<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8549
AVATEX CORPORATION
--------------------------------------------------------------
(Exact Name of Registrant as Specified in
its Charter)
DELAWARE 25-1425889
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5910 N. Central Expressway, Suite 1780, Dallas, Texas 75206
----------------------------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 214-365-7450
----------------
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Number of shares of Common Stock outstanding as of February 1, 1998: 13,806,375
<PAGE> 2
PART 1. FINANCIAL INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended December 31,
(in thousands, except per share amounts) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 2,974 $ 3,234
OPERATING COSTS
Operating costs, including general and administrative costs 4,538 2,647
Depreciation and amortization 251 358
Unusual items (5,592) --
- ----------------------------------------------------------------------------------------------
OPERATING INCOME 3,777 229
OTHER INCOME (EXPENSE) (5,231) 32,606
FINANCING COSTS
Interest income 379 384
Interest expense 1,460 1,595
- ----------------------------------------------------------------------------------------------
Financing costs, net 1,081 1,211
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL
CORPORATION, EQUITY IN INCOME OF AFFILIATES, INCOME
TAX PROVISION AND MINORITY INTEREST (2,535) 31,624
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income 1,345 401
Loss on National Steel Corporation settlement (59,038) --
Equity in income of affiliates 1,079 481
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
PROVISION AND MINORITY INTEREST (59,149) 32,506
Income tax provision 38 10
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (59,187) 32,496
Minority interest in results of operations of consolidated subsidiaries (11) 332
- ----------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (59,176) 32,164
Discontinued operations
Loss from discontinued operations, net of tax -- (1,583)
Gain (loss) on disposal of discontinued operations, net of tax 3,719 (835)
- ----------------------------------------------------------------------------------------------
NET INCOME (LOSS) (55,457) 29,746
Preferred stock dividends 6,474 5,888
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(61,931) $ 23,858
- ----------------------------------------------------------------------------------------------
BASIC INCOME (LOSS) PER SHARE
Income (loss) from continuing operations $ (4.76) $ 1.90
Discontinued operations 0.27 (0.17)
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE $ (4.49) $ 1.73
- ----------------------------------------------------------------------------------------------
DILUTED INCOME (LOSS) PER SHARE
Income (loss) from continuing operations $ (4.76) $ 1.79
Discontinued operations 0.27 (0.16)
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE $ (4.49) $ 1.63
- ----------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 13,806 13,806
Diluted 13,806 15,108
- ----------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 3
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months
ended December 31,
(in thousands, except per share amounts) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 9,797 $ 11,040
OPERATING COSTS
Operating costs, including general and administrative costs 11,943 11,896
Depreciation and amortization 703 1,196
Unusual items 25,996 --
- ---------------------------------------------------------------------------------------------------
OPERATING LOSS (28,845) (2,052)
OTHER INCOME (EXPENSE) (10,537) 30,788
FINANCING COSTS
Interest income 1,027 1,227
Interest expense 4,274 5,162
- ---------------------------------------------------------------------------------------------------
Financing costs, net 3,247 3,935
- ---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NATIONAL STEEL
CORPORATION, EQUITY IN LOSS OF AFFILIATES, INCOME
TAX PROVISION AND MINORITY INTEREST (42,629) 24,801
NATIONAL STEEL CORPORATION
National Steel Corporation net preferred dividend income 5,854 5,226
Loss on National Steel Corporation settlement (59,038) --
Equity in loss of affiliates (1,531) (1,906)
- ---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
PROVISION AND MINORITY INTEREST (97,344) 28,121
Income tax provision 38 29,855
- ---------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (97,382) (1,734)
Minority interest in results of operations of consolidated subsidiaries 325 1,342
- ---------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (97,707) (3,076)
Discontinued operations
Loss from discontinued operations, net of tax -- (20,772)
Gain (loss) on disposal of discontinued operations, net of tax 3,719 (239,883)
- ---------------------------------------------------------------------------------------------------
NET LOSS (93,988) (263,731)
Preferred stock dividends 18,972 13,048
- ---------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $(112,960) $(276,779)
- ---------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE
Loss from continuing operations $ (8.45) $ (1.05)
Discontinued operations 0.27 (17.04)
- ---------------------------------------------------------------------------------------------------
LOSS PER SHARE $ (8.18) $ (18.09)
- ---------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13,806 15,299
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
(in thousands of dollars) 1997 1997
- ---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and short-term investments $ 42,744 $ 7,173
Restricted cash and investments 321 33,115
Receivables - net 12,703 3,059
Other current assets 4,123 15,293
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 59,891 58,640
INVESTMENT IN NATIONAL STEEL CORPORATION -- 44,961
INVESTMENTS IN AFFILIATES 26,485 28,711
PROPERTY AND EQUIPMENT 30,132 19,414
Less accumulated depreciation and amortization 1,616 1,024
- ---------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 28,516 18,390
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE -- --
MISCELLANEOUS ASSETS 9,288 7,735
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 124,180 $ 158,437
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,847 $ 1,501
Other accrued liabilities 6,687 7,752
Long-term debt due within one year 3,164 2,969
- ---------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 11,698 12,222
LONG-TERM DEBT 28,092 27,482
OTHER LONG-TERM LIABILITIES 27,210 35,985
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 1,769 6,853
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK 208,364 189,402
STOCKHOLDERS' DEFICIT
Common stock $5.00 par value; authorized 50,000,000 shares;
issued: 13,806,375 shares at December 31, 1997 and 13,805,988
shares at March 31, 1997 69,032 69,030
Capital in excess of par value 119,100 119,092
Net unrealized holding loss on securities (26) --
Minimum pension liability -- (73,531)
Accumulated deficit (341,059) (228,098)
- ---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (152,953) (113,507)
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 124,180 $ 158,437
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
AVATEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months
ended December 31,
(in thousands of dollars) 1997 1996
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (93,988) $(263,731)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
Minority interest in results of operations of consolidated subsidiaries 325 1,342
Equity in loss of affiliates 1,531 1,906
Depreciation and amortization 703 1,196
Net preferred income from National Steel Corporation (5,854) (5,226)
Loss on National Steel Corporation settlement 59,038 --
Loss (gain) on disposal of discontinued operations (3,719) 239,883
Loss (gain) on investments 10,560 (32,783)
Other non-cash charges (credits) (4,402) 2,262
Deferred income tax provision -- 29,836
Depreciation and amortization, provision for losses on accounts
receivable and other items related to discontinued operations -- 11,373
Cash provided (used) by working capital items, net of acquisitions:
Receivables 46 22,101
Inventories -- 26,018
Other assets and restricted cash 33,310 (36,603)
Accounts payable and accrued liabilities (8,084) (12,137)
Proceeds from accounts receivable financing program -- 75,000
Other -- (196)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (10,534) 60,241
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reduction in cash from reclassification to discontinued operations -- (24,366)
Acquisition, net of cash acquired (7,399) --
Purchase of property and equipment (2,773) (34,084)
Purchase of investments (8,541) (6,623)
Proceeds from the sale of investments 63,714 102,580
Other 140 550
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 45,141 38,057
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in debt under revolving credit facilities -- 120,609
Proceeds from the issuance of long-term debt 16,368 14,520
Debt repayments (15,919) (212,286)
Debt issuance costs (185) (8,126)
Purchase of treasury stock -- (16,726)
Purchase of preferred stock -- (8,845)
Dividends paid on redeemable preferred stock -- (2,697)
Investment by minority interest 800 --
Dividends paid to minority interest (100) (1,735)
Exercise of stock options -- 1,680
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 964 (113,606)
- -------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 35,571 (15,308)
Cash and short-term investments, beginning of period 7,173 26,987
- -------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 42,744 $ 11,679
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
AVATEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
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 39% owned subsidiary, the Corporation is involved in operating a chain of
discount retail drugstores.
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.
Estimates are adjusted when necessary to reflect actual experience.
The condensed consolidated financial statements for prior periods have been
reclassified to reflect all discontinued operations. Certain other previously
reported amounts have been reclassified to conform to current year
presentations.
The accompanying condensed consolidated balance sheet of the Corporation as of
December 31, 1997, the condensed consolidated statements of operations for the
three and nine months ended December 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the nine months ended December 31,
1997 and 1996, are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited consolidated financial
statements, and include all adjustments necessary for the fair presentation of
financial position, results of operations and cash flows. Such adjustments were
of a normal recurring nature. The results of operations for the three and nine
months ended December 31, 1997 are not necessarily indicative of the results
that may be expected for the entire year. The condensed consolidated balance
sheet as of March 31, 1997 was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. Additional information is contained in the Corporation's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission for the
fiscal year ended March 31, 1997, and should be read in conjunction with this
quarterly report.
The "Unusual items" in the condensed consolidated statement of operations for
the three months ended December 31, 1997 primarily represented income from the
settlement of certain pension and other postretirement benefit claims of
former officers and employees. For the nine months ended December 31, 1997,
"Unusual items" also included charges incurred in connection with the settlement
of certain litigation with the Chapter 7 Bankruptcy Trustee of the Corporation's
subsidiary, FoxMeyer Corporation ("FoxMeyer"), and income from the settlement of
litigation primarily with insurance carriers related to environmental liability
claims. See Note 8.
NOTE 2 - EARNINGS PER SHARE OF COMMON STOCK
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" was issued. SFAS No. 128 requires a presentation of basic
and diluted earnings per share effective for all 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):
5
<PAGE> 7
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
December 31, December 31,
---------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ (59,176) $ 32,164 $ (97,707) $ (3,076)
Deduct dividends on preferred shares (6,474) (5,888) (18,972) (13,048)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations applicable to common
stockholders for Basic earnings per share (65,650) 26,276 (116,679) (16,124)
Effect of dilutive securities:
Dividends on convertible preferred shares unless anti-dilutive -- 815 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations applicable to common
stockholders for Diluted earnings per share $ (65,650) $ 27,091 $(116,679) $ (16,124)
- -----------------------------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares outstanding
for calculation of Basic earnings per share 13,806 13,806 13,806 15,299
Conversion of preferred stock unless anti-dilutive -- 1,290 -- --
Additional dilutive effect of outstanding options -- 12 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
for calculation of Diluted earnings per share 13,806 15,108 13,806 15,299
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
Basic $ (4.76) $ 1.90 $ (8.45) $ (1.05)
Diluted $ (4.76) $ 1.79 $ (8.45) $ (1.05)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase approximately 3.9 million and 1.8 million shares of common
stock were outstanding at December 31, 1997 and 1996, respectively. Except for
the three months ended December 31, 1996, the options were not included in the
computation of diluted earnings per share because the effect of including the
options in the calculation was anti-dilutive. For the three months ended
December 31, 1996, options for approximately 0.4 million shares were not
included in the calculation of diluted earnings per share as the exercise price
was greater than the average market price of the common stock during that
period.
NOTE 3 - NATIONAL STEEL CORPORATION SETTLEMENT
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, 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. The note
received as part of the NSC Settlement is to be paid over the following twelve
months and had an estimated discounted value of $9.4 million. 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 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 and 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 declined $20.7 million
as a result of this transaction.
6
<PAGE> 8
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
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. The Corporation
accounts for the Partnership on a consolidated basis. If the property had been
acquired at the beginning of the current or prior fiscal year, revenues for the
nine months ended December 31, 1997 and 1996 would have been approximately $1.2
million and $4.1 million greater than reported, respectively. The pro forma
impact on loss from continuing operations if the acquisition had taken place at
the beginning of the current or prior fiscal year is not material.
On September 19, 1997, the Corporation completed a previously announced
transaction relating to its 69.8% owned subsidiary, Hamilton Morgan LLC
("Hamilton Morgan"). Under an agreement with Hamilton Morgan, Robert Haft
(Hamilton Morgan's other owner) 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 acquisition price was approximately equal to the book value of the
minority interest acquired. The Corporation now owns directly, including shares
of Phar-Mor common stock which it had previously owned and were not involved in
this transaction, approximately 38.6% of Phar-Mor's common stock compared to
29.4%, net of minority interest, at March 31, 1997.
On November 19, 1997, the Corporation sold substantially all the assets of US
HealthData Interchange, Inc. ("USHDI") to ProxyMed, Inc. 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
discontinued operations as a result of the sale.
NOTE 5 - LONG-TERM DEBT
In November 1997, the Corporation repaid all amounts outstanding under a secured
loan of $14.9 million. All collateral securing the loan was released.
In connection with the purchase of certain improved real property (see Note 4),
the Partnership borrowed $7.5 million. The note is non-recourse, has an interest
rate of 9.16%, requires monthly principal and interest payments, has a balloon
payment at maturity in July 2004 and is secured by the property. In connection
with certain other real property, a separate partnership in which the
Corporation holds a 50% controlling interest borrowed approximately $0.9 million
through a short-term note. The proceeds were used to partially repay another
loan relating to that property and for construction related to the redevelopment
of the property.
In connection with the settlement of certain litigation with the FoxMeyer
Chapter 7 Trustee (the "Trustee") (see Note 8), 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 by a portion of
the 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.
7
<PAGE> 9
NOTE 6 - CAPITAL STOCK
The Corporation has not declared or paid any dividends on its preferred stock
since October 15, 1996. The two issues of preferred stock are cumulative.
Therefore, the dividends that would have been paid if declared have been shown
in the condensed consolidated statements of operations as if they had been
declared, with a corresponding charge to the accumulated deficit. The liability
for the cumulative unpaid dividends has been added to the carrying amount of the
redeemable preferred stock in the condensed consolidated balance sheets. The
cumulative dividends accrued but not paid were $4.1 million ($6.25 per share)
and $23.9 million ($5.53 per share) on the convertible preferred stock and
Series A preferred stock, respectively.
NOTE 7 - 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 nine months
ended December 31,
1997 1996
- -------------------------------------------------------- ------------- ---------
<S> <C> <C>
Interest paid $ 2,503 $18,140
Income taxes paid 38 25
Non-cash transactions:
Payment of dividends in kind on preferred stock - 4,354
Book value of note received in NSC Settlement 9,442 -
Cumulative dividends in arrears accrued 17,130 5,344
- -------------------------------------------------------- ------------- ---------
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
On October 9, 1997, the United States Bankruptcy Court for the District of
Delaware approved a settlement (the "Settlement") between the Corporation and
the Trustee. The Settlement dismissed the pending litigation relating to the
dividend of certain assets from FoxMeyer to the Corporation on June 19, 1996.
The terms of the Settlement were agreed upon between the Corporation and the
Trustee in July 1997 and, as a result, the Corporation recognized a $33.3
million charge related to the Settlement in the first quarter of fiscal 1998,
which was classified in "Unusual items" in the condensed consolidated statements
of operations.
Under the Settlement, (i) the pending litigation was dismissed against the
Corporation, (ii) the Preliminary Injunction Order entered in the litigation on
March 5, 1997 was dissolved, (iii) the Corporation paid the Trustee
approximately $25.8 million from a previously established escrow account, and
(iv) 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.
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. 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 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 have received various claims and demands from
governmental agencies relating to investigations and remedial actions to address
8
<PAGE> 10
environmental clean-up costs and in some instances have been designated as a
potentially responsible party by the Environmental Protection Agency.
As a result of the NSC Settlement, the Corporation relinquished its rights to
any balance left from its fiscal 1994 $10.0 million prepayment to NSC to
indemnify NSC from certain environmental liabilities. Otherwise, the
Corporation's reserves for environmental assessments, remediation activities,
penalties or fines that may be imposed for non-compliance with such laws or
regulations have not changed materially since March 31, 1997. 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.
The amounts of reserves for environmental liabilities are difficult to estimate
due to such factors as the unknown extent of the remedial actions that may be
required and, in the case of sites not owned by the Corporation, the unknown
extent of the Corporation's probable liability in proportion to the probable
liability of other parties. Moreover, the Corporation may have environmental
liabilities that the Corporation cannot in its judgment estimate at this time
and losses attributable to remediation costs may arise at other sites.
Management recognizes that additional work may need to be performed to ascertain
the ultimate liability for such sites, and further information could ultimately
change management's current assessment. A change in the estimated liability
could have a material impact on the financial condition and results of
operations of the Corporation.
In connection with litigation claims by the Corporation and certain other
plaintiffs against various insurance carriers for coverage of certain
environmental liabilities, the Corporation waived its rights to any additional
proceeds from settlements with the insurance carriers as part of the NSC
Settlement (see Note 3). The Corporation received $1.6 million in the second
quarter of the current fiscal year from the settlement of certain of these
claims and used this amount to fund a reinsurance obligation related to the
settlement owed by one of its subsidiaries. The $1.6 million cash settlement is
recorded in the condensed consolidated statements of operations in "Unusual
items".
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
condensed consolidated statements of operations.
In connection with the October 1994 merger of FoxMeyer into a wholly-owned
subsidiary of the Corporation (the "Merger"), several class action lawsuits were
filed against the Corporation, FoxMeyer and certain of FoxMeyer's officers and
directors alleging, among other things, that the defendants breached their
fiduciary duties owed to holders of FoxMeyer common stock. In December 1994, the
State of Wisconsin Investment Board ("SWIB") filed a complaint against the
Corporation. The SWIB complaint alleges that the defendants breached their
fiduciary duty to FoxMeyer's shareholders by agreeing to the Merger at an unfair
price and that the proxy statement issued in connection with the Merger failed
to disclose certain important facts. On April 30, 1995, the SWIB action was
consolidated with the class action lawsuit. An amended complaint was filed in
the consolidated case on February 13, 1996. The amended complaint essentially
alleges the same claims previously raised. The Corporation believes these
lawsuits are without merit and intends to contest these allegations.
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 stock and
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.
9
<PAGE> 11
The complaint alleges that the Corporation failed 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. At the Corporation's request, the Court
has entered a stay of all discovery pending a ruling on the Corporation's motion
to dismiss, which was filed on June 20, 1997. The Corporation intends to
prosecute the motion and defend itself in the consolidated lawsuit.
The Corporation and certain officers also have 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. This action purports to be brought on
behalf of all holders of the Corporation's common stock during the period from
October 30, 1995, to July 1, 1996, and which seeks unspecified money damages.
Plaintiff asserts claims of common law fraud and negligent misrepresentation,
based on allegations that she was induced not to sell her shares by supposed
misrepresentations and omissions that are substantially the same as those
alleged in the federal actions described above. On January 27, 1997, the
Corporation moved for summary judgment in the lawsuit on the ground that the
proposed plaintiff class, as plaintiff herself alleges, did not purchase or sell
any of the Corporation's securities during the class period. On September 28,
1997, the Court denied the Corporation's motion for a summary judgment. The
Corporation intends to continue to vigorously defend the lawsuit.
In connection with an age discrimination lawsuit filed against FoxMeyer and the
Corporation in August 1994, on September 9, 1996, the Corporation's motion for
summary judgment was granted by the United States District Court which entered a
partial final judgment in the Corporation's favor. The plaintiffs appealed the
judgment to the United States Court of Appeals for the Fifth Circuit, No.
96-11278. On December 4, 1997 the Court of Appeals entered an order affirming
the partial final judgment previously entered in favor of the Corporation.
The Corporation remains the owner of approximately 17% of the common stock of
Ben Franklin Retail Stores, Inc. ("BFRS"), which was previously engaged in the
franchising and operation of general variety and crafts stores, and the
wholesale distribution of products to such stores. BFRS and certain of its
operating subsidiaries (the "Subsidiaries") filed for relief under the
Bankruptcy Code in 1996 and subsequently liquidated its assets under Chapter 7
of the Bankruptcy Code. Beginning in August 1997, certain creditors of BFRS
and/or the Subsidiaries and the Chapter 7 Trustees of BFRS and the Subsidiaries
filed or threatened to file lawsuits against certain former officers and
directors of BFRS, the Corporation and certain current and former officers and
directors of the Corporation. The factual basis underlying these lawsuits and
potential lawsuits relates to the alleged altering of financial reports of BFRS
and the Subsidiaries and the alleged "freshening" of the dates of certain
accounts receivable owed to, and inventory held by, the Subsidiaries. As of
December 31, 1997, the plaintiffs in all of the filed lawsuits have amended
their initial filings to drop the Corporation and current and former officers
and directors of the Corporation (in their capacity as such) as defendants. In
accordance with Delaware law, the Corporation has agreed to pay a portion of the
legal expenses incurred by certain individuals who are named as defendants in
these lawsuits by reason of the fact that they were serving at the request of
the Corporation as a director or officer of BFRS, and may, if appropriate, agree
at a future date to indemnify such individuals in the lawsuit.
There are various other pending claims and lawsuits arising out of the normal
conduct of the Corporation's businesses. In the opinion of management, the
ultimate outcome of these claims and lawsuits will not have a material effect on
the consolidated financial condition or results of operations of the
Corporation.
10
<PAGE> 12
AVATEX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
OVERVIEW
Avatex Corporation is a holding company that, along with its subsidiaries
(collectively, the "Corporation"), owns interests in hotels and office buildings
and in other corporations and partnerships. Through Phar-Mor, Inc. ("Phar-Mor"),
its 39% owned subsidiary, the Corporation is involved in operating a chain of
discount retail drugstores.
In connection with the FoxMeyer Corporation ("FoxMeyer") bankruptcy, on October
9, 1997, the United States Bankruptcy Court for the District of Delaware
approved a settlement (the "Settlement") between the Corporation and FoxMeyer's
Chapter 7 Trustee (the "Trustee"). The Settlement dismissed the pending
litigation relating to the dividend of certain assets from FoxMeyer to the
Corporation on June 19, 1996. The terms of the Settlement were agreed upon
between the Corporation and the Trustee in July 1997 and, as a result, the
Corporation recognized a $33,292 charge related to the Settlement in the first
quarter of fiscal 1998, which was classified in "Unusual items" in the condensed
consolidated statements of operations.
Under the Settlement, (i) the pending litigation was dismissed against the
Corporation, (ii) the Preliminary Injunction Order entered in the litigation on
March 5, 1997 was dissolved, (iii) the Corporation paid the Trustee
approximately $25,817 from a previously established escrow account, and (iv) the
Corporation executed a three year, $8,000 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 $10,000 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 previously announced
transaction relating to its 69.8% owned subsidiary, Hamilton Morgan LLC
("Hamilton Morgan"). Under an agreement with Hamilton Morgan, Robert Haft
(Hamilton Morgan's other owner) 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 $6,060 in other assets to Hamilton
Morgan. The acquisition price was approximately equal to the book value of the
minority interest acquired. The Corporation now owns directly, including shares
of Phar-Mor common stock which it had previously owned and were not involved in
this transaction, approximately 38.6% 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 $7,399, net
of cash acquired in the acquisition. The Partnership accounted for the
acquisition using the purchase method of accounting. The Corporation accounts
for the Partnership on a consolidated basis.
On November 19, 1997, the Corporation sold substantially all the assets of US
HealthData Interchange, Inc. ("USHDI") to ProxyMed, Inc. for $4,017 in cash,
subject to certain adjustments. USHDI had been treated as a discontinued
operation since March 1997. The Corporation recognized a $3,719 gain on
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 $59,000 in cash and a non-interest bearing
11
<PAGE> 13
$10,000 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, 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. The note
received as part of the NSC Settlement is to be paid over the following twelve
months and had an estimated discounted value of $9,442. If the Corporation does
not comply with certain financial covenants, $5,000 of the amount due on the
note is subject to forfeiture. 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 relating to such claims and all amounts remaining of the
fiscal 1994 $10,000 prepayment to NSC to indemnify NSC from certain
environmental liabilities. As a result of the NSC Settlement, the Corporation
recognized a $59,038 loss. However, because $79,718 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 declined $20,680 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 $2,143 to these individuals for the termination
of the Corporation's payment obligations and recognized a gain of $5,581 which
was included in "Unusual items" in the condensed consolidated statements of
operations.
During the three and nine months ended December 31, 1997, the Corporation
recognized losses of $5,725 and $11,207, respectively, from the Corporation's
adjustment in the carrying value of its investment in Imagyn Medical
Technologies, Inc. ("Imagyn") to its market value as of December 31, 1997.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE AND NINE
MONTHS ENDED DECEMBER 31, 1996
OPERATING INCOME (LOSS)
Revenues from real estate operations decreased $260 and $1,243 to $2,974 and
$9,797 for the three and nine months ended December 31, 1997, respectively,
compared to $3,234 and $11,040 for the three and nine months ended December 31,
1996. The decrease was the result of the disposal of several properties in
fiscal 1997 partially offset by increased revenues at the remaining properties
and the purchase of an additional interest in a property as described above.
Operating costs and depreciation and amortization were $4,789 and $12,646 for
the three and nine months ended December 31, 1997, respectively, compared to
$3,005 and $13,092 for the three and nine months ended December 31, 1996.
Operating costs for the three months ended December 31, 1997 increased $1,784
when compared to the same period in the prior year. The operating costs for the
prior year were favorably affected by the settlement of tax and other
liabilities as well as lower pension costs. For the nine months ended December
31, 1997, the decrease in operating costs of $446 related to real estate
operations and, for the first six months of fiscal 1998, corporate overhead
costs. The decrease in real estate operating expenses was the result of the
disposal of several properties in the prior year partially offset by higher
costs related to increased revenues at the remaining properties and the purchase
of an additional interest in a property.
Income from unusual items for the three months ended December 31, 1997 primarily
represented a gain in connection with the disposition of certain pension and
other postretirement benefit obligations of former officers and employees. For
the nine months ended December 31, 1997, unusual items also included charges
incurred in connection with the settlement reached in litigation with the
Trustee, as
12
<PAGE> 14
discussed above, partially offset by income from the settlement of litigation
primarily with insurance carriers related to environmental liability claims.
OTHER INCOME (EXPENSE)
Other expense of $5,231 for the three months ended December 31, 1997 primarily
related to a loss of $5,725 for the quarter from the Corporation's adjustment in
the carrying value of its investment in Imagyn to its market value as of
December 31, 1997 partially offset by a gain on the sale of other assets of
approximately $494. In the prior year, the income of $32,606 for the three
months ended December 31, 1996 was primarily the result of a $34,056 gain on the
sale of a subsidiary, FoxMeyer Canada Inc. ("FoxMeyer Canada"), and a $6,144
gain from the sale of certain real estate partnerships partially offset by
losses on trading securities, including a $7,075 loss on Imagyn.
Other expense of $10,537 for the nine months ended December 31, 1997 primarily
related to the loss from the adjustment in the carrying value of Imagyn of
$11,207 partially offset by a gain of $670 on the sale of other assets. Other
income of $30,788 for the nine months ended December 31, 1996 reflected a
$34,056 gain on the sale of FoxMeyer Canada, gains of $7,700 from the sale of
real estate partnerships and real estate notes receivable partially offset by
losses on trading securities, including an $8,489 loss on Imagyn, and a charge
of $2,043 for the write-off of the Corporation's investment in Ben Franklin
Retail Stores, Inc.
NET FINANCING COSTS
Net financing costs decreased $130 to $1,081 for the three months ended December
31, 1997 compared to $1,211 for the three months ended December 31, 1996.
Interest income was approximately the same for both periods. Interest expense
decreased primarily due to a decrease in real estate interest charges from
properties disposed of in the prior year. In addition, the increased interest
charge related to the Trustee note substantially offset the decrease due to the
payoff of other corporate debt.
Net financing costs decreased $688 to $3,247 for the nine months ended December
31, 1997 compared to $3,935 for the nine months ended December 31, 1996.
Interest income decreased $200 primarily due to real estate notes sold in the
prior fiscal year. Interest expense decreased $888 due to reduced borrowings,
primarily from the repayments of the Corporation's non-real estate debt and from
the sale of real estate partnerships in the prior fiscal year, partially offset
by increased real estate borrowings for the purchase of an additional interest
in a property, as discussed above, and the Trustee note.
NATIONAL STEEL CORPORATION
The net preferred dividend income for NSC was $1,345 and $5,854 for the three
and nine months ended December 31, 1997, respectively, compared to $401 and
$5,226 for the same periods of the prior year. For fiscal 1998, the dividend
income for the three and nine months was to the date of the NSC Settlement in
November 1997. For the prior fiscal year, the dividend income was offset by a
valuation reserve which reflected the Corporation's adjustment of its NSC
investment to its estimated fair market value at December 31, 1996. Refer to the
"Overview" section above for a discussion of the $59,038 loss in connection with
the NSC Settlement.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income was $1,079 for the three months ended December 31, 1997
compared to $481 for the three months ended December 31, 1996. The increase was
primarily the result of the Corporation's equity investment in Phar-Mor which
had improved results in the current fiscal year. In addition, the equity in
income in the prior year included operating losses of FoxMeyer Canada which was
sold in the third quarter of fiscal 1997.
Equity in loss was $1,531 for the nine months ended December 31, 1997 compared
to $1,906 for the nine months ended December 31, 1996. The decrease in the
equity loss resulted from the sale in the prior year of the Corporation's equity
investment in FoxMeyer Canada, which had been incurring losses, partially
13
<PAGE> 15
offset by the loss in income from real estate equity investments, which were
either sold or became consolidated in prior periods, and an increase in the
equity loss of Phar-Mor for the nine months. Phar-Mor's increased loss resulted
primarily from a charge for severance costs of its former chief executive
officer in September 1997.
INCOME TAXES
The Corporation recorded an income tax provision for the current year for state
taxes paid net of a federal income tax refund. The income tax benefit on the
current year's operating loss was offset by an increase in the deferred tax
asset valuation allowance. The $29,855 income tax provision for the nine months
ended December 31, 1996 was primarily the result of the 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 in August
1996.
MINORITY INTEREST IN RESULTS OF OPERATIONS OF CONSOLIDATED SUBSIDIARIES
The minority interest decreased to $(11) and $325 for the three and nine months
ended December 31, 1997, respectively, compared to $332 and $1,342 for the three
and nine months ended December 31, 1996. The decrease in the minority interest
for the three month period was the result of decreased income from real estate
operations primarily related to the sale of properties in the prior fiscal year
and by the elimination of the minority interest related to Hamilton Morgan. For
the nine month period, the decrease in minority interest resulted from a
decrease in real estate income in the current year related to the sale of
properties and notes in the prior fiscal year partially offset by improved
results for Phar-Mor prior to the sale of the Corporation's interest in Hamilton
Morgan.
DISCONTINUED OPERATIONS
The gain for the three and nine months ended December 31, 1997 represents the
gain on the sale of USHDI. The loss for the three and nine months ended December
31, 1996 related to the loss from operations and/or the loss on disposal of
FoxMeyer and USHDI which were both treated as discontinued operations beginning
in the prior fiscal year, partially offset by the gain on the sale of the
Corporation's pharmacy benefit management operations.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends increased to $6,474 and $18,972 for the three and nine
months ended December 31, 1997, respectively, compared to $5,888 and $13,048 for
the three and nine months ended December 31, 1996. For the three month period,
the increase was primarily due to the fact that the dividend on the Series A
preferred stock increases each quarter that it remains unpaid. The increase for
the nine months 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 (see Note 6 to the condensed consolidated financial statements) being
substantially higher than the prior year charge based on the market value on the
ex-dividend date of the additional preferred stock to be issued as a pay-in-kind
dividend.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Corporation had cash and short-term investments of
approximately $42,744. This represents a significant increase over the prior
quarter due primarily to the cash proceeds from the NSC Settlement and the sale
of USHDI partially offset by the repayment of the Corporation's $14,900 secured
loan. The remaining debt of the Corporation consists of the $8,000 note payable
to the Trustee and the debt of real estate partnerships controlled by the
Corporation.
14
<PAGE> 16
Including, and 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. If the Corporation does not
pay dividends on its preferred stock for six consecutive quarters, the preferred
shareholders would have the ability to elect a specified number of members to
the Board of Directors.
The Corporation 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 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. However, the Corporation currently has no plans to
pay cumulative unpaid dividends on its preferred stock. In addition, there is
significant litigation (see Note 8 to the condensed consolidated financial
statements) that, if the Corporation were to lose, could have a material impact
on the financial condition, liquidity and results of operations of the
Corporation. 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.
15
<PAGE> 17
OTHER
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" which is effective for fiscal years beginning after
December 15, 1997. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. SFAS No. 130 will require that changes in the 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) be added or subtracted from net income to arrive
at comprehensive income. If the Corporation had adopted SFAS No. 130 in the
current fiscal year, comprehensive income (loss) for the three and nine months
ended December 31, 1997 and 1996 would be as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the three months ended
December 31,
1997 1996
- ----------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Net income (loss) $(55,457) $ 29,746
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments - 47
Reclassification adjustment for losses included in net income - 3
- ----------------------------------------------------------------- -------------- -------------
Net foreign currency translation adjustments - 50
Unrealized losses on securities (26) -
Reclassification adjustment for losses included in net income - 329
----------------------------------------------------------------- -------------- -------------
Net unrealized gain (loss) (26) 329
Minimum pension liability adjustment (1,916) -
Loss on plan termination included in net loss 79,718 -
- ----------------------------------------------------------------- -------------- -------------
Net minimum pension liability adjustment 77,802 -
- ----------------------------------------------------------------- -------------- -------------
Total other comprehensive income 77,776 379
- ----------------------------------------------------------------- -------------- -------------
Comprehensive income $ 22,319 $ 30,125
- ----------------------------------------------------------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
December 31,
1997 1996
- ----------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Net loss $(93,988) $(263,731)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments - 17
Reclassification adjustment for losses included in net loss - 21
- ----------------------------------------------------------------- -------------- -------------
Net foreign currency translation adjustments - 38
Unrealized losses on securities (26) (329)
Reclassification adjustment for losses included in net loss - 346
- ----------------------------------------------------------------- -------------- -------------
Net unrealized gain (loss) (26) 17
Minimum pension liability adjustment (6,187) -
Loss on plan termination included in net loss 79,718 -
- ----------------------------------------------------------------- -------------- -------------
Net minimum pension liability adjustment 73,531 -
- ----------------------------------------------------------------- -------------- -------------
Total other comprehensive income 73,505 55
- ----------------------------------------------------------------- -------------- -------------
Comprehensive loss $(20,483) $(263,676)
- ----------------------------------------------------------------- -------------- -------------
</TABLE>
The loss on plan termination included in net loss for the minimum pension
liability was a result of the NSC Settlement in which amounts charged to the
accumulated deficit in prior periods were reversed on the termination of the
Corporation's liability with respect to the Weirton pension plan.
16
<PAGE> 18
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which 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.
17
<PAGE> 19
PART II - OTHER INFORMATION
AVATEX CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
With respect to the matters reported in the Corporation's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, and its Form 10-Q's for the
fiscal quarters ended June 30, 1997 and September 30, 1997, the following
additional information is provided:
FOXMEYER DRUG COMPANY\LUSK LITIGATION. With reference to the age discrimination
lawsuit styled Lusk v. National Intergroup, Inc., on December 4, 1997, the
United States Court of Appeals for the Fifth Circuit entered an order affirming
the partial final judgment previously entered in favor of the Corporation.
MCKESSON/VENDOR LITIGATION. With reference to the lawsuit styled FoxMeyer Health
Corporation v. McKesson Corporation, et al., on August 27, 1997, the United
States Bankruptcy Court for the Northern District of Texas, Dallas Division,
entered an order denying the defendants' motion to transfer the case to the
Delaware Court, and deferred ruling on the Corporation's motion to remand the
case back to Texas State Court. The Dallas Court further indicated that if the
Delaware Court rules that the Corporation owns the claims asserted in this
lawsuit, the Dallas Court will grant the Corporation's motion to remand. The
defendants have also filed a second motion for summary judgment in the case,
which, along with their May 1997 motion, remains pending with the Delaware
Court.
NATIONAL STEEL CORPORATION; ENVIRONMENTAL INSURANCE LITIGATION. On November 25,
1997, the Corporation entered into an Agreement with National Steel Corporation
("NSC") and two of NSC's affiliates, NKK Corporation and NKK U.S.A. Corporation.
Under the Agreement, among other things, (i) NSC released the Corporation from
all environmental liabilities that were previously indemnified by the
Corporation and (ii) the Corporation released and assigned to NSC all of the
Corporation's rights to assert pre-1987 environmental claims against insurers of
both NSC and the Corporation and released the Corporation's share of any
settlement proceeds relating to such claims and all amounts remaining in an
environmental account pre-funded by the Corporation to NSC in fiscal 1994. As a
result of the Agreement, the Corporation has no further indemnification
obligations with respect to the matters previously reported in the Corporation's
Form 10-K under the heading "National Steel Corporation," and is no longer
prosecuting for its own benefit the matters previously reported under the
heading "Environmental Insurance Litigation."
OTHER. With reference to the application for an order under Section 3(b)(2) of
the Investment Company Act of 1940 (the "Act") or, in the alternative, Section
6(c) of the Act, for an exemption from Sections 3(a)(1) and 3(a)(3) of the Act,
previously filed by the Corporation with the Securities and Exchange Commission,
the Corporation has informed the Commission that as of December 31, 1997, the
Corporation no longer requires the exemptive relief requested in the
application.
BEN FRANKLIN LITIGATION. The Corporation remains the owner of approximately 17%
of the common stock of Ben Franklin Retail Stores, Inc. ("BFRS"), which was
previously engaged in the franchising and operation of general variety and
crafts stores, and the wholesale distribution of products to such stores. BFRS
and certain of its operating subsidiaries (the "Subsidiaries") filed for relief
under the Bankruptcy Code in 1996 and subsequently liquidated its assets under
Chapter 7 of the Bankruptcy Code. Beginning in August, 1997, certain creditors
of BFRS and/or the Subsidiaries and the Chapter 7 Trustees of BFRS and the
Subsidiaries filed and/or threatened to file lawsuits against certain former
officers and directors of BFRS, the Corporation and certain current and former
officers and directors of the Corporation. The factual basis underlying these
lawsuits and potential lawsuits relates to the alleged altering of financial
reports of BFRS and the Subsidiaries and the alleged "freshening" of the dates
of certain accounts receivable owed to, and inventory held by, the Subsidiaries.
As of December 31, 1997, the plaintiffs in all of the filed lawsuits have
amended their initial filings to drop the Corporation and current and former
18
<PAGE> 20
officers and directors of the Corporation (in their capacity as such) as
defendants, and there are currently no lawsuits pending against the Corporation
or current and former officers and directors of the Corporation (in their
capacity as such) with respect to BFRS and the Subsidiaries. In accordance with
Delaware law, the Corporation has agreed to pay a portion of the legal expenses
incurred by certain individuals who are named as defendants in these lawsuits by
reason of the fact that they were serving at the request of the Corporation as a
director or officer of BFRS, and may, if appropriate, agree at a future date to
indemnify such individuals in the lawsuit.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
The Corporation did not declare, nor did it pay, the dividends due for the
quarterly periods beginning January 15, 1997 on either its Convertible Preferred
Stock or its Series A Preferred Stock. These two issues are cumulative. The
cumulative dividends accrued and unpaid for the five quarters from January 15,
1997 through January 15, 1998 were approximately $4.1 million ($6.25 per share)
and $23.9 million ($5.53 per share) on the Convertible Preferred Stock and
Series A Preferred Stock, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10-A - Agreement, dated as of November 25, 1997, among
Avatex Corporation, National Steel Corporation,
NKK Corporation and NKK U.S.A. Corporation (Filed
as Exhibit 2 to Avatex Corporation's Current
Report on Form 8-K dated November 25, 1997 and
incorporated herein by reference).
27 - Financial Data Schedule
(b) Reports on 8-K
The Corporation filed the following Current Report on Form 8-K
during the three months ended December 31, 1997:
Form 8-K dated November 25, 1997, announcing the redemption by
National Steel Corporation of its preferred stock owned by the
Corporation and the release of the Corporation from various
related liabilities.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVATEX CORPORATION
February 4, 1998 By: /s/ Edward L. Massman
---------------------------------
Edward L. Massman
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
February 4, 1998 By: /s/ Scott E Peterson
---------------------------------
Scott E Peterson
Vice President Finance
and Controller
(Principal Accounting Officer)
20
<PAGE> 22
INDEX TO EXHIBITS
Exhibit No. Description
- ------------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AVATEX CORPORATION FOR THE
PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
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208,364
0
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