the partnership agreements which specify that
the partnership's business shall be managed, and its business controlled,
exclusively by the Corporation's subsidiary. The Corporation will lose its
right to exclusively manage the partnerships if (i) the current co-chief
executive officers cease to be officers or directors of the Corporation or
(ii) there has been at least a 50% aggregate return on the capital invested
by the Corporation.
The limited partnerships are engaged in the buying, holding, operating and
disposing of real estate, principally hotels and office buildings. The
properties owned by these partnerships are located in Maryland and
Washington, D.C. and are as follows:
A 38,510 square foot office building and 150 room hotel located in Annapolis,
Maryland. Both properties were purchased in November 1993 and refurbished.
The office building was 91% occupied and the hotel was approximately 66%
occupied during fiscal 1998.
A 194 room hotel located in Washington, D.C. in the Watergate area. A
partnership in which the Corporation is a general partner assumed operating
control of the hotel in November 1995 and has completely refurbished the
property. The fiscal 1998 occupancy rate was approximately 79%.
A 103,000 square foot office building with adjoining townhouse located in
Washington, D.C. was purchased in May 1996. The townhouse was sold in
January 1998. The building is presently being renovated with a plan to
convert the building into a 158 room hotel with an expected opening date in
November 1998. The projected cost of the renovation is approximately $14.8
million. The Corporation is committed to fund approximately $1.3 million
with
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the remainder to be provided through a construction loan. The partnership
had borrowed $2.2 million under the construction loan at March 31, 1998.
At the present time, the Corporation has no obligation for future
contributions with respect to the partnerships other than those discussed
above. The partnership mortgage loans are secured by the associated
properties. Certain mortgages are guaranteed by entities related to the
minority partner, or by the subsidiaries of the Corporation that hold
partnership interests.
EQUITY INVESTMENT IN PHAR-MOR, INC.
In fiscal 1996, the Corporation acquired a 69.8% interest in Hamilton Morgan
LLC, a Delaware limited liability company ("Hamilton Morgan"). Hamilton
Morgan subsequently acquired an approximate 30.9% common stock interest in
Phar-Mor. On September 19, 1997, the Corporation, under an agreement among
Hamilton Morgan, the owner of the minority interest in Hamilton Morgan and
certain other parties, acquired from Hamilton Morgan 3,750,000 shares of
Phar-Mor common stock in exchange for (i) the redemption of the Corporation's
ownership interest in Hamilton Morgan, (ii) the satisfaction of a promissory
note from Hamilton Morgan and (iii) the transfer of approximately $6.1
million in other assets to Hamilton Morgan. The Corporation now owns,
including shares of Phar-Mor common stock which it had previously owned and
were not involved in this transaction, approximately 38.4% of Phar-Mor's
outstanding common stock.
Phar-Mor operates a chain of 106 discount retail drugstores in 19 states
devoted to the sale of prescription and over-the-counter drugs, health and
beauty care products, and other general merchandise and grocery items.
Approximately 51% of Phar-Mor stores are located in Pennsylvania, Ohio and
West Virginia. An additional 23% are located in Virginia, North Carolina and
South Carolina.
In April through June 1998, Phar-Mor acquired approximately 11.2% of the
Corporation's outstanding common stock.
OTHER
The Corporation, through a limited partnership and from shares directly
owned, holds the equivalent of an approximate 11.3% interest in Carson, Inc.,
a global manufacturer of cosmetics.
The Corporation has an approximate 5.3% interest in Imagyn Medical
Technologies, Inc., a developer, manufacturer and distributor for the
urology, minimally invasive and general surgery, and gynecology markets.
The Corporation has an approximate 5.5% interest in JW Genesis Financial
Corp., a full service securities broker and investment banking firm providing
securities transaction processing and other related services.
The Corporation has an approximate 6.3% interest in Caring Technologies, Inc.
which is a privately held corporation that develops, manufactures and markets
miniature continuous-wear vital signs monitors that combine proprietary
sensor and wireless data transmission technologies.
The Corporation has a 10.8% ownership interest in AM Cosmetics, Inc., a
leading privately-held manufacturer of low cost cosmetics.
The Corporation, through a limited liability company, holds the equivalent of
an approximate 7.2% interest in Chemlink Laboratories LLC ("Chemlink") which
is principally engaged in the development, manufacture and distribution of
effervescent tablet formulations for use in cleaning, disinfectant and
sterilization applications.
The Corporation owns $1.25 million of preferred stock of HPD Holdings Corp
("HPD"), which is a privately held corporation whose subsidiary acquired
certain assets of Block Drug Company, Inc. ("Block") used in or related to
the manufacture, sale or distribution of Block's household product lines.
The Corporation also has a 2.5% interest in the common stock of HPD.
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The Corporation has an approximate 8.6% interest in RAS Holding Corp. ("RAS")
which is a privately-held corporation involved in the development and
distribution of medical and commercial optical devices.
The interests in Chemlink, HPD and RAS noted above are only the Corporation's
direct interest and do not include the effect of Phar-Mor's investment in
these same companies. Phar-Mor has an approximate 7.2% interest in Chemlink,
a 4.6% interest in RAS, and also owns $1.25 million of preferred stock, and a
2.5% interest in the common stock, of HPD.
The Corporation owned 17.4% of Ben Franklin Retail Stores, Inc. ("Ben
Franklin") which filed for protection under the U.S. Bankruptcy Code in July
1996 and subsequently liquidated its assets under Chapter 7 of the Bankruptcy
Code. The Corporation wrote off its investment in Ben Franklin in fiscal
1997 as a result of the bankruptcy filing.
ENVIRONMENTAL REGULATION
The Corporation, like many other enterprises, is subject to federal, state
and local laws and regulations governing environmental matters. Such laws
and regulations primarily affect the Corporation's previously sold or
discontinued operations where the Corporation retained all or part of any
environmental liabilities on conditions existing at the date of sale. As a
result of an agreement entered into in November 1997 between the Corporation,
NSC and certain other parties, the Corporation was released from its
contractual indemnification liability to NSC for environmental liabilities
that existed from its prior ownership of NSC or NSC's Weirton steel division.
It is anticipated that compliance with statutory requirements related to
environmental quality will continue to necessitate cash outlays by the
Corporation for other former operations. The amounts of these liabilities
are difficult to estimate due to such factors as the unknown extent of the
remedial actions that may be required and, in the case of sites not owned by
the 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 may ultimately change management's current
assessment. See Note N to the consolidated financial statements of the
Corporation contained herein. Also, see "Item 3. Legal Proceedings" for a
discussion of outstanding environmental actions involving the Corporation.
EMPLOYEES
The number of persons employed by the Corporation and its consolidated
subsidiaries was fourteen at March 31, 1998. This number does not include 87
employees of the consolidated real estate limited partnerships who were
employed at March 31, 1998 by their respective management companies.
ITEM 2. PROPERTIES
The Corporation's executive office, located at 5910 North Central Expressway,
Suite 1780, Dallas, Texas, contains approximately 6,139 square feet of space
under a lease agreement that expires in December 2001.
The following additional information is provided for the real estate properties
discussed in Item 1:
A hotel and office building located in Annapolis, Maryland have a net book value
of $5.1 million and are encumbered by a $5.2 million loan. The loan requires
monthly principal and interest payments and matures in fiscal 2022. The current
interest rate is 9.67% but will increase by at least 2% if the loan is not
retired by fiscal 2007. The occupancy rate for the hotel, since its acquisition
in fiscal 1994, was 43%, 65%, 64% and 66%, respectively, for fiscal 1995 through
fiscal 1998.
A hotel located in the Watergate area of Washington, D.C. has a net book value
of $8.7 million and is encumbered by two loans totaling $7.7 million. One loan
of $7.2 million requires monthly principal and interest payments with
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a balloon payment of approximately $6.3 million in fiscal 2004. The interest
rate is 10.19%. The other loan requires monthly principal and interest
payments, has an interest rate of 9.25% and matures in fiscal 2000. The
occupancy rate for the hotel since its acquisition in fiscal 1995 was 66%,
62% and 79%, respectively, for fiscal 1996 through fiscal 1998.
The office building located in Annapolis, Maryland, has two tenants which
occupy more than 10% of the 38,510 net rentable square feet. Fleet Business
School occupies approximately 29% and NationsBank approximately 16% of the
lease space. Fleet Business School's lease expires February 2000 and contains
four 5 year renewal options. Annual rent is $204,263. NationsBank's lease
expires November 1999 and contains three 5 year renewal options. Annual rent
is $216,611. Average rental per square foot was $21.27 in 1998. The
following table sets forth the lease expirations at the office building for
all current tenants:
<TABLE>
<CAPTION>
Fiscal Year Number of Tenants Lease in Square Feet Annual Rental % of Annual Rental
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<S> <C> <C> <C> <C>
1998 2 5,860 $ 18,000 2.4%
1999 1 2,750 59,622 8.0%
2000 5 23,786 556,306 74.4%
2003 4 6,114 113,786 15.2%
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- -------------------------------------------------------------------------------------------------
</TABLE>
The occupancy rate for the office building, since its acquisition in fiscal
1994, was 95%, 100%, 100% and 91%, respectively, for fiscal 1995 through fiscal
1998.
ITEM 3. LEGAL PROCEEDINGS
MCKESSON\VENDOR LITIGATION
On January 10, 1997, the Corporation filed a ten count lawsuit against
McKesson Corporation ("McKesson") and certain major pharmaceutical
manufacturers styled FOXMEYER HEALTH CORPORATION V. MCKESSON CORPORATION, ET
AL., Cause No. 9700311, in the 95th Judicial District Court of Dallas County,
Texas (the "Texas State Court") (the "McKesson Litigation"). In the McKesson
Litigation, the Corporation alleges that McKesson and the pharmaceutical
manufacturers conspired to drive the Corporation's pharmaceutical
distribution subsidiary, FoxMeyer Drug Company, out of business, 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 Corporation
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, and 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 loss in value in the Corporation's
interest in FoxMeyer Drug Company, plus punitive damages. In February 1997,
certain defendants in the McKesson Litigation removed the lawsuit to the
Bankruptcy Court for the Northern District of Texas, Dallas Division (the
"Dallas Bankruptcy Court"), under Adversary No. 397-3052, and filed a motion
to transfer the McKesson Litigation to the Bankruptcy Court for the District
of Delaware (the "Delaware Bankruptcy Court") as a proceeding related to the
Chapter 11 case of FoxMeyer Drug Company.
On February 26, 1997, the Official Committee of Unsecured Creditors of
FoxMeyer Corporation ("FoxMeyer") and FoxMeyer Drug Company (the "Committee")
filed a lawsuit against the Corporation in the Delaware Bankruptcy Court
under Adversary No. 97-20. In the Delaware lawsuit, the Committee seeks a
declaration that the claims asserted by the Corporation in the McKesson
Litigation are property of the FoxMeyer bankruptcy estate, and an injunction
barring the Corporation from continuing to prosecute the McKesson Litigation.
On March 19, 1997, McKesson intervened in the Committee's lawsuit and filed
its own complaint, in which McKesson asserts that (a) as of the commencement
of the FoxMeyer Chapter 11 case in August 1996, the claims asserted in the
McKesson Litigation were property of the bankruptcy estate, and (b) as of
November 1996, when McKesson purchased substantially all of the assets of
FoxMeyer Drug Company, the claims were transferred to McKesson. On May 30,
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1997, McKesson filed a motion for partial summary judgment in the Delaware
lawsuit and, on November 5, 1997, filed a second motion for summary judgment,
both of which remain pending.
On August 27, 1997, the Dallas Bankruptcy Court entered an order denying the
defendants' motion to transfer the McKesson Litigation to the Delaware
Bankruptcy Court, and deferred ruling on the Corporation's motion to remand
the case back to Texas State Court. The Dallas Bankruptcy Court further
indicated that if the Corporation owns the claims asserted in the McKesson
Litigation, the Dallas Bankruptcy Court will grant the Corporation's motion
to remand. On March 6, 1998, following the retirement of the Delaware
Bankruptcy Judge, the Corporation moved to transfer the Delaware lawsuit to
the Dallas Bankruptcy Court on the ground that it is now the court with the
most familiarity with all of the McKesson related litigation. On March 27,
1998, the Chief Judge of the Delaware Bankruptcy Court referred the pending
transfer motion to a bankruptcy judge in the Western District of
Pennsylvania, who has set a hearing on McKesson's first motion for partial
summary judgment on June 23, 1998.
1994 MERGER LITIGATION
On March 1, 1994, the Corporation and FoxMeyer announced that the Corporation
had proposed a merger in which a wholly-owned subsidiary of the Corporation
would be merged with and into FoxMeyer, making FoxMeyer a wholly-owned
subsidiary of the Corporation. 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 Court of Chancery in Delaware (the "Delaware Chancery
Court"). The amended complaint alleges that the defendants breached their
fiduciary duties to FoxMeyer's shareholders 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. No schedule has been set for the completion
of discovery in the case, the briefing of plaintiffs' class certification
motion or any other proceedings.
1996 SHAREHOLDER LITIGATION
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 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.
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NATIONAL ALUMINUM CORPORATION
During the fiscal year ended March 31, 1990, the Corporation disposed of the
operating assets of its subsidiary, National Aluminum Corporation ("NAC").
In connection with the disposition of such assets, the Corporation retained
responsibility for certain environmental matters, as described in paragraphs
(a) through (h) below:
(a) DIAZ. In June 1988, NAC received notification that it was considered to
be one of several hundred potentially responsible parties ("PRPs") for the
clean-up of a site known as the Diaz Refinery located in Diaz, Arkansas. In
September 1989, a complaint was filed against NAC and others in the Chancery
Court of Jackson County, Arkansas, styled GRANTORS TO THE DIAZ REFINERY PRP
COMMITTEE SITE TRUST, ET AL. V. RHEEM MANUFACTURING COMPANY, ET AL., in which
a PRP steering committee sought a declaratory judgment relating to cleanup
liability and cost recovery at the site. In January 1990, NAC was dismissed
as a defendant and realigned as a plaintiff, and thereby joined the PRP
steering committee that is participating in site remediation activities. NAC
is awaiting final approval of the cleanup by the State of Arkansas and,
assuming such approval, does not anticipate any additional material costs at
the site.
(b) FISHER-CALO. In December 1988, NAC received notification that it was
considered to be one of a number of PRPs for wastes present at the
Fisher-Calo Chemical and Solvent Recovery Site located in Kingsbury, Indiana.
The United States Environmental Protection Agency (the "EPA") ordered 23
entities, including NAC, to undertake and complete emergency removal
activities at the site, which has been substantially completed. In October
1990, the EPA sent a Special Notice Letter to approximately 350 PRPs,
including NAC, requesting their voluntary participation in performing or
financing the remedial design/remedial action at the site and demanding
payment of the EPA's past costs at the site. In August 1991, approximately 52
PRPs, including NAC, executed a Consent Decree to perform the remedial
design/remedial action and, in January 1992, approximately 45 PRPs, including
NAC, agreed to file a contribution action for the recovery of response costs
from non-participating PRPs. Under the Consent Decree and Cost Sharing
Agreement among the PRPs, NAC paid its allocated share of approximately
$890,000 of the estimated $31 to $47 million total cost of the cleanup.
Excluding any potential cost overruns, funding of the contribution action
against the non-participating PRPs and annual administrative fees of $4,000,
NAC does not anticipate any additional material costs at the site.
(c) GRANVILLE SOLVENTS. In May 1995, a complaint was filed against NAC and
others in the United States District Court for the Southern District of Ohio
styled AT&T GLOBAL V. UNION TANK CAR CO., in which a PRP group seeks to
recover costs incurred relating to the Granville Solvents site located in
Granville, Ohio. In August 1995, NAC was dismissed as a defendant following
its payment of approximately $18,000 for its allocated share of past costs
and agreement to join the PRP group and participate in funding the remedial
work at the site. NAC also signed an Administrative Order on Consent with the
EPA. The total cost of the remedial work at the site is estimated to be in
the range of $5.7 to $8 million, and NAC's allocated share is approximately
0.4%, or approximately $32,000, of the total.
(d) GREEN RIVER. In January 1992, the EPA notified NAC that it was
considered to be one of a number of PRPs with respect to the disposal of
allegedly hazardous substances at the Green River Disposal Site located in
Davies County, Kentucky. With respect to costs associated with the
investigation and remediation of the site, including but not limited to the
remedial investigation/feasibility study ("RI/FS") and the remedial action,
NAC has paid a total of approximately $245,000 of the total estimated costs,
and expects to pay in the future approximately $10,000 each year for operating
and maintenance costs. In 1997, NAC and a number of other parties received a
demand from the EPA to recover certain of its costs incurred at the site,
estimated at $1.2 million. NAC is supporting efforts of the PRPs that
previously paid the costs to investigate and remediate the site to have the
EPA's costs paid by non-participating PRPs. In any event, NAC believes that
its share of such costs is unlikely to exceed $60,000 based on a volumetric
allocation. In addition, at the direction of the EPA, the PRPs have agreed to
undertake limited groundwater monitoring in an attempt to establish that
groundwater remediation is unnecessary. Should groundwater remediation be
required, NAC would allegedly be responsible for its volumetric share of the
costs, which costs cannot be estimated at this time.
(e) HASTINGS/AMERIMARK. In April 1992, the United States District Court for
the Western District of Michigan ruled in favor of Amerimark Building
Products, the successor to Hastings Building Products, Inc., that NAC was
liable for 50% of all future costs of removal or remedial action related to
the mask wash contamination of soil and groundwater in the vicinity of a
former NAC plant located in Hastings, Michigan. Thereafter, the Court
entered an amended ruling that NAC was liable for 75% of response costs
incurred to date and any further response costs related to mask wash
contamination that are not inconsistent with the national contingency plan.
NAC has paid
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approximately $440,000 of response costs incurred to date at the site. NAC
is awaiting final approval with respect to the ongoing water treatment plan
at the site, after which NAC will continue to be obligated to pay operating
and maintenance costs at the site.
(f) HELEN KRAMER. In October 1989, the United States filed a complaint in
the United States District Court for the District of New Jersey entitled
UNITED STATES V. HELEN KRAMER, ET AL., seeking reimbursement of the EPA's
response costs as well as a declaratory judgment as to liability for future
response costs with respect to the Helen Kramer Landfill Site located in
Mantua Township, New Jersey. Thirteen of the 26 named defendants
subsequently filed a third-party complaint for contribution against 264
third-party defendants, including NAC's predecessor in interest, Denny
Corporation. In April 1998, NAC executed a settlement agreement and paid a
confidential amount with respect to its liability at the site. NAC does not
anticipate any additional material costs at the site.
(g) NORTHEAST GRAVEL. NAC is one of 25 PRPs participating in a RI/FS at the
Northeast Gravel Site located in Plainfield, Michigan. NAC had paid its $955
share of the $300,000 total cost of the RI/FS, and NAC's share of the total
response costs within the PRP group is 0.19%. No cost estimates are
available for the design and remedial action, and NAC cannot estimate its
future costs at the site.
(h) ORGANIC CHEMICAL. In March 1991, NAC received notification that its
former Hastings Aluminum Products division was considered to be one of a
number of PRPs for wastes present at the Organic Chemical Site located near
Grandville, Michigan. In the notice, the EPA requested NAC's voluntary
participation in certain remedial actions and, in January 1992, issued an
Administrative Order requiring NAC and approximately 150 other PRPs to
perform the first phase of the remediation at the site. A group of PRPs,
including NAC, is performing the first phase of the $6 million remediation
and have brought a cost recovery action against non-participating PRPs.
NAC's share of the first phase remediation is anticipated to be approximately
$90,000, less what is recovered from non-participating PRPs. The EPA has
also issued a Record of Decision with respect to the second phase of the
remediation which is estimated to cost between $3.7 million and $7.2 million.
Certain PRPs, including NAC, believe, however, that the second phase relates
only to contamination that was caused by the site's former owner and
operator. NAC cannot estimate its future costs at the site.
BULL MOOSE TUBE COMPANY
In August 1988, the Corporation sold all of the outstanding stock of Bull
Moose Tube Company ("Bull Moose") to Caparo, Inc. ("Caparo"). Bull Moose and
Caparo have indicated that they will seek indemnification from the
Corporation for the costs of removing dioxin contaminated soil at a facility
located in Gerald, Missouri, at which plant roads were allegedly sprayed with
dioxin contaminated oil in 1973 and 1977. The contamination has been
remediated under an EPA plan. The EPA may seek recovery of removal and
transportation (but not incineration) costs from Bull Moose, which may then
seek recovery of such costs, along with defense costs, from the Corporation.
Bull Moose and Caparo have provided the Corporation with certain initial cost
information totaling approximately $305,000. The information is an estimate
only, and the Corporation believes that it has certain defenses available to
it under the original stock purchase agreement.
FOXMEYER CORPORATION
In April 1998, FoxMeyer's Chapter 7 trustee (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.
BEN FRANKLIN RETAIL STORES, INC.
In 1997, 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
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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.
PREFERRED STOCKHOLDER LITIGATION
In April 1998, three substantially similar complaints were filed by preferred
stockholders of the Corporation in the Delaware Chancery Court. Two of the
complaints raise identical claims on behalf of a putative class consisting of
all holders of the Corporation's preferred stock and are styled HARBOR FINANCE
PARTNERS LTD., ET. AL. V. BUTLER, ET. AL., C.A. No. 16334, and STROUGO V.
BUTLER, ET. AL., C.A. No. 16345. The third complaint is styled as ELLIOTT
ASSOCIATES, L.P. ("ELLIOTT") V. AVATEX CORPORATION, ET. AL., C.A. No. 16336.
The defendants in all three complaints include the Corporation and the
following directors of the Corporation: Abbey J. Butler, Melvyn J. Estrin,
Hyman H. Frankel, Fred S. Katz, Charles C. Pecarro, William A. Lemer, and
John L. Wineapple. The Elliott complaint also names Xetava Corporation
("Xetava") as a defendant. All three actions challenge the merger of the
Corporation with and into Xetava, a transaction which has been approved by
the Corporation's Board of Directors and is subject to the approval of a
majority of the holders of the Corporation's common stock. Specifically,
plaintiffs contend that, under the Corporation's Certificate of
Incorporation, the merger is subject to a separate class vote by the holders
of the Corporation's preferred stock. Plaintiffs further allege that the
exchange ratios for the merger are unfair to the preferred stockholders.
Plaintiffs seek the following relief: a declaration that the defendant
directors have breached their fiduciary duties, a declaration that the merger
cannot proceed without the consent of the preferred stockholders, injunctive
relief preventing the consummation of the merger and damages and costs. In
May 1998, the Delaware Chancery Court consolidated the Elliott, Harbor
Finance and Strougo actions under the caption IN RE: AVATEX CORPORATION
SHAREHOLDERS LITIGATION, C.A. No. 16334. On June 3, 1998, the court granted
defendants' motion for partial judgment on the pleadings and held that the
preferred stockholders are not entitled under the Corporation's Certificate
of Incorporation to vote separately as a class on the proposed merger. On
June 8, 1998, the Corporation advised the Delaware Chancery Court that its
Board of Directors will meet to determine whether it would be appropriate to
reconsider and/or modify the terms of the proposed merger based on a number
of events that had occurred since the Board of Directors had approved the
merger. These events include the commencement of lawsuits and the June 3,
1998 court decision discussed above and potential changes in the value of
certain of the Corporation's assets. As a result, the Delaware Chancery
Court postponed the hearing originally scheduled for June 8, 1998, on the
request of certain preferred stockholders to enjoin the proposed merger.
In addition to the foregoing preferred shareholder lawsuits, on April 23,
1998, a complaint was filed with the Delaware Chancery Court pursuant to
Section 220 and 225 of the Delaware Corporation Code, styled INTRIERI, ET.
AL. V. AVATEX CORPORATION, C.A. No. 16335. The complaint was brought by four
individuals, Vincent Intrieri, Daniel Gropper, Ralph DellaCamera and Brian
Miller, who claim to have been elected to the Corporation's Board of
Directors on April 20, 1998 by the written consent of the holders of a
majority of the Corporation's preferred stock. The only defendant in the
action is the Corporation. Relying on the terms of the Corporation's
Certificate of Incorporation, plaintiffs contend that the holders of the
convertible preferred stock and the Series A preferred stock have the right
to elect two directors each upon the failure of the Corporation to pay
dividends on such preferred stock for six consecutive quarters, and that the
aforementioned individuals were validly elected to the Corporation's Board of
Directors. Additionally, in their purported capacity as directors,
plaintiffs sought an inspection of certain of the Corporation's records. In
order to secure a prompt hearing on the preferred stockholders' class voting
claim in the merger litigation described above, on May 1, 1998, the
Corporation consented to the election of Vincent Intrieri and Daniel Gropper
to the Corporation's Board of Directors by the holders of the Corporation's
Series A preferred stock. On June 8, 1998, the Delaware Chancery Court ruled
that Ralph DellaCamera and Brian Miller were validly elected to the
Corporation's Board of Directors by the written consent of a majority of
holders of its convertible and Series A preferred stocks. The size of the
Corporation's Board of Directors has thereby been increased to eleven
directors, four of whom have been elected by the Corporation's preferred
stockholders.
8
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DERIVATIVE ACTION
On June 5, 1998, Steven Mizel IRA and Anvil Investments Partners, L.P. filed
a lawsuit, allegedly on behalf of the Corporation, against seven of the
current 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 plaintiffs allege that, in connection with
such agreements and transactions, (i) the defendants have breached their
fiduciary duty to the Corporation's stockholders, (ii) the compensation
arrangements between the Corporation and Messrs. Butler and Estrin constitute
corporate waste and (iii) the defendants caused the Corporation's
subsidiaries and affiliates to improperly purchase the Corporation's stock
based upon confidential non-public information. The plaintiffs seek damages,
injunctive relief and an accounting. The plaintiffs did not make a demand on
the Corporation before filing their suit. The Corporation has not yet fully
analyzed its position with respect to the lawsuit or the Corporation's
obligations to the defendants under its Certificate of Incorporation,
by-laws, indemnification agreements with the defendants or Delaware law.
The Corporation also is a party to various other lawsuits arising in the
ordinary course of business. The Corporation, however, does not believe that
the outcome of these lawsuits, individually or in the aggregate, will have a
material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
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PART II
ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's common stock is listed for trading on the New York Stock
Exchange ("NYSE"). At May 31, 1998, the Corporation had 5,873 holders of
record. Information concerning the high and low market prices of the
Corporation's common and preferred stock and dividends declared on such stock
for each quarter in the last two fiscal years are shown below:
STOCK PRICES FOR FISCAL 1998 AND 1997
<TABLE>
<CAPTION>
Market Price Range Dividends Declared
------------------------------------------ Per Share
Fiscal 1998 Fiscal 1997 ---------------------
------------------- -------------------- Fiscal Fiscal
High Low High Low 1998 1997
-------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Common Stock (Symbol: AAV)
1st Quarter $1 1/2 $0 3/4 $20 7/8 $13 7/8 $ 0 $ 0
2nd Quarter 2 1/8 0 15/16 15 2 3/4 0 0
3rd Quarter 2 1/8 1 1/4 3 7/8 1 1/2 0 0
4th Quarter 2 5/16 1 3/16 2 1 0 0
- -------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock (Symbol: AAVPr)
1st Quarter 10 3/8 9 3/4 53 1/2 49 5/8 0 ** 1.25
2nd Quarter 13 1/4 10 49 7/8 28 1/2 0 ** 1.25
3rd Quarter 16 1/2 12 1/16 31 9 5/8 0 ** 0 **
4th Quarter 15 1/2 13 15/16 10 1/2 7 3/8 0 ** 0 **
- -------------------------------------------------------------------------------------------------------------------
Preferred Stock Series A (Symbol: AAVA)
1st Quarter 8 1/2 6 7/8 33 1/8 23 3/4 0 ** 1.05*
2nd Quarter 11 7 15/16 27 3/4 13 0 ** 1.05*
3rd Quarter 13 1/2 9 1/2 18 8 0 ** 0 **
4th Quarter 15 12 7/16 8 7/8 5 7/8 0 ** 0 **
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Paid in additional shares of Series A Preferred Stock.
** Dividends were not declared. Both series of preferred stock provide for
cumulative dividends which have been accrued as if declared. For the
Convertible Preferred Stock, unpaid cumulative dividends due at
March 31, 1998 were $7.50 per share. For the Preferred Stock Series A,
unpaid cumulative dividends due at March 31, 1998 were approximately
$6.73 per share.
Information with respect to restrictions on the payment of dividends on the
common stock is incorporated herein by reference to Note I to the
consolidated financial statements contained herein in Item 8.
The NYSE has advised the Corporation that it has fallen below the listing
criteria for net tangible assets and average net income for the past three
years and has requested the Corporation demonstrate when it will be able to
return to the NYSE's original listing requirements. The Corporation has been
in discussions with the NYSE regarding continued listing of the securities on
the NYSE and the effect of the Corporation's proposed merger with Xetava
Corporation (see Note T to the consolidated financial statements) on those
securities. The NYSE has advised the Corporation that, if the merger is not
consummated, the NYSE will proceed with efforts to suspend and/or delist the
Corporation's securities from trading on the NYSE and, in any event, may
proceed with efforts to suspend and/or delist the Corporation's securities
from trading subject to the Corporation's ability to comply with the NYSE's
original listing requirements.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated
financial statements contained herein:
AVATEX CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY AND RELATED DATA
<TABLE>
<CAPTION>
For the years ended March 31,
(In millions of dollars, except per share amounts) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues $ 12.2 $ 12.5 $ 10.4 $ 4.2 $ 0.9
Operating costs 21.8 14.9 17.5 14.3 12.4
Operating loss (9.6) (2.4) (7.1) (10.1) (11.5)
Other income (expense) (11.3) 19.2 21.8 47.4 1.0
Financing costs, net 3.5 4.7 3.6 1.5 1.6
National Steel Corporation (53.2) 9.6 3.3 5.4 5.3
Equity in income (loss) of affiliates (3.3) (5.2) (4.2) 0.8 (0.5)
Income tax provision (benefit) 0.1 29.9 3.0 0.3 (18.1)
Minority interest in results of operations of
consolidated subsidiaries 0.2 (1.1) 2.1 2.3 0.4
Income (loss) from continuing operations (81.2) (12.3) 5.1 39.4 10.4
Discontinued operations 3.7 (267.1) (68.8) 2.2 19.1
Net income (loss) $ (77.5) $ (279.4) $ (63.7) $ 41.6 $ 29.5
- ------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
Basic Earnings per share:
Continuing operations $ (7.74) $ (2.10) $ (0.97) $ 1.38 $ (0.03)
Discontinued operations 0.27 (17.89) (4.16) 0.15 1.13
Earnings (loss) per share $ (7.47) $ (19.99) $ (5.13) $ 1.53 $ 1.10
Diluted Earnings per share:
Continuing operations $ (7.74) $ (2.10) $ (0.97) $ 1.37 $ (0.03)
Discontinued operations 0.27 (17.89) (4.16) 0.15 1.13
Earnings (loss) per share $ (7.47) $ (19.99) $ (5.13) $ 1.52 $ 1.10
Cash dividends per share - - - - -
Average number of common shares outstanding
(in thousands):
Basic 13,806 14,931 16,521 14,711 16,930
Diluted 13,806 14,931 16,521 14,821 16,930
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INFORMATION
Working capital $ 40.6 $ 46.4 $ 276.4 $ 444.5 $ 375.0
Total assets 119.3 167.2 1,577.1 1,777.0 1,525.5
Capital expenditures 5.6 34.7 40.8 59.1 56.3
Long-term debt 22.9 27.5 403.8 422.8 310.9
Redeemable preferred stock 215.0 189.4 187.3 175.0 164.8
Stockholders' equity (deficit) (141.9) (113.5) 202.5 304.2 224.8
- ------------------------------------------------------------------------------------------------------------------------------
KEY FINANCIAL RATIOS
Current ratio 5.36:1 4.80:1 1.38:1 1.57:1 1.59:1
Long-term debt as a percent of total capitalization 23.9% 26.6% 50.9% 46.9% 44.4%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The comparability of the information presented above is affected by
acquisitions, dispositions, and other transactions which are described in the
accompanying footnotes to the consolidated financial statements which should
be read in conjunction with this five-year financial summary. Securities and
Exchange Commission regulations require that capitalization ratios also be
shown with the redeemable preferred stock included in debt. On this basis,
long-term debt as a percentage of total capitalization would be 247.8%,
209.8%, 74.5%, 66.3% and 67.9%, respectively, for each of the five years
ended March 31, 1998.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
In connection with the FoxMeyer Corporation ("FoxMeyer") fiscal 1997
bankruptcy, on October 9, 1997, the United States Bankruptcy Court for the
District of Delaware approved a settlement (the "FoxMeyer Settlement") of
certain litigation between the Corporation and FoxMeyer's Chapter 7 Trustee
(the "Trustee"). The litigation concerned the validity of the transfer of
certain property from FoxMeyer to the Corporation as a dividend on June 19,
1996. As a result, the Corporation recognized a $33.3 million charge, which
was classified in "Unusual items" in the consolidated statements of
operations.
Under the FoxMeyer Settlement, (i) the pending litigation was dismissed
against the Corporation, (ii) the Corporation paid the Trustee approximately
$25.8 million from a previously established escrow account, and (iii) the
Corporation executed a three year $8.0 million promissory note payable to the
Trustee. The promissory note is secured by (i) 1,132,500 shares of common
stock of Phar-Mor owned by the Corporation and (ii) a 30% interest, up to the
greater of $10.0 million or the amount owed under the promissory note, in the
net proceeds of certain litigation that may be brought by the Trustee against
specified third parties.
On September 19, 1997, the Corporation completed a transaction relating to
its 69.8% owned subsidiary, Hamilton Morgan LLC ("Hamilton Morgan"). Under
an agreement among Hamilton Morgan, Robert Haft (Hamilton Morgan's other
major investor) and certain other parties, the Corporation acquired from
Hamilton Morgan 3,750,000 shares of Phar-Mor common stock in exchange for (i)
the redemption of the Corporation's ownership interest in Hamilton Morgan,
(ii) the satisfaction of a promissory note from Hamilton Morgan and (iii) the
transfer of approximately $6.1 million in other assets to Hamilton Morgan.
The transaction was treated as a purchase of the minority interest in
Hamilton Morgan. The acquisition price was approximately equal to the book
value of the minority interest acquired. The Corporation, at March 31, 1998,
owned directly, including shares of Phar-Mor common stock which it had
previously owned and were not involved in this transaction, approximately
38.4% of Phar-Mor's common stock compared to 29.4%, net of minority interest,
at March 31, 1997.
On June 5, 1997, a partnership in which the Corporation holds a 50%
controlling interest (the "Partnership") acquired the remaining 65.5% of
certain improved real property not already owned by the Partnership for
approximately $7.4 million, net of cash acquired in the acquisition. The
Partnership accounted for the acquisition using the purchase method of
accounting. On March 31, 1998, the Corporation sold its interest in the
Partnership for $1.8 million recognizing a gain of $0.7 million.
On November 19, 1997, the Corporation sold substantially all the assets of US
HealthData Interchange, Inc. ("USHDI") for $4.0 million in cash, subject to
certain adjustments. USHDI had been treated as a discontinued operation
since March 1997. The Corporation recognized a $3.7 million gain on the
disposal of discontinued operations as a result of the sale.
On November 25, 1997, National Steel Corporation ("NSC"), certain of its
affiliates and the Corporation entered into an agreement whereby the
Corporation received $59.0 million in cash and a non-interest bearing $10.0
million note in exchange for the redemption of the NSC preferred stock owned
by the Corporation and NSC's release of the Corporation from various related
liabilities (the "NSC Settlement"). The Corporation was released from its
indemnification of NSC for all pension, life insurance, health insurance and
other benefit obligations for the current and former employees of NSC's
former Weirton Steel operations ("Weirton"), as well as various environmental
liabilities related to NSC and Weirton sites. The note received as part of
the NSC Settlement is to be paid in installments over the twelve months
following the NSC Settlement and had an estimated discounted value of $9.4
million at November 25, 1997. If the Corporation does not comply with
certain financial covenants, $5.0 million of the amount due on the note is
subject to forfeiture. In addition, the Corporation (i) assigned to NSC all
of the
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<PAGE>
Corporation's rights to assert pre-1987 environmental claims against insurers
of both NSC and the Corporation and (ii) released its share of any settlement
proceeds relating to such claims as well as all amounts remaining of the
fiscal 1994 $10.0 million prepayment to NSC to indemnify NSC from certain
environmental liabilities. As a result of the NSC Settlement, the
Corporation recognized a $59.0 million loss. However, because $79.7 million
in minimum pension liability reserves related to the Weirton pension plan had
been charged to the accumulated deficit in prior periods and were reversed in
connection with the NSC Settlement, the Corporation's accumulated deficit
improved $20.7 million as a result of this transaction.
In November 1997, the Corporation entered into lump sum payment agreements
with certain former officers and employees who were receiving supplemental
pension and other payments from the Corporation or its subsidiaries. As a
result of the agreements, the Corporation paid approximately $2.1 million to
these individuals for the termination of the Corporation's payment
obligations and recognized a gain of approximately $5.6 million which was
included in "Unusual items" in the consolidated statements of operations.
In March 1998, one inactive subsidiary of the Corporation, which had no
ongoing operations since 1990, exercised its right to terminate coverage of
its retiree healthcare and life insurance plans, as provided in the plan
documents. In addition, another subsidiary of the Corporation, which had no
ongoing operations since 1983 and no resources to pay its liabilities, was
dissolved in March 1998. As a consequence, this subsidiary's retiree
healthcare and life insurance plans were effectively discontinued. Most
retirees covered by these plans elected to participate in a transition
assistance payment plan and executed releases in favor of the applicable
subsidiary and its affiliates. A gain of approximately $21.3 million, net of
such payments and certain remaining claim reserves, was included in "Unusual
items" in the consolidated statements of operations as a result of the
termination or discontinuance of these plans.
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
will receive new common stock of Xetava, which upon consummation of the
merger will be renamed Avatex. Pursuant to the merger agreement, (i) each
share of the Corporation's common stock will be converted into one-half share
of Xetava common stock, (ii) each share of the Corporation's convertible
preferred stock will be converted into 4.1249 shares of Xetava common stock
and (iii) each share of the Corporation's Series A Preferred Stock will be
converted into 3.7271 shares of Xetava common stock. Following the
consummation of the merger, the common stockholders of the Corporation will
own approximately 26.9%, and preferred stockholders of the Corporation will
own approximately 73.1%, of Xetava's outstanding common stock (exclusive of
options previously granted under the Corporation's existing stock option plan
which will be assumed by Xetava in the merger). While the merger has been
approved by the Board of Directors, consummation of the merger is conditioned
upon the (i) approval of the transaction by the holders of a majority of the
Corporation's outstanding common stock, (ii) effectiveness of a registration
statement to be filed with the Securities and Exchange Commission with
respect to shares of Xetava common stock that will be issued in the merger,
and (iii) approval of the listing of such shares on the New York Stock
Exchange. On June 8, 1998, the Corporation announced that its Board of
Directors will meet to determine whether it would be appropriate to
reconsider and/or modify the terms of the proposed merger based on a number
of events that have occurred since the Board of Directors approved the
merger. These events include the commencement of lawsuits filed in connection
with the proposed merger (see Item 3 above and Note T to the consolidated
financial statements included in Item 8 below) and potential changes in the
values of certain of the Corporation's assets.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED
TO YEAR ENDED MARCH 31, 1997
Operating Loss
Revenues from real estate operations decreased $0.3 million to $12.2 million
for the year ended March 31, 1998, compared to $12.5 million for the year
ended March 31, 1997. The decrease was the result of the disposal of several
properties in fiscal 1997 ($4.9 million) partially offset by increased
revenues at the remaining properties ($0.7 million) and the purchase of an
additional interest in a property as described above ($3.9 million). The
sale of
13
<PAGE>
property at the end of fiscal 1998, as discussed above, will result in a
$3.9 million decrease in revenues in fiscal 1999. This anticipated decline
may be somewhat offset by the fiscal 1999 opening of a hotel currently being
renovated.
Total operating costs including depreciation and amortization increased $2.2
million to $17.1 million for the year ended March 31, 1998 compared to $14.9
million for the year ended March 31, 1997. Real estate operating costs
increased $0.5 million. Such increase is primarily attributable to an
increase in operating costs at existing properties ($0.7 million), as well as
incremental costs for the property purchased in fiscal 1998 ($3.5 million),
somewhat offset by a decline in operating costs associated with properties
sold in fiscal 1997 ($3.7 million). An increase in corporate operating costs
of $1.7 million related primarily to increased compensation, pension, legal
and insurance costs during the current fiscal year as compared to the prior
year.
Unusual items for the year ended March 31, 1998 consisted of $33.3 million
in charges incurred in connection with the FoxMeyer Settlement reached in
litigation with the Trustee, as discussed above, partially offset by $1.7
million in income from the settlement of litigation, principally from
payments received from insurance carriers related to the settlement of
environmental liability claims, and $26.9 million in gains in connection with
the settlement of certain pension and other postretirement benefit
obligations of former officers and employees.
Other Income (Expense)
Other income (expense) was an expense of $11.3 million for the year ended
March 31, 1998, compared to income of $19.2 million for the year ended March
31, 1997. In fiscal 1998, the loss was primarily related to a $12.9 million
charge for the year from the Corporation's adjustment in the carrying value
of its investment in Imagyn Technologies, Inc. ("Imagyn") to its market value
partially offset by $1.6 million in gains principally from the sale of other
assets. In fiscal 1997, the Corporation recognized gains of $34.0 million
from the sale of FoxMeyer Canada Inc. ("FoxMeyer Canada") and $7.3 million
from the sale of real estate properties and the early collection of a real
estate note receivable. The gains were partially offset by the write-down of
the Corporation's investment in Phar-Mor of $13.4 million, the write-off of
the Corporation's investment in Ben Franklin Retail Stores, Inc. ("Ben
Franklin") of $2.0 million and $6.7 million in other losses primarily from
marketable securities (including $4.8 million in losses related to Imagyn).
Net Financing Costs
Net financing costs decreased $1.2 million to $3.5 million for the year ended
March 31, 1998, compared to $4.7 million for the year ended March 31, 1997.
Interest income was approximately the same for both periods. A decrease in
interest income earned from real estate operations was offset by increased
income from excess cash invested by the Corporation primarily from proceeds
from the NSC Settlement and the USHDI sale and from funds previously held in
escrow that were used in the FoxMeyer Settlement. Interest expense decreased
$1.2 million. Such decrease was attributable to repayments of the secured
and revolving debt of the Corporation from proceeds of asset sales and the
NSC Settlement, somewhat offset by interest expense on the note payable
incurred in connection with the FoxMeyer Settlement.
National Steel Corporation Results
The net preferred income for NSC was $5.9 million for the year ended March
31, 1998, compared to $9.6 million for the prior period. The decrease was
primarily due to the redemption of the preferred stock in November 1997 as
part of the NSC Settlement compared to a full year of net preferred income in
the prior year. For a discussion of the $59.0 million loss in connection with
the NSC Settlement, see the "Overview" section above.
Equity in Loss of Affiliates
The equity in loss of affiliates decreased $1.9 million to a loss of $3.3
million for the year ended March 31, 1998, compared to a loss of $5.2 million
for the year ended March 31, 1997. The decrease in the equity loss of
affiliates resulted principally from the sale in the prior year of the
Corporation's equity investment in FoxMeyer Canada, which had been incurring
losses, and a decrease in the equity loss of Phar-Mor. While Phar-Mor had a
greater net loss in fiscal 1998 than in fiscal 1997, primarily as a result of
severance costs to its former chief executive officer
14
<PAGE>
and the write-down of fixed assets, the fiscal 1997 amount also included a
write-down of the Corporation's investment in Phar-Mor.
Income Taxes
The Corporation recorded an income tax provision for the current year for
state taxes incurred by subsidiaries, net of a federal income tax refund
received. The Corporation recorded an income tax provision of $29.9 million
for the year ended March 31, 1997. The provision for fiscal 1997 was
primarily due to an increase in the deferred tax asset valuation allowance
resulting from the loss of FoxMeyer's anticipated taxable income in future
years due to FoxMeyer's bankruptcy filing.
Minority Interest in Results of Operations of Consolidated Subsidiaries
The minority interest in net income of consolidated subsidiaries was $0.2
million for the year ended March 31, 1998, compared to a minority interest in
net loss of $1.1 million for the year ended March 31, 1997. The minority
interest related to real estate partnerships and the Corporation's investment
in Hamilton Morgan. The increase in the minority interest resulted from the
purchase of the minority interest in Hamilton Morgan in the current fiscal
year, eliminating the impact of the Phar-Mor losses subsequent to the
purchase, partially offset by a decrease in the minority interest in real
estate partnerships in the current year primarily as a result of earnings
recognized in the prior fiscal year from properties sold during fiscal 1997.
Discontinued Operations
The loss from discontinued operations for fiscal 1997 was $21.1 million. The
loss represented FoxMeyer's operating loss to June 30, 1996, the effective
date for treating FoxMeyer as a discontinued operation, of $17.5 million, and
USHDI's loss from operations through March 31, 1997, the effective date for
treating USHDI as a discontinued operations, of $3.6 million.
The gain on disposal of discontinued operations for the year ended March 31,
1998 represented the gain on the sale of USHDI. The loss on disposal of
discontinued operations for the year ended March 31, 1997, represented
estimated losses related to discontinuing the operations of FoxMeyer ($254.5
million) and USHDI ($4.9 million) partially offset by a gain on the sale of
the Corporation's pharmacy benefit management operations ($13.3 million).
Preferred Stock Dividends
Preferred stock dividends increased to $25.6 million for the year ended March
31, 1998, compared to $19.1 million for the year ended March 31, 1997. The
increase for the year was primarily due to the Series A preferred stock's
current year charge to equity based on the cash dividend that would have been
paid if declared being substantially higher than the prior year charge based
on the market value of the additional preferred stock issued as a pay-in-kind
dividend (see Note I to the consolidated financial statements).
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997 COMPARED
TO YEAR ENDED MARCH 31, 1996
Operating Loss
Revenues from real estate operations increased $2.1 million to $12.5 million
for the year ended March 31, 1997, compared to $10.4 million for the year
ended March 31, 1996. The increase was principally related to revenues from
an additional hotel operated beginning in late fiscal 1996 ($3.1 million) and
incremental revenues from the completion of renovations at certain sites
($0.6 million), partially offset by the sale of several properties during
fiscal 1997 ($1.6 million). Revenues in future years will be adversely
affected by the fiscal 1997 sales.
Total operating costs including depreciation and amortization decreased $2.6
million to $14.9 million for the year ended March 31, 1997, compared to $17.5
million for the year ended March 31, 1996. Such decrease was primarily
15
<PAGE>
the result of the disposition of FoxMeyer and related costs. The decrease
was partially offset by an increase of $0.4 million in real estate operating
costs. Included in the increase of $0.4 million was an increase in operating
costs of $3.2 million related to the additional hotel operated beginning in
late fiscal 1996 and to other properties following completion of renovations
at those sites partially offset by a $2.8 million decrease in operating costs
related to properties sold.
Other Income (Expense)
Other income decreased $2.6 million to $19.2 million for the year ended March
31, 1997, compared to $21.8 million for the year ended March 31, 1996. In
fiscal 1997, the Corporation recognized gains of $34.0 million from the sale
of FoxMeyer Canada and $7.3 million from the sale of real estate properties
and the early collection of a real estate note receivable. The gains were
partially offset by the write-down of its investment in Phar-Mor of $13.4
million, the write-off of the Corporation's investment in Ben Franklin of
$2.0 million and $6.7 million in other losses primarily from marketable
securities (including $4.8 million in losses related to Imagyn). In fiscal
1996, the Corporation realized gains of $19.6 million on the settlement of
certain unresolved issues related to the fiscal 1992 sale of The Permian
Corporation and other contingencies, $14.3 million on its investment in
Imagyn and $1.6 million on the early collection of real estate notes
receivable. The gains were partially offset by a write-down of $3.4 million
in the value of the Corporation's investment in Ben Franklin to its market
value and $10.3 million in losses on trading securities and other investments.
Net Financing Costs
Net financing costs increased $1.1 million to $4.7 million for the year ended
March 31, 1997, compared to $3.6 million for the year ended March 31, 1996.
Interest income decreased $1.1 million primarily as a result of the early
collection of certain real estate notes receivable in fiscal 1996 and early
fiscal 1997. Interest expense was $6.4 million for both years. Interest
related to real estate operations increased $1.0 million, due principally to
additional borrowings during the fiscal year in partnerships that were not
sold, offset by a reduction in connection with the retirement of the
Corporation's revolving credit facility in August 1996.
National Steel Corporation Results
The net preferred income for NSC was $9.6 million for the year ended March
31, 1997, compared to $3.3 million for the prior period. The increase was
primarily due to a decrease in the expense related to the Weirton pension
obligation for the year ended March 31, 1997.
Equity in Loss of Affiliates
The equity in loss of affiliates increased $1.0 million to a loss of $5.2
million for the year ended March 31, 1997, compared to a loss of $4.2 million
in the prior fiscal year. The Corporation's equity in Phar-Mor was $6.3
million lower than in the prior fiscal year as a result of Phar-Mor losses
and losses related to the write-down of the investment in Phar-Mor in fiscal
1997. This was substantially offset by the decrease in the equity loss
associated with Ben Franklin and FoxMeyer Canada. No equity loss in Ben
Franklin was recorded during fiscal 1997, as a result of the write-off of the
Corporation's investment in Ben Franklin, compared to an equity loss of $5.0
million in fiscal 1996.
Income Taxes
The Corporation recorded an income tax provision of $29.9 million for the
year ended March 31, 1997, compared to $3.0 million for the year ended March
31, 1996. The provision for fiscal 1997 was primarily due to an increase in
the deferred tax asset valuation allowance resulting from the loss of
FoxMeyer's anticipated taxable income in future years due to FoxMeyer's
bankruptcy filing. The slightly lower than statutory effective income tax
rate in fiscal 1996 was primarily due to permanent differences between book
and tax income partially offset by an increase in the deferred tax asset
valuation allowance.
16
<PAGE>
Minority Interest in Results of Operations of Consolidated Subsidiaries
The minority interest in the net loss of consolidated subsidiaries was $1.1
million for the year ended March 31, 1997, compared to a minority interest in
net income of $2.1 million for the year ended March 31, 1996. The minority
interest related to real estate partnerships and the Corporation's investment
in Hamilton Morgan. The decrease was primarily due to the decrease in income
of Hamilton Morgan as a result of lower earnings from its equity investment
in Phar-Mor as discussed above.
Discontinued Operations
The loss from discontinued operations for fiscal 1997 was $21.1 million
compared to $61.7 million in fiscal 1996. Both years reflect the loss from
the discontinued operations of FoxMeyer and USHDI. The loss for fiscal 1997
represented FoxMeyer's operating loss to June 30, 1996, the effective date
for treating FoxMeyer as a discontinued operation, of $17.5 million and
USHDI's loss from operations through March 31, 1997, the effective date for
treating USHDI as a discontinued operation, of $3.6 million. The fiscal 1996
loss consisted of a $58.0 million loss on FoxMeyer's operations and a loss of
$3.7 million from USHDI's operations. FoxMeyer's loss was principally the
result of unusual charges aggregating $47.4 million relating to the
write-down of assets, facility closings and employee severance and $34.0
million in operating expenses attributable to the opening of a new
distribution facility, implementation of new systems and facility closings.
The loss on disposal of discontinued operations was $246.1 million in fiscal
1997 compared to $7.1 million for the prior fiscal year. The loss on
disposal in fiscal 1997 represented losses related to discontinuing the
operations of FoxMeyer ($254.5 million) and USHDI ($4.9 million) partially
offset by the gain on the sale of Corporation's pharmacy benefit management
operations ($13.3 million). In the prior fiscal year, the loss represented
the estimated loss from disposal of FoxMeyer's managed care and information
service operations.
Preferred Stock Dividends
Preferred stock dividends were $19.1 million for the year ended March 31,
1997, compared to $21.1 million for the year ended March 31, 1996. The
decrease of $2.0 million was primarily due to the payment of
dividends-in-kind on the outstanding Series A preferred stock during the
first two quarters of fiscal 1997. The amount of the dividend-in-kind
charged against operations when the dividends were paid was based on the
market value of the Series A preferred stock which had decreased when
compared to the prior fiscal year. The decrease was partially offset in the
last two quarters of fiscal 1997 when the dividends were based on the cash
payments due. In addition, the number of shares of both series of preferred
stock decreased due to share repurchases.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Corporation had cash and short-term investments of
approximately $34.2 million. This represents a significant increase over the
prior year due primarily to the cash proceeds from the NSC Settlement and the
sale of USHDI, partially offset by the repayment of the Corporation's $14.9
million secured loan and the funding of certain equity investments.
The debt of the Corporation consists of the note payable to the Trustee
described above and the debt of real estate partnerships controlled by the
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,
the preferred stockholders would receive common stock of Xetava in exchange
for their preferred stock.
17
<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. While the NSC Settlement does relieve the
Corporation of existing and potential environmental liabilities at a
considerable number of sites, the Corporation still remains liable for
environmental liabilities related to other previously owned businesses.
The Corporation continuously evaluates current and potential investments in
connection with an ongoing review of its investment strategies, and will
continue to invest in real estate and other publicly and privately held
companies as opportunities arise which the Corporation believes would be
strategic fits. 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. For a discussion of current
litigation which, if the Corporation were to lose, would have a material
impact on the Corporation's financial condition, liquidity and results of
operations, see Note N to the consolidated financial statements.
The Corporation's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The financial
statements do not reflect any adjustments that might ultimately result from
the resolution of the uncertainties discussed in Note S to the consolidated
financial statements.
OTHER
The Corporation has approximately $1.8 million in reserves in connection with
environmental claims relating to businesses that were disposed of or
discontinued (see Note N to the consolidated financial statements). The
Corporation received $1.6 million during fiscal 1998 from the settlement of
certain claims against its insurance carriers for coverage of environmental
liabilities. During fiscal 1998, the Corporation paid approximately $0.4
million with respect to environmental claims and related legal fees. In
addition, the Corporation assigned to NSC its rights to additional recoveries
for pre-1987 environmental claims from its insurance carriers and the balance
of a prepayment to NSC to cover future environmental claims as part of the NSC
Settlement discussed above. As a result of the NSC Settlement, the
Corporation was relieved from future contractual liability for environmental
claims at NSC and Weirton sites (see Note G to the consolidated financial
statements).
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 131
"Disclosure about Segments of an Enterprise and Related Information" was
issued. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997; accordingly, the Corporation plans to adopt SFAS No. 131 with the
fiscal year beginning April 1, 1998. 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 disclosures of segment information.
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 are Year 2000 compliant. However, the Year 2000 readiness
of the Corporation's vendors and companies in which the Corporation has
invested may vary. At this time, it is uncertain to what extent the
Corporation may be affected by such matters at these other entities. The
Corporation is currently trying to ascertain and monitor the Year 2000
readiness of these companies.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
Page
<S> <C>
Independent Auditors' Report 20
Consolidated Statements of Operations - For the Three Years Ended
March 31, 1998 21
Consolidated Statements of Comprehensive Loss - For the Three Years
Ended March 31, 1998 22
Consolidated Balance Sheets - March 31, 1998 and 1997 23
Consolidated Statements of Stockholders' Equity (Deficit) - For the
Three Years Ended March 31, 1998 24
Consolidated Statements of Cash Flows - For the Three Years Ended
March 31, 1998 25
Notes to Consolidated Financial Statements - For the Three Years
Ended March 31, 1998 26
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Avatex Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Avatex
Corporation and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive loss, stockholders'
equity (deficit) and cash flows for each of the three years in the period then
ended. Our audits also included the financial statement schedules listed in
the Index at Item 14. These financial statements and financial statement
schedules are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Avatex Corporation and
subsidiaries at March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as whole, present fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. As discussed in Note S to
the financial statements, the Corporation's recurring losses from operations,
pending litigation and stockholders' deficiency raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning
these matters are also discussed in Note S. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Deloitte & Touche LLP
Dallas, Texas
April 30, 1998
(except the fourteenth paragraph of Note N and
the last paragraph of Note T, which are as of June 8, 1998)
20
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 12,228 $ 12,463 $ 10,439
OPERATING COSTS
Operating costs, including general and administrative costs 16,102 13,386 16,534
Depreciation and amortization 958 1,468 1,034
Unusual items 4,746 - -
- -------------------------------------------------------------------------------------------------------------
OPERATING LOSS (9,578) (2,391) (7,129)
OTHER INCOME (EXPENSE) (11,337) 19,228 21,779
FINANCING COSTS
Interest income 1,709 1,678 2,822
Interest expense 5,233 6,416 6,391
- -------------------------------------------------------------------------------------------------------------
Financing costs, net 3,524 4,738 3,569
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL
CORPORATION, EQUITY IN LOSS OF AFFILIATES, INCOME
TAX PROVISION AND MINORITY INTEREST (24,439) 12,099 11,081
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income 5,854 9,620 3,329
Loss on National Steel Corporation settlement (59,038) - -
Equity in loss of affiliates (3,336) (5,199) (4,168)
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
PROVISION AND MINORITY INTEREST (80,959) 16,520 10,242
Income tax provision 40 29,870 2,977
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (80,999) (13,350) 7,265
Minority interest in results of operations of consolidated subsidiaries 220 (1,106) 2,117
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (81,219) (12,244) 5,148
Discontinued operations
Loss from discontinued operations, net of tax - (21,057) (61,728)
Gain (loss) on disposal of discontinued operations, net of tax 3,719 (246,055) (7,081)
- -------------------------------------------------------------------------------------------------------------
NET LOSS (77,500) (279,356) (63,661)
Preferred stock dividends 25,604 19,081 21,108
- -------------------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(103,104) $(298,437) $(84,769)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE
Loss from continuing operations $ (7.74) $ (2.10) $ (0.97)
Discontinued operations 0.27 (17.89) (4.16)
- -------------------------------------------------------------------------------------------------------------
LOSS PER SHARE $ (7.47) $ (19.99) $ (5.13)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13,806 14,931 16,521
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET LOSS $ (77,500) $ (279,356) $ (63,661)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Foreign currency translation adjustment - 17 (40)
Reclassification adjustment for losses included in net loss - 21 -
- ----------------------------------------------------------------------------------------------------------------
Net foreign currency translation adjustment - 38 (40)
Unrealized gains (losses) on securities 1,168 (854) (4,211)
Reclassification adjustment for losses included in net loss - 871 1,820
- ----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 1,168 17 (2,391)
Minimum pension liability adjustment (6,187) (8,897) 10,794
Loss on plan termination from National Steel
Corporation settlement included in net loss 79,718 - -
- ----------------------------------------------------------------------------------------------------------------
Net minimum pension liability adjustment 73,531 (8,897) 10,794
- ----------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 74,699 (8,842) 8,363
- ----------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (2,801) $ (288,198) $ (55,298)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
(in thousands of dollars) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 34,193 $ 7,173
Restricted cash and investments 287 33,115
Receivables, less allowance for possible losses of $27
in 1998 and $539 in 1997 11,783 3,059
Other current assets 3,684 15,293
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 49,947 58,640
INVESTMENT IN NATIONAL STEEL CORPORATION - 44,961
INVESTMENT IN AFFILIATES 25,343 28,711
PROPERTY AND EQUIPMENT 20,657 19,414
Less accumulated depreciation and amortization 1,630 1,024
- ----------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 19,027 18,390
OTHER ASSETS
Deferred tax asset, net of valuation allowance - -
Miscellaneous assets 24,986 16,465
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 119,303 $ 167,167
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 2,665 $ 1,501
Other accrued liabilities 2,368 4,604
Salaries, wages and employee benefits 3,801 3,148
Long-term debt due within one year 492 2,969
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,326 12,222
LONG-TERM DEBT 22,923 27,482
OTHER LONG-TERM LIABILITIES 13,402 44,715
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 558 6,853
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE PREFERRED STOCK 214,996 189,402
STOCKHOLDERS' DEFICIT
Common stock $5.00 par value; authorized 50,000,000 shares; issued:
13,806,375 shares in 1998 and 13,805,988 shares in 1997 69,032 69,030
Capital in excess of par value 119,100 119,092
Accumulated other comprehensive income (loss) 1,168 (73,531)
Accumulated deficit (331,202) (228,098)
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (141,902) (113,507)
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 119,303 $ 167,167
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Capital in other
excess of comprehensive Accumulated
Common par income earnings Treasury
(in thousands of dollars) stock value (loss) (deficit) stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995 $ 120,836 $ 209,110 $ (73,052) $ 184,947 $(137,691)
Net loss (63,661)
Dividend paid in Ben Franklin Retail Stores, Inc.
common stock (29,709)
Dividends declared - Convertible Preferred -
$5.00 per share (4,061)
Dividends declared - Series A Preferred -
paid in additional stock (15,319)
Amortization of discount on Series A Preferred (1,728)
Conversion of preferred stock 104 434
Net unrealized holding loss on securities (2,391)
Reduction in additional minimum
pension liability 10,794
Stock options exercised 69 3,821
Foreign currency translation adjustment (40)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 120,940 209,613 (64,689) 70,469 (133,870)
Net loss (279,356)
Dividends declared - Convertible Preferred -
$5.00 per share (1,771)
Dividends declared - Series A Preferred -
paid in additional stock (4,354)
Dividends in arrears on Convertible Preferred
and Series A Preferred (10,806)
Amortization of discount on Series A Preferred (2,150)
Purchase and cancellation of preferred stock 6,355
Purchase of treasury stock (16,726)
Cancellation of treasury stock (51,910) (96,807) 148,717
Net unrealized holding gain on securities 17
Recognition of additional minimum
pension liability (8,897)
Stock options exercised (69) (130) 1,879
Foreign currency translation adjustment 38
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 69,030 119,092 (73,531) (228,098) -
Net loss (77,500)
Dividends in arrears on Convertible Preferred
and Series A Preferred (23,101)
Amortization of discount on Series A Preferred (2,503)
Conversion of preferred stock 2 8
Net unrealized holding gain on securities 1,168
Reduction in additional minimum
pension liability 73,531
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $ 69,032 $ 119,100 $ 1,168 $ (331,202) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (77,500) $ (279,356) $ (63,661)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries 220 (1,106) 2,117
Equity in loss of affiliates 3,336 5,199 4,168
Depreciation and amortization 958 1,468 1,034
Net preferred income from National Steel Corporation (5,854) (9,620) (3,329)
Loss on National Steel Corporation settlement 59,038 - -
Loss (gain) on disposal of discontinued operations (3,719) 246,055 7,081
Loss (gain) on investments 11,368 (21,141) (6,951)
Other non-cash charges (credits) (25,952) 2,167 (16,644)
Deferred income tax provision - 29,836 2,938
Depreciation and amortization, provision for losses on accounts
receivable and other items related to discontinued operations - 86,333 69,796
Cash provided (used) by working capital items, net of acquisitions:
Receivables 2,468 20,802 (55,314)
Inventories - 26,018 104,627
Other assets and restricted cash 32,883 (37,146) (160)
Accounts payable and accrued liabilities (8,545) (14,687) (8,803)
Other 20 110 (182)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (11,279) 54,932 36,717
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in cash from reclassification to discontinued operations
or change to equity method of accounting - (24,366) (9,108)
Purchase of property, plant and equipment (5,593) (34,748) (40,789)
Purchase of investments (15,315) (6,366) (84,354)
Proceeds from the disposition of investments 64,149 104,355 33,178
Acquisitions, net of cash acquired (7,399) - (6,215)
Other 2,192 250 718
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 38,034 39,125 (106,570)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities - 447,492 1,444,880
Repayments under revolving credit facilities - (326,883) (1,396,880)
Proceeds from the issuance of long-term debt 18,613 14,520 23,603
Debt repayments (18,660) (212,486) (2,418)
Debt issuance costs (388) (8,140) (1,055)
Purchase of treasury stock - (16,726) -
Purchase of preferred stock - (8,845) (4,236)
Investment by minority interest 800 - -
Dividends paid on redeemable preferred stock - (2,697) (4,180)
Dividends paid to minority interest (100) (1,786) (1,555)
Exercise of stock options - 1,680 3,449
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 265 (113,871) 61,608
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 27,020 (19,814) (8,245)
Cash and short-term investments, beginning of year 7,173 26,987 35,232
- ---------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 34,193 $ 7,173 $ 26,987
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
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 consolidated financial statements include the accounts of all
majority-owned subsidiaries and partnerships in which the Corporation has a
controlling interest. See Note B for a discussion of the Corporation's basis
for determining controlling interest. Investments in other companies and
partnerships in which the Corporation has significant influence but does not
have a controlling interest are accounted for on the equity basis. All
significant intercompany balances and transactions have been eliminated.
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments consist
principally of amounts held in demand deposit accounts and amounts invested
in other instruments having a maturity of three months or less at the time of
purchase and are recorded at cost. Use of approximately $0.3 million of cash
and short-term investments at March 31, 1998 was restricted, principally in
connection with real estate loans (see Note H). At March 31, 1997,
approximately $33.1 million was restricted principally in connection with
prior litigation (see Notes B and N).
INVESTMENTS: The Corporation's investments in debt securities and equity
securities that have a readily determinable fair value are classified as
either "available for sale" or "trading" and are carried at fair value. The
classification of the security is determined at the acquisition date and
reviewed periodically. The unrealized gains or losses, resulting from the
difference in the fair value and the cost of securities, for securities
available for sale are shown as a component of the stockholders' deficit, and
for trading securities are reported in the results of operations. The
Corporation periodically reviews its investments for which fair value is less
than cost to determine if the decline in value is other than temporary. If
the decline in value is judged to be other than temporary, the cost basis of
the security is written down to fair value. The amount of any write-down
would be included in the results of operations as a realized loss. Realized
gains and losses resulting from the sale of securities are determined using
the average cost method. See Note F.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Differences between amounts received and the net carrying values of
properties retired or disposed of are included in results of operations. The
cost of maintenance and repairs is charged against results of operations as
incurred. Depreciation of property and equipment is provided using the
straight-line method at rates designed to distribute the cost of properties
over their estimated service lives of 5 to 40 years for buildings and
building improvements and 3 to 10 years for equipment and furniture.
Amortization of leasehold improvements is included in depreciation and
amortization and is based on the lesser of the minimum term of the lease or
the asset's estimated useful life. Depreciation for income tax purposes is
computed using both the straight-line and accelerated methods.
26
<PAGE>
Property and equipment consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Land $ 5,631 $ 5,804
Buildings and building improvements 10,677 8,967
Leasehold improvements 61 28
Equipment and furniture 697 720
Construction in progress 3,591 3,895
-----------------------------------------------------------------------
$ 20,657 $ 19,414
-----------------------------------------------------------------------
</TABLE>
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES: Minority interest in results
of operations of consolidated subsidiaries represents the minority
shareholders' or partners' proportionate share of the net income (loss) of
various consolidated subsidiaries (see Note B). The minority interest in the
consolidated balance sheets reflects the proportionate interest in the equity
of consolidated subsidiaries.
REVENUE RECOGNITION: Revenues, consisting of receipts from hotels and
related operations as well as lease income from office rentals, are recorded
when earned. No one customer accounted for over 10% of revenues. All real
estate operations are located in the Washington D.C. and surrounding area.
INCOME TAXES: Deferred tax assets and liabilities are established for
temporary differences between financial statement carrying amounts and the
taxable basis of assets and liabilities using rates currently in effect. A
valuation allowance is established for any portion of the deferred tax asset
for which realization is not likely. The valuation allowance is reviewed
periodically to determine the amount of deferred tax asset considered
realizable.
STOCK-BASED COMPENSATION: As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", the
Corporation continued to apply the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting for Stock
Issued to Employees" and adopted only the disclosure requirements of SFAS No.
123. Accordingly, no compensation costs were recognized in connection with
the Corporation's stock option plans (see Note J).
COMPREHENSIVE INCOME (LOSS): The Corporation elected to adopt SFAS No. 130
"Reporting Comprehensive Income" in the current year. Comprehensive income
is the change in equity of a business enterprise during a period from
transactions and other events from nonowner sources. Changes in balances of
items that are reported directly in a separate component of stockholders'
equity (foreign currency translation adjustments, unrealized gains and losses
and minimum pension liability adjustments) are added or subtracted from net
income (loss) to arrive at comprehensive income (loss). See Note C.
RECLASSIFICATIONS: Certain previously reported amounts were reclassified to
conform to current year presentations.
27
<PAGE>
EARNINGS (LOSS) PER SHARE: In February 1997, SFAS No. 128 "Earnings per
Share" was issued. SFAS No. 128 requires a presentation of "basic" and
"diluted" earnings per share effective for periods ending after December 15,
1997. Earnings per share for all prior periods must be restated to conform
with the provisions of SFAS No. 128. The amounts used in the calculation of
earnings per share from continuing operations were as follows (amounts in
thousands, except per share amounts):
<TABLE>
<CAPTION>
For the years ended March 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $ (81,219) $ (12,244) $ 5,148
Deduct dividends on preferred shares 25,604 19,081 21,108
- -----------------------------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common
stockholders for BASIC earnings per share (106,823) (31,325) (15,960)
Effect of dilutive securities:
Dividends on convertible preferred shares, unless anti-dilutive - - -
- ---------------------------------------------------------------------------------------------------------------
Loss from continuing operations applicable to common
stockholders for DILUTED earnings per share $ (106,823) $ (31,325) $ (15,960)
- -----------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares outstanding
for calculation of BASIC earnings per share 13,806 14,931 16,521
Conversion of preferred stock, unless anti-dilutive - - -
Outstanding options, unless anti-dilutive - - -
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
for calculation of DILUTED earnings per share 13,806 14,931 16,521
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
Basic $ (7.74) $ (2.10) $ (0.97)
Diluted $ (7.74) $ (2.10) $ (0.97)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase approximately 3.9 million, 2.2 million and 3.2 million
shares were outstanding at March 31, 1998, 1997 and 1996, respectively (see
Note J). The options were not included in the computation of diluted
earnings 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
earnings per share as it would also have been anti-dilutive.
NOTE B - ACQUISITIONS AND DISPOSITIONS
FOXMEYER CORPORATION
In 1997, the Board of Directors of the Corporation approved a plan to divest
its drug distribution subsidiary, FoxMeyer Drug Company ("FoxMeyer Drug"),
the primary operating unit of the Corporation. 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 of $17.5 million,
net of taxes, for the three months ended June 30, 1996. In addition, the
Corporation recognized a loss of $254.5 million from the write-off of its
investment in FoxMeyer. Revenues included in results of discontinued
operations were $1.4 billion for the three months ended June 30, 1996 and
$5.5 billion for the year ended March 31, 1996. The loss from discontinued
operations was net of applicable income tax benefit of $4.6 million in 1997
and $28.9 million for the year ended March 31, 1996.
28
<PAGE>
The unaudited balance sheet of FoxMeyer at June 30, 1996, the date of
disposition, was as follows ( in thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 828,784
Property, plant and equipment 144,746
Goodwill and other intangibles 209,699
Deferred tax asset 52,252
Miscellaneous assets 20,672
-----------------------------------------------------------------------
Total assets $ 1,256,153
-----------------------------------------------------------------------
Current liabilities $ 679,912
Long-term debt 318,954
Other long-term liabilities 4,605
Stockholder's equity 252,682
-----------------------------------------------------------------------
Total liabilities and stockholder's equity $ 1,256,153
-----------------------------------------------------------------------
</TABLE>
Commencing in mid-July 1996, a group of FoxMeyer Drug's most significant
vendors began reducing their credit lines. Despite positive cash flow
projections, the liquidity offered by a new credit facility and FoxMeyer
Drug's history of timely debt payments, the group of vendors eliminated
approximately $100 million of liquidity from FoxMeyer Drug'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
Drug 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 Drug met with certain key vendors
requesting a reinstatement of credit lines to previous levels, however, an
agreement could not be reached. As a result of these events, FoxMeyer and
most of its subsidiaries filed for protection under Chapter 11 of the
Bankruptcy Code on August 27, 1996. On November 8, 1996, the U.S. Bankruptcy
Court for the District of Delaware approved a sale of the principal assets of
FoxMeyer and FoxMeyer Drug to McKesson Corporation ("McKesson"). On March
18, 1997, the Chapter 11 cases were converted into Chapter 7 liquidation
cases.
In connection with McKesson's purchase of FoxMeyer's and FoxMeyer Drug's
assets, 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 and FoxMeyer Drug's assets to McKesson.
BEN FRANKLIN RETAIL STORES, INC.
On September 29, 1995, each shareholder of record of the Corporation received
one share of Ben Franklin Retail Stores, Inc. ("Ben Franklin") common stock
for every six shares of the Corporation's common stock. The dividend of Ben
Franklin common stock resulted in a charge of $29.7 million to stockholders'
equity. The amount of the dividend was based on the book value of the shares
at the time of the distribution. As a result of the distribution, the
Corporation's ownership in Ben Franklin decreased from 67.7% to 17.4%.
Subsequent to the distribution, the Corporation accounted for Ben Franklin on
an equity basis. The carrying value of Ben Franklin was reduced by $3.4
million in 1996 to recognize an impairment of the value of the investment.
The Corporation wrote off the remaining book value of its investment in Ben
Franklin of approximately $2.0 million at June 30, 1996. The write-off
resulted from the bankruptcy filing by Ben Franklin on July 26, 1996. Ben
Franklin's assets were subsequently liquidated under Chapter 7 of the
Bankruptcy Code.
OTHER DISCONTINUED OPERATIONS
In July 1995, the Corporation adopted a plan to dispose of certain of
FoxMeyer's managed care and information service operations and recognized a
$0.5 million after-tax loss from discontinued operations and a $7.1 million
after-tax loss on the disposal of these discontinued operations. The $7.1
million after-tax loss was based on management's best estimate at the time of
the amounts of future operating losses and proceeds to be realized on the
sale or other disposition of the discontinued operations. Certain of the
operations were sold during fiscal year
29
<PAGE>
1996. On August 2, 1996, the remaining operation was sold for $30.5 million
with an additional minimum payment of $2.5 million due and payable at any
time subsequent to August 2, 1997. The additional payment may increase to a
maximum of $5.0 million based on certain criteria. The August 1996
transaction resulted in a gain on disposal of discontinued operations of
approximately $13.3 million.
In April 1997, the Corporation adopted a plan to dispose of US HealthData
Interchange, Inc. ("USHDI"), its medical claims processing operation. As a
result, a $3.6 million loss from discontinued operations was recognized to
the measurement date of March 31, 1997. The Corporation also recorded a $4.9
million loss on disposal of discontinued operations. The $4.9 million loss
was based on management's best estimate of the amounts of future operating
losses and proceeds to be realized on the sale or other disposition of this
operation. On November 19, 1997, the Corporation sold substantially all of
the assets of USHDI for $4.0 million in cash, subject to certain adjustments.
The Corporation recognized a $3.7 million gain on discontinued operations as
a result of the sale.
Sales for the years ended March 31, 1997 and 1996 for these discontinued
operations were $1.5 million and $15.7 million, respectively. The loss from
discontinued operations was net of tax benefits of $0.3 million and $2.4
million, respectively, for the years ended March 31, 1997 and 1996.
PHAR-MOR, INC.
During fiscal year 1996, the Corporation acquired a 69.8% interest in
Hamilton Morgan LLC, a Delaware limited liability company ("Hamilton
Morgan"). The acquisition of Hamilton Morgan was accounted for using the
purchase method of accounting resulting in goodwill of approximately $7.8
million. Hamilton Morgan subsequently acquired an approximate 30.9% common
stock interest in Phar-Mor, which operates a chain of discount retail
drugstores devoted to the sale of prescription and over-the-counter drugs,
health and beauty care products and other general merchandise and grocery
items. At that time, the Corporation also owned common stock of Phar-Mor
which represented an additional 7.8% interest.
The Corporation accounts for its investment in Phar-Mor on an equity basis.
At March 31, 1997, the Corporation determined that there was a decline in the
value of its investment in Phar-Mor that was other than temporary and
recorded a charge to earnings of $13.6 million (net of minority interest in
Hamilton Morgan) including the write-off of the goodwill related to the
acquisition of Hamilton Morgan. The reduction in value was based on
management's best estimate of the fair value of its investment in Phar-Mor at
March 31, 1997.
On September 19, 1997, the Corporation completed a transaction with Hamilton
Morgan, Robert Haft (Hamilton Morgan's other major investor) and certain
other parties, under which it acquired from Hamilton Morgan 3,750,000 shares
of Phar-Mor common stock in exchange for (i) the redemption of the
Corporation's ownership interest in Hamilton Morgan, (ii) the satisfaction of
a promissory note from Hamilton Morgan and (iii) the transfer of
approximately $6.1 million in other assets to Hamilton Morgan. The
transaction was treated as a purchase of the minority interest in Hamilton
Morgan. The acquisition price was approximately equal to the book value of
the minority interest acquired. The Corporation at March 31, 1998 owns
directly, including shares of Phar-Mor common stock it had previously owned
and were not involved in this transaction, approximately 38.4% of Phar-Mor's
common stock compared to 29.4%, net of minority interest, at March 31, 1997.
At March 31, 1998, the carrying value of the investment in Phar-Mor was $24.7
million with a market value of approximately $55.3 million.
30
<PAGE>
Summarized unaudited financial information for Phar-Mor was as follows for
the periods from September 1995, the acquisition date (the date Phar-Mor
emerged from bankruptcy), to March 31, 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 30 Weeks
Ended Ended Ended
March 28, March 29, March 30,
Condensed Statements of Operations 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,081,164 $ 1,084,325 $ 609,486
Operating earnings 3,712 4,901 11,632
Net income (loss) (9,092) (5,378) 5,210
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 28, March 29,
Condensed Balance Sheets 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Current assets $ 266,626 $ 270,883
Property and equipment 74,407 72,366
Other assets 13,629 13,391
-----------------------------------------------------------------------
Total assets $ 354,662 $ 356,640
-----------------------------------------------------------------------
Current liabilities $ 116,892 $ 104,043
Long-term obligations 155,714 163,258
Stockholders' equity 82,056 89,339
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 354,662 $ 356,640
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
DEVELOPMENT
Certain subsidiaries of the Corporation (collectively, "Development") are
controlling partners in various real estate limited partnerships engaged in
the buying, holding, operating and disposing of real estate and real estate
loans. These partnerships are consolidated in the accompanying financial
statements. Development controls these partnerships pursuant to rights
granted by the partnership agreements which specify that the partnership's
business shall be managed, and its business controlled, exclusively by
Development. Development will lose its right to exclusively manage the
partnerships if (i) the current co-chief executive officers cease to be
officers or directors of the Corporation or (ii) there has been at least a
50% aggregate return to the Corporation on the capital invested by
Development. Additionally, Development was a general partner or a limited
partner in other real estate partnerships in which it had significant
influence but did not have a controlling interest that were generally
accounted for using the equity method. Development's partnerships are
generally obligated to return Development's initial investment together with
a preferred rate of return on the undistributed investment before other
partners may receive distributions. Such preferred returns were accounted
for as liquidating dividends. Development invested, before dividends and
return of capital, approximately $1.4 million in 1998, $4.0 million in 1997
and $5.9 million in 1996 in various real estate partnerships.
During 1997, the Corporation sold its ownership interest in certain real
estate limited partnerships for $9.9 million. The transactions resulted in a
gain of approximately $6.0 million which was included in "Other income
(expense)" in the consolidated statements of operations.
On June 5, 1997, one of the consolidated partnerships acquired the remaining
65.5% of certain improved real property not already owned by the partnership
for approximately $7.4 million, net of cash acquired in the acquisition.
The partnership accounted for the acquisition using the purchase method of
accounting. If the property had been acquired at the beginning of the
current or prior fiscal year, revenues for the years ended March 31, 1998
and 1997, respectively, would have been approximately $1.2 million and $5.1
million greater than reported. The pro forma impact on the Corporation's
loss from continuing operations if the acquisition had taken place at the
beginning of the current or prior fiscal year was not material. On March 31,
1998, the Corporation sold its 50% interest in the partnership for $1.8
million, including $0.4 million in cash and a $1.4 million short-term note
receivable, resulting in a gain of $0.7 million which was included in "Other
income (expense)" in the consolidated statements of operations.
31
<PAGE>
FOXMEYER CANADA INC.
On October 7, 1996, the Corporation sold all of its interest in FoxMeyer
Canada Inc. ("FoxMeyer Canada"). 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 which was included in "Other income (expense)" in
the consolidated statements of operations. FoxMeyer Canada was a 39% owned
affiliate of the Corporation at the time of its sale and was accounted for on
the equity basis.
The Corporation's direct interest in FoxMeyer Canada was received as a
dividend from FoxMeyer on June 19, 1996. The Corporation was restricted from
using all but $5.0 million of the proceeds received until the settlement of
certain FoxMeyer bankruptcy litigation in October 1997 (see Note N). The
restricted funds were included in "Restricted cash and investments" in the
consolidated balance sheet at March 31, 1997.
NOTE C - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) AND SUPPLEMENTAL
COMPREHENSIVE INCOME (LOSS) INFORMATION
Accumulated other comprehensive income (loss) in the consolidated statements
of stockholders' equity (deficit) included the following components (in
thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation adjustment $ - $ - $ (38)
Unrealized gains (losses) on securities 1,168 - (17)
Minimum pension liability adjustment - (73,531) (64,634)
----------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) $ 1,168 $ (73,531) $ (64,689)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
Amounts charged to the minimum pension liability in prior periods were
reversed upon the termination of the Corporation's liability with respect to
the Weirton pension plan as a result of the settlement with National Steel
Corporation (see Note G) and were shown in the caption "Loss on plan
termination from National Steel Corporation settlement included in net loss"
in the consolidated statement of comprehensive loss for the year ended March
31, 1998.
As a result of the Corporation's income tax environment (see Note M), income
tax provisions (benefits) were not allocated to any of the components of
other comprehensive income (loss) for the three years ended March 31, 1998.
NOTE D - 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 years ended March 31,
1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 3,179 $ 18,738 $ 33,486
Income taxes paid 40 34 191
Non-cash transactions:
Note received as part of National Steel Corporation settlement 9,442 - -
Notes received on sale of other investments 1,350 2,315 -
Ben Franklin common stock distributed as a dividend - - 29,697
Payment of dividends in kind on Series A Preferred Stock - 4,354 15,319
Cumulative dividends accrued but not paid 23,101 10,806 -
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
The following supplemental information is provided for miscellaneous assets
and other long-term liabilities (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C>
Miscellaneous assets:
Prepaid pension cost $ 9,440 $ 8,730
Securities available for sale 7,212 -
Other investments, at cost 6,028 5,673
Other 2,306 2,062
---------------------------------------------------------------------------------------------
Total $ 24,986 $ 16,465
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Other long-term liabilities:
Pension and postretirement benefits $ 5,290 $ 34,743
Environmental liabilities 1,417 2,093
Liabilities related to discontinued operations 4,334 4,602
Other 2,361 3,277
---------------------------------------------------------------------------------------------
Total $ 13,402 $ 44,715
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
NOTE E - OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Corporation's receivables at March 31, 1998 represented a concentration
of credit risk. Receivables consisted of a $7.2 million receivable from
National Steel Corporation (see Note G), a $2.5 million receivable from the
purchaser of a discontinued operation (see Note B), a $1.9 million receivable
from the minority partner in the Corporation's real estate partnerships and
$0.2 million in other accounts receivable primarily related to real estate
operations. The accounts receivable valuation allowance at March 31, 1998
represented management's best estimate of potential credit losses. Actual
credit losses may differ from these estimated amounts. In addition,
temporary cash investments may also subject the Corporation to a
concentration of credit risk. The Corporation placed substantially all of
its temporary cash investments with major financial institutions and
diversified money market mutual funds.
NOTE F - INVESTMENTS IN MARKETABLE SECURITIES
The Corporation's investments in equity securities that have a readily
determinable market value were classified as either "available for sale" or
"trading". The carrying value and gross unrealized gains and losses for
available for sale securities were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Carrying value $ 7,212 $ -
Unrealized gains 1,168 -
Unrealized losses - -
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
Available for sale securities are included in "Miscellaneous assets".
Trading securities of $2.9 million and $13.6 million were included in "Other
current assets" at March 31, 1998 and 1997, respectively.
33
<PAGE>
The gross proceeds and realized gains and losses from the sale of available
for sale securities and the change in unrealized gains (losses) on available
for sale and trading securities were as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale securities:
Proceeds from sales $ -- $ 6 $ 13,523
Realized gains -- -- 1,103
Realized losses -- 871 892
Net unrealized gains (losses) 1,168 17 (2,391)
Trading securities:
Net unrealized gains (losses) included in net income (11,856) (6,552) 1,952
--------------------------------------------------------------------------------------------------
</TABLE>
During 1996, approximately $2.0 million of unrealized losses were charged to
operations as a result of changing the classification of certain securities
from available for sale to trading ($5.8 million in unrealized losses less
$3.8 million in unrealized gains).
NOTE G - INVESTMENT IN NATIONAL STEEL CORPORATION
In January 1984, the Corporation, through its then wholly-owned subsidiary
National Steel Corporation ("NSC"), sold substantially all of the assets of
the Weirton Steel Division ("Weirton") to Weirton Steel Corporation. In
connection with the sale, NSC retained certain liabilities arising out of the
operation of Weirton prior to May 1, 1983, including certain environmental
liabilities, a note payable to the NSC pension trust (the "NSC Note") and
employee benefits for Weirton employees, which consisted principally of
pension benefits for active employees based on service prior to May 1, 1983,
and pension, life and health insurance benefits for retired employees (the
"Weirton Liabilities"). As a result of transactions which occurred in
August 1984 and June 1990, the Corporation sold all but 13% of its common
stock investment in NSC to NKK Corporation. As part of the 1984 transaction,
the Corporation agreed to provide NSC sufficient funds for payment of, and to
indemnify NSC against, all Weirton Liabilities and for certain environmental
liabilities related to the former operations of NSC. As part of the 1990
transaction, the Corporation received newly issued NSC redeemable Series B
preferred stock (the "NSC Preferred Stock") and $146.6 million in cash. The
cash was transferred to NSC in exchange for NSC releasing the Corporation
from an equivalent amount of its indemnification liability with respect to
the Weirton Liabilities (the "Released Liabilities"). The NSC Preferred Stock
was valued at fair market value at the date of the transaction, with the
resulting premium in excess of the minimum redemption value being amortized
on an effective yield basis over the life of the NSC Preferred Stock.
In addition, under the terms of the 1990 transaction agreement, the
Corporation committed that all NSC Preferred Stock dividends and redemption
amounts were to be used to satisfy the Weirton Liabilities, excluding the
Released Liabilities (the "Remaining Liabilities"), before any funds were
available to the Corporation for general corporate purposes. As a result,
the Corporation reflected its dividend income from the NSC Preferred Stock,
interest accretion and pension charges on the Remaining Liabilities and
premium amortization of the NSC Preferred Stock as a single net amount in its
consolidated statements of operations. In addition, the Remaining
Liabilities were presented in the Corporation's consolidated balance sheet as
a reduction in the carrying value of the NSC Preferred Stock. At March 31,
1997, there were $19.0 million of Remaining Liabilities offset against the
carrying value of the NSC Preferred Stock.
In connection with a January 1994 disposition of its remaining investment in
NSC common stock, the Corporation was required to pay to NSC $10.0 million as
a prepayment for potential environmental liabilities for which the
Corporation had previously agreed to indemnify NSC (the "Prepayment
Account").
On November 25, 1997, NSC, certain of its affiliates and the Corporation
entered into an agreement whereby the Corporation received $59.0 million in
cash and a non-interest bearing $10.0 million note in exchange for the
redemption of the NSC Preferred Stock owned by the Corporation and NSC's
release of the Corporation from the Weirton Liabilities as well as various
environmental liabilities related to NSC and Weirton sites (the "NSC
Settlement"). The note received is to be paid in installments over the
twelve months following the NSC Settlement
34
<PAGE>
and had an estimated discounted value of $9.4 million at November 25, 1997.
The discount is being amortized on an effective yield basis of 8.5% over the
term of the note. If the Corporation does not have a minimum net worth,
including the book value of the redeemable preferred stock, of at least $15.0
million, $5.0 million of the amount due on the note is subject to forfeiture.
At March 31, 1998, the note receivable had a book value of $7.2 million and
was included in "Receivables" in the consolidated balance sheet. In
addition, the Corporation (i) assigned to NSC all of the Corporation's rights
to assert pre-1987 environmental claims against insurers of both NSC and the
Corporation and (ii) released its share of any settlement proceeds related to
such claims as well as all amounts remaining in the Prepayment Account. As a
result of the NSC Settlement, the Corporation recognized a $59.0 million
loss. However, in connection with the Corporation's contractual obligation
to NSC relating to the Weirton Retirement Program, the Corporation had
previously recorded a $79.7 million charge as of November 1997 to the
accumulated deficit to recognize the minimum pension liability adjustment
associated with the pension obligation. As a result of the NSC Settlement,
the Corporation reversed the charge. The reversal of the minimum pension
liability, net of the loss on the NSC Settlement, resulted in an improvement
in the Corporation's accumulated deficit of $20.7 million.
NOTE H - LONG-TERM DEBT
Long-term debt was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
Trustee note $ 8,322 $ -
Secured loan - 14,900
Development notes with various maturities 15,093 15,551
-------------------------------------------------------------------------
23,415 30,451
Long-term debt due within one year 492 2,969
-------------------------------------------------------------------------
Total $ 22,923 $ 27,482
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
To fund the Corporation's purchase of a majority interest in Hamilton Morgan
(see Note B), the Corporation entered into a $20.0 million secured loan with
a bank (the "Hamilton Facility"). The $14.9 million balance on the Hamilton
Facility was repaid in November 1997 from proceeds of the NSC Settlement.
All collateral securing the loan was released.
In connection with the settlement of certain litigation with the FoxMeyer
Chapter 7 Trustee (the "Trustee") (see Note N), on October 9, 1997, the
Corporation executed an $8.0 million three year note payable to the Trustee.
The note is secured by 1,132,500 shares of Phar-Mor common stock and a 30%
interest, up to the greater of $10.0 million or the amount owed under the
note, in the net proceeds from certain litigation that may be brought by the
Trustee against specified third parties. Interest accrues at the prime rate
and is compounded annually. The accrued interest and the principal balance
of the note are due at maturity on October 8, 2000; however, proceeds from
any sale of the Phar-Mor stock held as collateral, or the successful
resolution of the litigation that may be brought by the Trustee against third
parties, must first be used to satisfy the note.
The limited partnerships controlled by Development, and included in the
consolidated financial statements, have incurred certain indebtedness in
connection with the acquisition of real estate (the "Development Notes").
The Development Notes generally require (i) monthly payments of principal and
interest and (ii) that a percentage of revenues be escrowed which may later
be used to reimburse the partnership for capital expenditures or maintenance
of the property. The escrowed funds are included in restricted cash in the
consolidated balance sheets. The indebtedness is typically non-recourse and
secured by the underlying assets; however, certain Development Notes may also
be guaranteed by entities related to the minority partners, or Development
subsidiaries. The Development Notes, with maturities ranging from 2000 to
2022, bear interest at fixed rates of from 9.25% to 10.19% except for a
construction loan which bears interest at 1.75% over LIBOR with an initial
term of one year from January 1998. Since the partnership has already secured
permanent loan financing to replace the construction loan upon completion of
the project, this loan was treated as long-term. One of the Development
Notes has a balloon payment of $6.3 million in 2004. The Development Notes
also limit the amount of dividends or other distributions to the partners.
35
<PAGE>
Maturity and approximate sinking fund requirements on all long-term debt of
the Corporation by fiscal year were as follows: $0.5 million in 1999; $2.6
million in 2000; $8.6 million in 2001; $0.3 million in 2002: $0.3 million in
2003 and $11.1 million thereafter.
NOTE I - CAPITAL STOCK
COMMON STOCK SHARE REPURCHASE: Under various share repurchase programs
approved by the Corporation's Board of Directors, 2,966,800 shares of common
stock were purchased by the Corporation during the period from July 1996 to
September 1996 when the last repurchase program was suspended. The
Corporation canceled these and all other previously acquired treasury shares
in September 1996 with a corresponding reduction in common stock and capital
in excess of par value of $148.7 million.
REDEEMABLE PREFERRED STOCK: The Corporation is authorized to issue
10,000,000 shares of preferred stock. At March 31, 1998, there were two
series of redeemable preferred stock outstanding.
At March 31, 1998 and 1997, the Corporation had 652,331 and 652,531 shares of
cumulative convertible preferred stock outstanding, respectively, at a stated
price of $50.00 per share. Each share of this preferred stock is entitled to
a cumulative annual dividend of $5.00 and is convertible into common stock of
the Corporation at a conversion price of $25.80 per share. The Corporation
has reserved 1,264,207 shares of its common stock for issuance upon the
conversion of this preferred stock. The shares are redeemable at a price of
$50.00 per share. The Corporation is required to make sinking fund payments
in each year to 2002 in an amount sufficient to redeem 88,000 shares annually
and 220,000 shares in 2003. The Corporation did not make the required
sinking fund payment in January 1998. The Corporation did not declare, nor
did it pay, any of the dividends due since October 15, 1996. Cumulative
dividends unpaid for the convertible preferred stock at March 31, 1998 were
$4.9 million or $7.50 per share. As a result of the failure to pay dividends
on the other series of preferred stock as discussed below, the Corporation
may not redeem, and has not redeemed, any additional shares of this series of
preferred stock as long as any cumulative dividends remain unpaid.
At March 31, 1998 and 1997, the Corporation had 4,312,351 shares of $4.20
Cumulative Exchangeable Series A Preferred Stock, par value $5 per share,
with a liquidation preference of $40 (the "Series A Preferred Stock")
outstanding. The Series A Preferred Stock is redeemable at $40 per share on
November 30, 2003. The Series A Preferred Stock may be redeemed at the option
of the Corporation, in whole or in part, at any time after October 15, 1998,
at its liquidation preference plus unpaid dividends thereon. The Corporation
had the option, through October 15, 1996, of issuing either additional shares
of Series A Preferred Stock or paying the dividend in cash. The Corporation
issued 338,527 additional shares of Series A Preferred Stock in lieu of cash
dividends in 1997. In addition, 317,000 shares of Series A Preferred Stock
were repurchased during 1997 on the open market, as part of a share
repurchase program announced in August 1996, at a cost of $6.0 million.
Dividends due since October 15, 1996 have not been declared or paid. The
amount of cumulative dividends unpaid for the Series A Preferred Stock at
March 31, 1998 was $29.0 million or $6.73 per share. The amount of the
cumulative dividend accrued each quarter, if any dividends remain unpaid,
increases as if additional shares of the Series A Preferred Stock had been
issued in lieu of the cash dividend and such additional shares were
outstanding on each succeeding dividend date until such unpaid dividends have
been declared and paid in cash.
For those dividends paid in stock, the charge to retained earnings was based
on the closing market price of the Series A Preferred Stock on the
ex-dividend date. The difference in the Series A Preferred Stock's
liquidation preference and its market value on the ex-dividend date is being
amortized on an effective yield basis as additional preferred stock dividends
and charged to retained earnings over the remaining life of the Series A
Preferred Stock.
In addition, if all cumulative unpaid dividends have been paid, the Series A
Preferred Stock is exchangeable, at the option of the Corporation, in whole
but not in part, and on any dividend payment date, for the Corporation's
10.5% Subordinated Notes due 2003 (the "Exchange Notes") with a principal
amount equal to the aggregate liquidation value of the outstanding Series A
Preferred Stock. The Exchange Notes will mature on November 30, 2003. The
Exchange Notes may be redeemed, at the option of the Corporation, in whole or
in part, at any time on or after October 15, 1998, at a redemption price
equal to the principal amount plus any unpaid interest thereon. The
36
<PAGE>
payments of principal and interest on the Exchange Notes will be subordinated
to all senior indebtedness of the Corporation.
The amount of cumulative unpaid dividends accrued are reflected in the 1998
and 1997 consolidated statements of operations as if they had been declared
with a corresponding charge to retained earnings. The liability for the
cumulative unpaid dividends has been added to the carrying value of the
redeemable preferred stock in the consolidated balance sheets.
Because dividends on the convertible preferred stock and the Series A
Preferred Stock were in arrears for six full quarterly dividend periods as of
April 15, 1998, the holders of preferred stock have the ability to elect a
specified number of new directors until such cumulative dividends have been
paid in full. The voting rights and the term of office of these directors
shall cease at such time as all dividends in arrears have been paid in full,
or at such time as such dividends have been declared and an amount sufficient
to pay the full amount of such dividends has been irrevocably set aside for
payment. Four directors representing the preferred stockholders were elected
since the end of the fiscal year (see Note T).
See Note T for a discussion of a proposed merger of the Corporation with one
of its wholly-owned subsidiaries which would result in the conversion of the
outstanding preferred stock into common stock of the subsidiary.
COMMON STOCK: At March 31, 1998 and 1997, respectively, the Corporation had
13,806,375 and 13,805,988 shares of common stock outstanding. The
Corporation has also reserved 3,953,192 shares of its common stock for
issuance under its stock option and performance award plans (see Note J). As
long as there are cumulative unpaid dividends on the preferred stock, as
discussed above, no dividends may be paid on the common stock.
The New York Stock Exchange ("NYSE") has advised the Corporation that it has
fallen below the listing criteria for net tangible assets and average net
income for the past three years and has requested the Corporation demonstrate
when it will be able to return to the NYSE's original listing requirements.
The Corporation has been in discussions with the NYSE regarding continued
listing of the securities on the NYSE and the effect of the Corporation's
proposed merger with Xetava Corporation (see Note T) on those securities.
The NYSE has advised the Corporation that, if the merger is not consummated,
the NYSE will proceed with efforts to suspend and/or delist the Corporation's
securities from trading on the NYSE and, in any event, may proceed with
efforts to suspend and/or delist the Corporation's securities from trading
subject to the Corporation's ability to comply with the NYSE's original
listing requirements.
NOTE J- EMPLOYEE COMPENSATION PLANS
The Corporation maintains the 1993 Restated Stock Option and Performance
Award Plan (the "Plan"). The Plan provides for the granting of incentive
options and non-qualified options to purchase shares of the common stock of
the Corporation to certain officers and key employees of the Corporation and
its subsidiaries and for the granting of non-qualified stock options to the
outside directors on an automatic basis. The Plan also permits the granting
of performance shares, restricted shares and performance units to
participants (other than outside directors). Under the Plan, the Finance and
Personnel Committee of the Board of Directors of the Corporation determines
the price at which options are to be granted, the period over which options
are exercisable, the duration of performance or restriction periods and
performance targets over which performance shares shall be earned. Options
for an aggregate of 4,000,000 shares of the Corporation's common stock may be
granted under the Plan. At March 31, 1998, options for 100,078 shares were
still available for grant under the Plan.
Effective January 1, 1997, the Corporation instituted a Performance Incentive
Plan, as approved by the Board of Directors, that covers approximately eight
employees. The participants are entitled to share in a fund, the amount of
which shall be based on 17.5% of the Corporation's net income before the
charge for the incentive plan, the settlement with the FoxMeyer Trustee, the
NSC Settlement and the NSC net preferred dividend determined as of March 31st
of each year. Approximately $1.9 million was earned under the plan for the
year ending March 31, 1998. No amounts were earned for the period ending
March 31, 1997.
37
<PAGE>
The following table summarizes the information with respect to stock options
for the three years ended March 31, 1998. All options granted were at least
at the published market price of the Corporation's common stock on the date
of grant.
<TABLE>
<CAPTION>
Outstanding
---------------------------------
Weighted
Average
Exercisable Shares Shares Exercise Price
--------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1995 1,003,807 3,372,988 $ 17.50
1996:
Granted 527,500 19.78
Exercised 278,002 16.20
Canceled or forfeited 457,189 20.73
--------------------------------------------------------------------------------
March 31, 1996 1,329,669 3,165,297 17.52
1997:
Granted 4,932,786 7.13
Exercised 105,586 15.91
Canceled or forfeited 5,753,591 14.90
--------------------------------------------------------------------------------
March 31, 1997 40,792 2,238,906 1.45
1998:
Granted 1,655,000 1.13
Exercised - -
Canceled or forfeited 40,792 15.11
--------------------------------------------------------------------------------
March 31, 1998 1,452,909 3,853,114 1.16
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
The Corporation accounts for stock-based compensation using the intrinsic
value method of APB 25 (see Note A). Accordingly, no compensation expense
was recognized. If the Corporation had used the fair value of options at the
grant dates, as defined by SFAS No. 123, to recognize compensation cost for
the three years ended March 31, 1998, the Corporation's net income (loss) and
loss per common share would have been as follows on a pro forma basis (in
thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported
Net income (loss) from continuing operations $ (81,219) $ (12,244) $ 5,148
Net loss (77,500) (279,356) (63,661)
Pro forma
Net income (loss) from continuing operations $ (82,412) $ (12,006) $ 4,781
Net loss (78,693) (279,118) (64,028)
-------------------------------------------------------------------------------------------------------
As reported for both basic and diluted earnings per share
Net loss per share from continuing operations $ (7.74) $ (2.10) $ (0.97)
Net loss per share (7.47) (19.99) (5.13)
Pro forma for both basic and diluted earnings per share
Net loss per share from continuing operations $ (7.82) $ (2.08) $ (0.99)
Net loss per share (7.55) (19.97) (5.15)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated on the date of grant by
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the three years ended March 31, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield (%) 0.0 0.0 0.0
Expected volatility (%) 60.8 43.7 28.9
Risk-free interest rates (%) 6.2 6.3 5.9
Expected option lives (years) 4.0 4.5 3.1
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
The weighted-average fair values of options granted during 1998, 1997 and
1996 were $0.58, $1.57 and $5.47, respectively.
The following table summarizes information about significant option groups
outstanding and exercisable as of March 31, 1998 and related weighted-average
exercise price and weighted-average contractual life remaining:
<TABLE>
<CAPTION>
Options with Exercise Prices Outstanding Exercisable Remaining
Ranging from: Shares Price Shares Price Life
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.125 to $1.3125 3,853,114 $ 1.16 1,452,909 $ 1.19 4.0
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
NOTE K - RETIREMENT PLANS
The Corporation and its subsidiaries have retirement plans consisting of both
defined benefit and defined contribution plans. Pension benefits under the
defined benefit plans are generally based upon years of service or a
combination of remuneration and years of service. No current employees of
the Corporation are covered under the defined benefit plans. The
Corporation's funding policy for defined benefit plans is to make payments to
the pension trusts in accordance with the funding requirements of federal
laws and regulations. The outside directors of the Corporation are covered
under a non-qualified and unfunded defined benefit plan.
The Corporation has maintained an employees' savings plan under Section
401(k) of the Internal Revenue Code for all employees since April 1997.
Under the plan, employees generally may elect to exclude up to 15% of their
compensation from amounts subject to income tax as a salary deferral
contribution. The Corporation makes a matching contribution to each
employee, which immediately vests, in an amount equal to 50% of the first 6%
of the employee's contribution. For 1997 and 1996, a subsidiary of the
Corporation, FoxMeyer, maintained an employees' savings and profit sharing
plan under Section 401(k) which covered substantially all the Corporation's
employees prior to the acquisition of FoxMeyer's assets by McKesson in
November 1996 (see Note B).
Pension income for continuing operations under the Corporation's retirement
plans for the three years ended March 31, 1998, are presented in the table
below (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1998 1997 1996
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net periodic pension cost (income) for defined
benefit plans:
Service cost - benefits earned for the year $ 78 $ 44 $ 27
Interest cost on projected benefit obligation 4,098 4,364 4,539
Expected return on plan assets (4,387) (5,681) (5,239)
Net amortization and deferral (57) (100) (142)
---------------------------------------------------------------------------------------------
Net periodic pension cost (income) (268) (1,373) (815)
Pension cost for defined contribution plans 39 20 22
---------------------------------------------------------------------------------------------
Total pension cost (income) $ (229) $ (1,353) $ (793)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
The net periodic pension income for defined benefit plans was determined by
assuming a weighted average expected long-term rate of return on plan assets
of 8.5% for the year ended March 31, 1998 and 10.0% for the years ended March
31, 1997 and 1996.
As a result of agreements with certain former officers and employees who
elected lump sum payments in lieu of continuing payments from certain
unfunded plans, two plans were terminated and a third plan was partially
settled (see Note N).
39
<PAGE>
The following table sets forth the funded status of the Corporation's defined
benefit pension plans and amounts recognized in the Corporation's
consolidated balance sheets at March 31, 1998 and 1997 utilizing a weighted
average discount rate of 7.0% in 1998 and 7.8% in 1997 (in thousands of
dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 56,231 $ 57,706
Service cost 78 44
Interest cost 4,098 4,364
Actuarial losses (gains) 2,816 (151)
Curtailment gain (3,202) (282)
Benefits paid (6,241) (5,450)
----------------------------------------------------------------------------------
Projected benefit obligation, end of year 53,780 56,231
----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year 53,911 59,128
Actual return on plan assets 14,705 (679)
Benefits paid (4,437) (4,538)
----------------------------------------------------------------------------------
Fair value of plan assets, end of year 64,179 53,911
----------------------------------------------------------------------------------
Funded status 10,399 (2,320)
Unrecognized transition asset (724) (907)
Unrecognized net actuarial loss (gain) (1,267) 6,210
----------------------------------------------------------------------------------
Net prepaid pension cost $ 8,408 $ 2,983
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
At March 31, 1998, the assets of the Corporation's defined benefit pension
plans were comprised of approximately 23% bonds, 65% stocks and 12% other.
Included in pension plans assets were approximately 1.4 million shares of the
Corporation's common stock with a market value of $2.8 million at March 31,
1998.
NOTE L - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation or certain inactive subsidiaries have plans relating to
retired employees that provide for postretirement health care and life
insurance benefits. Health benefits include major medical insurance with
deductible and coinsurance provisions. Life insurance benefits are usually
for a flat benefit that decreases to age 65. Certain plans provide that
retirees pay for a portion of their coverage. The plans are not funded. The
Corporation pays all benefits on a current basis. No current employees are
covered under these plans.
In March 1998, one inactive subsidiary of the Corporation, which had no
ongoing operations since 1990, exercised its right to terminate coverage of
its retiree healthcare and life insurance plans, as provided in the plan
documents. In addition, another subsidiary of the Corporation, which had no
ongoing operations since 1983 and no resources to pay its liabilities, was
dissolved in March 1998. As a consequence, this subsidiary's retiree
healthcare and life insurance plans were effectively discontinued. Most
retirees covered by these plans elected to participate in a transition
assistance payment plan and executed releases in favor of the applicable
subsidiary and its affiliates. A gain of approximately $21.3 million, net of
such payments and certain remaining claim reserves, was included in "Unusual
items" in the consolidated statements of operations as a result of the
termination or discontinuance of these plans.
The net periodic postretirement benefit cost for continuing operations for
the three years ended March 31, 1998 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1998 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned for the year $ - $ - $ -
Interest cost 1,501 1,565 1,969
Amortization of prior service cost and net gain (464) (440) (259)
--------------------------------------------------------------------------------------------
Total postretirement benefit cost $ 1,037 $ 1,125 $ 1,710
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
The following table sets forth the funded status of the postretirement health
care and life insurance plans and amounts recognized in the consolidated
balance sheets at March 31, 1998 and 1997 utilizing a weighted average
discount rate of 7.0% for 1998 and 7.75% for 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
March 31,
1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation, beginning of year $ 19,871 $ 24,242
Service cost - -
Interest cost 1,501 1,565
Plan participants' contributions 489 517
Benefits paid (1,749) (1,784)
Actuarial loss (gain) 286 (4,669)
Settlement gain (18,068) -
-----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation, end of year 2,330 19,871
Unrecognized prior service cost - 2,979
Unrecognized net gain 1,278 4,634
-----------------------------------------------------------------------------------------------------------
Amount of postretirement benefit obligation included in the
consolidated balance sheet $ 3,608 $ 27,484
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
The 1998 reduction in plan liabilities reflects the plan settlements
discussed above. The 1997 reduction in plan liabilities reflects the
actuarial gain from the adjustment of expected future medical inflation rates
to reflect current medical cost trends.
Medical costs were assumed to increase at a rate of 9% during 1998 and then
to decline over a period of nine years to a rate of 5%. To demonstrate the
volatility of the valuation results based on this assumption, the impact of a
1% increase or a 1% decrease in the cost of health care would result in a
8.9% increase or a 7.6% decrease, respectively, in the postretirement benefit
obligation and a 15.4% increase or a 13.8% decrease, respectively, in
postretirement benefit cost for the remaining plan.
NOTE M - INCOME TAXES
The provision (benefit) for income taxes consisted of the following for the
three years ended March 31, 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
For the years ended March 31,
1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ (40) $ - $ -
Deferred - 24,557 2,938
State
Current 80 34 39
Deferred - 5,279 -
--------------------------------------------------------------
Income tax provision $ 40 $ 29,870 $ 2,977
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
The Corporation recorded a benefit for federal income tax purposes in 1998
relating to a tax refund. Because the Corporation believes it may not be
able to realize its deferred tax assets, the Corporation has adjusted its
valuation allowance to maintain a full valuation allowance against its net
deferred tax assets.
The Corporation recorded a federal tax provision of $24.6 million in 1997.
The federal income tax provision was primarily attributable to the
establishment of a full valuation allowance against its net deferred tax
assets in recognition of the impact of the FoxMeyer bankruptcy filing (see
Note B).
The reasons for the difference between the total tax provision and the amount
computed by applying the statutory federal income tax rate to income (loss)
from continuing operations before income taxes and minority interest were as
follows (in thousands of dollars):
41
<PAGE>
<TABLE>
<CAPTION>
For the years ended March 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to pre-tax income (loss) $ (28,336) $ 5,782 $ 3,585
Change in deferred tax asset valuation allowance (6,621) 26,702 2,654
Corporate dividend-received deduction (1,520) (1,976) (2,197)
State income taxes (net of federal tax effect) 52 3,453 25
Weirton interest expense - (1,063) (498)
Capital losses (296) (14,299) (175)
NSC Settlement 20,995 - -
FoxMeyer bankruptcy settlement 11,652 - -
Market adjustments to investments 4,528 7,569 -
Equity in affiliates 1,168 1,820 1,459
Other items (1,582) 1,882 (1,876)
- --------------------------------------------------------------------------------------------
Total tax provision $ 40 $ 29,870 $ 2,977
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The Corporation's current and noncurrent deferred taxes, which net to a zero
balance as of March 31,1998 and 1997 consisted of the following temporary
differences and net operating losses, at the statutory rate, tax credits, and
valuation allowance (in thousands of dollars):
<TABLE>
<CAPTION>
March 31
1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Tax net operating losses $ 79,005 $ 73,690
Other liabilities 613 11,860
Tax credits 7,595 8,284
----------------------------------------------------------------------
Total deferred tax assets 87,213 93,834
Valuation allowance on deferred tax assets (87,213) (93,834)
----------------------------------------------------------------------
Deferred tax asset - -
Deferred tax liability - -
----------------------------------------------------------------------
Deferred tax asset, net $ - $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
The net change in the valuation allowance for 1998 was a decrease of
approximately $6.6 million.
At March 31, 1998, the Corporation had, for federal income tax purposes,
operating loss, capital loss, and investment credit carryforwards of
approximately $225.8 million, $87.0 million, and $0.6 million, respectively,
subject to the limits discussed below. Operating loss carryforwards
available for utilization in the Corporation's consolidated income tax return
expire as follows: 2003 -$15.8 million, 2004 - $58.3 million, 2006 - $94.0
million, 2008 -$0.5 million, 2009 - $1.0 million, 2011 - $31.6 million, 2012
- - $12.6 million and 2013 - $12.0 million. The capital loss carryforwards
available for utilization in the Corporation's consolidated income tax return
will expire as follows: 1999 - $56.6 million and 2003 - $30.4 million.
Investment credit carryforwards will expire during the years 1999 through
2002. The Corporation also has alternative minimum tax credit carryforwards
of $7.0 million, which are available to offset the future regular income tax
liability of the Corporation. Alternative minimum tax credit carryforwards do
not expire.
The losses and tax credits referred to in the preceding paragraph have not
been examined by the U.S. Internal Revenue Service and, therefore, may be
subject to adjustment. The availability of such loss and tax credit
carryforwards to reduce the Corporation's future consolidated federal income
tax liability are subject to various limitations under the Internal Revenue
Code of 1986, as amended (the "Code"), including limitations upon the
utilization of loss and tax credit carryforwards in the event of an ownership
change (as defined in the Code) of the Corporation. The Corporation believes
that an ownership change occurred in 1995 and that another ownership change
occurred between January and April 1998. Consequently, except in connection
with the disposition of certain assets occurring in the next five years,
utilization of loss and tax credit carryforwards incurred prior to the latest
ownership change will be severely limited. The amount of the limitation is
not known at this time, however, the Corporation believes that it will
prevent the utilization of a significant amount of its operating and capital
loss and tax credit carryforwards.
42
<PAGE>
NOTE N - COMMITMENTS AND CONTINGENCIES
The Corporation leases various types of properties, primarily corporate
office space and equipment, through noncancelable operating leases. Rental
expense for continuing operations under operating leases totaled $0.1 million
in 1998, $1.1 million in 1997 and $2.5 million in 1996. Minimum rental
payments under operating leases with initial or remaining terms of one year
or more at March 31, 1998 total $0.4 million with payments due of $0.1
million in 1999, $0.1 million in 2000, $0.1 in million in 2001 and $0.1
million in 2002.
On October 9, 1997, the United States Bankruptcy Court for the District of
Delaware approved a settlement (the "FoxMeyer Settlement") of certain
litigation between the Corporation and the Chapter 7 Trustee of FoxMeyer and
certain of its subsidiaries (see Note B). The litigation concerned the
validity of the transfer of certain property from FoxMeyer to the Corporation
as a dividend on June 19, 1996. Under the FoxMeyer Settlement, (i) the pending
litigation was dismissed against the Corporation, (ii) the Corporation paid the
Trustee approximately $25.8 million from a previously established escrow
account, and (iii) the Corporation executed a three year $8.0 million
promissory note payable to the Trustee (see Note H). As a result of the
FoxMeyer Settlement, the Corporation recognized a $33.3 million charge which is
included in "Unusual items" in the consolidated statements of operations.
The Corporation has retained responsibility for certain potential
environmental liabilities attributable to former operating units. As a
result of the NSC Settlement, the Corporation has been released from
responsibility for claims resulting from its prior ownership of NSC or
Weirton (see Note G). The Corporation is still 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 related to sites of other former
operating units. 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 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.
At March 31, 1998, the Corporation had reserves of $1.8 million for
environmental assessments, remediation activities, penalties or fines at nine
sites that may be imposed for non-compliance with such laws or regulations.
Reserves are established when it is probable that liability for such costs
will be incurred and the amount can be reasonably estimated. The
Corporation's estimates of these costs are based upon currently available
facts, existing technology, presently enacted laws and regulations and the
professional judgment of consultants and counsel. Where the available
information is sufficient to estimate the amount of the liability, that
estimate has been used. Where the information is only sufficient to
establish a range of probable liability and no point within the range is more
likely than the other, the lower end of the range was used.
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 formerly 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.
In connection with litigation claims by the Corporation and certain other
plaintiffs against various insurance carriers for coverage of certain
environmental liabilities, the Corporation received a $1.6 million cash
settlement in 1998 for certain of these claims which was included in the
consolidated statements of operations in "Unusual items". In connection with
the NSC Settlement in November 1997, the Corporation assigned to NSC its
right to assert pre-1987 environmental claims against the insurance carriers
and released to NSC its share of any settlement proceeds related to such
claims.
In November 1997, the Corporation entered into lump sum payment agreements
with certain former officers and employees who were receiving supplemental
pension and other payments from the Corporation or its subsidiaries.
43
<PAGE>
As a result of the agreements, the Corporation paid approximately $2.1
million to these individuals for the termination of the Corporation's payment
obligations and recognized a gain of approximately $5.6 million, including
$3.2 million associated with certain retirement plans discussed in Note K,
which was included in "Unusual items" in the consolidated statements of
operations.
The Corporation entered into certain agreements in 1996 with Ashland Oil,
Inc. ("Ashland") settling unresolved issues relating to the sale of The
Permian Corporation ("TPC") to Ashland in 1992. As a result of the
agreements, the Corporation settled all outstanding claims and was released
from any additional claims in connection with the sale of TPC to Ashland.
Previously established liabilities of $19.6 million related to these claims
by Ashland, and to other contingencies settled during the year, were released
and were included in "Other income" in 1996 in the consolidated statements of
operations.
On March 1, 1994, the Corporation and FoxMeyer announced that the Corporation
had proposed a merger in which a wholly-owned subsidiary of the Corporation
would be merged with and into FoxMeyer, making FoxMeyer a wholly-owned
subsidiary of the Corporation. 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 Court of Chancery in Delaware. The amended complaint
alleges that the defendants breached their fiduciary duties to FoxMeyer's
shareholders 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. No
schedule has been set for the completion of discovery in the case, the
briefing of plaintiffs' class certification motion or any other proceedings.
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.
In 1997, the bankruptcy trustee and certain creditors of the Corporation's
17%-owned subsidiary, 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
44
<PAGE>
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 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 has not yet fully analyzed its
position with respect to the lawsuit or the Corporation's obligations to the
defendants under its Certificate of Incorporation, by-laws, indemnification
agreements with the defendants or Delaware law.
See Note T for a discussion of lawsuits filed by preferred stockholders
concerning a proposed merger of the Corporation with and into one of its
subsidiaries.
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.
NOTE O - UNUSUAL ITEMS AND OTHER INCOME (EXPENSE)
In 1998, unusual items consisted of a $33.3 million charge from the
settlement of certain litigation with the FoxMeyer Trustee (see
Note N), a gain of $1.7 million from the settlement of litigation,
principally from payments received from insurance carriers related to the
settlement of environmental liabilities (see Note N), and a gain of $26.9
million for the settlement or termination of certain pension and other
postretirement benefits of former officers and employees (see Notes L and N).
In 1998, other expenses consisted of a loss of $12.9 million during the year
from the adjustment in the carrying value of Imagyn Medical Technologies,
Inc. ("Imagyn") to its market value, partially offset by $1.6 million in
gains primarily from the sale of other investments. In 1997, other income
consisted of a gain of $34.0 million on the sale of FoxMeyer Canada and $7.3
million from the sale of real estate properties and the early collection of a
real estate note receivable. The gains were partially offset by the
write-down of the Corporation's investment in Phar-Mor of $13.4 million, the
write-off of the investment in Ben Franklin of $2.0 million and $6.7 million
in other losses primarily from marketable securities (including $4.8 million
in losses related to Imagyn). In 1996, other income consisted of a gain of
$19.6 million related to the settlement of certain unresolved issues in
connection with the 1992 sale of The Permian Corporation and other
contingencies, a gain of $14.3 million on the Corporation's investment in
Imagyn and $1.6 million in gains on the early collection of real estate notes
receivable. The gains were partially offset by a $3.4 million write-down of
the value of Ben Franklin and losses of $10.3 million on trading securities
and other investments.
45
<PAGE>
NOTE P - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments was determined by the
Corporation based on available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the amounts that
the Corporation might realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies might have had a
material effect on the estimated fair value at March 31, 1998 or 1997,
respectively.
The carrying amounts of cash and short-term investments, accounts and notes
receivable, accounts payable and other accrued liabilities were reasonable
estimates of their fair value.
The carrying value of long-term debt was $23.4 million and $30.5 million at
March 31, 1998 and 1997, respectively, while the estimated fair value was
$23.4 million and $30.1 million, respectively, based upon interest rates
available to the Corporation for issuance of similar debt with similar terms
and remaining maturities.
Equity securities classified as "available for sale" or "trading" were
carried at their estimated fair value (see Notes A and F). The carrying
value of the investment in NSC Preferred Stock in 1997 was net of the
Remaining Liabilities (see Note G). The carrying value of the NSC Preferred
Stock was $62.8 million at March 31, 1997. The estimated fair market value
of the NSC Preferred Stock was approximately $67.1 million based on NSC's
other outstanding debt with similar terms and remaining maturity. The
carrying value of the Remaining Liabilities at March 31, 1997 consisted
principally of pension liabilities and the NSC Note bearing interest at 8.5%
with an 11 year remaining amortization. The carrying value of the NSC Note
approximated its fair value at March 31, 1997.
The fair value of the Corporation's redeemable preferred stock, based on
quoted market prices at March 31, 1998 and 1997, was $69.3 million and $41.7
million, respectively.
The fair value of certain warrants with a carrying value of $1.1 million at
March 31, 1997 was estimated to be $2.2 million based upon the underlying
market value of the securities into which the warrants could be converted.
An investment in a partnership, with a book value of $3.0 million, held
publicly traded securities with a market value of $12.7 million and $14.2
million at March 31, 1998 and 1997, respectively.
The carrying value of other investments was estimated to be at fair value, or
it was not practicable to estimate their fair value without incurring
substantial costs. The carrying value of these investments at March 31, 1998
and 1997 was $3.0 million and $1.6 million, respectively.
The fair value estimates were based on pertinent information available to
management as of March 31, 1998 and 1997. Such amounts have not been
comprehensively revalued for purposes of these financial statements since
those dates, and current estimates of fair value may differ significantly
from the amounts presented herein.
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<PAGE>
NOTE Q - SEGMENT INFORMATION
The Corporation's principal operations are its real estate investments. In
addition, the Corporation performs certain corporate office and investment
activities ("Corporate"). Balance sheet related disclosures also include
information for discontinued operations (see Note B) where necessary. The
following table includes segment information for the three years ended March 31,
1998 (in thousands of dollars):
<TABLE>
<CAPTION>
Real Discontinued
Estate Corporate Operations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Revenues $ 12,228 $ - $ - $ 12,228
Operating income (loss) 1,855 (11,433) - (9,578)
Depreciation and amortization 917 41 - 958
Identifiable assets 23,479 95,824 - 119,303
Capital expenditures 5,583 10 - 5,593
- ----------------------------------------------------------------------------------------------------------------------------
1997:
Revenues $ 12,463 $ - $ - $ 12,463
Operating income (loss) 2,608 (4,999) - (2,391)
Depreciation and amortization 934 534 - 1,468
Identifiable assets 26,665 140,502 - 167,167
Capital expenditures 6,707 186 27,855 34,748
- ----------------------------------------------------------------------------------------------------------------------------
1996:
Revenues $ 10,439 $ - $ - $ 10,439
Operating income (loss) 940 (8,069) - (7,129)
Depreciation and amortization 723 311 - 1,034
Identifiable assets 29,403 167,075 1,380,592 1,577,070
Capital expenditures 2,017 - 38,772 40,789
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE R - QUARTERLY DATA (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of continuing
operations for the two years ended March 31, 1998 (in thousands of dollars,
except per share amounts):
<TABLE>
<CAPTION>
Quarter
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Revenues $ 3,163 $ 3,660 $ 2,974 $ 2,431
Operating income (loss) (33,472) 850 3,777 19,267
Net income (loss) from continuing operations (36,946) (1,585) (59,176) 16,488
Earnings (loss) per common share from continuing
operations after preferred stock dividends:
Basic (3.12) (0.57) (4.76) 0.71
Diluted (3.12) (0.57) (4.76) 0.66
- ---------------------------------------------------------------------------------------------------
1997:
Revenues $ 3,705 $ 4,101 $ 3,234 $ 1,423
Operating income (loss) (903) (1,378) 229 (339)
Net income (loss) from continuing operations (31,627) (3,613) 32,164 (9,168)
Earnings (loss) per common share from continuing
operations after preferred stock dividends:
Basic (2.13) (0.43) 1.90 (1.10)
Diluted (2.13) (0.43) 1.79 (1.10)
- --------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
In addition to those items discussed below, the Corporation's quarterly results
were significantly affected by the realized and unrealized gains or losses on
securities and other investments.
During the fourth quarter of 1998, the Corporation recognized a gain of $21.3
million on the termination and settlement of retiree healthcare and life
insurance benefits (Note L). In the third quarter of 1998, the Corporation
recognized a loss of $59.0 million on the NSC Settlement (Note G) and a gain
of $5.6 million on the settlement of certain pension and other postretirement
benefit claims of former officers and employees (Note N). In the second
quarter of 1998, the Corporation recognized $1.7 million in gains on
settlement of litigation, primarily the settlement of certain environmental
liability claims (see Note N). In the first quarter of 1998, the Corporation
recognized a $33.3 million charge related to the FoxMeyer Settlement with the
Trustee (see Note N).
In the fourth quarter of 1997, a $13.6 million charge, net of minority
interest, was recorded in connection with the reduction in the carrying value
of Phar-Mor (see Note B). During the third quarter of 1997, the Corporation
sold FoxMeyer Canada and certain real estate operations resulting in a gain
of approximately $40.0 million (see Note B). During the first quarter of
1997, the net loss reflected the increase in the valuation allowance for the
deferred tax asset as a result of the FoxMeyer bankruptcy filing (see Note M).
Per share amounts were computed independently for each quarter based on the
average number of shares outstanding during that quarter. Therefore, the sum
of the quarterly per share amounts may not equal the total for the fiscal
year because of stock or other transactions that occurred during such years
(see Note I).
NOTE S - GOING CONCERN
During the year ended March 31, 1998, the Corporation has had significant
success in resolving a number of matters which threatened its existence
including: (i) a significant reduction in operating cash outflows; (ii) the
settlement with the FoxMeyer Trustee of certain claims against the
Corporation and the release of the Corporation's assets from a temporary
restraining order and injunction; (iii) the restoration of the Corporation's
liquidity and the elimination of substantial healthcare, environmental and
other liabilities through an aggressively negotiated settlement of the
Corporation's preferred stock investment in NSC; and (iv) the elimination of
certain other material benefit obligations owed by the Corporation or its
subsidiaries. Nevertheless, the Corporation will likely continue to report
operating losses, which together with a continuing common stockholders'
deficiency and various pending claims and litigation as described in Note N,
raise doubt as to the Corporation's ability to continue as a going concern.
Building on the successes of 1998, management has turned its full attention
to the remaining issues. The following specific actions are planned: (a) to
overcome the operating losses, management will (i) continue current efforts
to identify and acquire an operating company and (ii) continually review and
assess its investment portfolio in order to identify those investments which
should be liquidated and those which merit new or additional investment; (b)
to correct its common stockholders' deficiency, the Corporation's Board of
Directors has approved a merger with Xetava Corporation which would eliminate
the preferred stock obligation (see Note T); and (c) to address its pending
litigation, management remains firm in its belief that such claims are
without merit and will continue its vigorous defense of the matters.
The Corporation's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The financial
statements do not reflect any adjustments that might ultimately result from
the resolution of these uncertainties.
NOTE T - SUBSEQUENT EVENT
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 will
receive new common stock of Xetava, which upon consummation of the merger will
be renamed
48
<PAGE>
Avatex. Pursuant to the merger agreement, (i) each share of the
Corporation's common stock will be converted into one-half share of Xetava
common stock, (ii) each share of the Corporation's convertible preferred
stock will be converted into 4.1249 shares of Xetava common stock and (iii)
each share of the Corporation's Series A Preferred Stock will be converted
into 3.7271 shares of Xetava common stock. Following the consummation of the
merger, the common stockholders of the Corporation will own approximately
26.9%, and preferred stockholders of the Corporation will own approximately
73.1%, of Xetava's outstanding common stock (exclusive of options previously
granted under the Corporation's existing stock option plan which will be
assumed by Xetava in the merger). While the merger has been approved by the
Board of Directors, consummation of the merger is conditioned upon the (i)
approval of the transaction by the holders of a majority of the Corporation's
outstanding common stock, (ii) effectiveness of a registration statement to
be filed with the Securities and Exchange Commission with respect to shares
of Xetava common stock that will be issued in the merger, and (iii) approval
of the listing of such shares on the New York Stock Exchange.
The following three lawsuits were filed by preferred shareholders in April
1998. First, on April 23, 1998, Elliott Associates, L.P. ("Elliott") filed a
lawsuit against the Corporation, Xetava and seven of the Corporation's
directors in the Court of Chancery in Delaware (the "Delaware Chancery Court").
Elliott is a private investment partnership that, along with an affiliate,
holds preferred and common stock of the Corporation. In the lawsuit, Elliott
seeks to enjoin the proposed merger of the Corporation with and into its
wholly owned subsidiary, Xetava, by alleging that (i) the proposed merger
requires the consent of the holders of the Corporation's preferred stock,
(ii) the individual defendants' actions in approving the merger breached
their fiduciary duties of care and loyalty, and (iii) the individual
defendants further breached their fiduciary duties by structuring the merger
in a manner calculated to entrench themselves in office. Second, on April 23,
1998, Harbor Finance Partners, Ltd. and Anvil Investment Partners, L.P.
(collectively, "Harbor") filed a purported class action lawsuit, allegedly on
behalf of the holders of the Corporation's two series of preferred stock,
against the Corporation and the same seven individual defendants in the
Delaware Chancery Court. In this lawsuit, Harbor alleges the same
allegations contained in the first two counts of the Elliott lawsuit, and
further alleges that (i) the defendants have breached the implied covenant of
good faith in the "organic corporate documents" applicable to the preferred
stock and (ii) the defendants' actions constitute an anticipatory breach of
such documents. Third, on April 29, 1998, Robert Strougo filed a lawsuit
against the Corporation and the seven individual defendants in the Delaware
Chancery Court, which is substantially identical to the Harbor lawsuit.
In addition to the foregoing preferred shareholder lawsuits, on April 23,
1998, the same date that Elliott filed its lawsuit, Vincent Intrieri, Daniel
Gropper, Ralph DellaCamera and Brian Miller filed a separate lawsuit against
the Corporation in the Delaware Chancery Court. In this lawsuit, the
plaintiffs seek a determination under Sections 220 and 225 of the Delaware
Corporation Code that (i) Messrs. Intrieri and Gropper have been duly elected
as directors of the Corporation by a majority of holders of the Corporation's
Series A Preferred Stock and (ii) Messrs. DellaCamera and Miller have been
duly elected as directors of the Corporation by a majority of holders of the
Corporation's convertible preferred stock. The plaintiffs also seek an order
recognizing the purported directors' right to examine the Corporation's books
and records.
On May 1, 1998, the Corporation consented to the election by a majority of
the holders of its Series A Preferred Stock of Messrs. Intrieri and Gropper
to the Corporation's Board of Directors in order to obtain an expedited
hearing on May 14, 1998 before the Delaware Chancery Court. Following the
May 14th hearing, on June 3, 1998, the Delaware Chancery Court ruled in the
Corporation's favor that its preferred shareholders are not entitled under
the Corporation's Certificate of Incorporation to vote separately as a class
on the proposed merger. On June 8, 1998, the Corporation advised the
Delaware Chancery Court that its Board of Directors will meet to determine
whether it would be appropriate to reconsider and/or modify the terms of the
proposed merger based on a number of events that have occurred since the
Board of Directors approved the merger. These events include the
commencement of lawsuits, the June 3, 1998 court decision and potential
changes in the values of certain of the Corporation's assets. As a result,
the Delaware Chancery Court postponed a hearing originally scheduled for that
date on the request of the preferred stockholders to enjoin the proposed
merger. In addition, the Delaware Chancery Court on June 8, 1998 ruled that
Messrs. DellaCamera and Miller were validly elected to the Corporation's
Board of Directors by the written consent of the majority of holders of the
convertible preferred stock and the Series A Preferred Stock.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of Avatex Corporation (the "Corporation") consists of
eleven members. The following sets forth, with respect to each member of the
Corporation's Board of Directors, his name, age, period served as director,
present position, if any, with the Corporation and other business experience.
THE BOARD OF DIRECTORS
ABBEY J. BUTLER, age 60, has served as a director of the Corporation since 1990.
Mr. Butler has also served as Co-Chairman of the Board of the Corporation since
March 1991 and was appointed Co-Chief Executive Officer of the Corporation in
October 1991. He has also served as a director of Phar-Mor, Inc. ("Phar-Mor")
since September 1995, and as its Co-Chairman of the Board and Co-Chief Executive
Officer since October 1, 1997. Mr. Butler also serves as managing partner of
Centaur Partners, L.P., an investment partnership with ownership interests in
the Corporation, as well as the President and a director of C.B. Equities Corp.,
a private investment company. Mr. Butler presently serves as a director and a
member of the Executive Committee of GrandBanc, Inc. ("GrandBanc"), the holding
company of Grand Bank, Maryland, and, in connection with investments by the
Corporation and its subsidiaries, as a director of Imagyn Medical Technologies,
Inc. ("Imagyn"), Carson, Inc. ("Carson"), AM Cosmetics, Inc. ("AM") and Cyclone,
Incorporated ("Cyclone"). Mr. Butler is a trustee and a member of the Executive
Committee of the Board of Trustees of The American University, and a director of
the Starlight Foundation, a charitable organization. He was appointed by
President George Bush to serve on the President's Advisory Committee on the
Arts, and he now serves as President and Chief Executive Officer of the National
Committee for the Performing Arts, John F. Kennedy Center, Washington, D.C. Mr.
Butler also served as Co-Chairman of the Board of FoxMeyer Corporation
("FoxMeyer") since March 1991 and was Co-Chief Executive Officer of FoxMeyer
from May 1993 to November 1996, and also served as Co-Chairman of the Board of
Ben Franklin Retail Stores, Inc. ("Ben Franklin") from November 1991 until March
1997. FoxMeyer, FoxMeyer Drug Company and Ben Franklin each filed for relief
under the Bankruptcy Code in 1996.
MELVYN J. ESTRIN, age 55, has served as a director of the Corporation since
1990. Mr. Estrin has also served as Co-Chairman of the Board of the Corporation
since March 1991 and was appointed Co-Chief Executive Officer of the Corporation
in October 1991. He has also served as a director of Phar-Mor since September
1995, and as its Co-Chairman of the Board and Co-Chief Executive Officer since
October 1, 1997. Mr. Estrin also serves as managing partner of Centaur
Partners, L.P., an investment partnership, and has served as Chairman of the
Board and Chief Executive Officer of Human Service Group, Inc., a private
management and investment firm, since 1983. Mr. Estrin presently serves as a
director and a member of the Executive Committee of GrandBanc, as a director of
Washington Gas Light Company and, in connection with investments by the
Corporation and its subsidiaries, as a director of Imagyn, Carson, AM and Caring
Technologies, Inc. ("CareTech"). Mr. Estrin also served as a Trustee of the
University of Pennsylvania and was appointed by President George Bush to serve
as Commissioner of the National Capital Planning Commission. Mr. Estrin also
served as Co-Chairman of the Board of FoxMeyer since March 1991 and was Co-Chief
Executive Officer of FoxMeyer from May 1993 to November 1996, and also served as
Co-Chairman of the Board of Ben Franklin from November 1991 until March 1997.
FoxMeyer, FoxMeyer Drug Company and Ben Franklin each filed for relief under the
Bankruptcy Code in 1996.
HYMAN H. FRANKEL, PhD., age 77, has served as a director of the Corporation
since February 1997. Dr. Frankel holds a PhD. in Sociology, and has served as a
consultant to the Corporation since 1992. See "COMPENSATION OF DIRECTORS"
below. He has served as President and a director of Human Service Group, Inc.,
a private management and investment firm, and was also a founder and has served
as an executive officer and a director of University Research Corporation since
1965. Both of these companies are controlled by Mr. Estrin. Dr. Frankel has
also served as Chairman of the Board of The Center for Human Service, Inc., a
non-profit health and education research organization, and as Vice President and
a director of American Health Services, an operator of general and psychiatric
hospitals and nursing homes. Dr. Frankel has held teaching and research
positions in social sciences at a number of universities
50
<PAGE>
throughout the United States during the past 35 years, and has served in
various capacities in connection with a number of government commissions and
other programs.
FRED S. KATZ, age 59, has served as a director of the Corporation since February
1997. Mr. Katz is President of First Taconic Capital Corporation ("First
Taconic"), a private merchant banking and consulting firm, since 1996. Mr. Katz
has also served as a Managing Director of Whale Securities, L.P., a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc., since June 1991, and as Chairman of the Board of Cyclone, a former
business unit of USX Corporation, since 1994. In 1995, a subsidiary of the
Corporation, M & A Investments, Inc. ("M&A"), invested in Cyclone. See
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" below. Mr. Katz
has over 30 years of diversified investment and merchant banking experience
specializing in investments in emerging growth companies and industries through
private placements or public offerings of securities.
WILLIAM A. LEMER, age 57, has served as a director of the Corporation since
February 1997. Mr. Lemer is a private investor and real estate developer. He
has served as President of Bethesda Avenue Photo, Inc. and Pentagon Concourse
Photo, Inc., franchisees of One Hour Moto Photo, since June 1992. Since April
1988, he has been the general partner of Metro Associates Limited Partnership,
which owns a shopping center in Woodbridge, Virginia. Until March 1997, Mr.
Lemer also served as a Director of Ben Franklin, which filed for protection
under the Bankruptcy Code in July 1996. Mr. Lemer is the brother-in-law of Mr.
Estrin.
CHARLES C. PECARRO, age 60, has served as a director of the Corporation since
February 1997. Mr. Pecarro is the Chief Financial Officer of Human Service
Group, Inc. and University Research Corporation, both of which are companies
controlled by Mr. Estrin. Mr. Pecarro has worked for the companies since 1972,
and he has been a certified public accountant since 1968. Mr. Pecarro also
serves on the Board of Directors of the Center for Technical Cooperation, a
private non-profit corporation.
JOHN L. WINEAPPLE, age 58, has served as a director of the Corporation since
February 1997. Mr. Wineapple is a consultant to First Taconic, a private
merchant banking and consulting firm, and has been the principal of John
Wineapple Associates, Inc., a marketing and business development consulting firm
that has advised such clients as Regent International, Inc., Fleet Street, Ltd.,
Moretz, Inc., Sara Lee Corporation and Wal-Mart Stores, Inc., since 1995. Mr.
Wineapple is also the Chairman and Chief Executive Officer of Visual Effect,
LLC, a strategic planning and consulting firm to the retail and manufacturing
industries specializing in visual and merchandise display, since 1996. From
1989 to 1995, he served as Senior Vice President and Partner of ScotchMaid,
Inc., a division of Sara Lee Corporation engaged in mass market distribution to
large retailers. Mr. Wineapple also served as an independent director of
FoxMeyer Funding, Inc., a subsidiary of FoxMeyer, during a portion of fiscal
1997.
DANIEL GROPPER, age 27, has served as a director of the Corporation since April
1998. Mr. Gropper has been an Analyst with Stonington Management Corp.
("Stonington") since 1995, and has worked on a variety of projects including
bankruptcies, restructurings, liquidations, activist positions, distressed high
yield situations, structured convertibles and private transactions. Prior to
joining Stonington, Mr. Gropper was an Associate in the Investment Banking
Department of Interstate/Johnson Lane, where he worked on public offerings and
merger transactions. Prior to his position with Interstate/Johnson Lane, Mr.
Gropper was an Analyst in the Financial Institutions Group of the Investment
Banking Division of Goldman, Sachs & Co. Mr. Gropper has a Bachelor of Science
in Commerce with Distinction from the University of Virginia.
VINCENT INTRIERI, age 41, has served as a director of the Corporation since
April 1998. Mr. Intrieri has been a Portfolio Manager with Stonington since
1995, where he analyzes investments and manages a portfolio of stocks and high
yield bonds in a variety of industries. He performs fundamental analysis and
workouts of distressed securities, special situations and turnarounds. Prior to
joining Stonington, Mr. Intrieri was a Partner in the Corporate Recovery
Services Group in the Chicago office of Arthur Anderson & Co., where he had
extensive experience in accounting, finance and consulting services for major
Fortune 500 corporations. Prior to Arthur Anderson & Co., Mr. Intrieri was a
Director in the Bankruptcy and Reorganization Services Group of Price
Waterhouse. Mr. Intrieri has a Bachelor of Science in Accounting with
Distinction from Pennsylvania State University, and is a director of Australian
Food and Fiber Limited, Marvel Holdings, Inc. and Marvel (Parent) Holding, Inc.
51
<PAGE>
RALPH DELLACAMERA, JR., age 44, has served as a director of the Corporation
since June 1998. Mr. DellaCamera joined Stonington as a convertible arbitrage
trader in 1986 and is currently Head Trader and Senior Risk Manager. Mr.
DellaCamera is responsible for managing investments in distressed securities,
equities, commodities and currencies. Prior to joining Stonington, Mr.
DellaCamera was employed by various Wall Street firms for the past 21 years he
has been in the finance business. Mr. DellaCamera holds a Bachelor of Science
in Business Administration from the University of New Haven.
BRIAN MILLER, age 32, has served as a director of the Corporation since June
1998. Mr. Miller joined Stonington as a trader in 1991 and is currently a
Portfolio Manager specializing in equity arbitrage strategies. Prior to joining
Stonington, Mr. Miller was employed by Yamaichi International as a derivatives
trader. Mr. Miller has a Bachelor of Science in Economics with Honors from
Albany State University.
EXECUTIVE OFFICERS
A brief biography of each executive officer of the Corporation (other than the
Co-Chairmen of the Board and Co-Chief Executive Officers, whose biographies are
set forth above) who served during fiscal 1998 is provided below. Executive
officers are typically elected by the Board of Directors at its annual meeting
and hold office until the next annual meeting of the Board of Directors or until
their successors have been duly elected and qualified. All of these individuals
were also formerly officers of FoxMeyer and FoxMeyer Drug Company, which filed
for relief under Chapter 11 of the Bankruptcy Code in 1996.
EDWARD L. MASSMAN, age 39, has served as Senior Vice President and Chief
Financial Officer of the Corporation since May 1996. Prior thereto, he served
the Corporation as Senior Vice President of Finance and Controller since
February 1996, as Vice President and Controller since July 1994 and as
Controller since July 1993. He also served as Senior Vice President and Chief
Financial Officer of FoxMeyer and FoxMeyer Drug Company from May 1996 to
September 1996 and, prior thereto, as Vice President and Controller from
September 1994 to February 1996 and as Director of Accounting since September
1990. Mr. Massman was employed by Deloitte & Touche LLP from January 1983 to
September 1990, serving most recently as Senior Audit Manager.
JOHN G. MURRAY, age 43, has served as Vice President - Finance of the
Corporation since July 1997. Prior thereto, he was a consultant to the
Corporation from July 1996 to July 1997 and served as Vice President and
Assistant Treasurer of the Corporation from April 1996 to July 1996 and as
Director of Special Projects and Assistant Treasurer from August 1993 to March
1996. He also served as Vice President and Assistant Treasurer of FoxMeyer and
FoxMeyer Drug Company from April 1996 to November 1996, and as Director of
Special Projects and Assistant Treasurer from August 1993 to March 1996.
Mr. Murray was Senior Vice President and Treasurer of Phoenix Ventures, Inc., a
venture capital firm, from April 1989 to August 1993.
GRADY E. SCHLEIER, age 46, has served as Vice President and Treasurer of the
Corporation since November 1995. He also served as Vice President and Treasurer
of FoxMeyer and FoxMeyer Drug Company from November 1995 to November 1996 and,
prior thereto, as Director of Project Finance since June 1993. He also served
as Treasurer of FoxMeyer Canada Inc., a former subsidiary of the Corporation,
until October 1996. Mr. Schleier was the Chief Financial Officer and a director
of American EnviroTech, Inc., a hazardous waste management company, from
February 1988 to September 1992.
SCOTT E PETERSON, age 46, has served as Vice President - Finance and Controller
of the Corporation since November 1996. He served as Vice President and
Controller of FoxMeyer and FoxMeyer Drug Company from March 1996 to November
1996 and, prior thereto, as Assistant Controller since May 1995. Mr. Peterson
served in various capacities, most recently Vice President, Controller,
Assistant Secretary and Treasurer, for Tom Thumb Food & Drugs, Inc. from
February 1993 to July 1994. Prior thereto, he was Vice President and Treasurer
of Tom Thumb Stores, Inc. from September 1989 to January 1993.
ROBERT H. STONE, age 38, has served as Vice President, General Counsel and
Secretary of the Corporation since November 1996. From November 1994 to
November 1996, he served as Associate General Counsel and Assistant Secretary of
the Corporation, FoxMeyer and FoxMeyer Drug Company. Mr. Stone was an attorney
with the law firm of Jones, Day, Reavis & Pogue from 1986 to November 1994.
52
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Corporation's directors,
executive officers and persons who beneficially own more than 10 percent of a
registered class of the Corporation's equity securities ("10% Owners") to file
reports of beneficial ownership of the Corporation's securities and changes in
such beneficial ownership with the Securities and Exchange Commission (the
"Commission"). Directors, executive officers and 10% Owners are also required
by rules promulgated by the Commission to furnish the Corporation with copies of
all forms they file pursuant to Section 16(a).
Based solely upon a review of the copies of the forms filed pursuant to Section
16(a) furnished to the Corporation, or written representations that no year-end
Form 5 filings were required for transactions occurring during fiscal 1998, the
Corporation believes that its directors, executive officers and 10% Owners
complied with Section 16(a) filing requirements applicable to them during fiscal
1998 and prior fiscal years, except as follows. United Equities Commodities
Company, Momar Corporation and Moses Marx (collectively, "United") filed an
Amendment to Schedule 13D, dated as of July 15, 1997, in which United stated
that it beneficially owned a total of 10% of the Corporation's common stock.
These shares were in addition to its ownership of 8% of the Corporation's Series
A preferred stock and 30% of its convertible preferred stock, the latter which
is convertible into the Corporation's common stock, as stated in the Schedule
13D filed on May 30, 1997. Neither United Equities Commodities Company, Momar
Corporation nor Moses Marx furnished the Corporation with a Form 3 with respect
to their status as a 10% Owner.
Thereafter, United filed another Amendment to Schedule 13D on July 30,1997,
at which time United stated that it had increased its beneficial ownership
of the Corporation's common stock to 14% and of the Corporation's Series A
preferred stock to 10%. In addition, pursuant to Written Consents, United had
further increased its beneficial ownership of the Series A preferred stock and
convertible preferred stock as of April 1998. Neither United Equities
Commodities Company, Momar Corporation nor Moses Marx furnished the Corporation
with a Form 4 with respect to the acquisition of additional securities after
becoming a 10% Owner.
53
f<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the three fiscal years ended
March 31, 1998 received by the Corporation's Co-Chief Executive Officers and the
next three most highly compensated executive officers of the Corporation for
fiscal 1998:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation (A)
--------------------------------------- ---------------------------
Awards Payouts
---------- -----------
Other Securities
Annual Underlying LTIP All Other
Name and Principal Fiscal Bonus Compensa- Options/ Payouts Compensa-
Position Year Salary($) ($)(B) tion($)(C) SARs(#) ($) tion($)(D)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Abbey J. Butler (E) 1998 583,333 750,000 (I) 600,000 451,404 136,732
Co-Chairman of the 1997 649,765 0 (I) 994,640 0 17,773
Board and Co-Chief 1996 858,000 0 195,071 50,000 0 8,527
Executive Officer
Melvyn J. Estrin (E) 1998 583,333 750,000 (I) 600,000 451,404 104,432
Co-Chairman of the 1997 649,765 0 (I) 994,640 0 7,274
Board and Co-Chief 1996 858,000 0 200,328 50,000 0 5,468
Executive Officer
Edward L. Massman (F) 1998 237,500 600,000 (I) 400,000 341,973 6,553
Senior Vice President and 1997 203,364 500,000 (I) 52,000 0 4,184
Chief Financial Officer 1996 162,711 0 (I) 30,000 0 4,620
Robert H. Stone (G) 1998 158,333 300,000 (I) 100,000 177,826 6,163
Vice President, General 1997 129,200 80,400 (I) 21,834 0 2,360
Counsel and Secretary 1996 97,137 6,000 (I) 2,000 0 790
Grady E. Schleier (H) 1998 158,333 200,000 (I) 100,000 177,826 6,192
Vice President and 1997 153,168 82,500 (I) 20,000 0 3,199
Treasurer 1996 113,230 8,958 (I) 3,000 0 3,608
</TABLE>
(A) The Corporation made no awards of restricted stock during the three fiscal
years ended March 31, 1998. "LTIP Payouts" consists of amounts paid by the
Corporation under its Performance Incentive Plan, as amended (the "Incentive
Plan").
(B) "Bonus" consists of amounts paid (i) in November 1997 and January 1998 by
the Corporation as a bonus to the named executive officers, (ii) in November
1996 by the Corporation in respect of the officers' agreements to be employed by
the Corporation and thereby forego additional compensation and severance
benefits to which they were entitled under their Employment Agreements with
FoxMeyer which had been assumed by McKesson Corporation ("McKesson"), and (iii)
in November 1996 by FoxMeyer Drug Company pursuant to two orders entered by the
United States Bankruptcy Court in its Chapter 11 case that approved a Stay Pay
Program ("Stay Pay").
(C) "Other Annual Compensation" consists of (i) amounts paid by the Corporation
or FoxMeyer before January 1, 1996 under FoxMeyer's non-qualified Supplemental
Savings Plan, and by Phar-Mor after October 1, 1997 under its
54
<PAGE>
non-qualified Deferred Compensation Plan, (ii) any personal use of corporate
property by the executive officer, and (iii) other personal benefits.
(D) "All Other Compensation" consists of amounts (i) contributed by the
Corporation to each executive officer's account under the Corporation's 401(k)
plan during fiscal 1998, (ii) contributed by the Corporation to each of Messrs.
Butler's and Estrin's account or by FoxMeyer to each of Messrs. Massman's,
Stone's and Schleier's account under FoxMeyer's 401(k) plan during fiscal 1997
and fiscal 1996, and (iii) paid by the Corporation or Phar-Mor to or on behalf
of Mr. Butler and Mr. Estrin for certain life insurance benefits, as described
in Note E below (which amounts were reflected in the column entitled "Other
Annual Compensation" in the Corporation's fiscal 1997 and fiscal 1996 Proxy
Statements). This column does not include de minimis amounts paid for group
term life insurance provided to all the Corporation and FoxMeyer employees as
part of their standard company benefit package.
(E) In fiscal 1998, Mr. Butler and Mr. Estrin each received $370,833 in salary
and a $750,000 bonus from the Corporation for serving as its Co-Chairman of the
Board and Co-Chief Executive Officer, and $212,500 from Phar-Mor for serving as
its Co-Chairman of the Board and Co-Chief Executive Officer since October 1,
1997. "All Other Compensation" for Mr. Butler consisted of (i) $17,897 paid by
the Corporation for certain term life insurance for the benefit of Mr. Butler,
(ii) $7,586 contributed by the Corporation to Mr. Butler's 401(k) plan account,
and (iii) $111,249 paid by Phar-Mor on a tax reimbursed "grossed-up" basis for a
$1.5 million whole life insurance policy on Mr. Butler's life. "All Other
Compensation" for Mr. Estrin consisted of (i) $5,796 paid by the Corporation for
certain term life insurance for the benefit of Mr. Estrin and (ii) $98,636 paid
by Phar-Mor on a tax reimbursed "grossed up" basis for a $1.5 million whole life
insurance policy on Mr. Estrin's life. Mr. Butler and Mr. Estrin may earn
additional compensation applicable to the Corporation's fiscal year ended March
31, 1998 under Phar-Mor's bonus plans, which will not be determined until the
end of Phar-Mor's fiscal year on June 30, 1998.
In fiscal 1997, Mr. Butler and Mr. Estrin each received $350,000 from the
Corporation for serving as its Co-Chairman of the Board and Co-Chief Executive
Officer, $231,314 from FoxMeyer for serving until November 1996 as its Co-Chief
Executive Officer, and $68,451 from Ben Franklin for serving until March 1997 as
its Co-Chairman of the Board. "All Other Compensation" for Mr. Butler consisted
of (i) $13,619 paid by the Corporation for certain term life insurance for the
benefit of Mr. Butler and (ii) $4,154 contributed by the Corporation to Mr.
Butler's 401(k) plan. "All Other Compensation" for Mr. Estrin consisted of (i)
$3,120 paid by the Corporation for certain term life insurance for the benefit
of Mr. Estrin and (ii) $4,154 contributed by the Corporation to Mr. Estrin's
401(k) plan. In addition to the amounts set forth in the Summary Compensation
Table, in fiscal 1997, Mr. Butler and Mr. Estrin received severance payments
from McKesson, which assumed FoxMeyer's obligations under their respective
employment agreements with FoxMeyer in connection with McKesson's acquisition of
substantially all of the assets of FoxMeyer and FoxMeyer Drug Company.
In fiscal 1996, Mr. Butler and Mr. Estrin each received $350,000 from the
Corporation for serving as its Co-Chairman of the Board and Co-Chief Executive
Officer, $400,000 from FoxMeyer for serving as its Co-Chairman of the Board and
Co-Chief Executive Officer, and $108,000 from Ben Franklin for serving as its
Co-Chairman of the Board. Mr. Butler received $174,736, and Mr. Estrin received
$181,281, under FoxMeyer's Supplemental Savings Plan, which amounts exceeded 25%
of the total "Other Annual Compensation" received by each of them in fiscal
1996. "All Other Compensation" for Mr. Butler consisted of (i) $3,907 paid by
the Corporation for certain term life insurance for the benefit of Mr. Butler
and (ii) $4,620 contributed by the Corporation to Mr. Butler's 401(k) plan.
"All Other Compensation" for Mr. Estrin consisted of (i) $848 paid by the
Corporation for certain term life insurance for the benefit of Mr. Estrin and
(ii) $4,620 contributed by the Corporation to Mr. Estrin's 401(k) plan.
In fiscal 1998, in connection with their serving as Co-Chairman of the Board and
Co-Chief Executive Officer of the Corporation and Phar-Mor, Mr. Butler and Mr.
Estrin were each granted options to purchase 400,000 shares of the Corporation's
common stock and options to purchase 200,000 shares of Phar-Mor common stock.
In fiscal 1997, all of the options to purchase 994,640 shares of the
Corporation's common stock that were previously granted to each of Mr. Butler
and Mr. Estrin, including options to purchase 99,440 shares of the Corporation's
common stock that expired in fiscal 1997, were repriced and/or replaced by the
Corporation. In fiscal 1996, Mr. Butler and Mr. Estrin were each granted
options to purchase 50,000 shares of the Corporation's common stock, and Ben
Franklin canceled and then granted replacement options to purchase 118,000
shares of Ben Franklin common stock that were previously granted to Mr. Butler
and Mr. Estrin.
55
<PAGE>
In addition to the amounts set forth in the Summary Compensation Table above,
Mr. Butler and Mr. Estrin each received compensation in fiscal 1998 for
serving as outside directors of certain companies in which the Corporation
holds less than majority ownership interests and which are not consolidated
subsidiaries of the Corporation, as follows: (i) in their capacity as outside
directors of Phar-Mor until September 30, 1997, Mr. Butler and Mr. Estrin
were each paid $12,500 as their pro rata portion of annual director fees,
plus per meeting fees, and were each granted options to purchase 10,000
shares of Phar-Mor common stock and credited with 7,703 shares of Phar-Mor
common stock under its Phantom Stock Plan, (ii) in their capacity as outside
directors of Imagyn, Mr. Butler and Mr. Estrin were each paid $21,000 in
director fees and were each granted options to purchase 7,500 shares of
Imagyn common stock, (iii) in their capacity as outside directors of Carson,
Mr. Butler and Mr. Estrin were each awarded 2,710 shares of Carson restricted
stock and options to purchase 5,000 shares of Carson common stock and (iv) in
his capacity as an outside director of CareTech, Mr. Estrin was granted
options to purchase 10,000 shares of CareTech common stock.
In fiscal 1997, (i) in their capacity as outside directors of Phar-Mor, Mr.
Butler and Mr. Estrin were each paid $25,000 in annual director fees, plus per
meeting fees, and were each granted options to purchase 5,000 shares of Phar-Mor
common stock and credited with 4,050 shares of Phar-Mor common stock under its
Phantom Stock Plan, (ii) in their capacity as outside directors of Imagyn, Mr.
Butler and Mr. Estrin were paid $11,000 and $10,000 in director fees,
respectively, and were each granted options to purchase 7,500 shares of Imagyn
common stock, and (iii) in their capacity as outside directors of Carson, Mr.
Butler and Mr. Estrin were each granted options to purchase 1,500 shares of
Carson common stock. In addition, during a portion of fiscal 1997, Mr. Butler
served as an outside director of CST Entertainment, Inc. ("CST"), and the
Corporation has been unable to obtain any information from CST regarding
director fees because it liquidated its assets and filed for relief under
Chapter 7 of the Bankruptcy Code during fiscal 1997.
In fiscal 1996, (i) in their capacity as outside directors of Phar-Mor, Mr.
Butler and Mr. Estrin were each paid $25,000 in annual director fees, plus per
meeting fees, and were each granted options to purchase 5,000 shares of Phar-Mor
common stock, (ii) in their capacity as outside directors of Imagyn, Mr. Butler
and Mr. Estrin were each paid $1,000 in director fees and were each granted
options to purchase 7,500 shares of Imagyn common stock and (iii) in his
capacity as an outside director of CST, Mr. Butler was granted warrants to
purchase 50,000 shares of CST common stock during CST's fiscal year ended June
30, 1996.
(F) Mr. Massman also served until September 1996 as Senior Vice President of
FoxMeyer and FoxMeyer Drug Company, which paid all of his compensation for
services rendered in fiscal 1997 and fiscal 1996. In fiscal 1997, Mr.
Massman was paid $100,000 pursuant to an August 8, 1996 incentive agreement
relating to the sale of the assets of FoxMeyer and FoxMeyer Drug Company. In
addition, as a retention bonus and for coordinating the separation and
relocation of the Corporation from FoxMeyer, the Corporation, pursuant to the
terms of his Employment Agreement, paid Mr. Massman $300,000 and assigned to
him a 50% interest in all amounts received by the Corporation from the
proceeds of any sale of any assets of or its interests in Alumet Partnership.
As of the date of the assignment, its fair market value was estimated to be
$100,000. Certain mineral rights of the Partnership were subsequently sold
in fiscal 1998, thereby increasing the value of the assignment. Options to
purchase 52,000 shares of the Corporation's common stock that were previously
granted to Mr. Massman in fiscal 1996 and fiscal 1995 were repriced by the
Corporation in fiscal 1997.
(G) Mr. Stone also served until November 1996 as Associate General Counsel and
Assistant Secretary of FoxMeyer and FoxMeyer Drug Company, which paid all of his
compensation for services rendered in fiscal 1997 through November 1996 and all
of fiscal 1996, including $5,400 in Stay Pay in fiscal 1997. Options to
purchase 21,834 shares of the Corporation's common stock that were previously
granted to Mr. Stone earlier in fiscal 1997 and in fiscal 1996 and fiscal 1995
were repriced by the Corporation in fiscal 1997.
(H) Mr. Schleier also served until November 1996 as Vice President and
Treasurer of FoxMeyer and FoxMeyer Drug Company, which paid all of his
compensation for services rendered in fiscal 1997 through November 1996 and all
of fiscal 1996, including $7,500 in Stay Pay in fiscal 1997. Options to
purchase 20,000 shares of the Corporation's common stock that were previously
granted to Mr. Schleier earlier in fiscal 1997 and in fiscal 1996 and fiscal
1995 were repriced by the Corporation in fiscal 1997.
(I) Other annual compensation to this executive officer did not exceed the
lesser of $50,000 or 10 percent of such executive officer's total salary and
bonus for such fiscal year.
56
<PAGE>
OPTION/SAR GRANTS IN FISCAL YEAR 1998 TO EXECUTIVE OFFICERS
The following table provides information regarding options granted during
fiscal 1998 to the Corporation's executive officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Percent of
Total
Options/
Number of SARs
Securities Granted
Underlying to Potential Realizable Value
Options/ Employees Exercise or at Assumed Annual Rates
SARs in Fiscal Base Price Expiration of Stock Price Appreciation
Name Granted(#) Year ($/Sh) Date for Option Term(A)
- ----------------------------------------------------------------------------------------------------------------------------
5%($) 10%($)
------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Abbey J. Butler(B)(C) 400,000 24.24% $1.125 07-01-02 $ 124,326 $ 274,729
Melvyn J. Estrin(B)(C)(D) 400,000 24.24% $1.125 07-01-02 $ 124,326 $ 274,729
Edward L. Massman(B) 400,000 24.24% $1.125 07-01-02 $ 124,326 $ 274,729
Robert H. Stone(B) 100,000 6.06% $1.125 07-01-02 $ 31,081 $ 68,682
Grady E. Schleier(B) 100,000 6.06% $1.125 07-01-02 $ 31,081 $ 68,682
</TABLE>
(A) The potential realizable values set forth under these columns result
from calculations assuming 5% and 10% growth rates as set by the
Commission and are not intended to forecast future price appreciation of
the stock indicated. The amounts reflect potential future value based
upon growth at these prescribed rates. The Corporation did not use an
alternative formula for a grant date valuation, an approach which would
state gains at present, and therefore lower, value. The Corporation is
not aware of any formula which will determine with reasonable accuracy a
present value based on future unknown or volatile factors. Actual gains,
if any, on stock option exercises are dependent on the future performance
of the stock indicated. There can be no assurance that the amounts
reflected in this table will be achieved.
(B) One-third (1/3) of each of these options will become exercisable on
each anniversary of the grant date, commencing on July 1, 1998.
(C) Mr. Butler and Mr. Estrin also have been granted options to acquire
common stock of Phar-Mor, Imagyn and Carson.
(D) Mr. Estrin also has been granted options to acquire common stock of
CareTech.
57
<PAGE>
AGGREGATE OPTIONS/SAR EXERCISES IN FISCAL 1998 BY EXECUTIVE OFFICERS AND FISCAL
YEAR-END OPTION/SAR VALUES
There were no options to purchase the Corporation's, Phar-Mor, Imagyn, Carson
or CareTech common stock exercised during fiscal 1998 by any of the executive
officers named in the Summary Compensation Table. The following table
provides information as to the value of options for the Corporation's common
stock held by such executives at fiscal 1998 year end measured in terms of
the last reported sale price for shares of such common stock on March 31,
1998.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SAR's at FY-End(#) Options March 31, 1998 ($)
------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Abbey J. Butler 663,093 731,547 580,206 665,104
Melvyn J. Estrin 663,093 731,547 580,206 665,104
Edward L. Massman 34,667 417,333 30,334 390,166
Robert H. Stone 14,556 107,278 12,737 100,118
Grady E. Schleier 13,333 106,667 11,666 99,584
</TABLE>
LONG-TERM INCENTIVE PLANS -- AWARDS
IN LAST FISCAL YEAR (A)
<TABLE>
<CAPTION>
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation Estimated Future Payouts Under Non-Stock
Name Rights(B) of Payout Price-Based Plans
- -----------------------------------------------------------------------------------------------------------
Threshold Target(C) Maximum
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Abbey J. Butler 4.38%/3.78% 04-1-99 0 451,404 None
Melvyn J. Estrin 4.38%/3.78% 04-1-99 0 451,404 None
Edward L. Massman 2.98%/2.86% 04-1-99 0 341,973 None
Robert H. Stone 1.44%/1.49% 04-1-99 0 177,826 None
Grady E. Schleier 1.44%/1.49% 04-1-99 0 177,826 None
</TABLE>
(A) The Corporation has adopted the Incentive Plan to motivate and reward high
performing executives, focus executive attention on achieving key objectives for
each fiscal year, and be a material component of a total competitive pay
structure. The participants in the Incentive Plan presently consist of the
Corporation's executive officers and certain key employees. Under the Incentive
Plan, amounts are distributed to participants based on specified percentages of
(i) the Corporation's net income, which is calculated in accordance with
generally accepted accounting principles, after all applicable taxes but before
accrual of any dividends on the Corporation preferred stock, and exclusive of
any activities relating to the Corporation's relationship with National Steel
Corporation and its settlement with the FoxMeyer Chapter 7 Trustee, and (ii)
Litigation Income, which consists of net income generated in connection with the
McKesson lawsuit (see Item 3). Although Incentive Plan distributions may be
made on an annual basis, the Incentive Plan is intended to serve as an incentive
for performance to occur over a period longer than one fiscal year, particularly
with respect to Litigation Income. The total percentage of net income and of
Litigation Income available under the Incentive Plan for the fiscal year ending
March 31, 1999 for all officers and key employees is 17.5%.
58
<PAGE>
(B) "Number of Shares, Units or Other Rights" lists the percentages awarded
in the last fiscal year of net income and Litigation Income, respectively,
that each named executive officer is entitled to receive under the Incentive
Plan for fiscal 1999 performance.
(C) The amount set forth under "Target" is a representative amount based on
the Corporation's net income, as defined in the Incentive Plan, in fiscal
1998. There was no Litigation Income in fiscal 1998.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of the Corporation or one of its
subsidiaries or members of the Executive and Nominating Committee receive an
annual fee of $22,500. They also receive $1,000 for each meeting of the
Board of Directors or of a committee of the Board of Directors (other than
the Executive and Nominating Committee) they attend. The Chairman of each of
the committees receive an additional $1,000 for each meeting of the committee
they attend. Directors are reimbursed for travel and lodging expenses in
connection with board and committee meetings.
Under the terms of the 1993 Restated Stock Option and Performance Award Plan,
directors who are not officers or employees of the Corporation or one of its
subsidiaries are automatically granted options to purchase 15,000 shares of
the Corporation's common stock when first elected to serve on the Board of
Directors and, in each year each director continues to serve as a member of
the Board of Directors, options to purchase 1,000 shares of common stock on
the third trading date following the later of (i) the date on which the
annual meeting of the Corporation's stockholders, or any adjournment thereof,
is held each year or (ii) the date on which the Corporation's earnings for
the fiscal quarter immediately preceding the date of such annual meeting are
released to the public.
The Corporation also maintains a Director's Retirement Plan that provides for
the payment of retirement benefits to directors who have a minimum number of
years of service, other than directors who are, or at any time subsequent to
December 31, 1975 have been, officers of the Corporation or any affiliated
corporation. Each qualifying director is entitled, at the later of
retirement or age 60, to receive a monthly benefit for a period equal to his
years of service or 15 years, whichever is less. Such monthly benefit is
equal to one-twelfth (1/12) of the highest annual fee in effect for directors
during such director's years of service on the Board of Directors.
One of the outside directors of the Corporation, Hyman H. Frankel, is
presently a party to a consulting agreement with the Corporation which is
terminable by either party on 30 days' prior written notice. Under the
consulting agreement, the Corporation pays Dr. Frankel a monthly consulting
fee of $7,500.
EMPLOYMENT AND INDEMNIFICATION AGREEMENTS
THE CORPORATION.
Abbey J. Butler and Melvyn J. Estrin, the Co-Chairmen and Co-Chief Executive
Officers of the Corporation, each has an employment agreement with the
Corporation dated as of February 27, 1995, and amended effective as of
February 1, 1998. The agreements are each for a rolling three year term at a
minimum annual base salary of $475,000, subject to periodic increases by the
Corporation's Board of Directors. Mr. Butler and Mr. Estrin are also
entitled to participate in the benefits generally available to senior
executives of the Corporation, and are permitted to engage in activities with
other companies, ventures or investments, provided that such activities do
not unreasonably impede the performance of his duties for the Corporation,
and to retain any compensation and other benefits he may receive in such
capacity. If either Mr. Butler's or Mr. Estrin's employment with the
Corporation is terminated "Without Just Cause" (as such term is defined in
the agreements, including but not limited to in the event of a change of
control of the Corporation), Mr. Butler or Mr. Estrin, as the case may be,
will be entitled to receive a one-time lump sum payment equal to one hundred
fifty percent (150%) times the full amount of his monthly base salary and
cash bonus awards that otherwise would have been earned by him during the
full term of his agreement, plus
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payment of certain allocated office overhead expenses, payment of premiums
payable by the Corporation for life insurance policies applicable to Mr.
Butler or Mr. Estrin, as the case may be, and certain tax adjustment payments
in respect of any amounts that constitute excess parachute payments under
federal tax laws. In addition, the Butler and Estrin employment agreements
provide that if (i) any "person" (as such term is defined in Section 13(d) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly,
of either (x) thirty-five percent (35%) of the outstanding shares of the
Corporation's common stock or (y) securities of the Corporation representing
thirty-five percent (35%) of the combined voting power of the Corporation's
then outstanding voting securities, or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Corporation cease, at any time after the
beginning of such period, for any reason to constitute a majority of the
Board of Directors of the Corporation, unless each new director was
nominated, or the election of such director was ratified, by at least
two-thirds of the directors still in office who were directors at the
beginning of such two-year period, then Mr. Butler or Mr. Estrin shall have
the right to elect to treat such event as constituting a termination "Without
Just Cause" under their respective employment agreements.
Edward L. Massman, the Senior Vice President and Chief Financial Officer of
the Corporation, has an employment agreement with the Corporation dated as of
November 7, 1996, and amended effective as of February 1, 1998. The
agreement expires on January 31, 2000, subject to automatic renewal for
successive one year terms unless the Corporation provides Mr. Massman with
six months' prior notice of its intent not to renew. Under the agreement,
Mr. Massman's minimum annual base salary is $300,000, plus a minimum annual
bonus in the amount of $100,000 payable no later than November of each year.
Mr. Massman is also entitled to participate in the benefits generally
available to senior executives of the Corporation. If upon expiration, Mr.
Massman's employment agreement is not renewed on terms at least as favorable
as the terms and conditions of his existing agreement, or his employment with
the Corporation is terminated "Without Cause" (as such term is defined in the
agreement, including but not limited to in the event of a change of control
of the Corporation), he would be entitled to receive a one-time lump sum
payment equal to the full amount of his monthly base salary and cash bonus
awards that otherwise would have been earned by him for a twenty-four month
period, plus certain tax adjustment payments in respect of any amounts that
constitute excess parachute payments under federal tax laws. In addition,
under the agreement, in 1996 the Corporation paid Mr. Massman $300,000 and
assigned to him a fifty percent (50%) interest in all amounts received by the
Corporation from the proceeds of any sale of any assets of or its interests
in Alumet Partnership, in respect of his agreement to be employed by the
Corporation (and thereby forego additional compensation and severance
benefits to which he was entitled under his Employment Agreement with
FoxMeyer, which had been assumed by McKesson), and for coordinating the
separation and relocation of the Corporation from FoxMeyer.
Robert H. Stone, the Vice President, General Counsel and Secretary of the
Corporation, has an employment agreement with the Corporation dated as of
November 12, 1996, and amended effective as of February 1, 1998. Under the
agreement, which expires on January 31, 2000, Mr. Stone's minimum annual base
salary is $200,000, and he is also entitled to participate in the benefits
generally available to senior executives of the Corporation. If Mr. Stone's
employment with the Corporation is terminated "Without Cause" (as such term
is defined in the agreement), he would be entitled to receive, at his option
(i) a single lump sum severance payment equal to the amount of total
compensation that would otherwise have been paid during the forthcoming nine
months or (ii) monthly severance payments for a period of eighteen months.
In addition, under the agreement, in 1996 the Corporation paid Mr. Stone
$75,000 in respect of his agreement to be employed by the Corporation and
thereby forego additional compensation and severance benefits to which he was
entitled under his Employment Agreement with FoxMeyer, which had been assumed
by McKesson.
Grady E. Schleier, the Vice President and Treasurer of the Corporation, Scott
E Peterson, the Vice President - Finance and Controller of the Corporation,
and John G. Murray, the Vice President - Finance of the Corporation, each has
an employment agreement with the Corporation that is substantively identical
to the employment agreement described above between the Corporation and Mr.
Stone. In addition, the Corporation has entered into an Indemnification
Agreement with each of its executive officers.
Each executive officer has entered into an indemnification agreement with the
Corporation dated as of October 23, 1997. Each agreement terminates upon the
later of (i) ten years following the date that such officer ceases to serve
in his capacity with the Corporation, any majority-owned subsidiary, other
enterprise of the Corporation or an employee benefit plan or trust related
thereto which such officer served at the Corporation's request and (ii) the
final termination of any proceeding to which indemnification or advancement
of expenses relates pursuant to such
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agreements. Under each indemnification agreement, the executive officer is
entitled to indemnification for damages and expenses in any proceeding
involving the Corporation (whether or not brought by or in the right of the
Corporation) subject to certain conditions and limitations depending on the
circumstances of the proceeding and conduct of such officer. In addition,
each executive officer is entitled to be advanced expenses in connection with
any such proceeding upon request by such executive officer and subject to
certain conditions.
If there is a change of control (as defined in each indemnification
agreement), upon the request of any executive officer in connection with any
proceedings for which indemnification or advancement of expenses is provided,
the Corporation is required to create a trust and fund such trust in an
amount sufficient to cover any expenses (as determined by an independent
counsel appointed in accordance with the terms of the indemnification
agreement) incurred by such executive officer relating to such proceeding.
PHAR-MOR.
Mr. Butler and Mr. Estrin each has an employment agreement with Phar-Mor.
The agreements are each for a rolling three-year term commencing on October
1, 1997 and provide for Messrs. Butler and Estrin to serve as Co-Chief
Executive Officers and Co-Chairmen of the Board. The initial annual base
salary of each of Messrs. Butler and Estrin is $425,000, subject to annual
increases of 8%. The agreements provide for an annual incentive bonus under a
company-sponsored bonus plan (if a bonus plan is approved, or otherwise as
provided under a separate agreement between Phar-Mor and each of Messrs.
Butler and Estrin), if reasonable performance objectives approved by the
Board are achieved, with a maximum bonus of 60% and a minimum bonus of 21% of
annual base salary, commencing in Phar-Mor's fiscal year ending June 30,
1998, with the exception that if the performance objectives are exceeded,
such bonus will be increased to a level commensurate with the amount of
bonuses payable to senior officers of Phar-Mor who are situated similarly to
Messrs. Butler and Estrin. Each of Messrs. Butler and Estrin has also been
granted options to purchase 200,000 shares of common stock of Phar-Mor at an
exercise price of $6.84375 per share under the Phar-Mor Stock Incentive Plan.
Pursuant to their respective employment agreements, Messrs. Butler and Estrin
are permitted to engage in activities (except certain activities that are
competitive with Phar-Mor's business), in addition to serving as Co-Chief
Executive Officers and Co-Chairmen of the Board, and pursue other investments
(except ownership of more than a 10% interest in an entity that derives more
than 50% of its gross revenues from the retail sale, at a discount, of
pharmaceuticals, unless Messrs. Butler and Estrin or their respective
immediate families owned or controlled, directly or indirectly, an ownership
interest of at least 1% in the entity as of October 1, 1997). The agreements
do not require Messrs. Butler and Estrin to provide services at Phar-Mor's
principal locations.
The employment agreements with Messrs. Butler and Estrin also provide for
long-term performance payouts to each of them, commencing with the three-year
period ending September 30, 2000 and each third year thereafter during the
term of the employment agreement, in an amount (subject to the offset
referred to in the last sentence of this paragraph) equal to 1.5% of any
excess of (i) the aggregate market value of the publicly-traded shares of
common stock of Phar-Mor based on the average closing price for the thirty
(30)-day period ending on the last day of the subject period (less the sum of
(a) the proceeds from the exercise during such period of any options or
warrants plus (b) any cash or property consideration actually received by
Phar-Mor during such period from the issuance of any shares of its common
stock) over (ii) the aggregate market value of the publicly traded shares of
common stock of Phar-Mor based on the average closing price for the thirty
(30)-day period ending on the last day of the immediately prior subject
period (provided that for the first day of the period ending on September 30,
2000, such average closing price shall be deemed to be $6.84375 per share).
One-half of the aggregate annual bonuses paid or payable in respect of the
applicable three-year period will be offset against the long-term payout
amount.
The employment agreements with Messrs. Butler and Estrin further provide for
various employee benefits and perquisites, including but not limited to
payment, on a tax reimbursed, "grossed-up" basis, for a $1.5 million whole
life insurance policy on Messrs. Butler and Estrin's lives or, at the
election of either of them, a term policy requiring an equivalent premium;
disability insurance adequate to pay Messrs. Butler and Estrin 60% of their
respective base salaries until age 75; reimbursement of all medical,
hospitalization and dental costs for Messrs. Butler and Estrin and their
families; the use of a car owned or leased by Phar-Mor and the provision of
other transportation for Messrs. Butler's and Estrin's travel requirements
such as the lease of an aircraft; and business expenses at locations other
than Phar-Mor's headquarters.
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Each of the agreements with Messrs. Butler and Estrin provides that, if it is
terminated without cause (as defined in each agreement), such officer will be
entitled to the present value of his base salary, discounted at 5%, for the
remaining contract term, annual and long-term incentive payments payable for the
remainder of the term, all compensation, benefits, stock options, health and
disability benefits accruing under the agreement for the remainder of the term
(or, at their option, the value of such stock options determined in accordance
with "Black Scholes Formula"), tax reimbursement in respect of any termination
payments that constitute excess parachute payments under Federal income tax
laws, and the accelerated vesting (and extended post-termination exercise
periods) of all stock options. Under each agreement, termination with cause by
Phar-Mor is limited to the entry of a felony conviction, voluntary resignation,
death, or permanent disability (as defined in each agreement).
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Finance and Personnel Committee (the "Finance Committee") of the
Corporation's Board of Directors performs the functions of a compensation
committee. The Finance Committee is comprised of three directors: Mr. John L.
Wineapple, who is the Chairman, and Messrs. Fred S. Katz and William A. Lemer.
Mr. Katz also serves as Chairman and is a shareholder of the Board of Cyclone.
Abbey J. Butler, is the Co-Chairman and Co-Chief Executive Officer of the
Corporation and of a subsidiary of the Corporation, M&A, and is also a director
of Cyclone.
In March 1995, M&A invested $700,000 in Cyclone in exchange for a promissory
note and a warrant to purchase 218,750 shares of common stock of Cyclone. In
October 1997, as part of a recapitalization of Cyclone, (i) M&A converted its
note and warrant into 883,638 shares of Cyclone common stock and (ii) Mr. Katz
converted his note, warrant and common stock into a total of 355,558 shares of
Cyclone common stock. In addition, immediately before the recapitalization,
First Taconic, of which Mr. Katz is the Chairman and Mr. Wineapple is a
consultant, acquired another investor's note and common stock for $450,000 and
converted them into 495,117 shares of Cyclone common stock. In connection with
M&A's original investment in Cyclone in 1995, Mr. Katz and Bradford G. Corbett,
who are shareholders of Cyclone, agreed to transfer 175,000 shares of his or
their Cyclone shares to M&A and, so long as M&A owns such shares, to nominate
and support a designated representative of M&A to sit on Cyclone's Board of
Directors. As part of the October 1997 recapitalization, the obligation to
deliver these shares was deemed satisfied.
REPORT OF THE FINANCE AND PERSONNEL COMMITTEE
The Finance Committee is comprised of three directors: Mr. John L. Wineapple,
who is the Chairman, and Messrs. Fred S. Katz and William A. Lemer.
EXECUTIVE COMPENSATION
Compensation for the Corporation's executive officers is comprised of base
salary, annual performance incentive payments, long-term incentive awards, stock
option grants, and employee health and welfare benefits. Executive officers are
also eligible to receive discretionary bonuses as an incentive for superior
performance. The goals of the Corporation's executive compensation policy are
to motivate and reward its executive officers for overseeing and managing the
Corporation's operations and investments, contributing towards long-term
strategic planning and improving long-term stockholder value, and to attract and
retain high-quality executive talent.
The Finance Committee's philosophy regarding executive compensation also
recognizes the unique factors applicable to the roles of the Corporation's
executive officers in the future success of the Corporation. In particular, the
Finance Committee recognizes that the Corporation's executive officers have
extensive and critical knowledge of the Corporation's history and operations
that would be impossible to re-create and that, absent their continued
employment by the Corporation, it would be extremely difficult for the
Corporation to continue to move forward on its most critical strategies and
initiatives, including but not limited to the following matters:
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a. Prosecuting the litigation commenced by the Corporation against
McKesson and numerous pharmaceutical manufacturers, which is currently
pending in Texas State Court and is the subject of various other
pending proceedings in Delaware;
b. Providing assistance to the Chapter 7 Trustee of FoxMeyer and FoxMeyer
Drug Company in connection with the investigation and prosecution of
lawsuits against persons and entities that significantly harmed the
FoxMeyer entities, which lawsuits and actions are critically important
to the Corporation because it holds a 30% interest in the proceeds of
the lawsuits and has pledged such interest as collateral to secure the
Corporation's $8 million obligation to the Trustee;
c. Providing assistance in defending the Corporation in the consolidated
class action shareholder lawsuits pending in federal and state court
in Dallas, which relate to actions of the Corporation that occurred in
1995 and 1996; and
d. Maximizing the Corporation's return on its investments.
The Finance Committee also reviewed and considered the role of each of the
Corporation's executive officers in a number of specific transactions that were
consummated during fiscal 1998. These items included (i) negotiating and
entering into a definitive agreement with National Steel Corporation in
November 1997, under which the Corporation received a $59 million cash payment
and would receive an additional $10 million payment over the course of the next
year, plus a release of various environmental and other previously indemnified
liabilities, (ii) negotiating and entering into a settlement agreement with the
Chapter 7 Trustee of FoxMeyer, under which the Corporation settled all of its
obligations arising out of the dividend of certain assets by FoxMeyer to the
Corporation in June 1996 and which was approved by the Federal Bankruptcy Court
and closed in October 1997, and (iii) acquiring 3,750,000 shares of Phar-Mor
from Hamilton Morgan in September 1997.
Based on all of the foregoing factors, the Finance Committee determined the
appropriate compensation levels for each of the Corporation's executive
officers with respect to both increases in base salary, which were reflected
in amendments to the executive officers' employment agreements executed near
the end of fiscal 1998, and discretionary bonus awards during fiscal year
1998.
CO-CHIEF EXECUTIVE OFFICERS
The Finance Committee makes decisions with respect to the compensation of
Abbey J. Butler and Melvyn J. Estrin, the Co-Chief Executive Officers of the
Corporation. During fiscal 1998, in accordance with their respective
employment agreements with the Corporation (see above), the Corporation
initially paid each of Messrs. Butler and Estrin a salary based on an annual
rate of $350,000. This base salary was approved by the Board of Directors in
January 1995, based upon the recommendation of the then-existing Personnel
and Compensation Committee. Effective as of February 1, 1998, the Finance
Committee approved amendments to the employment agreements with Messrs.
Butler and Estrin that included, among other things, an increase in each of
their base salaries to an annual rate of $475,000. Messrs. Butler and Estrin
were also awarded bonuses as determined by the Finance Committee based on the
factors set forth above.
Section 162(m) of the Code limits the deductibility on the Corporation's tax
return of compensation over $1 million to any of its named executive officers
unless, in general, the compensation is paid pursuant to a plan that is
performance related, non-discriminatory and has been approved by
shareholders. Because the compensation of certain executive officers of the
Corporation exceeded $1 million in fiscal 1998, the provisions of Section
162(m) will likely limit the deductibility of such compensation. In
addition, the Corporation and each of Messrs. Butler, Estrin and Massman have
entered into amendments to their respective employment agreements that
contain certain severance provisions applicable in the event of a change of
control of the Corporation. To the extent benefits received by Messrs.
Butler, Estrin or Massman pursuant to such severance provisions equal or
exceed 300% of his average annual taxable compensation (as defined in the
applicable regulations), the full amount of such excess ("parachute
payments") will not be deductible by the Corporation and the amount of the
parachute payments will reduce the $1 million limit under Section 162(m).
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JOHN L. WINEAPPLE (CHAIRMAN)
FRED S. KATZ
WILLIAM A. LEMER
The foregoing report is not incorporated by reference in any prior or future
filings of the Corporation under the Securities Act or under the Exchange Act
directly or by reference to the incorporation of proxy statements of the
Corporation, unless the Corporation specifically incorporates the report by
reference, and the report shall not otherwise be deemed filed under such Acts.
PERFORMANCE GRAPH
In its 1997 fiscal year, the Corporation determined that it would not be
appropriate to continue to compare the performance of the Corporation's common
stock with the same peer companies used in prior years and that it would be more
appropriate to compare the performance of the Corporation's common stock with
the Standard & Poor's SmallCap 600 Index. This index is a market-value weighted
index consisting of 600 domestic stocks chosen for market size, liquidity and
industry group representation. Consistent with its Proxy Statement for its 1997
fiscal year, the following graph compares the performance of the Corporation's
common stock, the Standard & Poor's 500 Index and the Standard & Poor's SmallCap
600 Index for the Corporation's last five fiscal years. The graph assumes that
the value of the investment in the Corporation's common stock and in each index
was $100 on April 1, 1993, and that all dividends were reinvested.
[GRAPHIC]
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------
4/1/93 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Corporation 100.00 123.08 149.04 139.42 7.69 15.86
S&P 500 Index 100.00 101.47 117.27 154.92 185.63 274.73
S&P SmallCap 600 100.00 108.65 114.38 150.05 162.64 240.19
</TABLE>
The foregoing graph is not incorporated in any prior or future filings of the
Corporation under the Securities Act or the Exchange Act, directly or by
reference to the incorporation of proxy statements of the Corporation, unless
the Corporation specifically incorporates the graph by reference, and the graph
shall not otherwise be deemed filed under such Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 19, 1998 with
respect to the beneficial ownership of the Corporation's common stock by (i)
persons believed by the Corporation to be the beneficial owners of more than 5%
of the outstanding shares of the Corporation's common stock, (ii) all directors
and nominees for election as
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directors of the Corporation, (iii) each of the named executive officers of
the Corporation, and (iv) all directors and named executive officers as a
group.
The number of shares of the Corporation's common stock beneficially owned by
each individual set forth below is determined under rules of the Commission
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which an individual has sole or shared voting power or
investment power and any shares that an individual presently, or within 60
days of the date of June 29, 1998 (the date on which this report is due at
the Commission, the "Due Date"), has the right to acquire through the
exercise of any stock option or other right. Unless otherwise indicated,
each individual has sole voting and investment power (or shares such powers
with his spouse) with respect to the shares of the Corporation's common stock
set forth in the following table.
<TABLE>
<CAPTION>
Number of Shares
of the Corporation's Percentage of
Name and Address (1) Common Stock Outstanding Shares
of Beneficial Owner Beneficially Owned (10)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
The Centaur Group
c/o Centaur Partners IV 1,504,055 (2) 9.17%
17 Battery Place, Suite 709
New York, New York 10004
Directors and Nominees for Directors
(including those who are also
Executive Officers):
Abbey J. Butler 2,632,028 (2)(3) 16.05%
Melvyn J. Estrin 2,635,784 (2)(4) 16.08%
Ralph DellaCamera 0 (15) (11)
Hyman H. Frankel 8,000 (5) (11)
Daniel Gropper 0 (15) (11)
Vincent Intrieri 0 (15) (11)
Fred S. Katz 8,000 (5) (11)
William A. Lemer 8,000 (5) (11)
Brian Miller 0 (15) (11)
Charles C. Pecarro 8,000 (5) (11)
John L. Wineapple 13,000 (6) (11)
NAMED EXECUTIVE OFFICERS:
Edward L. Massman 185,333 (7) 1.13%
Robert H. Stone 55,167 (8) (11)
Grady E. Schleier 53,333 (9) (11)
All Directors and Named Executive
Officers as a Group (14 persons) 4,102,590 25.02% (12)
BEA Associates 712,000 4.34% (13)
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<CAPTION>
Number of Shares
of the Corporation's Percentage of
Name and Address (1) Common Stock Outstanding Shares
of Beneficial Owner Beneficially Owned (10)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Dimensional Fund Advisors, Inc. 697,393 4.25% (14)
Elliott Associates, L.P., et al. 1,050,251 6.41% (15)
National Intergroup, Inc. Retirement
Program and Davenport, Inc. Pension Plan 1,361,500 8.30% (16)
Phar-Mor, Inc. 1,547,600 9.44% (17)
United Equities Commodities Company, et al. 1,917,000 11.69% (18)
</TABLE>
(1) The business address of each of the directors and executive officers
listed above is c/o Avatex Corporation, 5910 North Central Expressway, Suite
1780, Dallas, Texas 75206.
(2) The Centaur Group is comprised of Messrs. Butler and Estrin, Centaur
Partners IV, a New York general partnership ("Centaur IV"), Estrin Equities
Limited Partnership, a Maryland limited partnership ("Estrin Equities"), and
Butler Equities II, L.P., a Delaware limited partnership ("Butler Equities").
The general partners of Centaur IV are Estrin Equities and Butler Equities.
AB Acquisition Corp. is the sole general partner of Butler Equities, and Mr.
Butler owns all of the outstanding capital stock of AB Acquisition Corp. HSG
Acquisition Co. is the general partner, and Human Service Group, Inc. is the
largest limited partner, of Estrin Equities, and Mr. Estrin owns all of the
outstanding capital stock of HSG Acquisition Co. and Human Service Group, Inc.
The Centaur Group in the aggregate holds 1,504,055 shares of the
Corporation's common stock, which are held directly by the persons and
entities described above as follows: Centaur IV, 1,000 shares; Mr. Butler,
1,185,600 shares; Mr. Estrin, 310,455 shares (including 18,080 shares held in
two trusts for which Mr. Estrin is a co-trustee, the beneficial ownership of
which he disclaims), and Estrin Equities, 7,000 shares. Pursuant to the
terms of the Centaur IV partnership agreement, neither Estrin Equities nor
Butler Equities may acquire or dispose of shares of the Corporation's common
stock without the consent of Centaur IV. In addition, pursuant to the
Centaur IV partnership agreement, Estrin Equities and Butler Equities must
vote all shares of the Corporation's common stock owned by each such entity
as directed by Centaur IV. Accordingly, Centaur IV, which directly holds
1,000 shares, may be deemed to share the power to direct the voting and
disposition of the 7,000 shares held by Estrin Equities.
Estrin Equities has designated Mr. Estrin and Butler Equities has designated
Mr. Butler to act as a "Coordinating Person" pursuant to the Centaur IV
partnership agreement. Messrs. Estrin and Butler, acting together, manage
the affairs of Centaur IV and have the authority to make all decisions
concerning Centaur IV's interest in the Corporation's common stock.
Estrin Equities disclaims beneficial ownership of the shares of the
Corporation's common stock owned by Mr. Butler individually, and Butler
Equities disclaims beneficial ownership of the shares of the Corporation's
common stock owned by Estrin Equities and Mr. Estrin individually.
(3) Includes (a) Mr. Butler's beneficial ownership of the Corporation's
common stock through The Centaur Group and (b) options to purchase 1,127,973
shares of the Corporation's common stock that are exercisable within 60 days
of the Due Date.
(4) Includes (a) Mr. Estrin's beneficial ownership of the Corporation's
common stock through The Centaur Group, (b) 3,756 shares of the Corporation's
common stock through his prior participation in the FoxMeyer 401(k) Plan, and
(c) options to purchase 1,127,973 shares of the Corporation's common stock
that are exercisable within 60 days of the Due Date.
(5) Mr. Frankel, Mr. Katz, Mr. Lemer and Mr. Pecarro each holds options to
purchase 8,000 shares of the Corporation's common stock that are exercisable
within 60 days of the Due Date.
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(6) Mr. Wineapple owns 5,000 shares of the Corporation's common stock and
holds options to purchase 8,000 shares of the Corporation's common stock that
are exercisable within 60 days of the Due Date.
(7) Mr. Massman holds options to purchase 185,333 shares of the
Corporation's common stock that are exercisable within 60 days of the Due
Date.
(8) Mr. Stone holds options to purchase 55,167 shares of the Corporation's
common stock that are exercisable within 60 days of the Due Date.
(9) Mr. Schleier holds options to purchase 53,333 shares of the
Corporation's common stock that are exercisable within 60 days of the Due
Date.
(10) Percentages are based on a total of 16,396,154 shares of the
Corporation's common stock, which consists of 13,806,375 shares outstanding
as of June 19, 1998, plus 2,589,779 shares underlying options that are
exercisable within 60 days of the Due Date held by all directors and named
executive officers of the Corporation as a group under the Corporation's 1993
Stock Option Plan.
(11) Indicates less than 1%.
(12) Includes (a) 1,504,055 shares of the Corporation's common stock owned
by members of The Centaur Group, (b) 8,756 additional shares of the
Corporation's common stock owned by directors and the named executive
officers of the Corporation, and (c) 2,589,779 shares of the Corporation's
common stock underlying options that are exercisable within 60 days of the
Due Date held by directors and the named executive officers of the
Corporation.
(13) BEA Associates provided information regarding its stock ownership in
the Corporation by filing a Schedule 13G on February 3, 1998, which stated
that it beneficially owned 5.16% of the Corporation's outstanding common
stock (exclusive of shares underlying options that are exercisable within 60
days of the Due Date held by directors and named executive officers of the
Corporation). The stated address of BEA Associates was 153 East 53rd Street,
New York, New York 10022.
(14) Dimensional Fund Advisors, Inc. provided information regarding its
stock ownership in the Corporation by filing a Schedule 13G on February 12,
1997, which stated that it beneficially owned 5.05% of the Corporation's
outstanding common stock (exclusive of shares underlying options that are
exercisable within 60 days of the Due Date held by directors and named
executive officers of the Corporation). The stated address of Dimensional
Fund Advisors is 1299 Ocean Avenue, 11th Floor, Santa Monica, California
90401.
(15) Elliott Associates, L.P. and Westport International, L.P.
(collectively, "Elliott") provided information regarding their stock
ownership in the Corporation most recently by filing an Amendment No. 3 to
Schedule 13D on June 16, 1998, which stated that they beneficially owned
7.49% of the Corporation's outstanding common stock (including 111,637 shares
of convertible preferred stock that are allegedly convertible into 216,351
shares of the Corporation's common stock, but exclusive of shares underlying
options that are exercisable within 60 days of the Due Date held by directors
and named executive officers of the Corporation). Elliott has stated in
filings with the Commission that Elliott also owns 1,209,410 shares of the
Corporation's Series A preferred stock, that Paul E. Singer ("Singer") and
Braxton Associates, L.P., which is controlled by Singer, are the general
partners of Elliott Associates, L.P., and that Hambledon, Inc. is the sole
general partner of Westport International, L.P. The stated address of Elliott
is 712 Fifth Avenue, 36th Floor, New York, New York 10019. In addition,
Messrs. DellaCamera, Gropper, Intrieri and Miller, who are directors of the
Corporation, are employees of Stonington, which is controlled by Singer.
(16) The Corporation believes that the National Intergroup, Inc. Retirement
Program and the Davenport, Inc. Pension Plan beneficially own 1,361,500
shares of the Corporation's common stock.
(17) Phar-Mor provided information regarding its stock ownership in the
Corporation most recently by filing an Amendment No. 3 to Schedule 13D on
June 16, 1998, which stated that it beneficially owned 11.2% of the
outstanding common stock of the Corporation (exclusive of shares underlying
options that are exercisable within 60 days of the Due Date held by directors
and named executive officers of the Corporation). The stated address of
Phar-Mor was c/o Morris F. DeFeo, Jr., Swidler & Berlin, Chartered, 3000 K
Street, N.W., Washington D.C. 20007.
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<PAGE>
(18) United Equities Commodities Company ("United Equities"), Momar
Corporation ("Momar") and Moses Marx (collectively, "United") provided
information regarding their stock ownership in the Corporation most recently
by filing an Amendment to Schedule 13D on July 30, 1997, at which time they
stated that they beneficially owned 14% of the Corporation's outstanding
common stock (exclusive of shares underlying options that are exercisable
within 60 days of the Due Date held by directors and the named executive
officers of the Corporation). United has also stated in filings with the
Commission that they beneficially owned 10% of the Corporation's Series A
preferred stock and 30% of the Corporation's convertible preferred stock, the
latter of which is convertible into the Corporation's common stock, and that
Mr. Moses Marx, as a result of his position with and ownership interest in
United Equities and Momar could be deemed to have voting and/or investment
power with respect to shares of the Corporation beneficially owned by United
Equities and Momar. The stated address of United was c/o James E. Spiotto,
Chapman & Cutler, 111 West Monroe Street, Chicago, Illinois 60603. As of July
30, 1997, United's filings with the Commission reflected that it owned
1,917,000 shares of the Corporation's common stock, 438,000 shares of its
Series A preferred stock and 200,900 shares of its convertible preferred
stock. Although United has not filed any subsequent amendments to its
Schedule 13D filings to reflect any increase in holdings of the Corporation's
common and preferred stock, the Corporation received certain Written Consents
dated April 20, 1998 (the "Consents") executed by Cede & Co., the nominee of
The Depository Trust Company ("DTC"). The Consents stated that DTC was
informed that United beneficially owned 1,917,000 shares of the Corporation's
common stock, 852,900 shares of the Series A preferred stock and 204,300
shares of the convertible preferred stock.
In addition to the beneficial owners listed above, Warburg, Pincus
Counsellors, Inc. previously provided information regarding its stock
ownership in the Corporation by filing a Schedule 13G dated January 22, 1996,
at which time it stated that it owned 7.41% of the Corporation's outstanding
common stock. Based on conversations with Warburg, Pincus Counsellors, Inc.,
the Corporation does not believe that such entity currently owns any of the
Corporation's common stock, although it has not filed an amendment to a
previously filed Schedule 13G to reflect disposition of such common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With respect to Hyman H. Frankel, PhD., who is a director of the Corporation,
see "COMPENSATION OF DIRECTORS" above.
With respect to Fred S. Katz and John H. Wineapple, who are directors of the
Corporation, see "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION" above.
Ralph DellaCamera, Daniel Gropper, Vincent Intrieri and Brian Miller, who are
directors of the Corporation, are plaintiffs in a lawsuit against the
Corporation. See Item 3: "Preferred Stockholder Litigation" above. Messrs.
DellaCamera, Gropper, Intrieri and Miller have also identified themselves as
"associated" with Elliott, which is a plaintiff in a separate lawsuit against
the Corporation, Xetava Corporation and the Corporation's directors other
than Messrs. DellaCamera, Gropper, Intrieri and Miller.
The Corporation, through a number of wholly-owned subsidiaries (the
"Development Subsidiaries"), engages in the buying, holding, operating and
disposing of real estate, notes secured by real estate and other similar
investments. These activities are typically conducted through limited
partnerships (the "Partnerships") in which one of the Development
Subsidiaries holds a general partner's interest. The other partner in each
of the Partnerships is an affiliate of The Bernstein Companies, a real estate
development firm based in Washington, D.C. Melvyn J. Estrin, Co-Chairman and
the Co-Chief Executive Officer of the Corporation, is a director of each of
the Development Subsidiaries. Mr. Estrin is the brother of Wilma E.
Bernstein and the brother-in-law of Stuart A. Bernstein, owners of The
Bernstein Companies. As of March 31, 1998, the Development Subsidiaries
continued to have approximately $4.8 million invested in the remaining
Partnerships, and $200,000 was invested in one non-real estate venture
affiliated with The Bernstein Companies.
On March 31, 1998, one of the Development Subsidiaries, National Intergroup
Realty Arlington, Inc. ("NIRA"), sold its general partnership interest in one
of the Partnerships to Bernstein Millbank, Inc. ("BMI"), the other general
partner in the Partnership. The total consideration received by NIRA for the
sale was $1,800,000, of which $450,000 was paid
68
<PAGE>
in cash and $1,350,000 was evidenced by a secured promissory note which was
paid on June 1, 1998. The transaction was approved by the Board of Directors
of NIRA and approved by the Corporation, in its capacity as the sole
shareholder of NIRA.
In May 1997, seven entities purchased a total of $3.5 million of partnership
interests of JeffPro Investors I L.P. These entities included M&A, two
designees of Mr. Butler or Mr. Estrin and two parties related to, or referred
by, Messrs. Butler or Estrin. Of the total amount invested, M&A's share was
approximately 4.3%, the designees' share was approximately 4.3%, and the
related parties' share was approximately 5.7%.
In October 1997, as part of a recapitalization of Cyclone, M&A converted its
note and warrants into 883,638 shares of Cyclone common stock. In September
1997, Abbey J. Butler, and Melvyn J. Estrin and Suellen Estrin, as tenants by
the entirety, acquired a third party investor's Cyclone shares for $150,000,
which shares were converted into 324,000 shares of Cyclone common stock as
part of the recapitalization.
In December 1997, 28 persons and entities purchased a total of $5.9 million
of Series B Preferred Stock of CareTech. These persons and entities included
the Corporation; six of its officers, Abbey J. Butler, Melvyn J. Estrin,
Edward L. Massman, John G. Murray, Grady E. Schleier and Robert H. Stone;
seven additional parties related to, or referred to by, Abbey J. Butler,
Melvyn J. Estrin or Edward L. Massman and various other unaffiliated
investors. Of the total amount invested, the Corporation's share was
approximately 21.8%, the officers' share was approximately 5.6%, and the
related parties' share was approximately 6.5%. The largest share invested by
an officer of the Corporation was approximately 1.7% of the total amount
invested.
In December 1997 and January 1998, NII Health Care Corporation, a wholly
owned subsidiary of the Corporation, purchased a total of 372,000 shares of
Carson Class A common stock in the open market for $2.6 million. Messrs.
Butler and Estrin are directors of Carson. At the time of such purchases,
Messrs. Butler and Estrin each held outside director stock options to purchase
5,000 shares of Carson Class A common stock and owned 2,710 shares of outside
director restricted shares of Carson Class A common stock and 11,541 shares
of Carson Class C common stock.
In January 1998, the Corporation purchased a total of 500,000 shares of
common stock of Imagyn in the open market for $1.1 million. Messrs. Butler
and Estrin are directors of Imagyn. At the time of such purchases, (a) Mr.
Butler held outside director stock options to purchase 22,500 shares of
Imagyn common stock and owned 50,000 shares of Imagyn common stock, and (b)
Mr. Estrin held outside director stock options to purchase 22,500 shares of
Imagyn common stock and Human Service Group, Inc., a corporation wholly owned
by Mr. Estrin, owned 25,000 shares of Imagyn common stock.
In March 1998, 13 persons and entities purchased (or committed to purchase) a
total of $2.2 million of Series A membership interests in Chemlink
Acquisition Company, LLC, which in turn purchased a membership interest in
Chemlink Laboratories, LLC. These persons and entities included the
Corporation; Phar-Mor; three of the Corporation's officers, Abbey J. Butler,
Melvyn J. Estrin and Edward L. Massman (and/or their designees); one
non-officer director of the Corporation, Charles C. Pecarro; and five
additional parties related to, or referred to by, Abbey J. Butler or Melvyn
J. Estrin. Of the total amount invested, the Corporation's share was
approximately 35.8%, Phar-Mor's share was approximately 35.8%, the
officers/designees' share was approximately 14.8%, the non-officer director's
share was approximately 1.1%, and the related parties' share was
approximately 12.5%. The largest share invested by a Corporation officer or
director (or his designee) was approximately 6.8% of the total amount
invested.
In April 1998, 13 persons and entities purchased (or committed to purchase) a
total of $3 million of Series B Preferred Stock and warrants to purchase
Series B Preferred Stock of RAS Holding Corp. These persons and entities
included the Corporation; a wholly-owned subsidiary of Phar-Mor, Cabot Noble,
Inc. ("Cabot Noble"); all of the Corporation's executive officers and its
Director of Accounting (and/or their designees); one non-officer director of
the Corporation, Charles C. Pecarro; and two additional parties related to,
or referred to by, Abbey J. Butler or Melvyn J. Estrin. Of the total amount
invested, the Corporation's share was approximately 46.7%, Cabot Noble's
share was 25%, the officers/designees' share was 19.8%, the non-officer
director's share was 1% and the related parties' share was approximately
7.5%. The largest share invested by an officer or director of the
Corporation (or his designee) was 5% of the total amount invested.
69
<PAGE>
In April 1998, the Corporation and Cabot Noble each purchased $1.25 million
of preferred stock of HPD Holdings Corp. ("HPD") in connection with the
acquisition by a HPD subsidiary of certain of the assets of Block Drug
Company, Inc. ("Block") used in or related to the manufacture, sale or
distribution of Block's household product lines. In addition, the
Corporation and Cabot Noble each acquired 2.5% of the common stock of HPD as
part of the transaction. The largest shareholder of HPD is HPD Partners, LP,
a Delaware limited partnership and Abbey J. Butler and Melvyn J. Estrin are
limited partners of HPD Partners, LP.
On December 9, 1997, the Corporation advanced a short-term loan to each of
Messrs. Butler and Estrin. The loan to Mr. Butler was in the amount of
$100,000, and the loan to Mr. Estrin was in the amount of $350,000. Both
loans were paid in full, plus interest at the rate of 8% per year, on or
before December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Reference is made to the listing on page 72 of all financial
statements filed as part of this report.
(2) FINANCIAL STATEMENT SCHEDULES
Reference is made to the listing on page 72 of all financial
statement schedules filed as part of this report.
(3) EXHIBITS
Reference is made to the Exhibit Index beginning on page 81 for a
list of all exhibits filed as part of this report.
(b) REPORTS ON FORM 8-K
During the three months ended March 31, 1998, no Current Reports
on Form 8-K were filed.
The Corporation filed a Current Report on Form 8-K on April 15,
1998 which announced the proposed merger of the Corporation with
and into its wholly owned subsidiary, Xetava Corporation.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Edward L. Massman
-----------------------------------
Edward L. Massman
June 24, 1998 Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICERS:
/s/ Abbey J. Butler
- -------------------------
Abbey J. Butler Co-Chairman of the Board and
Co-Chief Executive Officer June 24, 1998
/s/ Melvyn J. Estrin
- -------------------------
Melvyn J. Estrin Co-Chairman of the Board and
Co-Chief Executive Officer June 24, 1998
/s/ Edward L. Massman
- -------------------------
Edward L. Massman Senior Vice President and Chief
Financial Officer June 24, 1998
(Principal Financial Officer)
/s/ Scott E Peterson
- -------------------------
Scott E Peterson Vice President Finance and Controller
(Principal Accounting Officer) June 24, 1998
ADDITIONAL DIRECTORS:
/s/ Hyman H. Frankel
- -------------------------
Hyman H. Frankel Director June 24, 1998
/s/ Fred S. Katz
- -------------------------
Fred S. Katz Director June 24, 1998
/s/ William A. Lemer
- -------------------------
William A. Lemer Director June 24, 1998
/s/ Charles C. Pecarro
- -------------------------
Charles C. Pecarro Director June 24, 1998
/s/ John L. Wineapple
- -------------------------
John L. Wineapple Director June 24, 1998
</TABLE>
71
<PAGE>
ITEM 14(a) (1) AND (2) AND ITEM 14(d)
AVATEX CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Avatex Corporation and subsidiaries are
included in Item 14(a)(1):
<TABLE>
<CAPTION>
Page No. in
Form 10-K
-------------
<S> <C>
Independent Auditors' Report 20
Consolidated Statements of Operations - For the Three Years Ended March 31, 1998 21
Consolidated Statements of Comprehensive Loss - For the Three Years Ended March 31, 1998 22
Consolidated Balance Sheets - March 31, 1998 and 1997 23
Consolidated Statements of Stockholders' Equity (Deficit) - For the Three Years Ended
March 31, 1998 24
Consolidated Statements of Cash Flows - For the Three Years Ended March 31, 1998 25
Notes to Consolidated Financial Statements - For the Three Years Ended March 31, 1998 26
</TABLE>
The following financial statement schedules of Avatex Corporation and
subsidiaries are included in Item 14(d):
<TABLE>
Page No. in
Form 10-K
-------------
<S> <C>
Schedule I - Condensed Financial Information of Registrant 73
Schedule II - Valuation and Qualifying Accounts 78
Schedule III - Real Estate and Accumulated Depreciation 79
Independent Auditors' Consent 80
</TABLE>
Financial statement schedules other than those listed above have been omitted
because the required information is contained in the consolidated financial
statements and notes thereto or such information is not applicable.
In accordance with Regulation S-X, audited financial statements of Phar-Mor,
Inc. (a 38% owned affiliate) for the fiscal year ending June 27, 1998 will be
filed as an amendment to the Corporation's Form 10-K within 90 days of
Phar-Mor, Inc.'s fiscal year end.
72
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING COSTS
Administrative and general expenses $ 7,317 $ 5,792 $ 8,585
Depreciation and amortization 41 8 -
Unusual items 26,096 - -
- -----------------------------------------------------------------------------------------------------------
OPERATING LOSS (33,454) (5,800) (8,585)
OTHER INCOME (EXPENSE) (12,310) 24,740 16,216
FINANCING COSTS
Interest income 1,598 788 947
Interest expense 2,108 3,173 3,695
- -----------------------------------------------------------------------------------------------------------
Financing costs, net 510 2,385 2,748
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL
STEEL CORPORATION, EQUITY IN INCOME (LOSS) OF SUBSIDIARIES
AND AFFILIATES AND INCOME TAX PROVISION (BENEFIT) (46,274) 16,555 4,883
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income 5,854 9,620 3,329
Loss on National Steel Corporation settlement (59,038) - -
Equity in income (loss) of subsidiaries and affiliates 18,199 (8,556) (3,064)
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAX PROVISION (BENEFIT) (81,259) 17,619 5,148
Income tax provision (benefit) (40) 29,863 -
- -----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (81,219) (12,244) 5,148
DISCONTINUED OPERATIONS
Equity in loss from discontinued operations - (21,057) (61,728)
Equity in gain (loss) on disposal of discontinued operations 3,719 8,417 (7,081)
Loss on disposal of discontinued operations - (254,472) -
- -----------------------------------------------------------------------------------------------------------
NET LOSS (77,500) (279,356) (63,661)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment - 59 -
Reclassification adjustment for losses included in net loss - 21 -
Equity in foreign currency translation adjustment - (42) (40)
- -----------------------------------------------------------------------------------------------------------
Net foreign currency translation adjustment - 38 (40)
- -----------------------------------------------------------------------------------------------------------
Unrealized gains on securities 19 - -
Equity in unrealized gains (losses) on securities 1,149 17 (2,391)
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 1,168 17 (2,391)
- -----------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment (6,187) (8,897) 10,794
Loss on plan termination from National Steel
Corporation settlement included in net loss 79,718 - -
- -----------------------------------------------------------------------------------------------------------
Net minimum pension liability adjustment 73,531 (8,897) 10,794
- -----------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 74,699 (8,842) 8,363
- -----------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (2,801) $ (288,198) $ (55,298)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
73
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
(in thousands of dollars) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 32,926 $ 520
Restricted cash and investments - 32,823
Receivables, less allowance for possible losses of $11 in 1998 9,701 36
Other current assets 3,532 15,185
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 46,159 48,564
INVESTMENT IN NATIONAL STEEL CORPORATION - 44,961
INVESTMENT IN SUBSIDIARIES AND AFFILIATES 68,597 62,674
PROPERTY AND EQUIPMENT 196 186
Less accumulated depreciation and amortization 49 8
- -----------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 147 178
OTHER ASSETS
Deferred tax asset, net of valuation allowance - -
Other assets 12,016 7,716
- -----------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 12,016 7,716
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 126,919 $ 164,093
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,273 $ 1,060
Other accrued liabilities 4,055 4,891
Long-term debt due within one year - 2,500
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,328 8,451
INTERCOMPANY PAYABLES 30,426 49,035
LONG-TERM DEBT 8,322 12,400
OTHER LONG-TERM LIABILITIES 9,749 18,312
REDEEMABLE PREFERRED STOCK 214,996 189,402
STOCKHOLDERS' DEFICIT
Common stock $5.00 par value; authorized 50,000,000 shares; issued:
13,806,375 shares in 1998 and 13,805,988 shares in 1997 69,032 69,030
Capital in excess of par value 119,100 119,092
Accumulated other comprehensive income (loss) 1,168 (73,531)
Accumulated deficit (331,202) (228,098)
- -----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (141,902) (113,507)
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 126,919 $ 164,093
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
74
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31,
(in thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (77,500) $(279,356) $ (63,661)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
Net preferred income from National Steel Corporation (5,854) (9,620) (3,329)
Loss on National Steel Corporation settlement 59,038 - -
Equity in loss (income) of subsidiaries and affiliates (21,918) 21,196 71,873
Deferred income tax provision - 29,863 -
Other non-cash charges (credits) (5,284) 2,018 (15,383)
Loss (gain) on investments 12,313 (26,435) -
Loss on disposal of discontinued operations - 254,472 -
Cash provided (used) by working capital items:
Receivables and other current assets 35,368 (32,139) (555)
Accounts payable and accrued liabilities (6,762) (5,827) (84)
Net intercompany activity with subsidiaries 2,772 51,547 17,937
Other 39 19 (520)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (7,788) 5,738 6,278
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments, including subsidiaries and affiliates (12,571) - (29,329)
Sale of affiliates and investments 59,675 37,442 -
Dividends received from subsidiaries and affiliates - - 10,000
Purchase of property and equipment (10) (186) -
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 47,094 37,256 (19,329)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on revolving credit facilities - (15,000) -
Proceeds from the issuance of long-term debt 8,000 - 20,000
Repayment of long-term debt (14,900) (5,100) -
Note payable to FoxMeyer Corporation - - 2,300
Debt issuance costs - (178) (367)
Purchase of treasury stock - (16,726) -
Purchase of preferred stock - (8,845) (4,236)
Dividends paid on redeemable preferred stock - (2,697) (4,180)
Exercise of stock options - 1,680 3,449
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (6,900) (46,866) 16,966
- --------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 32,406 (3,872) 3,915
Cash and short-term investments, beginning of year 520 4,392 477
- --------------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 32,926 $ 520 $ 4,392
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
75
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AVATEX CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED MARCH 31, 1998
NOTE A - SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
The condensed financial statements of the registrant should be read in
conjunction with the consolidated financial statements included in Item 8
contained herein. The notes for these condensed financial statements contain
only the additional disclosure required for this schedule. In particular,
see Note N to the consolidated financial statements concerning various
pending claims and lawsuits involving the registrant.
The preparation of the condensed 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 reported amounts of revenues and
expenses during such reporting periods. Actual results could differ from
these estimates.
The Parent Company's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The financial
statements do not reflect any adjustments that might ultimately result from
the resolution of the uncertainties discussed in Note S to the consolidated
financial statements.
Cash and Short-Term Investments: Cash and short-term investments consist
principally of amounts held in demand deposit accounts and amounts invested
in other instruments having a maturity of three months or less at the time of
purchase and are recorded at cost. Cash and short-term investments of $32.8
million were restricted as to use by the Parent Company at March 31, 1997 in
connection with the FoxMeyer Corporation ("FoxMeyer") bankruptcy filing.
Deferred Tax Asset: The Parent Company's deferred tax asset consists almost
entirely of tax net operating loss carryforwards and liabilities which were
not deductible for federal income tax purposes when accrued. The valuation
allowance is equal to the deferred tax asset as the Parent Company believes
it may not be able to realize its deferred tax asset.
Intercompany Payables: The intercompany payables between the Parent Company
and its subsidiaries are generally not evidenced by notes and do not bear
interest.
Unusual items: Unusual items consisted of a $33.3 million charge from the
settlement of certain litigation with the FoxMeyer Bankruptcy Trustee, a gain
of $1.6 million from the settlement of other litigation with insurance
carriers related to environmental liabilities and a gain of $5.6 million
related to the settlement or termination of certain pension and other
postretirement liabilities.
Other income (expense): In 1998, other expense consisted of a loss of $12.9
million from the adjustment during the year in the carrying value of Imagyn
Technologies, Inc. ("Imagyn") to its market value, partially offset by $0.6
million in gains on other investments. In 1997, other income consisted of a
gain of $34.0 million on the sale of FoxMeyer Canada Inc. partially offset by
the write-off of the Parent Company's investment in Ben Franklin Retail Stores,
Inc. ("Ben Franklin") of $2.0 million and $7.3 million in other losses
(including a $6.2 million trading loss on Imagyn). In 1996, other income
consisted of a gain of $19.6 million related to the settlement of certain
unresolved issues in connection with the 1992 sale of The Permian Corporation
and other contingencies partially offset by a $3.4 million write-down of the
value of Ben Franklin.
NOTE B - DIVIDENDS RECEIVED
The Parent Company received a dividend of $105.9 million from FoxMeyer on
June 19, 1996 consisting of marketable securities, certain subsidiaries of
FoxMeyer and the forgiveness of a $30.0 million note receivable from
76
<PAGE>
the Parent Company plus any accrued interest thereon. The Parent Company
received cash dividends of $10.0 million from FoxMeyer in the fiscal year
ended March 31, 1996.
NOTE C - TAX SHARING PAYMENTS
Under the tax sharing agreements with its subsidiaries, the Parent Company
received $1.7 million for the year ended March 31, 1996. No tax sharing
payments were received for the two years ended March 31, 1998.
NOTE D - SUPPLEMENTAL CASH FLOW 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 years ended March 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 1,215 $ 2,050 $ 3,863
Income tax refund (40) - -
Non-cash transactions:
Note received as part of National Steel Corporation
Settlement 9,442 - -
Ben Franklin common stock distributed as a dividend - - 29,697
Payment of dividends-in-kind on Series A Preferred Stock - 4,354 15,319
Cumulative dividends accrued but not paid 23,101 10,806 -
Dividend received from FoxMeyer - 105,888 -
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AVATEX CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- ---------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts- Deductions- at End
Description of Period Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1998
Allowance for possible losses on notes
and accounts receivable $ 539 $ 9 $ - $ 521 (2) $ 27
Year Ended March 31, 1997
Allowance for possible losses on notes
and accounts receivable $ 23,540 $ 3,906 (1) $ - $ 26,907 (1) $ 539
Reserve for inventory shrinkage 5,036 - - 5,036 (1) -
Year Ended March 31, 1996
Allowance for possible losses on notes
and accounts receivable $ 6,510 $ 21,885 (1) $ - $ 4,855 (1) $ 23,540
Allowance for possible losses on
pre-bankruptcy receivable from
Phar-Mor, Inc. 62,795 (1,385)(1) - 61,410 (1) -
Reserve for inventory shrinkage 1,934 4,444 (1) - 1,342 (1) 5,036
</TABLE>
Notes:
(1) Principally relates to discontinued operations.
(2) Principally the collection and write-off of receivables retained on the
sale of discontinued operations.
78
<PAGE>
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AVATEX CORPORATION AND SUBSIDIARIES
March 31, 1998
(in thousands of dollars)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL A COL B COL C COL D COL E
- -----------------------------------------------------------------------------------------------------------------------------------
Cost capitalized Gross amount
Initial cost subsequent at which carried
to company to acquisition at close of period
-------------------------------------------------------------------------------------------
Encum- Buildings and Carrying Buildings and
Description brances Land improvements Improvements costs Land improvements Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office building and
hotel Annapolis MD. $ 5,209 $ 1,079 $ 3,402 $ 1,029 $ - $ 1,079 $ 4,431 $ 5,510
Hotel Washington D.C. 7,714 4,000 2,310 2,935 - 4,000 5,245 9,245
Hotel Washington D.C. 2,170 552 1,001 3,591 - 552 4,592 5,144
----------------------------------------------------------------------------------------------------------
Total $ 15,093 $ 5,631 $ 6,713 $ 7,555 $ - $ 5,631 $ 14,268 $ 19,899
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
COL A COL F COL G COL H COL I
- -----------------------------------------------------------------------------------------------
Life on
which
Date depreciation
Accumulated of Date is
Description depreciation construction acquired computed
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office building and Hotel - 1971
hotel Annapolis MD. $ 588 Office - 1989 November 1993 5-39 years
Hotel Washington D.C. 629 1961 October 1994 5-20 years
Hotel Washington D.C. - 1955 May 1996 Under renovation
----------
Total $ 1,217
----------
----------
</TABLE>
NOTES: The cost of land and buildings and improvements for federal income tax
purposes is approximately $17.5 million.
The amounts for buildings and improvements include amounts classified
as construction in progress.
Reconciliation of real estate and accumulated depreciation for each of
the last three fiscal years ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
---------------------------------------------------------------------------------------
Accumulated Accumulated Accumulated
Real estate depreciation Real estate depreciation Real estate depreciation
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 18,667 $ 727 $ 18,172 $ 1,023 $ 15,260 $ 336
Acquisitions during period:
Acquisitions other than through
foreclosure 7,676 - 2,900 - - -
Improvements 5,450 - 4,052 - 1,116 -
Reclassification of asset held for
sale to operating - - - - 1,796 103
Contribution of joint venture assets - - 4,000 - - -
Depreciation - 613 - 397 - 584
---------------------------------------------------------------------------------------
31,793 1,340 29,124 1,420 18,172 1,023
Deductions during period:
Cost of real estate sold 11,894 123 10,457 693 - -
---------------------------------------------------------------------------------------
Balance at end of period $ 19,899 $ 1,217 $ 18,667 $ 727 $ 18,172 $ 1,023
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-56097 on Form S-8 and No. 33-37531 on Form S-3 of Avatex Corporation of
our report dated April 30, 1998, except the fourteenth paragraph of Note N
and the last paragraph of Note T which are as of June 8, 1998, which report
expresses an unqualified opinion and includes an explanatory paragraph
regarding the Corporation's ability to continue as a going concern, appearing
in and incorporated by reference in this Annual Report on Form 10-K of Avatex
Corporation for the year ended March 31, 1998.
Deloitte & Touche LLP
Dallas, Texas
June 26, 1998
80
<PAGE>
AVATEX CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3-A Restated Certificate of Incorporation of the Corporation and all
subsequent amendments thereto. (Filed as Exhibit 3-A to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993 and incorporated herein by reference.)
3-B Certificate of Amendment of Restated Certificate of Incorporation of the
Corporation dated October 12, 1994. (Filed as Exhibit 3-A to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1995 and incorporated herein by reference.)
3-C Certificate of Resolution relating to the Corporation's $5 Cumulative
Convertible Preferred Stock. (Filed as Exhibit 4-B to the Corporation's
Registration Statement on Form 8-B (File No. 1-8549) and incorporated
herein by reference.)
3-D Certificate of Designations, Rights and Preferences relating to the
Corporation's $4.20 Cumulative Exchangeable Series A Preferred Stock.
(Filed as Exhibit 9(c)(1) to the Corporation's Schedule 13E-4 Issuer
Tender Offer Statement dated October 6, 1993 and incorporated herein by
reference.)
3-E By-laws of the Corporation. (Filed as Exhibit 3-D to the Corporation's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995 and
incorporated herein by reference.)
3-F Certificate of Ownership and Merger Merging CareStream Holdings, Inc.
into FoxMeyer Health Corporation. (Filed as Exhibit 3-E to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1997 and incorporated herein by reference.)
10-A National Intergroup, Inc. 1993 Stock Option and Performance Award Plan.
(Filed as Exhibit 10-A to the Corporation's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994 and incorporated herein by
reference.)
10-B National Intergroup, Inc. Director's Retirement Plan dated December 1,
1983. (Filed as Exhibit 10-A to the Corporation's Annual Report on Form
10-K for the fiscal year ended March 31, 1992 and incorporated herein by
reference.)
10-C Amendment dated October 12, 1994 to the 1993 Stock Option and
Performance Award Plan of the Corporation. (Filed as Exhibit 10-D to
the Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by reference.)
10-D Performance Incentive Plan of the Corporation, effective January 1,
1997. (Filed as Exhibit 10-W to the Corporation's Annual Report on Form
10-K for the fiscal year ended March 31, 1997 and incorporated herein by
reference.)
10-E Amendment No. 1 to the Performance Incentive Plan of the Corporation.
(Filed as Exhibit 10-A to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and incorporated herein by reference.)
10-F Avatex Corporation Employees' Savings and Profit Sharing Plan, effective
as of April 1, 1997. (Filed as Exhibit 10-X to the Corporation's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997 and
incorporated herein by reference.)
81
<PAGE>
10-G Agreement, dated as of November 25, 1997, among the Corporation,
National Steel Corporation, NKK Corporation and NKK U.S.A. Corporation.
(Filed as Exhibit 2 to the Corporation's Current Report on Form 8-K
filed December 5, 1997 and incorporated herein by reference.)
10-H Employment Agreement, dated as of February 27, 1995, between the
Corporation and Abbey J. Butler. (Filed as Exhibit 10-AF to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1995 and incorporated herein by reference.)
10-I Employment Agreement, dated as February 27, 1995, between the
Corporation and Melvyn J. Estrin. (Filed as Exhibit 10-AG to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1995 and incorporated herein by reference.)
10-J Employment Agreement dated as of November 7, 1996 between the
Corporation and Edward L. Massman. (Filed as Exhibit 10-S to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1997 and incorporated herein by reference.)
10-K Employment Agreement dated as of November 12, 1996 between the
Corporation and Grady L. Schleier. (Filed as Exhibit 10-T to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1997 and incorporated herein by reference.)
10-L Employment Agreement dated as of November 12, 1996 between the
Corporation and Robert H. Stone. (Filed as Exhibit 10-U to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1997 and incorporated herein by reference.)
10-M Employment Agreement dated as of November 20, 1996 between the
Corporation and Scott E Peterson. (Filed as Exhibit 10-V to the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 1997 and incorporated herein by reference.)
10-N Amendment to Employment Agreement between the Corporation and Abbey J.
Butler, effective as of February 1, 1998. *
10-O Amendment to Employment Agreement between the Corporation and Melvyn J.
Estrin, effective as of February 1, 1998. *
10-P Amendment to Employment Agreement between the Corporation and Edward L.
Massman, effective as of February 1, 1998. *
10-Q Employment Agreement between the Corporation and John G. Murray,
effective as of February 1, 1998. *
10-R Amendment to Employment Agreement between the Corporation and Scott E
Peterson, effective as of February 1, 1998. *
10-S Amendment to Employment Agreement between the Corporation and Grady E.
Schleier, effective as of February 1, 1998. *
10-T Amendment to Employment Agreement between the Corporation and Robert H.
Stone, effective as of February 1, 1998. *
10-U Amendment No. 2 to the Performance Incentive Plan of the Corporation,
effective as of June 23, 1997. *
10-V Agreement and Plan of Merger, dated as of April 9, 1998, by and between
the Corporation and Xetava Corporation. (Filed as Exhibit 2 to the
Corporation's Current Report on Form 8-K filed April 15, 1998 and
incorporated herein by reference.)
82
<PAGE>
21 Subsidiaries of the Corporation.*
23 Consent of Independent Auditors is included in the List of Financial
Statements and Financial Statement Schedules.
27 Financial Data Schedule.*
</TABLE>
- -------------------
* Filed herewith
83
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "AMENDMENT"), effective as of
February 1, 1998, is entered into by and between Avatex Corporation, a Delaware
corporation formerly known as FoxMeyer Health Corporation (the "COMPANY"), and
Abbey J. Butler ("EXECUTIVE").
The Company and Executive hereby agree that this Amendment amends the
Employment Agreement dated and effective as of February 27, 1995 by and between
the Company and Executive (the "AGREEMENT"), as follows:
1. All references in the Agreement to FoxMeyer Health Corporation shall
be deemed to be references to Avatex Corporation.
2. Section 2 of the Agreement is hereby amended by changing the date
specified therein as the initial expiration date of the Agreement to January 31,
2001.
3. Section 3 of the Agreement is hereby amended by adding the following
to the end of such section:
Nothing in this Agreement shall prohibit Executive from engaging,
directly or indirectly, in activities with other companies, ventures
or investments in any capacity whatsoever, including without
limitation serving as an officer or director of one or more
corporations or entities, provided only that such activities do not
unreasonably impede Executive's performance of his duties for the
Company. In the event Executive serves another corporation or entity
in the capacity as an officer or director, Executive shall be entitled
to retain any compensation and other benefits he may receive in such
capacity, irrespective of whether the Company invests or otherwise
holds an interest in such other corporation or entity.
4. Section 4(a) of the Agreement is hereby amended by changing the
minimum monthly base salary specified in the first sentence therein to
$39,583.33.
5. Section 5(c)(iii) of the Agreement is hereby amended by adding the
following to the end of such section:
provided, however, that this subsection shall not apply to any act of
Executive that was taken pursuant to resolutions or other matters
approved, adopted or ratified by the Company's Board of Directors;
6. Section 5(d)(1) of the Agreement is hereby deleted in its entirety and
replaced with the following:
(i) the Executive shall be entitled to receive a one-time lump sum
payment equal to one hundred fifty percent (150%) times the full
amount of any Monthly Base Salary and cash bonus awards that otherwise
would have been earned by him during the full term of this Agreement,
as extended pursuant to the second sentence of Section 2 of the
Agreement. The computation of the cash bonus awards will be
determined in the same manner that they would have been computed by
the Company prior to Executive's termination, but in no event will
that amount be less than the highest amount paid in any one of the
prior three (3) years;
7. The phrase "for the period applicable" in Section 5(d)(4) of the
Agreement shall be deleted and replaced with the phrase "for the period
described in Section 5(d)(1) above, the Executive shall be entitled to receive".
8. New Sections 5(d)(5) and (6) of the Agreement are hereby added to the
Agreement as follows:
<PAGE>
(5) for the period described in Section 5(d)(1) above, the Company
shall continue to pay to or for the benefit of Executive an allocated
percentage of his office overhead, including salaries of personnel and
other expenses, at substantially the same location and on
substantially the same terms and conditions in effect on the date of
such Termination Without Just Cause; and
(6) the Company shall immediately pay in full (at a discount for
present value or otherwise) all premiums, or shall make provisions
reasonably satisfactory to Executive (which may include payment into
escrow or otherwise) for payment in full of all premiums, payable by
the Company for life insurance policies applicable to Executive in
existence as of February 1, 1998, on substantially the same terms and
conditions as presently contained in such policies.
9. The paragraph immediately preceding Section 6 of the Agreement is
hereby deleted in its entirety and replaced with the following paragraph:
Without in any way limiting the generality of what may be deemed
to constitute a Termination Without Just Cause hereunder, it is hereby
agreed that if (i) any "person" (as such term is defined in Section
13(d) of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of either (x) thirty-five
percent (35%) of the Company's outstanding shares of common stock or
(y) securities of the Company representing thirty-five percent (35%)
of the combined voting power of the Company's then outstanding voting
securities, or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board
of Directors of the Company cease, at any time after the beginning of
such period, for any reason to constitute a majority of the Board of
Directors of the Company, unless each new director was nominated or
the election of such director was ratified by at least two-thirds of
the directors still in office who were directors at the beginning of
such two-year period, then Executive shall have the right to elect to
treat such event as constituting a Termination Without Just Cause
hereunder.
10. Section 6 of the Agreement is hereby deleted in its entirety and
replaced with the following:
6. Executive shall be entitled to all of the rights and benefits set
forth in the Indemnification Agreement dated as of October 23, 1997
between the Company and Executive.
11. Section 7(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
(a) Executive acknowledges that during the course of the performance
of his services for the Company he will acquire confidential and
proprietary information with respect to the Company's business
operations (the "CONFIDENTIAL INFORMATION"). Executive agrees that
during the term of this Agreement and thereafter, Executive shall not
divulge any Confidential Information to any person, directly or
indirectly, except to the Company, its directors, officers, agents and
representatives and its subsidiaries and affiliated companies, or as
may reasonably be necessary in connection with his duties on behalf of
the Company or unless required by law.
12. Sections 8 and 10 of the Agreement, and the references to Section 8
contained in Sections 9 and
2
<PAGE>
11 of the Agreement, are hereby deleted in their entirety as moot.
13. The second sentence of Section 12 of the Agreement is hereby deleted
in its entirety and replaced with the following:
If the Company prevails on all issues in such litigation and is
thereby permitted to implement a Termination with Just Cause of
Executive's employment, then Executive agrees to reimburse to the
Company all such fees and costs.
14. Section 14(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
a. if to the Company:
Avatex Corporation
Attention: Senior Vice President
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
15. A new Section 24 is hereby added to the Agreement as follows:
24. TAX ADJUSTMENT PAYMENTS. If all or any portion of the amount
payable to Executive under this Agreement (together with all other
payments of cash or property, whether pursuant to this Agreement or
otherwise, including without limitation the issuance of options or
option shares or the granting of, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended, (the
"CODE") that are subject to the excise tax imposed by Section 4999 of
the Code (or any similar tax or assessment), the amounts payable
hereunder shall be increased to the extent necessary to place
Executive in the same after-tax position as he would have been in had
no such tax assessment been imposed on any such payment paid or
payable to Executive under this Agreement or any other payment
Executive may receive in connection therewith. The determination of
the amount of any such tax or assessment and the incremental payment
required hereby in connection therewith shall be made by an accounting
firm employed by Executive within thirty (30) calendar days after such
payment, and the incremental payment shall be made within thirty (30)
calendar days after such determination has been made. If, after the
date upon which the payment required hereby has been made, it is
determinated (pursuant to final regulations or published rulings of
the Internal Revenue Service, final judgment of a court of competent
jurisdiction, Internal Revenue Service audit assessment or otherwise)
that the amount of excise or other similar tax or assessment payable
by Executive is greater than the amount initially so determined, the
Company shall pay Executive an amount equal to the sum of (i) such
additional excise or other tax, (ii) any interest, fines and penalties
resulting from such underpayment, and (iii) an amount necessary to
reimburse Executive for any income, excise or other tax assessment
payable by Executive with respect to the amounts specified in items
(i) and (ii) above, and the reimbursement provided by this clause
(iii), in the manner described above in this Section 24. Payment
thereof shall be made within ten (10) business days after the date
upon which such subsequent determination is made. The Company may
review Executive's calculation of any payments made pursuant to this
Section 24 and object to the calculation, and Executive shall refund
to the Company any overpayments resulting from an incorrect or
estimated
3
<PAGE>
calculation.
16. Except as expressly provided in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective on
the date and year first above written.
AVATEX CORPORATION --------------------------------
Abbey J. Butler
By:
-----------------------------
Melvyn J. Estrin
Co-Chief Executive Officer
4
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "AMENDMENT"), effective as of
February 1, 1998, is entered into by and between Avatex Corporation, a Delaware
corporation formerly known as FoxMeyer Health Corporation (the "COMPANY"), and
Melvyn J. Estrin ("EXECUTIVE").
The Company and Executive hereby agree that this Amendment amends the
Employment Agreement dated and effective as of February 27, 1995 by and between
the Company and Executive (the "AGREEMENT"), as follows:
1. All references in the Agreement to FoxMeyer Health Corporation shall
be deemed to be references to Avatex Corporation.
2. Section 2 of the Agreement is hereby amended by changing the date
specified therein as the initial expiration date of the Agreement to January 31,
2001.
3. Section 3 of the Agreement is hereby amended by adding the following
to the end of such section:
Nothing in this Agreement shall prohibit Executive from engaging,
directly or indirectly, in activities with other companies, ventures
or investments in any capacity whatsoever, including without
limitation serving as an officer or director of one or more
corporations or entities, provided only that such activities do not
unreasonably impede Executive's performance of his duties for the
Company. In the event Executive serves another corporation or entity
in the capacity as an officer or director, Executive shall be entitled
to retain any compensation and other benefits he may receive in such
capacity, irrespective of whether the Company invests or otherwise
holds an interest in such other corporation or entity.
4. Section 4(a) of the Agreement is hereby amended by changing the
minimum monthly base salary specified in the first sentence therein to
$39,583.33.
5. Section 5(c)(iii) of the Agreement is hereby amended by adding the
following to the end of such section:
provided, however, that this subsection shall not apply to any act of
Executive that was taken pursuant to resolutions or other matters
approved, adopted or ratified by the Company's Board of Directors;
6. Section 5(d)(1) of the Agreement is hereby deleted in its entirety and
replaced with the following:
(i) the Executive shall be entitled to receive a one-time lump sum
payment equal to one hundred fifty percent (150%) times the full
amount of any Monthly Base Salary and cash bonus awards that otherwise
would have been earned by him during the full term of this Agreement,
as extended pursuant to the second sentence of Section 2 of the
Agreement. The computation of the cash bonus awards will be
determined in the same manner that they would have been computed by
the Company prior to Executive's termination, but in no event will
that amount be less than the highest amount paid in any one of the
prior three (3) years;
7. The phrase "for the period applicable" in Section 5(d)(4) of the
Agreement shall be deleted and replaced with the phrase "for the period
described in Section 5(d)(1) above, the Executive shall be entitled to receive".
8. New Sections 5(d)(5) and (6) of the Agreement are hereby added to the
Agreement as follows:
<PAGE>
(5) for the period described in Section 5(d)(1) above, the Company
shall continue to pay to or for the benefit of Executive an allocated
percentage of his office overhead, including salaries of personnel and
other expenses, at substantially the same location and on
substantially the same terms and conditions in effect on the date of
such Termination Without Just Cause; and
(6) the Company shall immediately pay in full (at a discount for
present value or otherwise) all premiums, or shall make provisions
reasonably satisfactory to Executive (which may include payment into
escrow or otherwise) for payment in full of all premiums, payable by
the Company for life insurance policies applicable to Executive in
existence as of February 1, 1998, on substantially the same terms and
conditions as presently contained in such policies.
9. The paragraph immediately preceding Section 6 of the Agreement is
hereby deleted in its entirety and replaced with the following paragraph:
Without in any way limiting the generality of what may be deemed
to constitute a Termination Without Just Cause hereunder, it is hereby
agreed that if (i) any "person" (as such term is defined in Section
13(d) of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of either (x) thirty-five
percent (35%) of the Company's outstanding shares of common stock or
(y) securities of the Company representing thirty-five percent (35%)
of the combined voting power of the Company's then outstanding voting
securities, or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board
of Directors of the Company cease, at any time after the beginning of
such period, for any reason to constitute a majority of the Board of
Directors of the Company, unless each new director was nominated or
the election of such director was ratified by at least two-thirds of
the directors still in office who were directors at the beginning of
such two-year period, then Executive shall have the right to elect to
treat such event as constituting a Termination Without Just Cause
hereunder.
10. Section 6 of the Agreement is hereby deleted in its entirety and
replaced with the following:
6. Executive shall be entitled to all of the rights and benefits set
forth in the Indemnification Agreement dated as of October 23, 1997
between the Company and Executive.
11. Section 7(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
(a) Executive acknowledges that during the course of the performance
of his services for the Company he will acquire confidential and
proprietary information with respect to the Company's business
operations (the "CONFIDENTIAL INFORMATION"). Executive agrees that
during the term of this Agreement and thereafter, Executive shall not
divulge any Confidential Information to any person, directly or
indirectly, except to the Company, its directors, officers, agents and
representatives and its subsidiaries and affiliated companies, or as
may reasonably be necessary in connection with his duties on behalf of
the Company or unless required by law.
12. Sections 8 and 10 of the Agreement, and the references to Section 8
contained in Sections 9 and
2
<PAGE>
11 of the Agreement, are hereby deleted in their entirety as moot.
13. The second sentence of Section 12 of the Agreement is hereby deleted
in its entirety and replaced with the following:
If the Company prevails on all issues in such litigation and is
thereby permitted to implement a Termination with Just Cause of
Executive's employment, then Executive agrees to reimburse to the
Company all such fees and costs.
14. Section 14(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
a. if to the Company:
Avatex Corporation
Attention: Senior Vice President
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
15. A new Section 24 is hereby added to the Agreement as follows:
24. TAX ADJUSTMENT PAYMENTS. If all or any portion of the amount
payable to Executive under this Agreement (together with all other
payments of cash or property, whether pursuant to this Agreement or
otherwise, including without limitation the issuance of options or
option shares or the granting of, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended, (the
"CODE") that are subject to the excise tax imposed by Section 4999 of
the Code (or any similar tax or assessment), the amounts payable
hereunder shall be increased to the extent necessary to place
Executive in the same after-tax position as he would have been in had
no such tax assessment been imposed on any such payment paid or
payable to Executive under this Agreement or any other payment
Executive may receive in connection therewith. The determination of
the amount of any such tax or assessment and the incremental payment
required hereby in connection therewith shall be made by an accounting
firm employed by Executive within thirty (30) calendar days after such
payment, and the incremental payment shall be made within thirty (30)
calendar days after such determination has been made. If, after the
date upon which the payment required hereby has been made, it is
determinated (pursuant to final regulations or published rulings of
the Internal Revenue Service, final judgment of a court of competent
jurisdiction, Internal Revenue Service audit assessment or otherwise)
that the amount of excise or other similar tax or assessment payable
by Executive is greater than the amount initially so determined, the
Company shall pay Executive an amount equal to the sum of (i) such
additional excise or other tax, (ii) any interest, fines and penalties
resulting from such underpayment, and (iii) an amount necessary to
reimburse Executive for any income, excise or other tax assessment
payable by Executive with respect to the amounts specified in items
(i) and (ii) above, and the reimbursement provided by this clause
(iii), in the manner described above in this Section 24. Payment
thereof shall be made within ten (10) business days after the date
upon which such subsequent determination is made. The Company may
review Executive's calculation of any payments made pursuant to this
Section 24 and object to the calculation, and Executive shall refund
to the Company any overpayments resulting from an incorrect or
estimated
3
<PAGE>
calculation.
16. Except as expressly provided in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective on
the date and year first above written
AVATEX CORPORATION -------------------------
Melvyn J. Estrin
By:
------------------------------
Abbey J. Butler
Co-Chief Executive Officer
4
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "AMENDMENT"), effective as of
February 1, 1998, is entered into by and between Avatex Corporation, a Delaware
corporation formerly known as FoxMeyer Health Corporation (the "COMPANY"), and
Edward L. Massman ("EMPLOYEE").
The Company and Employee hereby agree that this Amendment amends the
Employment Agreement dated and effective as of November 7, 1996 by and between
the Company and Employee (the "AGREEMENT"), as follows:
1. All references in the Agreement to FoxMeyer Health Corporation shall
be deemed to be references to Avatex Corporation.
2. Section 1 of the Agreement is hereby amended by changing the date
specified therein to January 31, 2000.
3. Section 3(a) of the Agreement is hereby amended by changing the
minimum monthly base salary specified in the first sentence therein to
$25,000.00.
4. A new Section 3(f) is hereby added to the Agreement as follows:
f. Employee shall be entitled to all of the rights and benefits
set forth in the Indemnification Agreement dated as of October 23,
1997 between the Company and Employee.
5. Section 4(d) of the Agreement is hereby deleted up to the phrase
commencing with "Without in any way limiting the generality 1/4", and replaced
with the following:
d. The Company shall have the right to terminate Employee's
employment at any time without Cause ("TERMINATION WITHOUT CAUSE").
In the event that (1) upon expiration of the Agreement, the Company
has not renewed Employee's employment on terms at least as favorable
as the terms and conditions of this Agreement, or (2) a Termination
Without Cause of Employee's employment occurs, and provided that
Employee complies with SECTION 5 hereof, then:
(i) Employee shall be entitled to receive a one-time lump sum
payment equal to the full amount of any Monthly Base Salary and
cash bonus awards that otherwise would have been earned by him
for a twenty-four (24) month period. The computation of the cash
bonus awards will be determined in the same manner that they
would have been computed by the Company prior to Employee's
termination, but in no event will that amount be less than the
highest amount paid in any one of the prior two (2) years;
provided, however, that the Initial Bonus paid to Employee, and
the value of all property distributed to Employee pursuant to the
Assignment, shall not be considered in the foregoing computation
of the cash bonus award;
(ii) All rights of Employee under any benefit plan or
arrangement that have not vested shall be deemed to have vested
as of the date of such termination, and the Company shall cause
all benefits vested and deemed to be vested thereunder to be paid
to Employee pursuant thereto;
(iii) All rights of Employee under the Company's 1993 Stock
<PAGE>
Option and Performance Award Plan, as amended, and any other
stock option plan or arrangement that have not yet vested
thereunder shall be deemed to have vested as of the date of such
termination and Employee shall be entitled to exercise any such
options during the remaining term specified in the option grant
and pursuant to the other terms thereof; and
(iv) for the period covered by Section 4(d)(i), medical and
dental benefits coverage, less any amount the Employee is
required to pay to receive such medical and dental coverage had
termination of employment not occurred.
6. Section 14(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
a. if to the Company:
Avatex Corporation
Attention: Mr. Abbey J. Butler
Mr. Melvyn J. Estrin
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
7. A new Section 19 is hereby added to the Agreement as follows:
19. TAX ADJUSTMENT PAYMENTS. If all or any portion of the
amount payable to Employee under this Agreement (together with all
other payments of cash or property, whether pursuant to this Agreement
or otherwise, including without limitation the issuance of options or
option shares or the granting of, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended, (the
"CODE") that are subject to the excise tax imposed by Section 4999 of
the Code (or any similar tax or assessment), the amounts payable
hereunder shall be increased to the extent necessary to place Employee
in the same after-tax position as he would have been in had no such
tax assessment been imposed on any such payment paid or payable to
Employee under this Agreement or any other payment Employee may
receive in connection therewith. The determination of the amount of
any such tax or assessment and the incremental payment required hereby
in connection therewith shall be made by an accounting firm employed
by Employee within thirty (30) calendar days after such payment, and
the incremental payment shall be made within thirty (30) calendar days
after such determination has been made. If, after the date upon which
the payment required hereby has been made, it is determinated
(pursuant to final regulations or published rulings of the Internal
Revenue Service, final judgment of a court of competent jurisdiction,
Internal Revenue Service audit assessment or otherwise) that the
amount of excise or other similar tax or assessment payable by
Employee is greater than the amount initially so determined, the
Company shall pay Employee an amount equal to the sum of (i) such
additional excise or other tax, (ii) any interest, fines and penalties
resulting from such underpayment, and (iii) an amount necessary to
reimburse Employee for any income, excise or other tax assessment
payable by Employee with respect to the amounts specified in items (i)
and (ii) above, and the reimbursement provided by this clause (iii),
in the manner described above in this Section 19. Payment thereof
shall be made within ten (10) business days after the date upon which
such subsequent determination is made.
2
<PAGE>
The Company may review Employee's calculation of any payments made
pursuant to this Section 19 and object to the calculation, and
Employee shall refund to the Company any overpayments resulting
from an incorrect or estimated calculation.
8. Except as expressly provided in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective on
the date and year first above written.
AVATEX CORPORATION --------------------------------
Edward L. Massman
By:
---------------------------
Abbey J. Butler
Co-Chief Executive Officer
3
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), effective as of February 1,
1998, is entered into by and between Avatex Corporation, a Delaware corporation
(the "COMPANY"), and John G. Murray ("EMPLOYEE").
In consideration of the mutual covenants contained herein, the parties
hereto agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby agrees to be employed by the Company, beginning on the date of
this Agreement through and including January 31, 2000 (the "TERM OF
EMPLOYMENT").
2. POSITION AND RESPONSIBILITIES. The Company hereby employs Employee to
serve as Vice President -- Finance. Employee shall have such duties,
responsibilities and authority as may, from time to time, be assigned to
Employee by more senior officers of the Company.
3. COMPENSATION. As compensation for all services performed and to be
performed by Employee under this Agreement, the Company shall compensate
Employee as follows:
a. BASE SALARY. The Company shall pay Employee a minimum monthly
base salary of $16,666.67 (as may be adjusted from time to time, the
"MONTHLY BASE SALARY"). During the term of this Agreement, Employee's
Monthly Base Salary shall be reviewed periodically to determine whether
such salary shall be adjusted in accordance with the duties and
responsibilities of Employee and his performance thereof, but no adjustment
shall reduce Employee's base salary below the minimum Monthly Base Salary
set forth above.
b. CAR ALLOWANCE. The Company shall pay Employee a minimum monthly
car allowance in the amount of $750.00.
c. BENEFITS, INCENTIVES AND PERQUISITES. Employee shall be entitled
to participate in the incentive, stock option and employee benefit plans of
the Company, including but not limited to a Performance Incentive Plan to
be implemented by the Company, and the perquisites enjoyed by other
employees with similar or same titles of the Company as presently in effect
or as they may be modified from time to time, provided that the Company may
not reduce the benefits provided to Employee pursuant to Employee's life
insurance, accidental death and dismemberment, long-term disability and
business travel accident insurance during the term of this Agreement.
d. INDEMNIFICATION. Employee shall be entitled to all of the rights
and benefits set forth in the Indemnification Agreement dated as of October
23, 1997 between the Company and Employee.
4. TERMINATION. This Agreement may be terminated upon the following
terms:
a. TERMINATION UPON DEATH. If Employee dies during the Term of
Employment, this Agreement shall terminate immediately.
b. TERMINATION UPON DISABILITY. The Company shall have the right to
terminate this Agreement upon the "Disability" of Employee by providing ten
(10) days written notice to Employee. "DISABILITY" as used in this section
shall mean any illness or any impairment of mind or body that (i) renders
it impossible or impracticable for Employee to perform his duties and
responsibilities hereunder for a continuous period of at least six (6)
months or (ii) is likely to prevent Employee from performing his duties and
responsibilities hereunder for more than nine (9) months during any
eighteen (18) month period, each as determined in good faith by a physician
selected by the Board of Directors. The Company's selection of a physician
shall be subject to Employee's approval, which shall not be unreasonably
withheld. Any refusal without reasonable cause by Employee to submit to a
medical examination for the purpose of certifying Disability under this
section shall be deemed to constitute conclusive evidence of Employee's
Disability. In the event of termination upon Disability, Employee shall
continue to receive the Monthly
<PAGE>
Base Salary in effect at the time of termination (reduced by any amounts
payable to Employee as disability benefits under any Company plan, social
security or otherwise) for the remainder of the Term of Employment.
c. TERMINATION FOR CAUSE. The Company shall have the right to
terminate this Agreement, and have no further obligation to Employee under
this Agreement, for "Cause" after giving written notice of termination to
Employee. "CAUSE" as used in this section shall mean:
(i) misconduct or negligence in the performance by Employee of his
duties and responsibilities hereunder;
(ii) the failure by Employee to follow any reasonable directive of
Employee's Supervisor or the Company's Chief Executive Officers in
carrying out his duties or responsibilities hereunder;
(iii) the failure by Employee to substantially achieve agreed upon
goals and objectives;
(iv) the theft or misappropriation of funds or the disclosure of trade
secrets or other confidential or proprietary information in violation
of SECTION 6 of this Agreement; or
(v) the conviction of Employee for (A) a crime involving an act or
acts of dishonesty or moral turpitude or (B) a felony.
d. TERMINATION WITHOUT CAUSE. The Company shall have the right to
terminate Employee's employment at any time without Cause ("TERMINATION
WITHOUT CAUSE"). In the event of a Termination Without Cause of Employee's
employment, and provided that Employee complies with SECTION 5 hereof, the
Company agrees to provide Employee with:
(i) At Employee's option, (x) a single lump sum severance payment
equal to the amount of the total compensation that would otherwise be
paid by the Company to Employee during the nine (9) month period
commencing on the effective date of Termination Without Cause or (y)
monthly severance payments in the amount of Employee's total annual
compensation during the twelve (12) month period commencing on the
effective date of Termination Without Cause, divided by twelve (12),
for a period of eighteen (18) months; and
(ii) For a period of twelve (12) months commencing on the effective
date of Termination Without Cause, medical and dental benefits
coverage, less any amount that Employee is required to pay to receive
such medical and dental coverage had termination of his employment not
occurred.
In addition to the foregoing, as set forth in Section 12 of the
Company's 1993 Stock Option and Performance Award Plan (as amended, the
"PLAN") and Section 4(c) of the stock option agreements previously executed
by the Company and Employee, in the Event of a Termination Without Cause of
Employee's employment following or in connection with a Change in Control
(as such term is defined in Section 14 of the Plan), all options previously
issued to Employee pursuant to the Plan that have not yet vested thereunder
shall be deemed to have vested as of the date of such termination and
Employee shall be entitled to exercise all options issued pursuant to the
Plan during the remaining term specified in the option grant and pursuant
to the other terms thereof.
Without in any way limiting the generality of what may be deemed to
constitute a Termination Without Cause hereunder, it is hereby agreed that
any material reduction of Employee's duties, responsibilities and authority
shall be deemed to constitute a Termination Without Cause hereunder.
e. TERMINATION BY EMPLOYEE. Employee shall be entitled to terminate
his employment with the Company at any time. If Employee's terminates his
employment for Good Reason (as such term is defined below), such
termination shall be deemed a Termination Without Cause under SECTION 4(d)
of this
2
<PAGE>
Agreement. If Employee terminates without Good Reason, Employee
shall no longer be entitled to any form of compensation, including but not
limited to any Monthly Base Salary, benefits, incentives, perquisites or
vacation.
Without in any way limiting the generality of what may be deemed to
constitute a Good Reason hereunder, it is hereby agreed that a termination
by Employee shall be deemed for Good Reason if it is as a result of or
follows:
(i) A breach by the Company of this Agreement (including but not
limited to as a result of or following rejection of this Agreement
under any debtor relief or similar law);
(ii) A reduction in Employee's Monthly Base Salary as in effect on
the date hereof or as may be increased from time to time;
(iii) The taking of any action by the Company that could be deemed
to constitute a Termination Without Cause; or
(iv) The mandatory transfer of the permanent residence of Employee
to another geographic location more than 40 miles from Dallas, Texas,
except for required travel on Company business to an extent
substantially consistent with Employee's prior business travel
obligations.
5. NONDISCLOSURE.
a. Employee acknowledges that during the course of the
performance of his services for the Company he will acquire confidential
and proprietary information with respect to the Company's business
operations (the "CONFIDENTIAL INFORMATION"). Employee agrees that during
the term of this Agreement and thereafter, Employee shall not divulge any
Confidential Information to any person, directly or indirectly, except to
the Company, its directors, officers, agents and representatives and its
subsidiaries and affiliated companies, or as may reasonably be necessary in
connection with his duties on behalf of the Company or unless required by
law.
b. Employee acknowledges that all documents, written information,
records, data, computer information and material, tapes, film, maps and
other material of any kind relating to Confidential Information,
including, without limitation, memoranda, notes, sketches, records,
reports, manuals, business plans and notebooks (collectively, "MATERIALS")
in Employee's possession or under his control during the term of his
employment hereunder are and shall remain the property of the Company and
agrees that if his relationship with Company is terminated (for whatever
reason), he shall not take with him but shall leave with the Company all
Materials and any copies thereof or, if such Materials are not on the
premises of the Company, he shall return the same to the Company
immediately upon his termination.
c. This SECTION 5 shall survive any termination of this Agreement
and shall continue to bind Employee in accordance with its terms. The
existence of any claim or cause of action by Employee against the Company
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the Company's enforcement of the covenants contained in this
Agreement.
6. REMEDIES. In the event that Employee breaches any of the provisions
of SECTION 5 above, in addition to any legal rights and remedies that the
Company may have to enforce the provisions of this Agreement, the Company shall
have no further obligations to Employee under this Agreement. In the event of
such a breach, Employee agrees that any and all proceeds, funds, payments and
proprietary interests of every kind and description arising from, or
attributable to, such breach shall be the sole and exclusive property of the
Company and the Company shall be entitled to recover any additional actual
damages incurred as a result of such breach.
7. INJUNCTIVE RELIEF. Notwithstanding anything contained in this
Agreement to the contrary, in the
3
<PAGE>
event of a breach of the provisions of SECTION 5 above, the Company shall, in
addition to any other remedies available under law, be entitled to an
injunction enjoining Employee or any person or persons acting for or with
Employee in any capacity whatsoever from violating any of the terms thereof.
8. SEVERABILITY. If any provision of this Agreement shall for any reason
be held invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement, but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision was never contained herein and the remaining provisions
of this Agreement shall remain in full force and effect.
9. WAIVER AND LIMITATION. Any waiver by either party of a provision or a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any other provision or subsequent breach of any provision hereof.
10. TAXES. Employee shall be responsible for the payment of all
individual taxes on all amounts paid or benefits provided to him under this
Agreement. All compensation paid to Employee shall be subject to any
withholdings as from time to time may be required to be made pursuant to law,
government regulations or order, or by agreement with, or consent of, Employee.
11. NO FUNDING. The right of Employee under this Agreement shall be that
of a general creditor of the Company and Employee shall have no preferred claims
on, or any beneficial ownership in, the assets of the Company.
12. ENTIRE AGREEMENT. Except as expressly provided herein, this
Agreement, and the agreements, documents and compensation, incentive and option
plans referred to herein, contain the entire agreement between the parties
hereto relating to the subject matter hereof and supersede any and all other
prior or contemporaneous employment, compensation, incentive or retirement
agreements, either oral or in writing, between the parties.
13. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, legatees,
legal representatives, successors and assigns. Employee may not assign any of
his rights or responsibilities under this Agreement.
14. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
mailed by certified mail (return receipt requested) or sent by overnight
delivery service, cable, telegram, facsimile transmission or telex to the
parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
a. if to the Company:
Avatex Corporation
Attention: Mr. Abbey J. Butler
Mr. Melvyn J. Estrin
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
b. if to Employee:
John G. Murray
3512 Marquettte
Dallas, Texas 75225
15. HEADINGS. Section and subsection headings used in this Agreement have
been inserted solely for convenience of reference and do not constitute a part
of this Agreement and are not intended to affect the
4
<PAGE>
interpretation of any provision of this Agreement.
16. AMENDMENTS. This Agreement may not be amended except by an instrument
in writing signed by the parties hereto.
17. GOVERNING LAW. This Agreement and all performance hereunder shall be
governed by and construed in accordance with the laws of the State of Texas
without regard to the principles of conflict of laws thereof.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
the date and year first above written.
AVATEX CORPORATION ------------------------------
John G. Murray
By:
--------------------------
Abbey J. Butler
Co-Chief Executive Officer
6
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "AMENDMENT"), effective as of
February 1, 1998, is entered into by and between Avatex Corporation, a Delaware
corporation formerly known as FoxMeyer Health Corporation (the "COMPANY"), and
Scott E Peterson ("EMPLOYEE").
The Company and Employee hereby agree that this Amendment amends the
Employment Agreement dated and effective as of November 20, 1996 by and between
the Company and Employee (the "AGREEMENT"), as follows:
1. All references in the Agreement to FoxMeyer Health Corporation shall
be deemed to be references to Avatex Corporation.
2. Section 1 of the Agreement is hereby amended by changing the date
specified therein to January 31, 2000.
3. Section 3(a) of the Agreement is hereby amended by changing the
minimum monthly base salary specified in the first sentence therein to
$16,666.67.
4. A new Section 3(e) is hereby added to the Agreement as follows:
e. Employee shall be entitled to all of the rights and benefits set
forth in the Indemnification Agreement dated as of October 23,
1997 between the Company and Employee.
5. Sections 4(d)(i) and (ii) of the Agreement are hereby deleted in their
entirety and replaced with the following:
(i) At Employee's option, (x) a single lump sum severance
payment equal to the amount of the total compensation that would
otherwise be paid by the Company to Employee during the nine (9) month
period commencing on the effective date of Termination Without Cause
or (y) monthly severance payments in the amount of Employee's total
annual compensation during the twelve (12) month period commencing on
the effective date of Termination Without Cause, divided by twelve
(12), for a period of eighteen (18) months; and
(ii) For a period of twelve (12) months commencing on the
effective date of Termination Without Cause, medical and dental
benefits coverage, less any amount that Employee is required to pay to
receive such medical and dental coverage had termination of his
employment not occurred.
In addition to the foregoing, as set forth in Section 12 of the
Company's 1993 Stock Option and Performance Award Plan (as amended,
the "PLAN") and Section 4(c) of the stock option agreements previously
executed by the Company and Employee, in the Event of a Termination
Without Cause of Employee's employment following or in connection with
a Change in Control (as such term is defined in Section 14 of the
Plan), all options previously issued to Employee pursuant to the Plan
that have not yet vested thereunder shall be deemed to have vested as
of the date of such termination and Employee shall be entitled to
exercise all options issued pursuant to the Plan during the remaining
term specified in the option grant and pursuant to the other terms
thereof.
6. The fourth through seventh sentences of Section 4(e) of the Agreement
are hereby deleted as moot.
7. Sections 14(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
<PAGE>
a. if to the Company:
Avatex Corporation
Attention: Mr. Abbey J. Butler
Mr. Melvyn J. Estrin
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
8. Except as expressly provided in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective on
the date and year first above written.
AVATEX CORPORATION ----------------------------
Scott E Peterson
By:
--------------------------
Abbey J. Butler
Co-Chief Executive Officer
2
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "AMENDMENT"), effective as of
February 1, 1998, is entered into by and between Avatex Corporation, a Delaware
corporation formerly known as FoxMeyer Health Corporation (the "COMPANY"), and
Grady E. Schleier ("EMPLOYEE").
The Company and Employee hereby agree that this Amendment amends the
Employment Agreement dated and effective as of November 12, 1996 by and between
the Company and Employee (the "AGREEMENT"), as follows:
1. All references in the Agreement to FoxMeyer Health Corporation shall
be deemed to be references to Avatex Corporation.
2. Section 1 of the Agreement is hereby amended by changing the date
specified therein to January 31, 2000.
3. Section 3(a) of the Agreement is hereby amended by changing the
minimum monthly base salary specified in the first sentence therein to
$16,666.67.
4. A new Section 3(e) is hereby added to the Agreement as follows:
e. Employee shall be entitled to all of the rights and benefits set
forth in the Indemnification Agreement dated as of October 23,
1997 between the Company and Employee.
5. Sections 4(d)(i) and (ii) of the Agreement are hereby deleted in their
entirety and replaced with the following:
(i) At Employee's option, (x) a single lump sum severance
payment equal to the amount of the total compensation that would
otherwise be paid by the Company to Employee during the nine (9) month
period commencing on the effective date of Termination Without Cause
or (y) monthly severance payments in the amount of Employee's total
annual compensation during the twelve (12) month period commencing on
the effective date of Termination Without Cause, divided by twelve
(12), for a period of eighteen (18) months; and
(ii) For a period of twelve (12) months commencing on the
effective date of Termination Without Cause, medical and dental
benefits coverage, less any amount that Employee is required to pay to
receive such medical and dental coverage had termination of his
employment not occurred.
In addition to the foregoing, as set forth in Section 12 of the
Company's 1993 Stock Option and Performance Award Plan (as amended,
the "PLAN") and Section 4(c) of the stock option agreements previously
executed by the Company and Employee, in the Event of a Termination
Without Cause of Employee's employment following or in connection with
a Change in Control (as such term is defined in Section 14 of the
Plan), all options previously issued to Employee pursuant to the Plan
that have not yet vested thereunder shall be deemed to have vested as
of the date of such termination and Employee shall be entitled to
exercise all options issued pursuant to the Plan during the remaining
term specified in the option grant and pursuant to the other terms
thereof.
6. The fourth through seventh sentences of Section 4(e) of the Agreement
are hereby deleted as moot.
7. Sections 14(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
<PAGE>
a. if to the Company:
Avatex Corporation
Attention: Mr. Abbey J. Butler
Mr. Melvyn J. Estrin
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
8. Except as expressly provided in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective on
the date and year first above written.
AVATEX CORPORATION ----------------------------
Grady E. Schleier
By:
--------------------------
Abbey J. Butler
Co-Chief Executive Officer
2
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "AMENDMENT"), effective as of
February 1, 1998, is entered into by and between Avatex Corporation, a Delaware
corporation formerly known as FoxMeyer Health Corporation (the "COMPANY"), and
Robert H. Stone ("EMPLOYEE").
The Company and Employee hereby agree that this Amendment amends the
Employment Agreement dated and effective as of November 12, 1996 by and between
the Company and Employee (the "AGREEMENT"), as follows:
1. All references in the Agreement to FoxMeyer Health Corporation shall
be deemed to be references to Avatex Corporation.
2. Section 1 of the Agreement is hereby amended by changing the date
specified therein to January 31, 2000.
3. Section 3(a) of the Agreement is hereby amended by changing the
minimum monthly base salary specified in the first sentence therein to
$16,666.67.
4. A new Section 3(e) is hereby added to the Agreement as follows:
e. Employee shall be entitled to all of the rights and benefits set
forth in the Indemnification Agreement dated as of October 23,
1997 between the Company and Employee.
5. Sections 4(d)(i) and (ii) of the Agreement are hereby deleted in their
entirety and replaced with the following:
(i) At Employee's option, (x) a single lump sum severance
payment equal to the amount of the total compensation that would
otherwise be paid by the Company to Employee during the nine (9) month
period commencing on the effective date of Termination Without Cause
or (y) monthly severance payments in the amount of Employee's total
annual compensation during the twelve (12) month period commencing on
the effective date of Termination Without Cause, divided by twelve
(12), for a period of eighteen (18) months; and
(ii) For a period of twelve (12) months commencing on the
effective date of Termination Without Cause, medical and dental
benefits coverage, less any amount that Employee is required to pay to
receive such medical and dental coverage had termination of his
employment not occurred.
In addition to the foregoing, as set forth in Section 12 of the
Company's 1993 Stock Option and Performance Award Plan (as amended,
the "PLAN") and Section 4(c) of the stock option agreements previously
executed by the Company and Employee, in the Event of a Termination
Without Cause of Employee's employment following or in connection with
a Change in Control (as such term is defined in Section 14 of the
Plan), all options previously issued to Employee pursuant to the Plan
that have not yet vested thereunder shall be deemed to have vested as
of the date of such termination and Employee shall be entitled to
exercise all options issued pursuant to the Plan during the remaining
term specified in the option grant and pursuant to the other terms
thereof.
6. The fourth through seventh sentences of Section 4(e) of the Agreement
are hereby deleted as moot.
<PAGE>
7. Sections 14(a) and (b) of the Agreement are hereby deleted in their
entirety and replaced with the following:
a. if to the Company:
Avatex Corporation
Attention: Mr. Abbey J. Butler
Mr. Melvyn J. Estrin
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
b. if to Employee:
Robert H. Stone
6422 Riverview Lane
Dallas, Texas 75248
8. Except as expressly provided in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment effective on
the date and year first above written.
AVATEX CORPORATION -----------------------------
Robert H. Stone
By:
--------------------------
Abbey J. Butler
Co-Chief Executive Officer
3
<PAGE>
AVATEX CORPORATION
AMENDMENT NO. 2 TO
PERFORMANCE INCENTIVE PLAN
Pursuant to the rights reserved in Section E of the Performance
Incentive Plan of Avatex Corporation (the "Company") adopted effective as of
January 1, 1997, as amended by Amendment No. 1 thereto dated as of June 23,
1997 (as amended, the "Plan"), the Plan is hereby amended as follows:
1. Section D(4) is hereby amended to read as follows:
The calculation of Net Income shall exclude for all purposes any
effect on income, operations or other items resulting from (a)
any settlement by the Company of the lawsuit styled OFFICIAL
COMMITTEE OF UNSECURED CREDITORS OF FOXMEYER CORPORATION, ET AL.,
V. FOXMEYER HEALTH CORPORATION, Adversary No. 96-205, filed in
the United States Bankruptcy Court for the District of Delaware,
(b) any other actual or potential litigation or similar
proceeding against the Company and/or any of its officers or
directors that involves the matters alleged in such lawsuit
and/or relates in any way to the Chapter 11 or Chapter 7
proceedings of FoxMeyer Corporation and certain of its
subsidiaries, or (c) Litigation Income (as such term is defined
in Section E(a) below); provided, however, that Litigation Income
shall be distributed to participants in accordance with the
percentages reflected on Revised Exhibit A hereto and pursuant to
the final paragraph of Section D of the Plan, irrespective of
whether any Net Income other than Litigation Income exists and is
distributed.
2. Section E(3) of the Plan is hereby deleted in its entirety, and the
date in Section E(4) of the Plan is hereby changed to April 1, 1999.
3. The Plan is hereby amended by deleting Exhibit A thereto in its
entirety and replacing it with the document entitled "Revised
Exhibit A" attached hereto, which sets forth the participants in
the Plan, their respective positions and their respective
percentage award levels under the Plan for (a) Net Income other
than Litigation Income for the fiscal year ending March 31, 1998,
(b) Litigation Income, and (c) Net Income other than Litigation
Income for the fiscal year ending March 31, 1999.
Notwithstanding the provisions of Section E(a) of the Plan, each
of the participants identified on the original Exhibit A has
consented to the reallocation of the percentages applicable to
Litigation Income.
PURSUANT TO THE APPROVAL OF THIS AMENDMENT NO. 2 BY THE FINANCE AND
PERSONNEL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY, THE COMPANY HEREBY
ADOPTS THIS AMENDMENT NO. 2 EFFECTIVE AS OF _______________, 1998.
AVATEX CORPORATION
By:
------------------------------
Abbey J. Butler
Co-Chief Executive Officer
<PAGE>
REVISED EXHIBIT A
AVATEX CORPORATION
PERFORMANCE INCENTIVE PLAN
<TABLE>
<CAPTION>
PERCENTAGE AWARDS
-----------------
FY 1998 NON- LITIGATION FY 1999 NON-
NAME TITLE LITIGATION NET INCOME INCOME LITIGATION NET INCOME
---- ----- --------------------- ------ ---------------------
<S> <C> <C> <C> <C>
Abbey J. Butler Co-Chair/Co-CEO 4.125% 3.775% 4.38%
Melvyn J. Estrin Co-Chair/Co-CEO 4.125% 3.775% 4.38%
Edward L. Massman SVP and CFO 3.125% 2.860% 2.98%
John G. Murray VP 1.487% 1.44%
Scott E. Peterson VP 1.625% 1.487% 1.44%
Grady E. Schleier VP 1.625% 1.487% 1.44%
Robert H. Stone VP, GC & Secretary 1.625% 1.487% 1.44%
Tanis Darnell Dir. -- Planning/Bus. Dev. 0.625% 0.572% 0 %
Steven N. Shapu Dir. -- Accounting 0.625% 0.572% 0 %
------- -------- ------
Totals ...................................... 17.5 % 17.5 % 17.5 %
</TABLE>
<PAGE>
EXHIBIT 21
AVATEX CORPORATION
SUBSIDIARIES OF THE CORPORATION
AS OF APRIL 30, 1998
All subsidiaries are 100% owned except where otherwise indicated:
Davenport, Inc. (Delaware)
Intergroup Services, Inc. (Delaware)
M&A Investments, Inc. (Delaware)
National Aluminum Corporation (Delaware)
National Intergroup Realty Arlington , Inc. (Delaware)
National Intergroup Realty Corporation (Delaware)
National Intergroup Realty Riva, Inc. (Delaware)
National Intergroup Realty Development, Inc. (Delaware)
National Intergroup Realty Funding, Inc. (Delaware)
National Intergroup Ventures, Inc. (Delaware)
Natmin Development Corporation (Delaware)
NII Health Care Corporation (Delaware)
Oceanside Enterprises, Inc. (Delaware)
Riverside Insurance Co., Ltd. (Bermuda)
Starcom International, Inc. (Delaware) (80%)
US HealthData Interchange, Inc. (Delaware)
Xetava Corporation (Delaware)
The following subsidiaries are in Chapter 7 bankruptcy proceedings (except for
FoxMeyer Funding, Inc.):
FoxMeyer Corporation (Delaware)
FoxMeyer Drug Company (Delaware)
FoxMeyer Funding, Inc. (Delaware)
Health Mart, Inc. (Colorado)
FoxMeyer Software, Inc. (Delaware) (80%)
Healthcare Transportation System, Inc. (Delaware)
Merchandise Coordinator Services Corporation (Delaware)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AVATEX CORPORATION FOR THE TWELVE MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 34,193
<SECURITIES> 2,872
<RECEIVABLES> 11,810
<ALLOWANCES> 27
<INVENTORY> 0
<CURRENT-ASSETS> 49,947
<PP&E> 20,657
<DEPRECIATION> 1,630
<TOTAL-ASSETS> 119,303
<CURRENT-LIABILITIES> 9,326
<BONDS> 22,923
214,996
0
<COMMON> 69,032
<OTHER-SE> (210,934)
<TOTAL-LIABILITY-AND-EQUITY> 119,303
<SALES> 12,228
<TOTAL-REVENUES> 12,228
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,233
<INCOME-PRETAX> (81,179)
<INCOME-TAX> 40
<INCOME-CONTINUING> (81,219)
<DISCONTINUED> 3,719
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (77,500)
<EPS-PRIMARY> (7.47)
<EPS-DILUTED> (7.47)
</TABLE>
